What’s the Value of Innovation? (Part 1 in a 2-part series)

The Affordable Care Act created the CMS Innovation Center to allow Medicare and Medicaid programs to test innovative payment and delivery models that improve patient care and lower healthcare costs.

The Innovation Center organizes models into seven categories. Some models are based on payment transformation, while others result in the voluntary formation of groups of healthcare providers (e.g., Accountable Care Organizations, or ACOs) to furnish coordinated care and chronic disease management.

CMS is transitioning providers from fee-for-service to value-based payment through Advanced Payment Models (APMs). Ultimately, the agency aims to move more providers into Advanced APMs, a subset of APMs that allows physician practices to earn more by assuming some financial risk related to patients' outcomes. Qualified Participants earn special incentives by assuming financial risk. The following models are eligible Advanced APMs:

In January 2017, 480 ACOs participated in the MSSP, and hundreds more were commercial ACOs.

Issues in Valuing ACOs

Because ACOs must be legal entities to qualify for the MSSP, valuation issues abound in ACO transactions and in the distribution of earnings or losses to participating providers, including physicians, healthcare facilities, and certain other providers.

HHS established five waivers to protect qualifying ACOs in the MSSP, including protections applicable to the federal Stark Law, the federal anti-kickback statute, and the federal civil monetary penalties law. Despite these waivers, Fair Market Value (FMV) becomes a key consideration in a variety of circumstances involving ACOs, such as the following:

Whether appraising the ACO itself, assets contributed by an ACO investor, or an investor’s equity interest, valuation of an ACO is accomplished by the use of generally accepted business valuation approaches and methods. Thus, the asset, income and market approaches and their related methods are considered for appropriateness in valuing the ACO.

Asset Approach

The asset approach is a way of determining value (whether of a business, a business ownership interest, or a security) by using one or more methods based on the value of the assets, net of liabilities. The adjusted net asset method restates the balance sheet of the ACO to the FMV of individual assets and liabilities. The indicated value of equity is the aggregated net asset value, or the value of aggregated assets less liabilities. In the valuation of an ACO, arriving at the value of certain intangible assets (e.g., patient panel) is not an insignificant exercise.

Income Approach

The income approach derives an indication of value from methods that convert anticipated economic benefits into a present single amount. In the valuation of an ACO, this method involves complex projections of economic benefits. For example, use of the discounted cash flow method in the appraisal of an MSSP ACO requires analysis of various forms of revenue applicable to the ACO, not the least of which are shared savings and losses, operating expenses, and additions to and deductions from free cash flow. To the resulting cash flow analysis, the analyst applies discount and capitalization rates representing risk associated with ownership relative to other investments.

Market Approach

The market approach is used to determine value by comparing the subject business, business interest, or asset to sales of similar holdings. While conceptually simple, the application of this approach is made very difficult by the lack of market data on transactions involving comparable businesses—in the case of the ACO, comparable in terms of participating provider makeup, applicable payer(s), patient attribution, MSSP track, performance, organizational structure, and many other factors.

Indications of Value

The resulting indications of value arrived at in the application of the above (and other) methods are synthesized and reconciled to arrive at the indicated value for the enterprise. In the case of minority and non-controlling interests, further analysis is required to apply appropriate discounts to arrive at the value conclusion.

Clearly, the valuation of an ACO is a significant undertaking, necessitating the use of analysts with business valuation expertise in the healthcare industry and a thorough understanding of ACO finance and operations. Selection of a valuation analyst should be undertaken with due care through a solid vetting process.

In the second installment, we will look at the FMV of ACO physician compensation and distributions to participating providers.

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