With the explosion in the demand for COVID tests, a new type of “clinic” has emerged – specimen collection clinics (“SCC”).  The new testing locations (usually mobile) are popping up in retail locations, office buildings, parking decks, and storefronts.  These mobile testing sites are merely collecting the specimen via a nasal swab and then selling the specimen to a CLIA certified lab for processing.  We even heard a story of a collection business trying to sell their nasal swabs to “the highest bidder”.  This type of behavior will definitely raise the eyebrows of the regulators.  As such, many labs across the country are wanting to ensure the price they pay for a patient specimen is fair market value.

In some cases, the SCC is contracting with labs to perform only the specimen collection part of the entire test on behalf of the lab.  If the terms of the arrangement meet all of the necessary requirements to comply with the Anti-kickback Statue (AKS) and the Eliminating Kickbacks in Recovery Act (“EKRA”) then the terms of the deal can be structured on a “$/per-sample” basis, but the transaction price must be fair market value.  So, what is the FMV of a COVID test specimen? One way of determining the FMV of a patient specimen (i.e. nasal swab) is by use of the cost approach.  The first step is to closely analyze the expenses incurred at the specimen collection clinic and then apply an appropriate mark-up on the costs. From here, an analyst can impute the periodic revenue of the SCC and divide it by the number of samples collected during the period to arrive at the FMV per sample. So, the question becomes, what is a fair and reasonable profit margin for an SCC?  The way to begin to answer this question is by analyzing the business risks of a specimen collection business. Here are a few of the major risk factors:

  1. Is there a barrier to entry into the specimen collection business?
  2. How much start-up capital is needed for a clinic?
  3. How difficult will it be to locate customers (i.e. labs)
  4. What are the fixed costs of a clinic?
  5. What types of personnel are needed and how difficult is it to recruit, train and retain?
  6. What is the likely shelf life or term of the specimen collection business?
  7. What is the customer type and their credit risk?

The valuation analyst should also compare the expense structure and operations of the SCC to other similar types of clinics/businesses and observe the benchmark profit margin and/or mark-up in that particular sector.  In many cases, HVG is hired by the lab and we do not have access to the financial information of the specimen collection business.  In that case, we have the challenge of building up the expense structure that we believe is needed to produce X number of samples per day/week/month. Once we have the estimated expense and the fair and reasonable mark-up on costs, we can calculate the implied revenue to be earned from specimen collection services, which represents fair market value.  Finally, we divide the number of tests produced (in that period) by the imputed revenue to arrive at the FMV per patient specimen.