Healthcare

The ambulatory surgery center (ASC) market has seen a lot of growth and success since first arriving on the scene over 40 years ago. While the ASC market has grown significantly over this time, that growth has slowed in the last 10 years and ASCs now appear to be operating in a “maturing” market. At the same time we are seeing rapid change in the market where ASCs operate and many of these changes may have a significant impact on the value of ASCs. Below are some of those areas that could have tremendous impact on ASC values.

Stipends (or subsidy payments) are an area we are seeing a lot of activity in lately. It is not uncommon in the market for hospitals to subsidize physician groups in order to ensure physician compensation at market levels, particularly in markets that are heavily impacted by low reimbursement rates. From a compliance standpoint, one of the biggest issues is whether or not the subsidy payment represents fair market value (FMV). While it may seem straightforward, taking a physician group’s historical income statement (or in cases of a start-up venture a financial statement projection) at face value for paying a stipend is a bad idea. Why? Because without dissecting the various components you don’t really know what drives that number. You don’t know if market factors contribute to the loss, if the practice’s loss is due to internal operating characteristics or, as in many cases, a combination of both. So what do you look for? Below are three critical areas of any group’s income statement that should be examined, and if necessary adjusted, to determine true market driven subsidy needs.

Two days into the 2015 Annual Meeting, two important fair market value (FMV) and commercial reasonableness (CR) issues stand out as worthy of emphasis, as they resonate in almost every discussion on hospital/physician deal compliance.

There have been several times over the years when a hospital client has contacted me asking me to determine fair market value in response to an offer from a competitor attempting to hire or exclusively contract with the hospital’s physician(s) or physician group. In some cases the competitor has offered the group compensation that far exceeds existing compensation. Many times the first question the client asks is for us to prepare a FMV report that supports the competitor’s offer price, or in some cases exceed it. This is often where the problems begin. 

“I only want you to tell me what the doctor’s practice is worth. I will worry about her salary. Why do you care about compensation anyway?”

This is a common response from clients when we ask for post-acquisition physician compensation as an input to determine fair market value of the physician’s practice in a potential acquisition. Hospitals sometimes try to compartmentalize physician practices by looking at the value of the business apart from the value of the physician’s services. Because medicine is a service-based industry, however, value is largely dependent on income from physician services, and physicians expect compensation for such services. Therefore, you cannot consider the value of a physician practice without considering the value, or cost, of its primary income generator, the physician.

I was fortunate to have been invited to co-author a chapter on merit-based savings distribution models in The ACO Handbook: A Guide to Accountable Care Organizations, Second Edition with Bo Bobbitt.  Bo is a seasoned health care attorney who works with many ACOs and clinically integrated networks. He is with the Smith Anderson law firm in Raleigh, North Carolina, and speaks and writes on this subject extensively.

Breaking down the siloes that exist in our fragmented healthcare system requires the collaborative commitment of clinicians and facilities, and true clinical integration fosters (and, in turn, is promoted by) teamwork, transitional care, reduction in clinical variation, and information-sharing. For the ACO model to be successful, a correlation must exist between financial incentives and the common goals of improving experience of care for patients, improving the health of populations, and reducing the per capita cost of healthcare. 

Given the regulatory risks associated with failure to pay fair market value (FMV) in certain physician compensation arrangements, parties contracting with physicians for services are rightly concerned about FMV and are justified in their efforts to find effective means by which FMV can be determined and documented.

One such means for the assessment of FMV is the use of widely available published survey reports on physician productivity and compensation. Several sources exist for this information, and there is a broad acceptance of published surveys in the industry as indicative of compensation for physicians in many specialties. Let’s look at what the government—specifically CMS—says about the use of surveys.

The recent Citizens Medical Center settlement brings to resolution yet another qui tam action which, among other facts, underscores the compliance risks of hospital compensation arrangements with physicians in excess of fair market value. The USDOJ announced last month that Citizens Medical Center will pay $21,750,000 to settle the False Claims Act allegations involving over two dozen individual physicians of at least six different specialties and practice groups. The opinion of U.S. District Court Judge Gregg Costa of the Southern District of Texas in ruling on the Defendant’s motion to dismiss the plaintiff’s FCA allegations is instructive particularly with regard to the compensation by the hospital of its employed cardiologists.

On April 16, 2015, President Obama signed the Medicare Access and CHIP Reauthorization Act into law, which repealed the much-maligned sustainable growth rate formula. Physicians are breathing a sigh of relief as the SGR repeal prevented steep reimbursement cuts that have been threatening physicians since the late 1990s. Now that the focus is off SGR, physicians and policy makers can shift focus to new patient care models that are supported under MACRA.

Healthcare machinery and equipment (M&E) change hands daily across the country through larger business transactions or as individual assets or groups of assets being bought and sold. M&E values can impact the viability of the transaction or the parties’ compliance with complex laws governing the deal. Below are easy-to-remember tips on the Purpose, Process, and Pitfalls of M&E appraisals.

With record attendance of over 450 professionals attending AHLA’s Transaction Program in Nashville last week, it’s evident that healthcare transactions are top of mind. One might think the industry would be further down the road in defining the latest iteration of payment and delivery system models, but the healthcare industry appears to be a marathon, rather than a sprint.

Today’s sessions at AHLA’s Transactions Program made me reflect on the fact that time has taught us valuable lessons about what not to do in the future. An initial wave of hospital affiliations and acquisitions has occurred with mixed success.

Three recognizable trends were dicussed today that are reshaping healthcare transactions:

As a healthcare appraiser, one question I have heard many times over the years is “do I need to get a valuation?” Typically, the primary goal of a healthcare appraisal is to demonstrate due diligence around fair market value (FMV), so the question may be better stated as “what constitutes adequate FMV due diligence when contracting with physicians?”. While there is no universal answer to this question, there are some points worth considering that should factor into the decision.