Not All Valuation Reports Are Created Equal: A Practical Guide to Reviewing and Applying Real Estate Valuation Reports

To avoid liability under the Stark Law, health systems’ real estate arrangements with physicians and other referral sources must, among other requirements, be predicated on terms that are consistent with fair market value. Health systems often rely on internal real estate departments, internal legal teams, or external counsel to ensure these standards. In most instances, these individuals rely heavily on external valuation professionals as the experts to establish fair market value and provide the supporting valuation reports. But obtaining a report is only half the battle. Simply having a third-party valuation report “in the file” does not guarantee compliance. The ultimate responsibility rests on the health system to ensure that the valuation report establishes a sound fair market value opinion and is applied appropriately to the lease in question. Due to the Stark Law’s strict liability standard, it is critical for health systems to be diligent in their evaluation and application of real estate valuation reports. This article addresses some of the fundamental elements that should be closely reviewed and highlights common misconceptions about real estate valuation reports.

The Report Should Be Prepared by A Qualified Valuation Consultant

First and foremost, health systems should take care to evaluate and engage only independent, objective, and qualified third-party professionals to perform real estate valuation services. By default, many health systems turn to a local real estate appraiser. In some cases, this is a prudent course of action, but in other cases there may be other alternatives. It is notable to highlight that neither the Stark Law nor the Centers for Medicare and Medicaid Services (CMS) prescribe a specific method of valuation or specific credentials or qualifications necessary for the purposes of determining Fair Market Value, thus leaving a certain degree of discretion to select a method that is appropriate under the given circumstances:

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