Transcript 10 Leading Topics Related to the FMV of Healthcare

Leading Topics Related to
the FMV of Healthcare
Arrangements
Presenter:
Daryl P. Johnson, HealthCare Appraisers, Inc.
Topic No. 1
Investment value vs. fair market value
– How do these standards of value
differ, and how do the differences
affect the valuation of healthcare
transactions?
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No. 1 - Investment Value vs. FMV
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The fair market value standard is a hypothetical willing
buyer/willing seller scenario. No consideration is given
to any unique attributes or synergies of either party in
reaching a determination of value.
The investment value standard takes into consideration
the unique synergies or attributes that one or both
parties may possess.
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For example, if a hospital has more favorable
reimbursement that will enhance the profitability of a
diagnostic cath lab being considered for purchase by the
hospital, any valuation consideration of this benefit would
reflect investment value, and not FMV.
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No. 1 - Investment Value vs. FMV
(cont.)
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While FMV is the applicable valuation standard
for most healthcare transactions, commercial
reasonableness may dictate a departure from
the strict FMV definition. For example, if a
hospital has purchasing economies related to
med/surg supplies, any arrangement involving
the hospital’s acquisition of these items through
an agreement with physicians should give
consideration to the hospital’s actual cost (which
invokes investment value).
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Topic No. 2
The OIG precludes the use of
potentially “tainted” market values
(i.e., those arrangements that involve
physician ownership). What are
some of the key implications of this
OIG guidance in valuing healthcare
transactions?
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No. 2 - Tainted Market Values
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In addition to healthcare regulations, general valuation theory
requires the use of “arms length” market transaction data.
Healthcare transactions are frequently suspect.
A market approach is the preferred valuation approach for many
types of compensation arrangements.
For certain types of arrangements, virtually no “non-tainted” data is
available.
 Lithotripsy (to be discussed later)
 On-call arrangements
 Medical directorships
The valuator must consider alternate approaches.
 Consider analysis of physician compensation data
 Consider reimbursement rates from Medicare and commercial
payors
 Consider whether the arrangement can be “crosswalked” to a
non-healthcare setting
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Topic No. 3
What is the “top down” approach in the
context of valuing under
arrangements, and is such approach
a valid valuation approach?
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No. 3 - “Top Down” Approach
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“Non-traditional” under arrangement agreements are emerging
related to outpatient surgical departments, cath labs and other
hospital services.
A “top down” approach “passes through” all of the hospital's
reimbursement, less a portion retained by hospital related to billing,
collections, and other hospital services.
This approach leaves open significant opportunity for challenge.
 The actual services provided by the under arrangement entity
must be FMV, and the valuation approach should primarily
consider the value of such services
 The level of reimbursement received by a hospital may have no
bearing on the FMV of the services
 Consider a “crosswalk” to non-healthcare scenarios
“Under arrangements” structures might not be available except
where only components of the services (and not the entire service)
are provided. This may preclude many of the existing and future
arrangements of this type.
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Topic No. 4
Is the concept of a physician’s
“opportunity cost” a viable valuation
methodology?
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No. 4 - “Opportunity Cost”
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Not really. In fact, Stark III says…opportunity cost (i.e., the
value of his/her clinical services) may not be an indicator of
the value of a physician’s administrative time.
This position is logical and consistent with the general
definition of FMV (i.e., a willing buyer/willing scenario).
Doesn’t opportunity cost represent investment value ?
RBRVS specifically identifies that certain physician duties carry
a higher relative worth than others. (Otherwise, the
“physician work” component of RVUs would be time-based.)
Opportunity cost can be considered, along with market data
related to administrative services (e.g., Clark Survey) and
informed judgment as to relevant worth of one activity
compared to another.
For certain physician specialties (e.g., PCPs), the value of
administrative time may be higher than the value of clinical
time.
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Topic No. 5
Regarding compensated call coverage
arrangements, what are current
trends in payment methodologies,
and how can these arrangements be
valued?
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No. 5 - On-Call Compensation
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Payment for on-call services (or at least compensation for unfunded
emergent care) has almost become a “mandate” of sorts for most
hospitals.
 Where possible, rather than simply paying for call with an “autopilot” mentality, hospitals should attempt to incorporate select
quality standards to be met.
The most prevalent payment methodologies include:
 Payment for unfunded care (e.g., 80% to 120% of Medicare)
 Provision of claims defense or indemnification or reimbursement
for malpractice insurance
 Per diem (typically a 24-hour period) or per diem plus payment
for unfunded care
 “Activation fee” (Payment only for days the on-call physician is
“activated”)
 Deferred compensation plans
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No. 5 – On-Call Compensation
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On-call compensation pitfalls:
 See OIG Advisory Opinion 07-10
 Paying above FMV (A better vehicle for overcompensating
physicians than the medical directorship!)
 Paying for call coverage absent a contractual commitment
for defined periods of coverage
 Paying for unnecessary or duplicative coverage (e.g., ortho
hand and plastics hand)
 Paying for “back-up” call when not supported by call
frequency and/or the urgency of patient needs
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Topic No. 6
What unique issues arise in connection
with valuing lithotripsy and other “per
click” arrangements, and what should
cause concern?
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No. 6 – “Per Click” Arrangements
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Breaking news… “Urologists Corner the U.S. Lithotripsy Market”
Non-physician owned lithotripsy companies are a distinct minority.
Therefore, “non-tainted” market data is extremely limited.
Without reliable market data, a “cost approach” is the most
appropriate valuation approach. Invariably, a cost approach yields
lower values than the urologist-investors seek.
Consider the possibility of a descending payment structure; a fixed
fee plus a per click; and/or a payment “cap” to avoid windfall
payments should volume escalate.
 Notwithstanding, as a hospital’s lithotripsy volume approaches a
certain threshold, the commercially reasonable option is for the
hospital to purchase its own lithotripter or to contract with a
lithotripsy provider on comparable terms (whereupon the
urologists’ lithotripsy referrals will make a beeline for another
surgical facility).
A lithotripsy arrangement could be the “poster child” for regulatory
abuse.
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Topic No. 7
What impact does the elimination of
the CMS safe harbor for personally
performed physician services have on
healthcare organizations?
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No. 7 – Elimination of the Hourly
Safe Harbor
Hourly Rate
(75th)
Hourly Rate
(90th)
Hourly Rate
CMS
“Safe Harbor”
Cardiology
$264
$324
$146
Nephrology
$209
$252
$106
Neurology
$168
$217
$ 96
OB/GYN
$195
$245
$130
Oncology
$287
$508
$116
Psychiatry
$128
$151
$ 86
Rheumatology
$145
$200
$ 92
Topic No. 8
“Co-management arrangements”
typically involve physician/hospital
ventures to manage hospital services
lines, with compensation consisting of
base and incentive components.
What valuation approaches can be
used to assess this new breed of
management arrangements?
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No. 8 – Co-Management
Arrangements
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Compliance with FMV is critical for regulatory compliance, but
also for the ultimate success of the project.
Available valuation methodologies are limited and somewhat
subjective.
In considering the primary valuation approaches (cost,
income and market), an income approach can likely be
eliminated.
Using a cost approach, FMV of the management fee can be
established by assessing the required number of work hours
needed to provide the management services multiplied by a
fair market value hourly rate.
 However, the exact number of required work hours cannot
reasonably be determined in advance.
 Further, a key ideal of most co-management arrangements
is to reward results rather than time-based efforts.
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No. 8 – Co-Management
Arrangements
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A market approach recognizes that each co-management
arrangement is unique, and reflects specific market and
operational factors which are singular to the specific setting.
 Break the specific services down into specific tasks and
objectives, and then compare to other arrangements
 On an item specific basis, assess the relative worth of each
task/objective, and determine necessary adjustments to
the comparable arrangements.
The cost and market valuation methodologies described
above must be reconciled to arrive at a final conclusion of
value.
The FMV of the total management fee must be established, as
well as the base and incentive components.
Rev Proc. 97-13 may limit the amount of the incentive fee in
relationship to the base fee.
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Topic No. 9
Discussion of CMS developments
related to the permissibility of “per
click” compensation arrangements.
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No. 9 – Status of “Per Clicks”
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Stark III does not specifically affect per
click arrangements, but the proposal in
the physician fee schedule rule would
prohibit such arrangements with an
individual physician or physician group.
Joint ventures would still be viable
vehicles.
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…and last…
Topic No. 10
In theory, local market data may be
the most relevant market data in
evaluating physician transactions.
However, local data may be difficult
to obtain. What implications does
this have on the valuation process?
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No. 10 – Local Market Values
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Most healthcare providers are reluctant to share their physician
compensation data.
Even if a few local market values can be obtained, there will
undoubtedly be insufficient information to allow reasonable
comparisons to a subject arrangement (e.g., how productive is the
OB/GYN being paid $340,000 in the local market?).
There is no assurance that local data points are free from
overcompensation bias.
In comparison to the thousands of respondents to at least 6
national salary surveys, local data is generally anecdotal.
CMS specifically addresses situations when local data (e.g., with
respect to real estate) is insufficient.
FMV of physician compensation may best be determined using
national surveys as a starting point. Adjustments from the “norm”
can then be made based upon differences in productivity, extent of
call coverage and administrative duties, local economics, etc.
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Questions?
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