Healthcare

It is not uncommon to see parties to a transaction or arrangement engage more than one valuation firm to arrive at fair market value. This is especially true when the parties have both referral and financial relationships and risk implicating federal physician self-referral laws. However, there is a difference between using separate appraisers and “opinion shopping,” the latter of which can be a very risky proposition. The scenarios below provide some examples of the use of multiple valuators, when they are effective, and when they become very costly.

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Volume-based, fee-for-service reimbursement is gradually being replaced with value-based reimbursement. In fact, CMS recently announced a target of 50 percent of Medicare payments tied to quality or value through alternative payment models by 2018. A Clinically Integrated Network is one type of model that is helping move the industry from volume to value. In the CIN, providers collaborate to achieve enough integration at the clinical level to contract jointly with payers and reach the Triple Aim — better patient care, better population health, and lower cost of care. 

One factor that helps ensure the success of the CIN is the method by which the organization compensates participating providers for furnishing high quality, cost-effective care. In this environment of delivery and payment system reforms, distribution models based on the value contributed to the organization by its providers are better positioned to achieve organizational objectives.

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In earlier days of hospital-based physician coverage, specialties were mostly limited to radiology, pathology, anesthesiology, and emergency medicine. As the hospitalist specialty developed, more hospitals began contracting for inpatient coverage to provide a broader continuum of care. Later, additional specialties, including pediatric hospitalists, intensivists, nocturnists, laborists, surgicalists, and neonatologists, grew in popularity.

Coverage by hospital-based physicians can be based on shifts or hourly or daily coverage, and can extend to multiple facilities and hospital departments. Coverage can include restricted and unrestricted on-call coverage as part of the arrangement. In addition, administrative responsibilities, quality improvement, and program development are often required.

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In the continuing evolution of hospital/physician relations, new and more complicated pay arrangements find their way into the market each year. However, overpayment of physicians can run afoul of regulatory requirements for fair market value and commercial reasonableness. Having more than one paid service or compensation arrangement between parties increases the risk that aggregate compensation is more than FMV. While the compensation terms outlined in each agreement may represent FMV, when taken together, total compensation in some cases can exceed FMV. The following scenarios show some of the ways that pay arrangements can be “stacked,” placing the parties at higher risk:

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On August 14, 2014, the U.S. Department of Justice reported a $1.3 million settlement between New York Heart Center, a New York cardiology group practice, and the United States government to resolve allegations that the practice violated the Physician Self-Referral (Stark) Law and the False Claims Act by "knowingly compensating its physicians in a manner that violated federal law."

The unique nature of services furnished by health care professionals and the possible conflicts of interest arising from financial arrangements between providers has resulted in laws and regulations that differ dramatically from other industries, like the Stark Law. The law was intended to ensure that a physician’s medical judgment is not compromised by improper financial incentives that encourage internal referrals of certain services known as Designated Health Services for Medicare patients.

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Given the continued flurry of activity in hospital-physician financial arrangements and increased enforcement activity, hospital system CEOs and in-house and outside counsel all have a vested interest in getting optimal value from the working relationship between the health care valuation analyst and legal counsel.

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Most hospital system acquisitions of physician practices are structured as asset purchases, with the former physician-owners and employed physicians of the acquired practice subsequently employed by the purchasing hospital or a hospital-controlled entity. Because of the financial and referral relationships in arrangements such as these, the Stark law and federal anti-kickback statute are nearly always implicated, and compliance with these laws dictates that the financial arrangements be consistent with fair market value. Exceeding fair market value can expose the parties to potentially staggering fines and penalties if found liable as part of a qui tam or government enforcement action. Yet, as discussed in a recent post, New White Paper Doesn't Settle the Workforce Valuation Debate, diversity of opinion exists on certain valuation issues in these types of transactions. 

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Team-based Care – Part II

Look into many markets in the U.S. and you’re likely to find non-physician providers in greater demand and better paid than in the past few years. The 2013 HORNE Medical Office Staff Salary Survey supports this by reporting a significant upswing in the demand for non-physician providers. Survey results show a startling 68% jump in the number of non-physician providers added to hospitals and practices from 2009 to 2013. But perhaps the quick rise in demand isn’t as surprising when put into the context of the Affordable Care Act, and shrinking reimbursement. 

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Median expenditures for emergency department (“ED”) call coverage, according to the 2012 Sullivan, Cotter & Associates Physician On-Call Pay Survey Report, increased for both trauma and non-trauma hospitals between 2009 and 2012. So paying close attention to fair market value in ED on-call arrangements is as important as ever. This means that filtering through anecdotal information is critical to avoid missteps when hospitals enter into on-call payment arrangements.

An important distinction in ED on-call pay is found in the difference between independent physicians and many physicians employed by the hospital. Two central economic concepts related to ED on-call pay – compensation for physician availability and reimbursement for uncompensated care – may be vastly different for an independent and an employed physician. Continue reading >

Few subjects have provoked as much passionate debate in the health care valuation community as relying on the asset approach as the sole basis for a conclusion of physician practice value when the income approach indicates no supportable intangible value, including the value of a trained and assembled workforce. A new white paper, Intangible Asset Valuation, Cost Approach Methods and Procedures, authored by highly regarded valuation expert Robert Reilly and published by the AICPA, is a much needed and generally well-written technical resource on the application of cost approach methodology to the valuation of intangibles.

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