Healthcare

Change is a defining characteristic of healthcare. From technology to regulation to reimbursement, every aspect of the industry is in a constant state of evolution.

However, few things have changed healthcare as quickly and radically as the COVID-19 pandemic. Within the space of a few months, the landscape has been fundamentally reshaped. The long-term implications are still unknown, particularly in the area of physician practice acquisition.

Hundreds of physician practice acquisitions and healthcare-related transactions are in process at any given time. When the COVID-19 pandemic hit, the accompanying shutdown threw many such transactions into a state of uncertainty.

Recently, we spoke to Bob Homchick about today’s acquisition environment. A partner with Seattle-based Davis Wright Tremaine, Bob has played a leadership role in the American Health Law Association for many years. During our conversation, we identified six fundamental ways that COVID-19 will impact healthcare transactions currently underway, as well as those that may commence after the state of emergency ceases.

When considering Stark Law exceptions for vetting financial arrangements with physicians, we often witness a tendency to focus primarily on Fair Market Value (FMV). This is rightly so, as ensuring physician contracts comply with FMV is a critical part of risk management.

Determining fair market value (FMV) compensation in a healthcare setting generally requires the use of multiple, objective data points and an understanding of how to apply that information given the unique facts and circumstances of the subject arrangement relative to the overall market.

Understanding what the government considers as support for FMV, and what it does not, is critical to selecting and enacting policies and procedures for establishing FMV physician compensation.

Currently, one of the more perplexing issues around fair market value physician compensation relates to designing comp models that effectively reward physicians for quality and cost savings in a market that is still driven by fee for service (FFS) reimbursement. Compliance-minded hospitals are understandably concerned about adopting (seemingly aggressive) models that stack quality payments on top of existing FFS models, particularly if total compensation exceeds what is commonly considered outside the upper range of FMV. Unfortunately, what those models should look like, especially what resulting (compliant) physician compensation should come from those models, represents somewhat unchartered waters.

With the passage of MACRA in April 2015 we began to get some real clarity regarding Medicare’s plans for moving physician reimbursement from volume-based to value-based. With MACRA set to be implemented over the next few years, now is the time to begin addressing how changing reimbursement will impact physician compensation models. Because future reimbursement will be greatly impacted by physicians’ ability to deliver value and quality, hospitals will need to design compensation models that reward and encourage physician behaviors that support these goals.

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.

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. 

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. 

While non-physician providers already play a large role in providing health care in the U.S., it is expected that in the near future NPPs will begin to take on a larger role because more individuals will have access to health insurance and there is an existing shortage of physicians. Most state laws require some level of physician supervision over the services of NPPs—specifically physician assistants and nurse practitioners which are the two types of NPPs that are commonly employed in the physician practice setting and are more generally associated with broad patient care services.

Compensating physicians for supervising NPPs normally involves two types of supervision and two compensation structures, however each case must be analyzed as the amount of supervision varies and the resulting compensation must conform to the fair market value of the services performed. 

As hospitals continue to ramp up efforts to acquire and contract with physician practices, they must do so in a way that reflects not only good market strategy, but also protects future financial stability and regulatory compliance. Hospitals that are in an aggressive acquisition mode often point to the looming changes in reimbursement models that shift payments from fee-for-service to an outcomes-based model focused on episodes of care. Many hospitals feel that in order to stay competitive in this changing market , they need to align with physician practices, and do it expeditiously before competitors beat them to the punch. But at what cost?