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BUSINESS VALUATION • PROFESSIONAL SERVICES VALUATIONS • ASSET APPRAISALS • REAL ESTATE • TRANSACTION ADVISORY • CONSULTINGDALLAS • NASHVILLE
2014
THE LATEST AND GREATEST IN PAY FOR PERFORMANCE AND ACOS
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INTRODUCTION
VMG Health
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VMG Health strives to be a trusted advisor by providing thought leadership and valuation solutions to the healthcare industry. We seek to provide this expertise through our core values of integrity, depth
of knowledge and responsiveness while providing outstanding opportunities for our professionals.
VMG Health provides transaction advisory and valuation services solely in the healthcare industry Founded in 1995 Offices in Dallas, Texas and Nashville, Tennessee Clients include non-profit and for-profit health systems throughout the United States in
addition to ancillary health services providers, physician organizations and health plans. The VMG team performs over 1,500 engagements each year
VMG is structured in teams Professional Service Agreement Valuations Business Valuation Transaction Advisory Services / JV Relationship Development Equipment Appraisals Real Estate Appraisals Financial Reporting Valuations (ASC 805 & ASC 350) Due Diligence
INTRODUCTION
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Partner at VMG Health Leads Professional Service Agreements Division Previously with KPMG’s litigation department Former Finance professor from the University of North Texas Published and presented over 50 times related to physician compensation and fair market value Board meetings, articles and presentations on P4P initiatives
• April 2014 HFM Magazine “Evaluating The Fair Market Value of Pay for Performance”
• Finance Committee Attendance on major P4P initiatives
Jen Johnson, CFA
INTRODUCTION
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P4P OVERVIEW
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Non P4P reasons for integration
Increased compensation: post employment or contracted arrangement
Better hospital-based reimbursement
Replace potential loss of ancillary earnings
Physicians and hospitals need to collaborate more than ever – P4P drivers
Affordable Care Act
Security – healthcare reform, changing reimbursement
Investment requirements for information technology
Participate in risk-based contracting, ACOs, quality initiatives
WHY THE GROWTH IN INTEGRATION & P4P?
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Hospital Quality Incentive Demonstration (HQID) for over 250 hospitals: 2003-2009
Physician Group Practice Demonstration for ten physician groups: 2005-2010
In 2008, the Robert Wood Johnson Foundation and California HealthCare Foundation
reported results of a national program that tested the use of financial incentives to
improve the quality of health care. Tested seven projects across the nation that adjusted
compensation based on performance scores – hospitals and physicians. Notable findings:
– Financial incentives motivate change
– Alignment with physicians is a critical activity for quality outcomes
– Public reporting is a strong catalyst for providers to improve care
February 2012 – Committee on Ways and Means – 1 example
– UnitedHealth Group discusses results of its Premium Designation Program (PD)
– Results show over 50% decrease in some complication rates
P4P BACKGROUND - QUALITY
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Savings alone (capitation) no longer in the mix
13 Gainsharing Opinions (2001-2008) – quality thresholds
2013 Results 114 ACOs in the program - 54 of the ACOs saved money - of $126 million
September 2014 ACO Business News Reports – mixed reviews
22 of original 32 Pioneer ACO programs remain
Sharp just dropped out because it was at risk for “a significant shared loss”
Wellmark/BCBS 5 ACOs – improved quality 35% and saved $12 million over 2 years
Multiple Models and arrangements exist today beyond commercial and Medicare ACOs
2013 Greater New York Hospital Association - 100 hospitals desired to work with participating
physicians to account for the use of hospital resources. Physicians that met hospital quality targets
while lowering costs could be compensated a portion of the savings.
SAVINGS & QUALITY COMBINED
Third party payors
– UnitedHealth Group – largest US health insurer by sales
2013 paid 21 different specialties based on quality
– WellPoint – largest US health insurer by membership
Will increase primary care physician pay by 10% - coordinated care
Additional cost savings bonus of 20% to 30% of savings achieved
– BCBS and Aetna
Growing P4P programs
Including payments for both cost savings and quality
Governmental Programs growing
– State and Federal
– MSSP, ACOs and bundled payments
Market Comparables for P4P Payments
ACA Provisions & P4P
CMS to play major role in developing P4P programs
“VBP” – quality and cost goals simultaneously Section 3001: Hospital Value Based Purchasing 2012
• Quality Outcomes payments• Efficiency measures in 2014• Must be reporting on Hospital Compare website for at least 1
year• DRG reductions nationwide will fund• UP to 2% can be earned
Section 3006: Value Based Purchasing Skilled Nursing Facilities and Home Health
Section 3007: Value Based Payment Modifier under the Physician Fee Schedule
• Payment modifier for cost and quality• 2015 for larger groups• 2017 for all• Size of incentive not specified
ACA provisions continued…
Section 3008: Payment reduction for Hospital Acquired Conditions
Section 3021: Establishment of Center for Medicare and Medicaid Innovation within CMS, 3 of 18 models are P4P
• Appropriate criteria for diagnostic imaging orders• Payments for using patient decision support tools• Payments for using evidence based guidelines for cancer care
Section 3022: Medicare Shared Savings Program• Promotes ACO development• Cost savings and quality must be met
Governmental programs – great roadmap for how much is acceptable to distribute to physicians. Consider 3rd party payors as well when defining the “P4P market”.
But…does the market know what works and how to best structure payments?
2014 RAND Report: Measuring Success in Health Care - Value Based Purchasing programs U.S. Department of Health and Human Services requested study 129 VBP programs (91 P4P, 27 ACOs, 11 bundled payments) Measures: clinical quality, cost, outcomes, experience Recommendations:
Set measurable goals, use national data Case-mix adjust outcomes measures, use broad set of measures,
identify overtreatment measures, monitor Evolve from narrow process measures to broader set emphasizing
outcomes Sponsor engage providers in design/implementation VBP sponsors should collect a common set of factors to find best
working program Need more information:
• HHS should develop a structured research agenda to address gaps in VBP knowledge base
• CMS should study private-sector programs, program design information not available
• Study changes and investments, experiences and challenges
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P4P ARRANGEMENTS & FMV
Standard process leading up to P4P payments1. Recognized organization identifies quality metrics or average costs2. Reporting measures is required, or costs are tracked3. Benchmarking data is gathered4. Payments for outcomes or savings is observed in market
FMV can now be established
Justification for payments changing1. Payments for Reporting (ie: PQRI)2. Pay for Process3. Pay for Outcomes4. At risk for sub-par quality
Common factors included in P4P arrangements– Lowering costs without sacrificing quality– Quality outcomes payments– individual, services line level, entire population– Use of technology
Valuation drivers– Outcomes– New dollars coming in from 3rd parties– Service line or practice level
Evolution of P4P Arrangements – What We Do Know
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May be a result of joint ventures, acquisitions, employment or independent contractor arrangements.
*May have a P4P component – biggest area of research and innovation for PSA Division. We will be stuck between FFS and P4P for a while
Professional Service Agreements (“PSA”)
PHYSICIAN ALIGNMENT TRENDS – P4P
Physician Executive Administrative Services* Call Coverage* Co-management
(fixed + variable)*
Management* P4P, Bundled, & ACO Payment models*
PSA Model($/WRVU + expenses)*
Professional/ technical splits Clinical Services* Development
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Less risk for physicians - traditional deals with P4P component
Clinical (% of base add-on)Medical directorships (hourly rate differential)Call coverage (portion at risk for outcomes)
Medium risk - Co-management of service line = fixed + variable fee
Quality outcomesSometimes savings
More risk for physicians
ACO type modelsUpside based on actual savings -> possibly downside
– Quality initiatives provide gate or extra upsideBundled Payments
PHYSICIAN RISK & ARRANGEMENT TYPES WITH P4P
1. Agreement terms must be understood and are sometimes unclear at valuation stage, define:
– What services will be provided?
– How will parties be compensated?
2. Commercially Reasonable – gaining importance
– Facility needs – check for overlap of services (numerous medical directors needed)
– Operational assessment (quality metrics relevant for patient population)
3. There are no published standards for physician compensation valuations, P4P new
– Appraisal firm should understand
Healthcare regulations
Valuation principles
Fair Market Value
Data considerations – competing hospital, extra caution
Valuation Starting Point
Based on the anti kickback statute, and other healthcare regulations and guidelines, any transaction
between hospitals and physicians must be at Fair Market Value.
The amount at which property would change hands between a willing seller and a willing buyer when
the former is not under any compulsion to buy and the latter is not under any compulsion to sell and
when both have reasonable knowledge of the relevant facts, absent the consideration of referrals.
Provides a conclusion which should not reflect consideration for value or volume of referrals.
– Offer equal P4P opportunities to all providers
– Do not tie P4P compensation to expected referrals
P4P comparables
– Stick to regulatory guidance when it comes to paying for quality or shared savings
– Governmental programs and third party payors are good market comparables
Fair Market Value Definition
Hospital and physicians enter into an agreement where physicians are jointly
responsible with hospital for managing a defined service line
Various arrangement types exist in the market
– Joint Ventures
– Contractual arrangements
Payments contained in the agreement
– Will vary based on services outlined
– Should be linked to actual services and/or outcomes
Co-Management - The Basics
Fixed Fee + Variable Fee = Co-Management Fee Structure
Physician service related payments are justified by need for clinical expertise
Time dedicated to meetings designed to improve the overall quality of care for a specific
service line.
May also include
– Medical Directorship
– Non-physician services
Billing
Management/administration
– Call coverage
The duties must not overlap with hospital staff
Probably not a typical management fee
Co-Management - Fixed Fee Overview
Quality outcomes drive payments - create payment tiers for incentives based on various outcomes
Improvement and superior outcomes may warrant incentive payment
– Obtain industry-recognized benchmark data for the quality metrics, (average or median and
top or 90th percentile)
– Understand historical performance and who is responsible for developing and implementing
the strategy
Cost savings metrics
– Administrative oversight to protect quality is essential
– Measurement must be tied to physician’s input
Co-Management - Variable Fee Overview
The following payment allocations may be included within a clinical integration model Bundled payment splits – understand who is providing what service
Quality and Shared Savings splits among ACO entity and hospital and physicians
FMV process - balanced approach for overall model should be assessed Third party funded or from hospital
Infrastructure cost recovery
Buy-in or participation Fee
Time spent/effort – hourly rate paid
Split of savings – existence of minimum savings threshold
Split of quality - benchmarks utilized
Upside and downside risk
Care coordinator payments – ie: Nurse care manager
PMPM fee for management – consider acuity and NCQA
Clinical Integration payments - ACO/IDN models
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P4P COMPLIANCE AND TIPS
Hospital is at risk for relying on unsupportable valuations
Valuation methodology is as important as total compensation
No opinion shopping, carefully choose your valuation firm
Logic Test:
– Is it commercially reasonable?
– Do not pay fulltime benefits/malpractice premiums for part-time services
– Physicians paid above the 75th percentile of market data should demonstrate productivity consistent with
other physicians in this percentile
– Understand arrangements where the provider is not making money
– Compensation for administrative duties should be based on significant duties
– P4P – watch out for low hanging fruit and rebase annually
Case Law Growth and Take-Aways
Quality measures should be clearly and separately identified Quality measures should utilize an objective methodology verifiable by
credible medical evidence Quality measures should be reasonably related to the hospital’s
practice and consider patient population Do not consider the value or volume of referrals. Consider an incentive program offered to all applicable providers Incentive payments should consider the hospital’s historical baseline
data and target levels developed by national benchmarks Thresholds should exist where no payment will accrue and should be
updated annually based on new baseline data. Hospitals should monitor the incentive program to protect against the
increase in patient fees and the reduction in patient care Incentive payments should be set at FMV
Regulatory Guidance - Quality
Gainsharing Guidance – Favorable OIG Opinions Each member of the physician group should have medical staff privileges The arrangement should be administered by a program administrator, whose compensation was not
tied in any way to the incentive compensation.– A program administrator should identify cost-savings metrics after reviewing historical practices and
understanding its medical appropriateness.– The savings targets should be “re-based” at the end of each year in multi-year arrangements.– The hospital should calculate the cost savings separately for each group and for each cost savings
recommendation. The arrangement should include objective measures to monitor quality (i.e., CMS Specification
Manual for National Hospital Quality Measures). Incentive payments should be set at FMV------------------------------------------------------------------------------------------------------- More complex factors should be considered for allocating savings associated with patient population
and bundled payments – Responsibility for outcomes and savings– Risk adjustment for patient population– Responsibility for infrastructure costs (if applicable)
Caps are prudent and seen in demonstration projects
Regulatory Guidance – Shared Savings
Evolutionary Process, “Seen one, seen one”
Reported Data for making P4P decisions – provider and payor concerns
– Inaccurate
– Inconsistent, outlier treatment
– Expensive/timely to aggregate and report
IT Infrastructure – other issues
– Sharing and access
– New software options
– Connectivity of information among integrated parties
Common Challenges with P4P
Allocation of payment methodologies
– Primary care versus specialists
Primary care – ACO model, PMPM and allocation of shared savings
Specialists – ACO model, service line co-management and bundled payments
– Year 1 versus Year 2+
Care coordinators – needed and who pays for them?
Risk taking
Choosing Metrics - inconsistent among P4P programs
Common Topics in the Boardroom with P4P
Start small
Have a written agreement
Modest set of metrics – perhaps consistent with those found in both commercial ACOs and Medicare ACOs
Update and rebase metrics annually
Understand who is driving cost savings and quality
Have safeguards which prevent cherry picking and lemon dropping
Identify flow of funds allocation early on in process
Compliant P4P payment formula = Good Data + Logic + FMV guidance
P4P Program Starting Guidelines
