The use of artificial intelligence (AI) is rapidly evolving and the demand for data is rapidly growing. Many industries are finding ways to deploy AI technology to improve efficiencies, increase sales, lower costs and automate processes. In the healthcare space, hospitals, insurers, medical device companies, and pharmaceutical companies are generating, collecting, acquiring and utilizing data for AI and value-based arrangements. Generally speaking, the more data the better. As such, data is valuable. But the question is, just how valuable? This question is now being raised and will continue to grow in popularity. Data in the healthcare space is used to improve the effectiveness and quality of value-based arrangements and to establish benchmarks for outcome-based compensations. I predict that insurers, hospitals and other healthcare related companies will begin to exchange/trade or lease anonymous patient data and/or case outcomes. These such transactions for data will need to comply with the fair market value requirements of the Stark Law and anti-kickback statute.
So, what is the proper way to establish the fair market value of data? Data seems like such a vague and nebulous thing. The first question that needs to be asked and answered is: What is data? Data is considered an intangible asset.
According to the International Glossary of Business Valuation Terms, an intangible asset is a “non-physical assets (such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts as distinguished from physical assets) that grant rights, privileges, and have economic benefits for the owner.”
There are multiple characteristics that give rise to the existence and value of an intangible asset. According to Dr. Shannon Pratt, “there should be a specific bundle of legal rights (and/or other natural properties) associated with the existence of the intangible asset. For an intangible asset to have quantifiable value it should possess certain additional attributes such as:
- It should generate some measurable amount of economic
income to its owner. This economic benefit may be in the form
of an income increment or a cost decrement.
- It should enhance the value of other assets with which it is
associated; the other assets may include tangible personal
property, real estate, or other intangible assets.”[1]
According to the book, Valuing Intangible Assets by Robert F. Reilly and Robert P. Schweihs, for an intangible asset to exist from a valuation or economic perspective, it should possess a number of the following characteristics:
1. It should be subject to specific identification and recognizable description.
2. It should be subject to legal existence and protection. It should be subject to the right of private ownership, and the private ownership should be legally transferable.
3. There should be some tangible evidence or manifestation of the existence of the intangible asset (e.g., a contract, a license, a registration document, a computer diskette, a listing of customers, a set of financial statements, etc.).
4. It should have been created or have come into existence at an identifiable time or as the result of an identifiable event.
5. It should be subject to being destroyed or to a termination of existence at an identifiable time or as the result of an identifiable event.”
6. A collection of data is appropriately referred to as a “database”. So, the subject intangible asset is a database, which possesses many of the aforementioned characteristics.
The next step in this valuation journey is to identify the proper metric, or unit of measure. When an appraiser values a piece of equipment, piece of real estate or a share of stock, the actual subject is easily definable. However, how does one measure a database?
A database is most appropriately measured by the size of the database or the number of data points or entries. For example, a database could be a collection of auto sales transactions, business sales transactions, COVID cases, college students, office visits, cancer patients, etc. Each entry can have a multitude of parameters or statistics. This is sometimes referred to as the richness of the database. Fundamentally speaking, we can safely say that a database with 3,000 entries is more valuable to an end user than a database with 30 entries.
Here is what I’ve determined so far:
What is the subject asset?: database (a collection of data points)
What is the unit of measure?: number of entries and/or the number of parameters
In my next post, I’ll discuss the proper methods and approaches used to estimate the fair market value of a database and why.
[1] Valuing a Business; The Analysis and Appraisal of Closely Held Companies, Fifth Edition; Shannon Pratt, 2008 (pp 365 – 366).
