It’s good for the bottom line when your health system or hospital is included in as many regional payer networks as possible.
Brand name recognition can help achieve that. Healthcare organizations with national brand name recognition (think Mayo Clinic, Cleveland Clinic) or regional brand recognition (Northwell Health, Emory Healthcare) have an excellent chance of being included in an insurer’s network, because insurers believe that plan members (or their employers who bear the cost of insurance) will take their business elsewhere if they are not.
Brand name recognition also has other benefits: It can be helpful in recruiting physicians and other clinical staff, building a loyal patient-base, and negotiating contracts with managed care organizations.
Building on the Work of Others
Most healthcare organizations that have that kind of name recognition have built it up over many years. If your system or hospital is not (yet) in the fortunate position of being perceived as indispensable by important payers, it is increasingly possible to achieve that position by working with organizations that do have such recognition.
Systems with easily identified “makers’ marks” are licensing their brand names to other healthcare organizations. This may happen as the result of a major affiliation agreement, or it may pertain only to certain service lines. It is not done lightly, of course. The organization with the name brand does not want to see it “diluted” by over-exposure or association with less than ideal clinical care. Usually the “licensee” licenses both the brand name and the licensor’s clinical protocols and specific care processes to facilitate sharing of expertise between organizations and enforce quality standards.
This process can improve the licensee’s quality of care, while giving the licensor an opportunity to continue to build its own name brand recognition and possibly increasing referrals of complex cases to their organization.
Licensing agreements can be structured to provide specific benefits in exchange for fees, or they can be joint ventures in which the brand name health system owns the joint venture entity.
Valuing a Brand Name
Regardless of licensing structure, the arrangement must be consistent with fair market value in most cases. But how does one determine Fair Market Value (FMV) of a brand name, when financial terms from comparable brand name licensing agreements aren’t usually publicly available?
Financial details reported in connection with mergers and acquisitions often include trade name valuations as part of the purchase price allocation filed with the Securities and Exchange Commission (SEC). These valuations can be “reverse engineered” to estimate the probable benchmark royalty rates used by management and the appraisers.
Based on data reported between 2004 and 2016, for example, the median implied royalty rate for health systems and hospitals was 0.78 percent and the rate for outpatient services was 0.87 percent. For purposes of determining appropriate payments for use of a trade name, these types of royalty rates are applied to the specific revenues of the licensee included within the scope of the arrangement.
Of course, various factors will influence the value of a specific brand in a particular market. Among these is the strength of the brand’s reputation in that local market. A brand that is perceived better than not only other regional but other national brands might be able to charge a royalty higher than the benchmark rates.
Applying Value in a Specific Situation
The rate determined above needs to be modified after a careful qualitative analysis of the specific relationship between the licensee and licensor, and the terms of the license. Factors to be assessed include:
• The term and exclusivity of the license
• Any restrictions on brand name usage
• Whether the royalty rate is to be applied to total revenue or incremental revenue for the licensed unit (i.e. all revenue for a specific service line, or new revenue realized after the licensing agreement is in effect)
• How much the brand name contributes to service profitability
Once determined, the royalty rate can be used to account for the contribution of a brand to a joint venture, or to a larger affiliation agreement. Separate analyses should be conducted for other aspects of the relationship, such as the use of clinical protocols, educational support, or information technology.
William Hamilton, MBA, CVA, Manager, Veralon
Will is an experienced healthcare consultant, having worked with a wide range of healthcare providers, ACOs, health plans, healthcare information technology companies and pharmacies. He has focused on valuation, including equity valuation of ACOs and CINs as well as ambulatory surgery, imaging, diagnostic and cancer centers; and on financial advisory services for mergers and acquisitions and venture capital deals.
Will is a certified valuation analyst (CVA) of the National Association of Certified Valuators and Analysts. He has published several articles and presented at meetings and webinars for national and regional organizations.