FMV Compliance with Equipment Lease Transactions
September 6, 2023
Written by Kyle Spears and Nicole Montanaro, CVA
Per the U.S. Healthcare Staffing Market Size, Share & Trends Analysis Report, the U.S. healthcare staffing market is expected to reach USD 34.7 billion by 2030. The growing demand for healthcare staffing services has driven the rise in service agreements among related parties, some of which require a fair market value opinion. The underlying reasons for this high demand include:
Additionally, according to the U.S. Bureau of Labor Statistics’ Occupational Outlook Handbook, employment is expected to grow from 2022-2032 for registered nurses (6%), nurse anesthetists, nurse midwives, nurse practitioners (38%), physician assistants (27%), physical therapists (15%), occupational therapists (12%), speech-language pathologists (19%), EMTs and paramedics (5%), and physicians and surgeons (3%).
With this growing demand for healthcare workers, healthcare operators are increasingly seeking new ways to staff their facilities. For example, many have outsourced recruitment and staffing operations to third-party healthcare staffing firms. Another popular solution includes entering into third-party agreements and/or partnerships with other health systems, hospitals, and outpatient facilities that have a greater scope of in-house operations and better access to qualified talent.
The latter is often between parties that may be able to refer to one another which adds a layer of complexity to these arrangements. As with many healthcare arrangements, the fair market value requirement becomes an important part of the process before signing one of these agreements. As discussed in more detail below, VMG Health has provided insight as to what leaders should think through when entering into recruiting and leased staff agreements with related parties.
The typical recruiting services arrangement will include either a retained fee (payment made up-front) or a contingent fee (payment made upon placement) that is stated as a percentage of the candidate’s first-year salary.
Although recruiting services for various position levels (i.e., physicians, advanced practice providers, nurses, senior management, etc.) can be provided by the same personnel or service providers, it is important to note that the fees for each position level often vary based on factors including, but not limited to, the size of the qualified candidate pool, difficulty to recruit a certain position in a certain market, and the skill/expertise required of the candidate. Therefore, many recruiting services agreements will include a specific fee for each position level rather than one encompassing fee for all positions.
Due to the various scope of services and positions recruited, it may be difficult to find agreements in the market that could be considered directly comparable to a party’s recruiting needs. Therefore, from a valuation and compliance perspective, it is also important to consider the service provider’s costs to provide the recruiting services in addition to observed market fees, if available. This two-step process helps the contracting parties truly understand what services are being provided and assists with documenting FMV.
Similar to recruiting services, leased staff arrangements are highly tailored to both the specific needs of one party and the staffing availability of the service provider. That said, the fee structure for these arrangements is often based on a markup to the fully loaded personnel costs, in which the appropriate markup to costs varies depending on the nature of the staffing arrangement and the financial risk placed on the service provider.
From a high-level perspective, an important factor for a staffing arrangement is the nature in which the personnel will be provided, as laid out below:
Additionally, factors such as the contract period of the agreement, payment terms (actual costs vs. projected costs), and type of staff provided (clinical personnel or administrative personnel), may impact the financial risk placed on the service provider under the arrangement.
As the demand for competent healthcare staff continues to grow, healthcare leaders are identifying numerous types of companies that can fulfill their staffing needs. Since many of these companies are in a position to refer, it is important to ensure any recruiting and leased staff agreements are consistent with FMV principles. VMG Health has extensive experience valuing FMV payments for recruiting services and leased staff arrangements.