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Healthcare facilities often elect to contract with a third party for the provision of management services for various operational and financial reasons. The following are generally considered typical management services:
- Financial management and annual operating budgets;
- Administer accounting and purchasing functions;
- Human resource management;
- Information technology management;
- Public relations;
- Development plans of the facilities or their services;
- Maintain all necessary licenses and regulatory compliance;
- Design, institute, and supervise the physical and administrative operations of the entity;
- Prepare and submit all cost reports; and
- Negotiate and consummate agreements and third party contracts.
From a business perspective, understanding standard services and appropriate fees is fundamental. Also, fair market value documentation is key in arrangements where a healthcare facility and management services provider are in a position to generate referrals. Challenges include: understanding typical management services in the market and the relative comparability between the services and the subject arrangement, appropriately utilizing market fee data for similar services, and assessing the cost of providing the services, along with a market-based return.
VMG Health has insight into the latest trends and fee structures based on extensive experience in valuing management services arrangements. As a result, VMG can rapidly assist in confirming if a management services arrangement is consistent with fair market value.
Documentation illustrating that a management services arrangement is set at fair market value represents best practice for compliance purposes. Based on regulatory guidance, compensation should be derived based on a sound methodology reflecting the terms of the arrangement and relevant value drivers. Five key value drivers that should be considered when analyzing a management arrangement include: 1) net revenue of the facility 2) expertise of the administrative services provider 3) breadth of services provided 4) cost structure and the efficiency of the management services provider and 5) whether services are being provided by physicians versus non-physicians. VMG has a keen understanding of these value drivers, and a myriad of other valuation drivers associated with management arrangements.