Client’s Challenge:
Independent IVF Medical Practice leases office space full time from a Hospital in the hospital-owned MOB. Specializing in Fertility & Reproductive Endocrinology, the Physician Group has incubators located in the office suite that necessitate power 24/7/365. The Hospital provides this power through its emergency generator, which is a service not provided as part of the office space lease. The Hospital requested that we provide a Fair Market Value opinion as to the annual compensation amount for this service to ensure that no undue benefit is provided to Independent IVF Medical Practice.
The Situation:
The fair market value determination for providing an IVF laboratory access to a hospital’s emergency generator is unique because the arrangement is driven by the critical need to protect highly sensitive embryos and maintain uninterrupted operation of incubators during power outages. Unlike typical tenant utility arrangements, the benefit being conveyed includes enhanced business continuity, risk mitigation, and preservation of irreplaceable biological assets, all of which should be considered in assessing the economic value of the service.
The valuation should reflect the hospital’s direct and indirect costs of providing generator capacity, including infrastructure investment, maintenance, fuel, monitoring, testing, and any incremental reserve capacity dedicated to the IVF laboratory. Additionally, because reliable backup power is essential to the laboratory’s regulatory compliance, operational viability, and patient care obligations, comparable market data may be limited, requiring consideration of both cost-based and market-based valuation methodologies.
HMS Solution:
This engagement presented a particularly unique fair market value challenge because there is no readily observable market for a hospital’s provision of emergency generator capacity to an independent IVF practice for the protection of embryo incubators and other sensitive laboratory equipment. Unlike traditional medical office building services, such as rent, utilities, or common area maintenance, generator access for continuous backup power is a highly specialized arrangement with limited, if any, directly comparable market transactions. As a result, significant professional judgment and creativity were required to develop a supportable valuation methodology that accurately reflected the economic benefit conveyed while remaining consistent with fair market value and Stark Law compliance principles.
Given the absence of reliable market comparable data, HMS primarily relied on the cost approach to estimate the fair market value of the arrangement. Under this methodology, HMS considered multiple factors including the replacement cost new of the Hospital generator utilized to provide the backup power service, kW generator output, accessory equipment, installation, maintenance, fuel, taxes, insurance, etc.
A second challenge involved allocating the total generator calculated cost to the IVF practice in a reasonable and economically supportable manner. Rather than relying on subjective estimates, HMS considered the hospital’s electrical load data to determine the proportionate share of generator capacity attributable to the physician’s use and the physician practice need.
The valuation required a creative yet defensible approach because the benefit received by the IVF practice extends beyond simple electricity usage. The backup power arrangement provides critical business continuity, protects irreplaceable biological materials, mitigates substantial operational risk, and supports uninterrupted patient services during power outages. These unique characteristics create economic value that is not readily captured through traditional utility or facility pricing benchmarks.
Based on the procedures performed and information provided by the parties, HMS believes the concluded compensation represented a fair market value rate that is commercially reasonable and suitable for Stark Law compliance purposes.
