Valuation Links

July 2nd, 2010 | Posted by Mark Dietrich in - (Comments Off on Valuation Links)

ALERT: CMS changed the location of the pages and files listed below three times in the last administration without leaving forwarding links and the pattern continues! As such, some of the CMS links below will be worthless.

Whether you are new to the business of valuing medical practices, or looking to update or develop a medical practice-specific valuation report with National Economic and Regulatory data unique to healthcare, use these links. Not enough time to do all of the research yourself? Purchase the Medical Practice Valuation Guidebook (Sorry, Sold Out! but call for options) and receive a free copy of our Report on the Healthcare Economy, including the Regulatory Environment and Medicare Program, suitable for inclusion in your own reports! (written by Mark O. Dietrich, CPA/ABV.)

Background on Healthcare

medterms.com
A Medical Dictionary search engine.

http://www.medpac.gov/document_search.cfm
If you have ever wanted to locate the “single source” to an understanding of the Medicare program’s reimbursement methods for various classes of providers, this is it: The Medicare Payment Advisory Commission (MedPAC) Annual Report to the Congress. In addition to a comprehensive explanation of the methods, it contains recommendations to Congress for increases or decreases in the payment rates to Hospitals for both inpatient and outpatient services, Physicians, Skilled Nursing Facilities (SNFs), Home Health Services, Outpatient Dialysis and Ambulatory Surgery Centers.

http://waysandmeans.house.gov/media/pdf/hr1/hr1jtexplstate.pdf
Various summaries of the new Medicare Prescription Drug, Improvement and Modernization Act, the most significant legislation since the Balanced Budget Act of 1997.

https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/mc86c01.pdf

A summary of the Balanced Budget Act of 1997, perhaps the single most important piece of legislation on healthcare finance since the Medicare program was adopted. A key component of any valuation report and valuator’s understanding of the healthcare reimbursement environment.

http://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNMattersArticles/downloads/se0432.pdf
A summary of the Balanced Budget Refinement Act of 1999

http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/A9EAA7E2-C6C5-48A2-9BC5-A385C79D3356
The law firm McDermott, Will & Emery’s summary of the Benefits Improvement and Protection Act of 2000.

http://www.cms.hhs.gov/QuarterlyProviderUpdates/
The location of CMS’ What’s New page.

http://www.cms.hhs.gov/
The Centers for Medicare and Medicaid website index.

http://www.cms.hhs.gov/MedicareProgramRatesStats/03_HlthCrInds.asp
This is the location of the Health Care Indicators providing the most recent CMS data on Hospital, Employment, and Price Indicators for the Health Care Industry. Included are various tables displaying the current trend in days per 1000, admits per 1000 and medical price CPI, as well as many others. This is an excellent source of data for preparing that section of your valuation report that deals with current trends in the healthcare segment of the economy. Downloads are available in html and Adobe format.

http://www.cms.hhs.gov/home/regsguidance.asp
Links to regulations relating to the Medicare program. Find our what the current state of the law is and make sure you demonstrate an understanding of it in your valuation report.

http://www.hmodata.com/
This is the company Interstudy’s site. Interstudy publishes a variety of statistical reports about HMO enrollment across the country and their findings are summarized here in periodic press releases. An invaluable source on what is going on in the HMO industry across the country and regionally.

http://www.healthleaders.com
An e-newspaper with a broad variety of healthcare news items and articles, submitted to us by pediatrician Dr. Jeff Lasker.

http://www.cdc.gov/nchs/products/nhsr.htm
The Advance Data reports at the Center for Disease Control’s National Center for Health Statistics have been renamed National Health Statistics Reports and, of course, relocated(!) Much of the statistical data in the Medical Practice Valuation Guidebook came from CDC. You can quickly locate data such as Hospital Discharges or Ambulatory Surgery that may influence your valuation conclusion.

Example
http://www.cdc.gov/nchs/data/nhsr/nhsr029.pdf
The most recently available Hospital Discharge Summary (2006). “The discharge rate per 10,000 population ranged from 940.2 in the West to 1,330.7 in the Northeast region. The average length of stay ranged from 4.2 days in the Midwest to 5.3 days in the Northeast region.” This tells you that utilization of hospital services in the Northeast is much higher than any other part of the country.

http://www.cms.hhs.gov/MedicareFeeforSvcPartsAB/03_MEDPAR.asp#TopOfPage
The location of many of the Medicare’s program statistical summaries of hospital utilization and costs. MEDPAR files contain information for 100% of Medicare beneficiaries using hospital inpatient services. Data is provided by state and then by DRG for all short stay and inpatient hospitals. As of this update (August 2009), the most recent data is 2007.

http://oig.hhs.gov
The Office of the Inspector General of Health and Human Services home page containing links to the laws and regulations that anyone valuing a medical practice should be certain to read! Get the latest information on changes in the volatile regulatory environment.

http://www.justice.gov/opa/pr/2012/November/
The Civil Division of the Department of Justice (DOJ) press release page where you can find the latest news about fines levied against healthcare providers in connection with the False Claims Act and qui tam cases, among others.

http://www.access.gpo.gov/su_docs/fedreg/a010104c.html
The location of the final Stark II regulations – don’t value a medical practice without reading them (or, at least, the summary of the regulations in the current edition of the Medical Practice Valuation Guidebook). To find the correct link, go down the page to “Health Care Financing Administration” (hint: use the ‘find’ command of your browser) and click on each of the three links for different portions of the regulations. Each link contains 50 pages of material.

http://www.gpo.gov/fdsys/pkg/FR-2007-09-05/pdf/07-4252.pdf
This is the third ‘set’ of Stark II regulations, containing 11 pages. Pages 9 through 11 contain a list of Stark services by CPT code enabling you to identify those codes that present a potential problem area. For example, you may encounter a group practice compensation system where the income from those Stark services is allocated to the physician who ordered the test and no exception is available. The most recent listing of CPT and HCPCS codes (2012) covered by Stark is located here http://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/Downloads/2012Addendum.zip

https://oig.hhs.gov/fraud/medicaid-fraud-control-units-mfcu/index.asp
If the government is concerned about the arrangements listed here, you should be too! This is the Fraud Alert page that lists to specific areas the Office of the Inspector General is looking for potential fraud. Be on the look out for these when conducting a valuation.

http://oig.hhs.gov/fraud/docs/alertsandbulletins/consultants.pdf
The link to the Office of the Inspector General’s WARNING to consultants, including valuation consultants, about practices which may violate federal civil and criminal statutes. Pay careful attention to page 4.

http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/downloads/cms-1533-fc.pdf/
CMS’ periodic reports on various segments if the healthcare provider industry with invaluable summaries of market research.

Regional Data

Valuators generally want to review in their reports the state of the economy in the region in which the valuation subject operates. The links in this section provide access to government sites where this data is maintained.

http://www.census.gov/population/www/estimates/popest.html
This is the Census Bureaus entry point for population statistics, available by state and in various levels of detail.

Example
http://www.census.gov/population/estimates/state/st-99-08.txt contains the population broken down by five year age groups for each state in the nation.

http://www.census.gov/econ/census07// contains the Summary Statistics for the United States from the 2007 Economic Census by Major Industry (NAICS – North American Industry Classification System) Grouping. There are links to get the same data by state, county and metropolitan area!

http://www.census.gov/econ/census07/
This is the Census Bureau’s entry point for when detailed information from the 2007 Survey on conditions in the various segments of the economy will be released.
Example
http://www.census.gov/epcd/ec97/us/US000_54.HTM contains detailed information on Professional, Scientific, and Technical Services by Subsector.

http://www.bls.gov/
Bureau of Labor Statistics home page with links to the various offices that maintain regional CPI statistics.

http://www.bls.gov/eag/home.htm
The Bureau of Labor Statistics’ Economy at a Glance page. Using a map of the United States, you can click on the valuation subject’s state and instantly locate current and historical employment, unemployment, and other employment stats.

http://stats.bls.gov/iag/iaghome.htm
The Bureau of Labor Statistics’ Industry at a Glance page with current information on each of the major sectors of the economy.

http://www.census.gov/hhes/www/hlthins/ Census Bureau’s 2006 report on the health insurance status of the country.

Quantitative Data

One of the most challenging tasks is finding the necessary quantitative data to use in the valuation model. The links below enable you to quickly obtain the risk-free rate and the rate of inflation for use in developing your discount and capitalization rates, as well as detailed physician reimbursement data of the type described in the Medical Practice Valuation Guidebook, Including Comprehensive Financial Analysis and the Influence of Managed Care.

http://www.phc4.org/reports/fin/06/Default.htm
Pennsylvania Health Care Cost Containment Council report page containing detailed data on hospitals and Ambulatory Surgery Centers in Pennsylvania, an excellent source of (free) data on revenues and profitability.

http://www.healthaffairs.org/
Health Affairs, The Policy Journal of the Health Sphere Owned and published by Project HOPE – The People-to-People Health Foundation, Inc.

http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp
The National Health Expenditure Projections presented here are based on the 2006 version of the National Health Expenditures released in February 2008. The Projections are estimates of spending for health care in the U.S. for the years 2007-2017. The Projections are presented by type of service delivered (hospital care, physician services, nursing home care, etc.) and by source of funding for those services (private health insurance, Medicare, Medicaid, out-of-pocket spending, etc.).

CMS Statistics

http://www.cms.hhs.gov/ActuarialStudies/ The location of the following links:

Medicare Trust Funds

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2012.pdf

Medicare Rates

http://www.cms.hhs.gov/MedicareAdvtgSpecRateStats/RSD/list.asp#TopOfPage: Medicare Advantage capitation payment rates and information
http://www.cms.hhs.gov/SustainableGRatesConFact/01_overview.asp Estimated Sustainable Growth Rate and Conversion Factor for Medicare Payments to Physicians
http://www.cms.hhs.gov/ActuarialStudies/02_PhysicianResponse.asp#TopOfPage: Analysis of physician response to changes in Medicare payment rates
http://www.medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-glance.html: Medicare premiums, deductibles, and coinsurance

Medicare and Medicaid

https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareProgramRatesStats/downloads/MedicareMedicaidSummaries2010.pdf A brief overview of the Medicare and Medicaid programs
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/HealthPlanRepFileData/Monthly.html Monthly Trend Report for Medicare & Medicaid

Health Accounts

Health Expenditures and Sources of Funds — historical and projected national health expenditures and historical estimates by state.
Health Care Indicators — contains data and analysis of recent trends in health care spending, employment and prices.

http://www.statehealthfacts.kff.org/
The Kaiser Family Foundation’s State Health Facts Online, a comprehensive aggregation of spending data on all types of healthcare. Perhaps the best site of its kind imaginable!
http://www.statehealthfacts.kff.org/profile.jsp
The direct link to individual state profiles. Click Health Costs & Budgets for statistical data.

Other

http://www.federalreserve.gov/releases/H15/update/ – A Federal Reserve Board site that is updated daily with the 20 year treasury bond rate! Contains historical information sufficient to get data for virtually any valuation date.

http://www.phil.frb.org/research-and-data/real-time-center/survey-of-professional-forecasters/
Survey of Professional Forecasters on the current growth, inflation rate, and other key factors in the economy.

http://www.bls.gov/cpi/
The Bureau of Labor Statistics Consumer Price Index page. An inflation calculator is located here that enables you to calculate the value of a dollar based on inflation since 1980.

http://www.cms.hhs.gov/MedicareFeeforSvcPartsAB/04_MedicareUtilizationforPartB.asp#TopOfPage
With the changes to the CMS website, only certain utilization data seems to be readily available at the link above. The mother lode of free data: the file containing physician utilization by CPT code for 2004 http://www.cms.hhs.gov/PhysicianFeeSched/01_Overview.asp#TopOfPage is back: Utilization File [ZIP, 1.3MB]! This database can be opened using Microsoft Access. You can then sort the data, for example, by medical subspecialty (e.g., internal medicine, cardiology, etc.) and CPT Code sequence to obtain the “normal” coding pattern. You can then compare this coding pattern to the practice you are valuing. The most important codes to analyze for a medical (as opposed to surgical) specialty are the established patient visit codes, 99211-99215. For the consultative specialties, such as cardiology and gastroenterology, you should also look at 99242-99245. This type of analysis is explained in the Medical Practice Valuation Guidebook, Including Comprehensive Financial Analysis and the Influence of Managed Care . It is the key to a properly conducted valuation. (See the following link as well)

physpec.xls
I have had many inquiries from users of this site about where to find the cross-reference to physician specialties listed by number in the physician utilization data above, and here it is. (See the previous link as well)

http://www.cms.hhs.gov/PhysicianFeeSched/PFSCSF/list.asp#TopOfPage
This page contains the state by state detail of the Medicare Physician Fee schedule for the years 1998 through 2008. This data can be used to evaluate the collectibility of Medicare charges in a physician practice. For example, you may compute the average collected fee for key CPT codes in a practice and compare it to this fee schedule using a vertical lookup table.

E-Newsletters

The following links give you the opportunity to sign up for e-mail newsletters from a variety of organizations that we at Dietrich & Wilson have found valuable in our healthcare practice.

Atlantic Information Services (AIS) main link to sign-up for one or more of their e-newsletters listed below.

http://www.aishealth.com/GovernmentNews.html

AIS Health’s Government News of the Week. Just what it says, a weekly newsletter that tracks announcements by the Centers for Medicare and Medicaid(CMS), the OIG, the Department of Justice and various state regulatory authorities.

http://www.aishealth.com/MDPracticeAlert.html

AIS Health’s MD Practice Alert. In addition to news relevant to physicians from CMS, this newsletter tracks such diverse items as the malpractice insurance crisis and news releases about physician recruitment and compensation.

http://www.AISHealth.com/BusinessNews.html

AIS Health’s Business News of the Week. This weekly newsletter (Tuesday) tracks such things as trends in health insurance coverage, conversions of Blue Cross plans to for-profit status, and other items of note in the healthcare industry.

Other E-Newsletters

Modern Healthcare, a weekly industry magazine, offers a free daily newsletter. The topics are varied, including government action as well as the introduction of new pharmaceuticals, purchases and sales of hospitals, and anti-trust action.

http://www.healthaffairs.org/1260_opt_in.php

Health Affairs, The Policy Journal of the Health Sphere, is a bi-monthly academic research publication sponsored by Project Hope. The e-mail newsletter offers summaries of select articles form the current issue, which is available online for free.

Need to acquire statistical data for benchmarking or excess earnings calculations?

Medical Group Management Association

Cost Survey; 2012 Report Based On 2011 Data (updated annually)
http://www.mgma.com/store/Surveys-and-Benchmarking/Cost-Survey-2012-Interactive-Report-Based-on-2011-Data-CD-Single-User/

Physician Compensation And Production Survey: 2007 Report Based On 2006 Data (updated annually)
http://www.mgma.com/physcomp/

104 Inverness Terrace East
Englewood, CO 80122-5306
# (303) 799-1111

American Medical Group Association

http://www.amga.org/Research/2011ExecSummary.pdf

1422 Duke Street
Alexandria, Virginia 22314-3430
# (703) 838-0033

American Medical Association

Medicare RBRVS: The Physician’s Guide
Capitation: The Physician’s Guide – Highly Recommended (may be out of print)
Physician Practice Management Companies: What You Need To Know
Physicians’ Current Procedural Terminology-CPT 05

515 North Street
Chicago, Illinois 60610
# (312) 464-4332

Tips for Physicians

July 2nd, 2010 | Posted by Mark Dietrich in - (Comments Off on Tips for Physicians)

Welcome to our web page designed specifically for the needs of physicians with respect to valuation. The text below includes links to other pages on our website where you will find detailed discussion of many of the issues mentioned briefly here.

At a variety of points during their careers, physicians are concerned about the value of their own or another physician’s practice. The first encounter with this issue is typically when a physician is offered an opportunity to buy into a practice with which he or she has been an associate.

Buying Into a Practice

The most basic issue, of course, is the purchase price. How that purchase price is calculated is of critical importance, as is whether the purchase price includes “goodwill” and if so, on what basis. Any special conditions imposed by the seller are equally significant. The impact of the buy-in payments on the buyer’s take home compensation and the period of time over which it must be paid are the remaining issues we will address.

Computation of the purchase price

If the seller has retained a valuation consultant, some form of report should have been prepared which should be made available to the buyer. Reports come in many formats. Formal valuations can be costly and in some cases not necessary for the purposes of the buy-in. A good compromise is a written report, which summarizes the salient features of the practice, describes the valuation methodology employed and the valuation conclusion. The report should include the quantitative exhibits so that the buyer’s representative can review the computations and provide advice.

In some cases, no valuation will be performed and the seller will develop a purchase price based upon prior experiences, conversations with colleagues, articles in trade magazines, or perhaps based upon nothing more than a particular need for cash. In other cases, the valuation “expert” will be nothing of the sort and the purchase price will be based upon anecdote, misimpressions, or the desires of the seller. Be particularly cautious of “reports” which consist simply of a valuation conclusion without documentation of the reasons therefore.

Comment: One of the most egregious examples of poor valuation work I have ever seen involved a former equipment salesman with no training in valuation. He issued a one-paragraph report, of which one sentence addressed the valuation – the conclusion of value. The number was patently ridiculous and created a nearly insurmountable problem in negotiating the transaction.

Although Rules of Thumb are not a substitute for a proper valuation, they are useful for providing a frame of reference as to what a practice may be worth. /articles/thumb1.html

Inclusion of “goodwill”

Physicians often resent paying for goodwill, as they perceive it to be a personal asset. Certainly, personal goodwill does exist, and it is less common to pay for it. However, there is a separate class of business or practice goodwill that is distinct from personal goodwill and which represents a valuable asset of the seller, and a valuable asset to the buyer. This asset is described in detail at /articles/Enterprise.html. You may also wish to read /articles/separate.html

Whether or not a buyer has to pay for personal goodwill is directly tied to the presence or lack of a covenant not to compete, or noncompetition agreement. These agreements restrict the right of the physician to practice after leaving employment. At the time a physician becomes employed by a practice, he or she may sign such an agreement. If such agreement exists and it is enforceable under the laws of the state in which it was signed, the effect may be to assign personal goodwill to the employing practice. This is due to the fact that the physician cannot open a competing practice and take advantage of the patient relationships that have been developed. /articles/covenants.html

The enforceability of noncompetition agreements varies from state to state, and requires interpretation by an attorney with specialized knowledge of healthcare.

Payment of the buy-in price

The goal of buying into a practice is generally an expectation of an increased income as well as “permanent” employment and equal status in the practice. The longer the buy-in period, the longer the time before the increased income is realized. The key to a proper valuation is that the purchase price must be payable in pre-tax dollars over a period of three to five years. The length of the buy-in period is often a feature of the local marketplace and is also driven by the years of associate status before the buy-in commences. The total period of associate status and buy-in should not exceed seven years and is usually closer to five.

Agreement on a buy-out price and structure

This is one of the most critical aspects of the buy-in negotiation, and one that we find is often not properly evaluated. For that reason, we have dedicated an entire article to it. /articles/buyout.html

Special conditions or Senior Doctor Rights (SDRs)

Many transactions involving small medical practices are cluttered with so-called Senior Doctor Rights or SDRs. Typically, the selling physician attempts to sell a ratable share (say 50%) of the value of a 100% interest while retaining that same 50% or even 60% of the value via the SDRs! To illustrate, assume that the entire practice is worth $300,000 on a 100% control basis, and the buyer is to purchase 50%. The price is $150,000, right? What if the seller retains the right to the office location, all patient charts and the phone number if the deal doesn’t work? Is the buyer’s 50% interest still worth $150,000? What if the seller has a veto over all practice decisions that cannot be agreed on? Is the buyer’s 50% interest still worth $150,000? SDRs represent a substantial diminution in the value actually acquired by the buyer.

Comment: It is common for valuators who lack formal training to ignore lack of control discounts. SDRs that expire at the end of the buy-in period are not uncommon in purchase agreements. Their impact on the amount of a lack of control discount should be evaluated in conjunction with the disposition of the buy-in payments in the event the buyer is terminated from the practice. If all of the payments were forfeited, a substantial discount would be warranted. If the payments were returned, the discount would be minimal.

The presence of SDRs during the buy-in period is not uncommon. The disposition of the payments made towards the buy-in if the seller terminates the deal needs to be negotiated, however. Here are some of the options:

  1. If the buyer engages in a competing practice, the income shift payments are forfeited.
  2. If the buyer engages in another practice outside the service area, a portion of the payments may be forfeited, or they may all be returned.
  3. If the buyer chooses to terminate, a portion or all of the payments may be forfeited.

Managing Partner

As part of a buy-in, the senior doctor in a two-person practice is ‘granted’ managing partner status in the practice for a period of 10 years at an annual salary of $40,000. The true value of these services, assuming they are performed and performed competently, is $12,000. The difference of $28,000 can be discounted to a present value for the 10-year period of time.

Call Schedule Preference

A frequent and very contentious SDR is reduced or no call, the term used to describe evening and weekend coverage of the practice. One of the least desirable aspects of practicing medicine is getting called in the middle of the night or on a weekend afternoon. Exclusion from the call schedule has a significant value that should not be overlooked.

Governance

It is much more difficult to quantify an SDR discount for practice governance. Clearly, having veto authority in one individual can impact the ultimate flow of cash, even if the compensation arrangement is specified in employment contracts and is otherwise fair. The veto could be used to block acquisition of a potentially profitable item of equipment, a move to a better and potentially more profitable location, hiring, retaining or firing key, or more often non-key, employees, or generally creating a nuisance.

There are a number of other circumstances in which valuation plays a key role in the physician’s decision making process. The links below lead to discussions on the topic noted. If you are considering selling your practice to a hospital or Integrated Delivery System, you can view our PowerPoint Presentation “Guide to Hospital-Physician Transactions” here.

Negotiating the buy-out of a retiring partner in a two person practice: /articles/buyout.html

Selling your practice to a Practice Management Company: /articles/samesto.html and /articles/ppm.html

Getting out of a “bad deal” with a hospital buyer: /articles/unwind.html

Creating practice value through mergers: /articles/mergval.html

Identifying value in practice improvement opportunities: /articles/mgmt.html

Mark Dietrich’s book providing comprehensive coverage of all financial aspects of the operation and value of a medical practice, as well as detailed discussions of capitation and the statistical distribution of the E&M codes: Publications

Consulting Information

July 1st, 2010 | Posted by Mark Dietrich in - (Comments Off on Consulting Information)

Healthcare Consulting

We offer healthcare providers our more than two decades of expertise in a variety of areas. Please visit our Valuation page for details on that aspect of our practice. Visit our Articles and Commentary page for the details of our thinking and advice as reflected in the many publications we have written for. The thumbnails below each caption below lead to relevant additional material.

Managed Care Contracts

We have extensive experience in analyzing and negotiating both capitated and fee-for-service contracts with HMOs. Our clients have in excess of 14,000 capitated full-risk Medicare lives for which we play a major role in contract negotiation. We also represent IPAs in negotiating commercial risk contracts on a capitated or fee-for-service with withhold basis. Mark Dietrich’s book The Medical Practice Valuation Guidebook, Including the Influence of Managed Care, includes an extensive analysis on how capitation works in the commercial and Medicare settings. Mark’s new book for John Wiley & Sons, The Financial Professional’s Guide to Healthcare Reform, contains a wealth of knowledge about Romneycare, Medicare Advantage and the federal Reform legislation!

Practice Evaluation

Curious about how your practice compares to others in the same specialty? Interested in knowing how your use of the Evaluation and Management codes compares to other physicians? Our comprehensive Practice Evaluation program looks at your practice’s productivity and expenses compared to statistical norms, use of the E&M codes, management and aging of accounts receivable, and distribution of charges, receipts, and contractual adjustments by payor. This program is particularly valuable to hospital’s that have acquired medical practices and experienced difficulty in understanding their lack of financial success.

Mergers and Acquisitions

Closely related to our valuation practice, we offer physicians hands-on experience with structuring and negotiating buy-ins and buy-outs in their practices. We have represented numerous buyers and sellers and served as the principal consultant in the formation of a number of successful group practices. Our overriding goal is a “win-win” for all parties. The 3rd Edition of Mark’s American Health Lawyers/Business Valuation Resources Guide to Healthcare Valuation includes an all new chpater devoted to buy-ins, written by Mark.

Valuation of Medical Practices, Strategies for Creating Merger Value

Physician Compensation Plans

“The engine that drives the practice” is the way one of our group practice clients’ administrators described it. With our in-depth knowledge of both the fee-for-service, RVU and capitated worlds, we can assist you in designing a compensation plan that rewards behaviors necessary to succeed in the mixed environment that many practices operate in.

Strategic Planning

Healthcare providers face a number of critical challenges in the new era. Notable among these is the market power HMOs and the move towards P4P payment mechanisms, notable Accountable Care Organizations (ACOs). We can assist you in charting a course through the financial perils of today’s medical practice.

Tax Planning

With our academic and practical background in income taxation, we can offer the traditional tax planning services that other accounting firms offer, and combine your income tax strategy with the balance of your financial planning. If your practice uses a professional corporation, we have the detailed knowledge of the workings of the tax law in this area necessary to prevent the kind of tragic errors often made by advisors with no experience. We are also available to represent you in proceedings before the Internal Revenue Service.

Valuation of Medical Practices, Chemotherapy Drugs are NOT Merchandise
Goodwill Requires Enforceable Covenant Not To Compete
Section 280H – LOOKOUT!

Seems as though Massachusetts has once again fired the Shot Heard 'Round the World – or, at least, 'Round the USA. Cooler minds seems to be prevailing for the moment in Washington and the rush to judgment on "Reform" has slowed to a crawl.

Its a little too early to gauge the ultimate result – that seems to have been the case for many months now – but any draconian risk assessments can be laid to rest for the moment. One thing that may or may not be fixed this year (or ever) is the Sustainable Growth Rate or SGR formula that has dogged physician reimbursement for many years; elimination was part of the Reform deal. As of now, this leaves us where we have been, with growth rates in the 2% to 3% range overall for physicians when calculating cap rates.

Never count your chickens before they hatch.

The IRS has posted a Guide Sheet for Examining Agents to be used in audits of tax-exempt entities, including hospitals. Of particular note are items 13 and 14 with respect to approval of compensation arrangements.

Payments to existing physician staff members (or physicians already located in the catchment area) such as those based on replication cost of Intangibles in a practice acquisition where the Income Approach shows no value could run the risk of being considered as compensation. Something to think about.

http://www.irs.gov/pub/irs-tege/governance_guide_sheet.pdf

Meanwhile, "back at the ranch," the instructor in Fair Market Value 101 is asking the students: "How many of you would pay $500,000 to replicate a business from which business you could earn no income?" Sampling of answers to follow…

In an earlier post, I promised to offer some insight into the workings of Medicare Advantage.  If you would like to read about it yourself, visit www.medpac.gov and download the 2009 Report to Congress and read Chapter 3.

The predecessors of Medicare Advantage – Medicare Risk and Medicare+ Choice – originated at the behest of west coast HMOs back in the 1980s (TEFRA).  (read more here: http://www.cms.hhs.gov/HealthCareFinancingReview/downloads/06-07Winpg81.pdf ) The original model had the Medicare Program paying the HMO 95% of the local traditional (or fee-for-service) Medicare Per Capita spending, known as the Adjusted Average Per Capita Cost or AAPCC.  Theoretically, this was to save 5% for the Medicare Program; however, most studies indicated that enrollees in these Medicare HMOs tended to be healthier than those in traditional Medicare and therefore have lower levels of spending.  Nonetheless, for reasons explained below, these Models had a large impact on Medicare spending.

The early models used capitation to pay physician practices or larger, integrated entities which included hospitals.  Capitation pays a fixed fee per month to the practice or other entity for each patient enrolled with that entity, from which all the costs of care for the patient must be paid. This contrasts with fee-for-service, which pays for each treatment the patient receives.  Fixed payment per patient enrolled versus variable payment based on services utilized.  The effect for many years was to drive down utilization and therefore cost. To the extent that the physicians did a good job managing the care and cost of their patients, they earned financial incentives from the difference between the capitation payment and the cost of caring for the patients.

The reduction in Hospital utilization as measured by Average Length of Stay (ALOS) was dramatic in the early years.  As capitated Medicare moved into new markets, ALOS would decline significantly in both Medicare HMOs and fee-for-service Medicare!  This saved money for sure and for a time altered the way hospitals were utilized.  However, as can be seen from the following Graph, by the end of the 1990s, most of the savings from reducing ALOS had been squeezed out of the system.

Alos

Next Post on this topic: “Wha’ Happened?”

How Far Is It?

August 25th, 2009 | Posted by Mark Dietrich in Healthcare Reform - (0 Comments)

Its about 650 miles from Paris, France to Berlin, Germany.  It’s about that far from Boston to Charlottesville, Virginia and from San Francisco to Portland, Oregon. And, its about 3000 miles from Portland to The Big Apple.  Along the way from West to East, you pass over mountains, through deserts and vast hectares of farmland where very few people live.  Point is, a lot of things change when you move far away from a given location. Lifestyle, food, environment, health and – guess what – healthcare.  There are a lot of rather silly comparisons between European-style healthcare systems for small countries you can easily cross in half a day and the United States, one of the largest countries by square miles in the world and with an ethnically diverse population.  These comparisons are similar in foolishness to the comparisons of public transit systems in countries the size of American states.  The population of England is about 51 million in an area less than the state of Oregon, whose population is less than 4 million.  England is 9 times more densely populated than the US: I’ll betcha that makes public transit work better – if you can find a seat.

California has the sixth or seventh largest economy in the world – at least it did before the recession.  The areas like San Francisco have very mature Managed Care market structures.  If you go to Jackson, Mississippi you are not going to find a Managed Care insurance system like San Francisco.  And, given the lack of population size and density, you could never make one work.  The Greater Boston Area has the highest concentration per capita of physicians in the country – and perhaps the world.  (find it here: http://www.cms.hhs.gov/MedicareMedicaidStatSupp/LT/list.asp#TopOfPage)  That is not true of Millinocket, Maine or the State of Montana.  Because of the disparity in geographical distances and provider concentration (among other factors) the Medicare Program has a special class of hospital called a Critical Access Hospital to service rural areas, which are paid based upon their costs rather than the standard Medicare Prospective Payment System – Millinocket has one of these.  Montana has less than 1 million people, but in size it is about the same square miles as Germany, which has 82 million residents.  You have to travel a long way for healthcare in much of Montana, without public transit.

I heard a rather curious report on NPR yesterday, which did not serve to freshen the air. http://www.npr.mobi/templates/story/story.php?storyId=112172939.  The interviewee was a Washington Post Reporter who had traveled around the world for three years to write a book on different healthcare systems.  He had a number of anecdotes about doctors he had interviewed in various countries, the collection of which made him an expert on what healthcare system was best, I guess.  To be fair, I haven’t read the book, but I have been doing this for more than 30 years and doubt you could learn every major health system in only three years.  My favorite story was how the Japanese love going to the doctor.  He failed to mention that per capita spending on pharmaceuticals in Japan is 16% higher than in the US, the highest in the developed countries. Don’t take my word for it, read it for yourself. http://www.vfa.de/download/SAVE/en/vfa-en/publikationen-en/e-statistics/e-statistics-2008.pdf  This has something to do with the fact that “Japan has fewer physicians per capita than most other OECD countries. In 2006, Japan had 2.1 practising physicians per 1 000 population, well below the OECD average of 3.1. The relatively low number of doctors per capita in Japan is due at least partly to government policies fixing limits on the number of new entrants in medical schools.” http://www.oecd.org/dataoecd/45/51/38979974.pdf  No time for treatment, take this pill.  He did say, without elaboration, that Japan’s average hospital stay is 36 nights versus our 6 nights.  I, for one, would love to hear what he learned about that.

As the misinformation, disinformation and overall lack of information in the debate on reform of the healthcare system mounts to Everest scale, the latest factoid requiring some clarification is the attempt to blame health insurance companies for the millions of uninsured.  One peculiar aspect of this blame game involves the suggestion that health insurers need competition from a government-sponsored alternative. I have not heard a single politician, reporter or interviewee mention the fact that for decades, the Department of Justice and Federal Trade Commission, irrespective of controlling political party, have effectively ceded monopsony control of insurance markets to the private health insurance companies.

In July 2004, the two Agencies released a report titled Improving Health Care: A Dose of Competition, which basically reinforced the 1996 and 2002 Statements. 

"Indeed, even if we assume physicians confront a monopsonist health plan that neither unlawfully acquired nor unlawfully exercised that power, authorizing physicians to engage in collusive conduct will not serve the interests of consumers. A health insurer with monopsony power is likely to impose quantity restrictions that will increase prices for consumers. If providers were to acquire countervailing market power, the result is likely to be further quantity restrictions – increasing the prices paid by consumers above those already imposed by the monopsonist."

Monopsonist refers to a situation in which there is a single buyer in a market, similar to a monopolist, which refers to a single seller in a market.

And, as always, don't take my word for it.  You can read about it in a Government Accountability Office report: Private Health Insurance: Number and Market Share of Carriers in the Small Group Health Insurance Market in 2004.

http://www.gao.gov/new.items/d06155r.pdf

I have been watching some of the “talking heads” from both political parties waxing philosophical about Healthcare Reform.  On Sunday’s programs, there seemed to be a competition between “Medicare for All” (MFA (or Museum of Fine Arts?)) as seen at http://www.youtube.com/watch?v=f3BS4C9el98) and something I’ll call “Multi-State Health Insurance” (MUSHI or MUSH, for short) where federal law would trump state licensing of insurers operating within their borders.

Let’s dispense with Medicare for All (MFA).  Readers of this BLOG will be familiar with Medicare as it is followed and reported on closely.  Medicare Part A, which covers Hospital, Skilled Nursing Facilities (SNFs or Sniffs) and various other costs, is supposedly paid for out of the 2.90% payroll tax (charged on ALL payroll, irrespective of earnings), one-half of which is paid by the employer and one-half by the employee.  These taxes go into a “Trust Fund”, which will be bankrupt by 2019 according to the Trustees 2009 Report (http://www.cms.hhs.gov/ReportsTrustFunds/) (it has long been actuarially bankrupt, much like the Retirement Plans of many “old economy” employers and airlines).  Medicare Part B, which pays for Physicians Services, Outpatient Services etc. is in large part funded out of general tax revenues!  You can see what is covered by Part A and Part B at

http://www.medicare.gov/Library/PDFNavigation/PDFInterim.asp?Language=English&Type=Pub&PubID=10116.

More importantly from the standpoint of the insured or Medicare Beneficiary, the co-insurance, co-pays and deductibles work like this: For Part A, Beneficiaries generally pay no monthly premium since the costs are to be paid from the (bankrupt) Trust Fund.  The Deductible charged to the Beneficiary during the first 60 days of Hospitalization is $1,068; after 60 days and until 90 days it is $267 per day; after 90 days it is $534 per day.  For Skilled Nursing Facilities the Coinsurance is $133.50 per day for days 21 through 100 of each benefit period.

http://www.mymedicaresupplementinsurance.com/2009_Medicare_Deductibles_Copays.html. 

For “standard” beneficiaries, Part B insurance costs $96.40 per month; it can be as much as $308.30 if the Beneficiary is filing a joint return with more than $426,000 of Income.  The costs in excess of the premium paid by Beneficiaries are paid from general tax revenues of the U.S. Treasury, or more accurately, by adding to the Deficit.  The Part B deductible payable by each Beneficiary is $135.  The co-insurance, however, is 20% of ALL Medicare Allowed Charges and there is no ceiling on this co-pay.  There are also significant limitations on outpatient therapies (e.g., physical therapy) as well, for example.

http://www.cms.hhs.gov/apps/media/press/factsheet.asp?Counter=3272

 

It is not clear to me how attractive Medicare-style coverage would be to many employees of larger companies.  I would encourage you to express your view to your Congress-folk.  Speaking for myself, Medicare would be very unattractive as a coverage without Medicare Supplemental Insurance, which many Medicare beneficiaries pay a significant monthly premium for.


Onto MUSH. Speaking for myself, I would truly like to believe that if I lived in New York City I could buy health insurance at the same rate as folks living in rural Pennsylvania if only the licensing of insurance companies was a Federal Right and not a State Right, as one Congressman suggested Sunday.  Constitutional limitations notwithstanding, I am disinclined to believe that residents of one of NYC’s Five Boroughs could buy Health Insurance at, say, Kutztown, PA rates, irrespective of insurance company licensing.  It costs a lot more to live in Manhattan than Kutztown. Rent is higher, food is higher, wages are higher, and I recall that utilization of healthcare services is much higher.  Therefore, the cost for a given diagnosis is much higher in NYC than in Kutztown.  And, lo and behold, the cost of insurance reflects the higher costs (Duh).  This is easily borne out by Medicare data (See my article Healthcare Market Structure and Its Implication for Valuation of Privately Held Provider Entities: An Empirical Analysis, Business Valuation Review, Volume 27, Number 2 (Summer 2008) where Kings County (Brooklyn), New York County (Manhattan), and Nassau County (part of Long Island) are among the 20 most expensive counties for healthcare costs in the nation.  Or, you can read about different market areas in a report by the Government Accountability Office (GAO) at http://www.gao.gov/products/GAO-08-880.)

A quick and easy means of comparing cost differences is to look at Medicare Advantage rates by County.The 2009 Monthly Medicare Advantage rate for residents of Kutztown,which is part of Berks County,is $802.  For a resident of New York, it is $1,127, which is 25% higher.  This is not a perfect comparison as there are limitations built into the Advantage rates which would tend to understate New York cost in my experience.  Medicare has a different benefit structure than commercial or HMO polices for the non-Medicare population – and those policies have numerous benefit structures themselves!  If you have looked at the breakdown of insurance companies in a doctor’s medical billing system, you will often see dozens of different categories from the same insurance company reflecting different policies/benefits or the ASO policies described in the previous post below.

Upshot? Health insurance premiums are less in Pennsylvania because the cost of healthcare services is less.  Changing insurance laws is not going to change that, even in the long-term – unless local economies collapse and cost of living differentials disappear.

Bottom line is that you should not hire an actor to repair a fighter plane, even if he/she played a mechanic on TV or flew first class to LA.  You can fill empty space with noise, but the empty space will still be devoid of thought.


Other BLOG posts dealing with Healthcare Market structure implications are at http://cpanet.typepad.com/cpanet/market_approach/.

This is likely to be the first of several posts as I explore the more than 1100 pages in the Proposed Rule. First no-surprise is that Imaging gets hammered once again. As recommended by MedPAC and initially contained in legislation that did not pass last Fall, the utilization assumption for high-tech imaging equipment costing more than $1.0 million is to rise from 50% to 90%, resulting in a dramatic reduction in the practice expense component/technical component payment per scan.

Quoting the Rule: "We believe the studies cited by MedPAC suggest what we have long suspected, that physicians and suppliers would not typically make huge capital investments in equipment that would only be utilized 50 percent of the time." (Duhhh)

This Proposed Change begs a significant Valuation issue. The drop in revenue and even greater drop in contribution margin cannot be quantified via the discount rate; it has to be accounted for in the cashflow forecast and dramatic differences in value will result from the quantification assumption. Good time to check with Industry experts like Doug Smith at Barrington Lakes Group about what operators are expecting and doing with transactions. Doug's Imaging Chapter in BVR's Guide to Healthcare Valuation is an eye-opener about the valuation of Imaging Centers.