Leading Topics Related to Leading Topics Related to the FMV of Healthcare the FMV of Healthcare

Arrangements Arrangements

Presenter: Presenter:

Daryl P. Johnson, HealthCare Appraisers, Inc.Daryl P. Johnson, HealthCare Appraisers, Inc.

Topic No. 1Topic No. 1

Investment valueInvestment value vs. vs. fair market fair market valuevalue – How do these standards – How do these standards of value differ, and how do the of value differ, and how do the differences affect the valuation differences affect the valuation

of healthcare transactions?of healthcare transactions?

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No. 1 - Investment Value vs. FMVNo. 1 - Investment Value vs. FMV

The The fair market value standardfair market value standard is a hypothetical is a hypothetical willing buyer/willing seller scenario. No willing buyer/willing seller scenario. No consideration is given to any unique attributes or consideration is given to any unique attributes or synergies of either party in reaching a synergies of either party in reaching a determination of value. determination of value.

The The investment value standardinvestment value standard takes into takes into consideration the unique synergies or attributes consideration the unique synergies or attributes that one or both parties may possess. that one or both parties may possess. For example, if a hospital has more favorable For example, if a hospital has more favorable

reimbursement that will enhance the profitability of reimbursement that will enhance the profitability of a diagnostic cath lab being considered for purchase a diagnostic cath lab being considered for purchase by the hospital, any valuation consideration of this by the hospital, any valuation consideration of this benefit would reflect benefit would reflect investment valueinvestment value, and not , and not FMV. FMV.

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No. 1 - Investment Value vs. FMVNo. 1 - Investment Value vs. FMV(cont.)(cont.)

While FMV is the applicable valuation While FMV is the applicable valuation standard for most healthcare transactions, standard for most healthcare transactions, commercial reasonablenesscommercial reasonableness may dictate a may dictate a departure from the strict FMV definition. departure from the strict FMV definition. For example, if a hospital has purchasing For example, if a hospital has purchasing economies related to med/surg supplies, economies related to med/surg supplies, any arrangement involving the hospital’s any arrangement involving the hospital’s acquisition of these items through an acquisition of these items through an agreement with physicians should give agreement with physicians should give consideration to the hospital’s actual cost consideration to the hospital’s actual cost (which invokes (which invokes investment valueinvestment value).).

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Topic No. 2Topic No. 2

The OIG precludes the use of The OIG precludes the use of potentially “tainted” market potentially “tainted” market

values (values (i.e.,i.e., those arrangements those arrangements that involve physician that involve physician

ownership). What are some of ownership). What are some of the key implications of this OIG the key implications of this OIG guidance in valuing healthcare guidance in valuing healthcare

transactions?transactions?

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No. 2 - Tainted Market ValuesNo. 2 - Tainted Market Values

In addition to healthcare regulations, general valuation In addition to healthcare regulations, general valuation theory requires the use of “arms length” market transaction theory requires the use of “arms length” market transaction data. Healthcare transactions are frequently suspect.data. Healthcare transactions are frequently suspect.

A market approach is the preferred valuation approach for A market approach is the preferred valuation approach for many types of compensation arrangements.many types of compensation arrangements.

For certain types of arrangements, virtually no “non-For certain types of arrangements, virtually no “non-tainted” data is available.tainted” data is available. Lithotripsy (to be discussed later)Lithotripsy (to be discussed later) On-call arrangementsOn-call arrangements Medical directorships Medical directorships

The valuator must consider alternate approaches.The valuator must consider alternate approaches. Consider analysis of physician compensation dataConsider analysis of physician compensation data Consider reimbursement rates from Medicare and Consider reimbursement rates from Medicare and

commercial payorscommercial payors Consider whether the arrangement can be “crosswalked” Consider whether the arrangement can be “crosswalked”

to a non-healthcare settingto a non-healthcare setting

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Topic No. 3Topic No. 3

What is the “top down” approach What is the “top down” approach in the context of valuing under in the context of valuing under

arrangements, and is such arrangements, and is such approach a valid valuation approach a valid valuation

approach?approach?

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No. 3 - “Top Down” ApproachNo. 3 - “Top Down” Approach

““Non-traditional” Non-traditional” under arrangementunder arrangement agreements are emerging agreements are emerging related to outpatient surgical departments, cath labs and other related to outpatient surgical departments, cath labs and other hospital services. hospital services.

A “top down” approach “passes through” all of the hospital's A “top down” approach “passes through” all of the hospital's reimbursement, less a portion retained by hospital related to reimbursement, less a portion retained by hospital related to billing, collections, and other hospital services. billing, collections, and other hospital services.

This approach leaves open significant opportunity for This approach leaves open significant opportunity for challenge. challenge. The The actual servicesactual services provided by the under arrangement provided by the under arrangement

entity must be FMV, and the valuation approach should entity must be FMV, and the valuation approach should primarily consider the value of such services primarily consider the value of such services

The level of reimbursement received by a hospital may have The level of reimbursement received by a hospital may have no bearing on the FMV of the servicesno bearing on the FMV of the services

Consider a “crosswalk” to non-healthcare scenariosConsider a “crosswalk” to non-healthcare scenarios ““Under arrangements” structures might not be available except Under arrangements” structures might not be available except

where only components of the services (and not the entire where only components of the services (and not the entire service) are provided. This may preclude many of the existing service) are provided. This may preclude many of the existing and future arrangements of this type.and future arrangements of this type.

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Topic No. 4Topic No. 4

Is the concept of a physician’s Is the concept of a physician’s “opportunity cost” a viable “opportunity cost” a viable

valuation methodology?valuation methodology?

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No. 4 - “Opportunity Cost”No. 4 - “Opportunity Cost” Not really. In fact, Stark III says…opportunity cost (Not really. In fact, Stark III says…opportunity cost (i.e., i.e.,

the value of his/her clinical services) the value of his/her clinical services) may notmay not be an be an indicator of the value of a physician’s administrative indicator of the value of a physician’s administrative time. time.

This position is logical and consistent with the general This position is logical and consistent with the general definition of FMV (definition of FMV (i.e.,i.e., a willing buyer/willing scenario). a willing buyer/willing scenario). Doesn’t opportunity cost represent Doesn’t opportunity cost represent investment valueinvestment value ? ?

RBRVS specifically identifies that certain physician duties RBRVS specifically identifies that certain physician duties carry a higher relative worth than others. (Otherwise, carry a higher relative worth than others. (Otherwise, the “physician work” component of RVUs would be time-the “physician work” component of RVUs would be time-based.) based.)

Opportunity cost can be considered, along with market Opportunity cost can be considered, along with market data related to administrative services (data related to administrative services (e.g.,e.g., Clark Clark Survey) and informed judgment as to relevant worth of Survey) and informed judgment as to relevant worth of one activity compared to another.one activity compared to another.

For certain physician specialties (For certain physician specialties (e.g.,e.g., PCPs), the value of PCPs), the value of administrative time may be administrative time may be higher thanhigher than the value of the value of clinical time.clinical time.

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Topic No. 5Topic No. 5

Regarding compensated call Regarding compensated call coverage arrangements, what coverage arrangements, what are current trends in payment are current trends in payment methodologies, and how can methodologies, and how can

these arrangements be valued?these arrangements be valued?

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No. 5 - On-Call CompensationNo. 5 - On-Call Compensation

Payment for on-call services (or at least compensation for Payment for on-call services (or at least compensation for unfunded emergent care) has almost become a “mandate” unfunded emergent care) has almost become a “mandate” of sorts for most hospitals.of sorts for most hospitals. Where possible, rather than simply paying for call with Where possible, rather than simply paying for call with

an “auto-pilot” mentality, hospitals should attempt to an “auto-pilot” mentality, hospitals should attempt to incorporate select quality standards to be met.incorporate select quality standards to be met.

The most prevalent payment methodologies include:The most prevalent payment methodologies include: Payment for unfunded care (Payment for unfunded care (e.g.,e.g., 80% to 120% of 80% to 120% of

Medicare)Medicare) Provision of claims defense or indemnification or Provision of claims defense or indemnification or

reimbursement for malpractice insurancereimbursement for malpractice insurance Per diemPer diem (typically a 24-hour period) or (typically a 24-hour period) or per diemper diem plus plus

payment for unfunded carepayment for unfunded care ““Activation fee” (Payment only for days the on-call Activation fee” (Payment only for days the on-call

physician is “activated”)physician is “activated”) Deferred compensation plansDeferred compensation plans

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No. 5 – On-Call Compensation No. 5 – On-Call Compensation

On-call compensation pitfalls: On-call compensation pitfalls: See OIG Advisory Opinion 07-10See OIG Advisory Opinion 07-10 Paying above FMV (A better vehicle for Paying above FMV (A better vehicle for

overcompensating physicians than the medical overcompensating physicians than the medical directorship!)directorship!)

Paying for call coverage absent a contractual Paying for call coverage absent a contractual commitment for defined periods of coveragecommitment for defined periods of coverage

Paying for unnecessary or duplicative coverage Paying for unnecessary or duplicative coverage ((e.g.,e.g., ortho hand and plastics hand) ortho hand and plastics hand)

Paying for “back-up” call when not supported by Paying for “back-up” call when not supported by call frequency and/or the urgency of patient needscall frequency and/or the urgency of patient needs

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Topic No. 6Topic No. 6

What unique issues arise in What unique issues arise in connection with valuing connection with valuing

lithotripsy and other “per click” lithotripsy and other “per click” arrangements, and what should arrangements, and what should

cause concern?cause concern?

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No. 6 – “Per Click” ArrangementsNo. 6 – “Per Click” Arrangements

Breaking news… “Urologists Corner the U.S. Lithotripsy Market”Breaking news… “Urologists Corner the U.S. Lithotripsy Market” Non-physician owned lithotripsy companies are a distinct Non-physician owned lithotripsy companies are a distinct

minority. Therefore, “non-tainted” market data is extremely minority. Therefore, “non-tainted” market data is extremely limited.limited.

Without reliable market data, a “cost approach” is the most Without reliable market data, a “cost approach” is the most appropriate valuation approach. Invariably, a cost approach appropriate valuation approach. Invariably, a cost approach yields lower values than the urologist-investors seek.yields lower values than the urologist-investors seek.

Consider the possibility of a Consider the possibility of a descendingdescending payment structure; a payment structure; a fixed fee plus a per click; and/or a payment “cap” to avoid fixed fee plus a per click; and/or a payment “cap” to avoid windfall payments should volume escalate.windfall payments should volume escalate. Notwithstanding, as a hospital’s lithotripsy volume Notwithstanding, as a hospital’s lithotripsy volume

approaches a certain threshold, the approaches a certain threshold, the commercially commercially reasonablereasonable option is for the hospital to purchase its own option is for the hospital to purchase its own lithotripter or to contract with a lithotripsy provider on lithotripter or to contract with a lithotripsy provider on comparable terms (whereupon the urologists’ lithotripsy comparable terms (whereupon the urologists’ lithotripsy referrals will make a beeline for another surgical facility). referrals will make a beeline for another surgical facility).

A lithotripsy arrangement could be the “poster child” for A lithotripsy arrangement could be the “poster child” for regulatory abuse.regulatory abuse.

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Topic No. 7Topic No. 7

What impact does the elimination What impact does the elimination of the CMS safe harbor for of the CMS safe harbor for

personally performed physician personally performed physician services have on healthcare services have on healthcare

organizations?organizations?

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No. 7 – Elimination of the Hourly No. 7 – Elimination of the Hourly Safe HarborSafe Harbor

Hourly Rate (75th)

Hourly Rate (90th)

Hourly RateCMS

“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. 8Topic No. 8

““Co-management arrangements” Co-management arrangements” typically involve physician/hospital typically involve physician/hospital

ventures to manage hospital ventures to manage hospital services lines, with compensation services lines, with compensation consisting of base and incentive consisting of base and incentive

components. What valuation components. What valuation approaches can be used to assess approaches can be used to assess

this new breed of management this new breed of management arrangementsarrangements??

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No. 8 – Co-Management No. 8 – Co-Management ArrangementsArrangements

Compliance with FMV is critical for regulatory compliance, Compliance with FMV is critical for regulatory compliance, but also for the ultimate success of the project.but also for the ultimate success of the project.

Available valuation methodologies are limited and Available valuation methodologies are limited and somewhat subjective.somewhat subjective.

In considering the primary valuation approaches (cost, In considering the primary valuation approaches (cost, income and market), an income approach can likely be income and market), an income approach can likely be eliminated. eliminated.

Using a cost approach, FMV of the management fee can Using a cost approach, FMV of the management fee can be established by assessing the required number of work be established by assessing the required number of work hours needed to provide the management services hours needed to provide the management services multiplied by a fair market value hourly rate.multiplied by a fair market value hourly rate. However, the exact number of required work hours However, the exact number of required work hours

cannot reasonably be determined in advance. cannot reasonably be determined in advance. Further, a key ideal of most co-management Further, a key ideal of most co-management

arrangements is to reward results rather than time-arrangements is to reward results rather than time-based efforts. based efforts.

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No. 8 – Co-Management No. 8 – Co-Management Arrangements Arrangements

A market approach recognizes that each co-management A market approach recognizes that each co-management arrangement is unique, and reflects specific market and arrangement is unique, and reflects specific market and operational factors which are singular to the specific operational factors which are singular to the specific setting. setting. Break the specific services down into specific tasks and Break the specific services down into specific tasks and

objectives, and then compare to other arrangementsobjectives, and then compare to other arrangements On an item specific basis, assess the relative worth of On an item specific basis, assess the relative worth of

each task/objective, and determine necessary each task/objective, and determine necessary adjustments to the comparable arrangements. adjustments to the comparable arrangements.

The cost and market valuation methodologies described The cost and market valuation methodologies described above must be reconciled to arrive at a final conclusion of above must be reconciled to arrive at a final conclusion of value. value.

The FMV of the The FMV of the total management feetotal management fee must be must be established, as well as the established, as well as the basebase and and incentiveincentive components. components.

Rev Proc. 97-13 may limit the amount of the incentive fee Rev Proc. 97-13 may limit the amount of the incentive fee in relationship to the base fee.in relationship to the base fee.

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Topic No. 9Topic No. 9

Discussion of CMS developments Discussion of CMS developments related to the permissibility of related to the permissibility of

“per click” compensation “per click” compensation arrangements.arrangements.

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No. 9 – Status of “Per Clicks”No. 9 – Status of “Per Clicks”

Stark III does not specifically affect Stark III does not specifically affect per click arrangements, but the per click arrangements, but the proposal in the physician fee proposal in the physician fee schedule rule would prohibit such schedule rule would prohibit such arrangements with an individual arrangements with an individual physician or physician group. Joint physician or physician group. Joint ventures would still be viable ventures would still be viable vehicles.vehicles.

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……and last…and last…Topic No. 10Topic No. 10

In theory, local market data may In theory, local market data may be the most relevant market be the most relevant market data in evaluating physician data in evaluating physician transactions. However, local transactions. However, local

data may be difficult to obtain. data may be difficult to obtain. What implications does this have What implications does this have

on the valuation process?on the valuation process?

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No. 10 – Local Market ValuesNo. 10 – Local Market Values

Most healthcare providers are reluctant to share their Most healthcare providers are reluctant to share their physician compensation data.physician compensation data.

Even if a few local market values can be obtained, there will Even if a few local market values can be obtained, there will undoubtedly be insufficient information to allow reasonable undoubtedly be insufficient information to allow reasonable comparisons to a subject arrangement (comparisons to a subject arrangement (e.g., e.g., how productive how productive is the OB/GYN being paid $340,000 in the local market?).is the OB/GYN being paid $340,000 in the local market?).

There is no assurance that local data points are free from There is no assurance that local data points are free from overcompensation bias. overcompensation bias.

In comparison to the thousands of respondents to at least 6 In comparison to the thousands of respondents to at least 6 national salary surveys, local data is generally anecdotal.national salary surveys, local data is generally anecdotal.

CMS specifically addresses situations when local data (CMS specifically addresses situations when local data (e.g.,e.g., with respect to real estate) is insufficient.with respect to real estate) is insufficient.

FMV of physician compensation may best be determined FMV of physician compensation may best be determined using national surveys as a starting point. Adjustments using national surveys as a starting point. Adjustments from the “norm” can then be made based upon differences from the “norm” can then be made based upon differences in productivity, extent of call coverage and administrative in productivity, extent of call coverage and administrative duties, local economics, etc.duties, local economics, etc.

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Questions?Questions?

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