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AICPA National Healthcare Industry Conference Healthcare Hardball Questions

We had a question we could not answer definitively at yesterday’s Healthcare Hardball session concerning assignment of Medicare beneficiaries to an ACO when they do not have a Primary Care Physician. The answer is that if a beneficiary does not see a PCP, as defined in the regulations, CMS will then evaluate which specialist physicians the beneficiary sought primary care services from. Presumably, this would be based on CPT and ICD data. Chapter 8 of my book on Healthcare Reform with Greg Anderson is devoted to ACOs.
http://www.cpa.net/publications/financial-professionals-guide-to-healthcare-reform/

Someone also had a question about the excise tax on Medical Devices and here is the link to the IRS web page that contains links to the various issuances on the ACA.

http://www.irs.gov/uac/Affordable-Care-Act-of-2010:-News-Releases,-Multimedia-and-Legal-Guidance

The issue of tax-exempt organizations participation in the Medicare Shared Savings Program (ACOs) also came up and I said I would post the link to the IRS position on same. Importantly, the IRS has in no way waived the general rules of 501(c)(3) for participation and the anti-inurement rules still apply – unlike the waivers from Stark, AKS and anti-trust issues provided by CMS and DOJ. As I indicated in my session on Valuation and Reasonable Compensaiton for tax purposes, there is a lack of focus on income tax issues due to the prevailing obsession with Stark and the AKS.
http://www.irs.gov/file_source/pub/irs-news/fs-2011-11.pdf

Grand Slam Completed! 4 Books in One Year.

The new BVR/AHLA Guide to Healthcare Compensation and Valuation is out! Edited by Tim Smith and me, it includes substantial contributions by Tim on the discipline of Compensation Valuation as well as a major chapter by me on Reasonable Compensation for Tax Purposes. Other contributions include chapters by members of leading healthcare appraisal firms including PYA, HAI and Horne. Stay tuned for a link to the new web page.
http://www.bvresources.com/bvstore/selectbook.asp?pid=PUB314

AICPA 2012 National Healthcare Industry Conference

I’ll be Conference Chair at the Bellagio in Las Vegas November 14-16. I’ll be speaking on Reasonable Compensation issues with a focus on tax matters as well as on qui tam investigations and valuation with Greg Anderson, who is also my co-author on the Financial Professional’s Guide to Healthcare Reform.

The Conference features a number of tracks including an 8-session Valuation “Thread” devoted to critical issues in healthcare valuation, the only Conference to offer Healthcare Valuation professionals a dedicated multi-session program. Here is the program description.

Valuation practice in the Healthcare Industry has become a specialized practice area, similar in complexity to ESOPs, 409A or GAAP purchase price allocation. With the increasing focus of federal and state regulatory authorities on valuation as seen in the recent Tuomey and Bradford Regional whistleblower cases, practitioners need to be up-to-date on the most recent developments to appropriately advise clients and manage risk in their own practices. Upcoming tax law changes from the federal Healthcare Reform legislation bring S Corporation and reasonable compensation valuation issues to the forefront. Perhaps most importantly, the move to physician employment by hospitals has greatly expanded the practice opportunities in Compensation Valuation. If you practice, or want to practice, in the Healthcare Industry, you should not miss this unique opportunity.

The 2012 AICPA National Healthcare Industry Conference features a specialized Valuation Thread built into the Conference Tracks designed to give valuation practitioners the skill set necessary to meet market demand for services. Leading industry experts who are also top-rated speakers in both business valuation and specialty healthcare practice offer participants practical tips and exceptional insight.

Valuation Track Sessions

How Health Information Technology is Changing Physician Practices: Did you know that valuation analysts who receive HIPAA-covered data in the course of their engagement have the same responsibility for securing that data as healthcare providers, including exposure to possible civil and criminal penalties? Did you know that physician practice may receive significant payments from the Medicare program for adopting medical records that should be considered in forecasting cashflow in a valuation? This session is led by the Chief Information Officer of a physician multi-specialty practice and an attorney from the law firm King & Spaulding.

Physician Compensation – Making it to the Promise Land of Black Ink: As the healthcare market experiences increasing consolidation, valuation practice shifts from Invested Capital to Physician Compensation. Timothy Smith, CPA/ABV, one of the thought leaders in this area and editor and co-author of a forthcoming book with the first comprehensive detailing of, and valuation approach to, Physician Compensation, provides rarely seen insight into compensation valuation practice. You cannot value what you don’t understand. Learn what users of valuation services need to understand about physician compensation plans.

Hot Topics in Tax Practice Valuation: Conversion of C Corporation to S Corp status to limit exposure to the new Medicare tax, valuing noncompete agreements and personal goodwill in physician sale transactions and reasonable compensation for tax purposes are all critically important, particularly to the private practice physician sector. Mark Dietrich, CPA/ABV provides insight from both his valuation practice and tax practice and audit experience and introduces his Return on Labor – Return on Capital analytical approach to the issue of reasonable compensation. Mark is also Conference Chair.

Hospital/Physicians Alignment Initiatives: With hospital-physician relationships driving valuation opportunities, new means of compensating physicians to accomplish defined clinical and financial goals must pass regulatory muster. Many agreements now have various clinical, administrative and incentive-based components, each of which must be valued. Participants will learn methodologies and benchmark sources for various components of physician compensation, gain an appreciation of analyzing multi-faceted agreements for commercial reasonableness and learn the latest in incentive-based compensation as implemented by providers across the US. Carol Carden, CPA/ABV, ASA, an industry thought leader and Chair of the AICPA Business Valuation Committee, leads this session.

Analysis of a qui tam Investigation: What to look for in a Valuation Report: With the Tuomey and Bradford Regional cases leading the way, and the not-yet-tried Halifax case on the horizon, valuation analysts need to understand what regulators are focused on when evaluating valuation work done for a transaction or employment arrangement. Greg Anderson, CPA/ABV, CVA and Mark Dietrich, CPA/ABV lead this session, providing considerable insight from their own experience from working with healthcare lawyers and in the regulatory arena. Participants will receive a detailed checklist, developed by Greg and Mark for the legal community, for use in their own valuation practice to identify potential risk areas and items that should appear in a valuation report.

Mergers & Acquisitions, Buy-ins, Buyouts and Noncompetes: Consolidation means practice mergers, private equity acquisitions and increasing value to physician practices. If you want to value something, you have to know what buyers and sellers are transacting. Ron Finkelstein, CPA who has unique experience with private equity transactions, leads this analysis of the value drivers in private practice transactions and the engagement opportunities, including transaction due diligence, benchmarking, tax issues, purchase price allocation, and noncompete provisions. A must-know for the appraiser doing actual transaction valuation.

Pre-Transaction Valuation Planning should consider Post-transaction Financial Reporting: Not-for-profit healthcare organizations contemplating a merger, acquisition or an affiliation, or with previously recognized goodwill on your books need to consider the impact of financial reporting requirements, in particular SFAS 164. This session will assist valuation analysts in addressing valuation issues to non-accountant executives in business development who are often driving the acquisition train as well accounting executives. In particular the session will cover: accounting for an acquisition & the new rules of purchase accounting, annual impairment testing of goodwill, developing and updating fair value estimates, due diligence for pre-deal business plans. Featuring Don Barbo, CPA/ABV and Karen Van Compernolle of Deloitte.

Healthcare Hardball – Ask the Experts: Panel members will include Joseph Lynch of King and Spaulding, Timothy Smith, Reed Tinsley, and Mark Dietrich answering your questions about the difficult problems you confront in your practice. Panel members will be available to take questions from you BEFORE the session if you want, questions can be written down and provided to an AICPA Conference Team member, or you can ask your question during the session.

Guide to Healthcare Industry Compensation and Valuation Completes 2012 Grand Slam

Tim Smith and I have completed the editing of the BVR Guide to Healthcare Industry Compensation and Valuation, to which we both serve as contributing authors along with a number of others. This is the first book of its kind and offers some dramatic new research into the use of the various compensation surveys as well as the first attempt to present a model for the systematic application of the principles of fair market value to healthcare industry compensation. In-depth discussions of commercial reasonableness are also included. There are 42 chapters in all, including 30 that represent all new or completey revised material.

My own contributions include a chapter analyzing the interplay of Business Valuation and Compensation Valuation with Fair Market Value (FMV) and Commercial Reasonableness (CR) that is certain to generate some debate about where the line betwen FMV and CR is drawn. My chapter on Reasonable Compensation for Tax Purposes includes nearly 27,000 words with a review of IRC section 162 and the case law, the Independent Investor test re-emphasized in the new Mulcahy case, how the differentiation between personal and enterprise goodwill and intangible value affects reasonable compensation and challenges the compensation appraisal industry to apply the principles of section 162 to FMV, particularly where the employing entity is tax-exempt.

I’d like to express my gratitude to the various contributors from Horne, PYA, HAI and CBIZ.

With the U.S. Open about to conclude, I am reflecting on my own version of the Grand Slam: publishing four books in a single year. You can see the others here:
http://www.cpa.net/publications/

Bob Cimasi and NACVA 2012

With apologies, I am compelled to state that slide 35 of Bob Cimasi’s June 2012 NACVA presentation contains a wholesale misrepresentation of the IRS 1996 EO CPE Text with respect to trained workforce. Here is the precise quote of what that document says on the page that precedes the quotation in his presentation about intangible asset valuation using the Cost Approach, taken in context, not wholly out of context as is the case in Cimasi Slide 35:

“Goodwill in the Allocation Technique

The value of goodwill can be allocated to specific intangible assets; the value of the latter is limited to the value of the former, as calculated under the income approach. For example, if the total value of the individual intangible assets exceeds the total value of the medical practice net of the aggregate fair market value of the tangible assets, the amount of value that can be allocated among the intangible assets is more limited. Also, it is important to note that intangible value may not always be present in a medical practice.

Thus, ascribing value to intangible assets is a matter of allocating value derived using the income approach to specific intangible assets. The following example illustrates this process:

Example: The BEV of a medical practice under the income approach is $12,200,000. Medical equipment, furniture, and fixtures have a value of $2,200,000 determined under the cost approach. Buildings and real estate have a value of $6,400,000 determined under the market approach. The maximum value attributable to all intangible assets is $3,600,000.”

Note: “Thus, ascribing value to intangible assets is a matter of allocating value derived using the income approach to specific intangible assets” and “The maximum value attributable to all intangible assets is $3,600,000.” This amount is the difference between the total value using a Discounted Free Cashflow method under the Income Approach, less the tangible assets, which tangible assets are “Medical equipment, furniture, and fixtures” and “real estate.”

There is absolutely no basis whatsoever to claim that this EO CPE document supports exclusive reliance on the Cost Approach to value intangibles. In fact, it specifically states exactly the opposite.

I am deeply disappointed to see so flagrant a misrepresentation used in a Continuing Education Program aimed primarily at Certified Public Accountants. It is a disservice to our profession that cannot go unanswered or unexposed.

Cost Approach Again – NACVA June 2012

I had to turn down an invitation to speak at NACVA this past June in favor of my 35th wedding anniversary. I would not have decided differently, but was surprised to see that Bob Cimasi’s presentation was devoted in its entirety to refuting the White Paper written by me and 7 other co-authors and published in the American Health Lawyers Association Hospitals and Health Systems Rx publication.

There are a variety of specious arguments in the presentation, but I will limit myself to a few.

There are a variety of citations to IRS CPE texts and the Friendly Hills private letter ruling in support of the notion that it is appropriate to use the cost approach to value physician workforce in place. These citations conveniently ignore the fact that the CPE texts clearly state that the cost approach is used to allocate the value determined under the Income Approach (discounted cashflow method) and CRITICALLY that the appraisal in support of the Friendly Hills private letter ruling included a letter from the managing partner of the physician practice that stated the following:

“It has been clearly stated to the partners that, in the past, their compensation reflected not only the value of their medical services, but also the profits attributable to their ownership of the Network; that the latter element will be replaced by a cash payment, which they can invest … that the Medical Group’s income will thereafter be derived from arms-length contract for medical services; and that these rates will necessarily be significantly lower than the total historical income they have been receiving …”

Now, less there be any doubt what is stated here, “the Medical Group’s income will thereafter be derived from arms-length contract for medical services; and that these rates will necessarily be significantly lower than the total historical income they have been receiving” is in stark contrast to many of the transactions that take place where physician workforce is paid for and post-transaction the physicians receive a higher income than they historically earned. There is simply no basis whatsoever for believing that the IRS was unaware of the interrelationship between practice valuation and physician compensation.

I still have a copy of that letter, which was an integral part of the valuation and the granting of IRS approval for the transaction.

Perhaps the most outlandish argument is using Bankruptcy case law and theory in suport of fair market value and commerical reasonableness in a healthcare transaction.

One of the many arguments against the White Paper’s position that there be an income return analysis to establish value is that somehow a “cost decrement” or reduction in expenses gets around the requirement that the hypothetical investor of the fair market value standard would not invest in something that generates no income. Income is revenue minus expense, of course. All things held equal, if revenue stays constant and expenses go down, income will increase. However, if there is no revenue in the first instance that does not violate the prohibition against DHS referrals, even if expenses are less, there is no income for purposes of the requirement that the expense reduction be commercially reasonable in the absence of referrals.

It is hard to envision that a transaction based upon an expectation of losing money is commercially reasonable for the hospital, although the presentation supports it based upon Bankruptcy case law. Certainly, if all hospitals entered into such transactions expecting to lose money and did not have the benefit of referrals from the transaction to DHS, they would all go bankrupt. Perhaps that is the connection.

Essay in the UK

April 27th, 2012 | Posted by Mark Dietrich in Regulatory Matters | Seminars & Publications - (0 Comments)

My Essay entitled “Can private practice in the UK learn from the US private practice experience with regulators?” appears in the current edition of Independent Practitioner Today, the leading business magazine for private practice physicians in the United Kingdom. I’ll be visiting Belfast in Northern Ireland and Edinburgh in Scotland to address these and other issues in May, my third visit to the UK in the last 4 years.

http://www.independent-practitioner-today.co.uk/feature_details.php?r=1242&a=public

Pull Quotes from the 3rd Edition of the BVR/AHLA Guide to Healthcare Valuation

Here are some quotes from the new Guide, available in May!

“The consensus today, including that of many of the contributors to this Guide, is that future physician compensation is typically a more significant element of a transaction than is the value of the practice.”

“Before going to the Stark modifications of Fair Market Value it is important to note that the use of an appropriate equity discount rate and/or weighted average cost of capital is designed to account for the investment risk inherent in owning a business. One of the many differences between Fair Market Value and Strategic or Investment Value or Value to the [existing] Owner is the use of a market-based rate of return to discount future cashflows to present value.”

Pull Quotes from the forthcoming Financial Professional’s Guide to Healthcare Reform

February 12th, 2012 | Posted by Mark Dietrich in Healthcare Reform | Medicare | Regulatory Matters | Seminars & Publications - (0 Comments)

As the November election looms, the issue of Romneycare and its relationship to Obamacare remains at the forefront. The Financial Professional’s Guide to Healthcare Reform contains an entire chapter devoted to the Massachusetts experience with Reform, carefully cited to state government documents that make clear the many negative economic consequences that offset the 97% coverage that was achieved.

“As will be seen throughout this chapter and the balance of the book, the extent of the federal legislation’s reliance on theMassachusettslegislation is striking. As such, to gain an understanding of the federal legislation, it is necessary to first understand its source. More importantly, the experience o fMassachusetts with its Reform, notably as reflected in the “new” 2010 legislation described at the end of the Chapter, portends what is likely to happen with the federal legislation.”

“’When Massachusetts passed its landmark health reform law (Chapter 58 of the Acts of 2006, An Act Providing Access to Affordable, Quality, Accountable Health Care), it established a model for the nation in creating a path to achieve near universal health insurance coverage for its residents. Chapter 58 was designed to expand coverage and, with over 97 percent of the state’s residents now insured, that effort has proven to be a success. However, the reform law of 2006 was not intended to tackle health care costs specifically, and the rapid annual escalation of costs is causing significant fiscal challenges. The state’s individuals, families, and employers, as well as state and local government, are all struggling under the weight of high and rapidly rising health care costs, which is creating barriers to accessing care, cutting into wage growth, stifling job creation, and preempting spending in other sectors of the economy.’[1]

“Leaving the barn door open may be unintended but losing the horse as a result cannot be unexpected.”

“The 2006 Reform legislation took place against a backdrop of spiraling healthcare costs and a desire for universal coverage along with then Governor Mitt Romney’s presidential campaign and looked to the small group market yet again as a place to cost-shift; a lesson for small business with respect to the same “reform” of the small group and individual market contemplated by the federal legislation.[i] ”

“The 1996 Small Group Reform law described earlier banned small business from organizing into group purchasing cooperatives for the purpose of buying health insurance at lower rates and was designed to slow the exodus of small business into the self-insured market. As noted earlier, the 2006 Reform in Massachusetts required the merger of the small group and individual insurance markets and resulted in an explosion in the cost of health insurance in the merged market as well as a dramatic increase in individual insured cost-sharing (co-pays and deductibles) and a reduction in benefits. This market segment therefore experienced the most dramatic adverse changes and served as the catalyst for bringing the Massachusetts health insurance premium crisis to the forefront. This is a key element of the legislative changes that took place in the summer of 2010.”

[i] The 2006 Conference Committee Summary stated:

“The bill merges the non- and small-group markets in July 2007, a provision that will produce an estimated drop of 24% in non-group [i.e., individual] premium costs. An actuarial study of the merging of the two insurance markets will be completed before the merger to assist insurers in planning for the transition. The bill also enables HMOs to offer coverage plans that are linked to Health Savings Accounts, reducing costs for those who enroll in such plans. Young adults will be able to stay on their parents’ insurance plans for two years past the loss of their dependent status, or until they turn 25 (whichever occurs first), and 19-26 year-olds will be eligible for lower-cost, specially designed products offered through the Connector.

“The bill creates a subsidized insurance program called the Commonwealth Care Health Insurance Program. Individuals who earn less than 300% FPL [Federal Poverty Limit] and are ineligible for MassHealth will qualify for coverage. Premiums for the program will be set on a sliding scale based on household income, and no plans offered through this program will have deductibles. The program will be operated through the Connector, and retain any employer contribution to an employee’s health insurance premium. The subsidized products must be certified by the Connector as being of high value and good quality. For individuals who earn less than 100% of the Federal Poverty Level ($9,600/yr), special protections in this bill provide for subsidized insurance products with comprehensive benefits, and waive any premiums. Currently, most childless adults are not eligible for MassHealth at any income level, unless they are disabled or have very little history of employment.”[i]

[1] Division of Health Care Finance and Policy (DHCFP), “The Health Care Cost Challenge and Policy Recommendations forMassachusetts”

2012 Edition of the BVR/AHLA Guide to Healthcare Valuation

I am please to report that editing on the 2012 Guide is completed. The May release will feature 12 New Chapters and 14 Revised Chapters. In addition to the contributors noted in my January 8 post, Todd Sorensen and VMG have updated their chapter on Ambulatory Surgery Centers, Andrea Ferrari of HAI and Tim Smith have updated their Medical Director chapter and Mark Browne, M.D., Burl Stamp, FACHE and David McMillan, CPA of PYA have contributed a new chapter on Whole Hospital Co-Management Agreements.

healthcare reform, healthcare valuation, medical practice valuation, reform, regulatory compliance, valuation