Hot Valuation Issues for Physician Agreements

#AICPAhealth

Hot Valuation Issues for Physician

Agreements

2014 AICPA National Healthcare Conference

November 6, 2014

Carol W. Carden, CPA/ABV, ASA, CFE

American Institute of CPAs #AICPAhealth

Agenda

Overview

Multiple Layers of Physician Compensation – FMV and CR

Losses and Commercial Reasonableness

Impact of Health Reform

Questions

Carol Carden is a Principal with Pershing Yoakley & Associates, P.C., and

provides business valuation and related consulting services to a wide variety

of business organizations, primarily in the healthcare industry. Ms. Carden’s

primary areas of expertise are in finance, valuation, managed care and

revenue cycle operations for healthcare organizations. She has performed

appraisals of businesses and securities for a wide variety of purposes such

as mergers, acquisitions, joint ventures, management service agreements and

other intangible assets.

In addition to being a Certified Public Accountant, she has also earned the

Accredited in Business Valuation (ABV) credential from the American Institute

of Certified Public Accountants, the Accredited Senior Appraiser (ASA)

credential from the American Society of Appraisers and the Certified Fraud

Examiner (CFE) credential from the Association of Certified Fraud Examiners.

She is the Chair of the Executive Committee for Forensic and Valuation

Services and the former Chair of the Business Valuation Committee for the

AICPA, was Chair of the 2010 National AICPA Business Valuation Conference

and was on the planning committee for the 2011 AICPA National Healthcare

Conference. She was inducted into the AICPA Business Valuation Hall of Fame

in 2013.

Speaker Biography

#AICPAhealth

Multiple Layers of Physician

Compensation


Overview

With these types of models, it is important to:

• Understand the various functional agreements and how they relate to each

other.

• Know when a “stacking” analysis is in order.

• Be aware of the multiple benchmark compensation data sources available.

• Be aware of the various forms of compensation that are included in clinical

benchmark data.

• Appreciate the increased risks in stacking agreements.

• Ensure that each component of compensation, and the components when

viewed in their entirety, do not exceed fair market value (“FMV”) and are

commercially reasonable.

Hospitals and other organizations are utilizing more complex

compensation models, often with multiple layers of compensation for multiple services (sometimes referred to as “stacking”).


Physician Compensation:

Multiple Layers

Clinical Services

Teaching Services or Research Activities

Medical Directorships

Call Coverage

Co-management and Performance

Management

Mid-Level Provider

Supervision



Multiple Layers (Cont’d)

In addition, physicians can receive compensation in many forms, such as:

Base Salary

Sign-on/Retention

Bonuses

Productivity-Based

Incentives

Quality-Based IncentivesPractice

Profitability (Profit Sharing)

Tail Insurance

Excess Vacation

Relocation Costs

Excess Benefits



Multiple Layers (Cont’d)

As new compensation models become more complex, in

certain cases “the sum of the parts can exceed the whole”

and create commercial reasonableness and FMV issues

for the organization.


Evaluation of Increased Risks

Avoid being paid for two or more services at the same

time.

For clinical services, need: billing and

productivity records

For administrative services, need: time and

activity logs

Each component must be:

• Identifiable

• Measurable

• Recorded

Avoid being paid for the same

service twice (or more) via

multiple forms of

compensation


Evaluation of Increased Risks (Cont’d)

Avoid double payment for the same service or payment

for services not provided.

Identify (or match) the compensation with each service

to be provided.

Can the physician perform all of the duties due to the

number of hours required? Can quality be maintained?

Model the individual compensation components to

determine the total amount of compensation that could

occur under the arrangement.

Should consider placing caps on the amount of

compensation that can be earned under each component.


Valuation Process

Assess historical productivity

(i.e., wRVUs, collections, visits)

Analyze benchmark compensation associated with similar productivity levels

• National

• Regional

• State

Analyze benchmark data

for other administrative components

Stack the appropriate components and

evaluate the compensation in total

for FMV and commercial

reasonableness


Benchmark Compensation Data

For AMGA, HHCS, MGMA, and Sullivan Cotter surveys, the total compensation is reported as direct compensation which may include:

salary

bonus and/or incentive payments

research stipends

honoraria

profit-sharing

clinical medical directorships

call coverage

voluntary salary reductions

However, the reported data excludes fringe benefits paid by the

medical practice (e.g., retirement plan contributions, health insurance).


Inside the Stack vs.

Outside the Stack

Base compensation

Productivity

Quality incentive

Sign on/retention

Call pay-Maybe

Medical Director pay-Maybe

Supervision of mid-levels

Benefits

Co-management compensation

Practice profitability sharing

Call pay-Maybe

Medical Director pay-maybe


Example Calculation

Base (up to 5,000 wRVUs) $180,000

Productivity (at expected wRVUs of 6,000) $ 40,000

Sign-on bonus $ 10,000

Quality-based incentive $ 20,000

Total potential compensation $250,000

MGMA 77th wRVUs 6,004

MGMA 79th compensation $251,892

#AICPAhealth

Losses and Commercial

Reasonableness


COMMERCIAL REASONABLENESS

FAIR MARKET VALUE

Compliance Issues Regarding

Hospital-Physician Financial Relationships

Overall Arrangement

“WHY?”

SENSE CENTS

Range of Dollars Only

“HOW MUCH?”

Scope

Key Question


Commercial Reasonableness

Department of Health and Human Services Definition1

• An arrangement which appears to be “a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”

Stark Definition2

• “An arrangement will be considered ‘commercially reasonable’ in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential designated health services (“DHS”) referrals.”

OIG Threshold 3

• Compensation arrangements with physicians should be “reasonable and necessary.”

1 63 Fed. Reg. 1700 (Jan. 9, 1998).2 69 Fed. Reg. 16093 (March 26, 2004).3“OIG Compliance Program For Individual and Small Group Physician Practices,” Notice, 65 Fed. Reg. 59434 (Oct. 5, 2000); OIG Advisory Opinion

No. 07-10, September 20, 2007, pg. 6, 10; “OIG Supplemental Compliance Program Guidance for Hospitals,” Notice, 70 Fed. Reg. 4858 (Jan. 31,

2005).


Factors in Determining CR

Business Purpose

Provider Analysis

Facility Analysis

Resource Analysis

Independence & Oversight

Commercial

Reasonableness

Determination


Commercial Reasonableness

BUSINESS

PURPOSE

Does the proposed service represent a reasonable necessity essential

to the functioning of the hospital?

Is the specific purpose of the service clearly identifiable and

appropriately defined?

Does the proposed service relate to the business and/or clinical plans

of the hospital?

Does the proposed service contribute to the hospital’s profits and/or the

development of a service line?


Commercial Reasonableness (Cont’d)

Does the role require a physician to perform the services?

Does the role require a physician of a certain specialty to perform the

services?

Has the amount of time demanded of the physician in the proposed role

been considered?

Do any salary considerations exist related to providers of similar specialty

and experience in comparable organizations and positions?

PROVIDER

ANALYSIS



Are patient demand/number of hospital patients sufficient to justify the

service?

Are patient acuity levels such that the proposed service is necessary?

Do patient needs dictate the need for a separate and distinct physician

for the proposed services?

Are the size of the hospital and its relevant departments appropriate

for the proposed service?

FACILITY

ANALYSIS

Text Goes Here



Counsel

In – house

Outside

Valuation Firm

Internal

External

Internal

Management

Board

WHO

DECIDES?


Safeguards

Use qualified legal counsel / valuation firms

Do not have multiple valuations

Needs Assessment from provider that makes the business case for the arrangement (absent referrals)

Transaction and compensation must be viewed as a whole

Avoid part-time employment arrangements, particularly with full-time benefits


Safeguards (Cont’d)

Expected Losses/ROI factor

Allow for adjustments in terms based on marketplace/hospital changes; no fixed fees (without revaluation) for more than 2-3 years

Term and Termination triggers

Clearly defined scope of services; documentation of services

Limit number of arrangements covering same services/service line


Renewals and Financial Losses

Many agreements from the acquisition frenzy

coming up for renewal now

How to analyze/address losses

Industry Experience

What do the regulators think?


Analyzing/Addressing Losses

What are the drivers?

• Removal of ancillary revenues

• Increased benefit costs

• Hospital overload allocations

• Others?

Offset by:

• Better managed care rates – maybe,

maybe not

• Better supply expense contracts

• Others?


Analyzing/Addressing Losses (Cont’d)

What if Losses remain after specific factor analysis?

• Contribution to mission/community need

• Uniqueness of specialty

• Competitive nature of managed care market

• What would compensation look like if the physicians were still in

private practice?


Industry Experience

Benchmarks publish average

losses per physician for some

specialties (MGMA Cost

Survey for example)

Is the comparison apples to

apples?

Would the argument persuade

a regulator?


What do the Government Regulators

think about Losses and CR?

No specific guidance available

Some “informal” approaches shared indicate they might think Losses ≠ FMV

One healthcare system court case seems to indicate they believe losses invalidate the FMV of compensation or certainly the commercial reasonableness of the transaction


If there are Losses, now what?

Analyze losses to identify source

Document mission-related reasons for any losses

Document other market factors that contribute to

the losses (i.e., payer environment, demand, etc.)

Make the best determination of what the physician

would earn if independent

#AICPAhealth

Impact of Health Reform


State of Health Reform

Continue to see positive trends in

primary care compensation and

“prestige”

Still a strong consolidation

environment, particularly for primary

care

Quality incentive/withholds the norm,

not the exception

• MGMA indicates 64% of respondents had a

quality bonus/withhold

• AMGA indicated 31% had compensation tied to

something other than production


State of Health Reform (cont.)

More services are covered

More patients with coverage

• Are these primarily Medicaid patients?

• Will patients be forced to accept a lower level

of care (i.e. a mid-level provider) due to

shortages?

Higher out-of-pocket expenses for

patients – could translate to less

elective care


State of Health Reform (cont.)

Increasing transparency for providers

• Data.Medicare.Gov Website –includes

comparison for Physician, ACO, Home Health,

Dialysis and Hospitals

• Commercial insurance score cards

Value-based payment modifier in play

in 2015

• Shift from reporting incentive to performance

incentive/reduction

No loss of momentum in bundling

payments or ACO development


Tiered Value-Based Payment Modifier

Both upside reward and downside risk

Focused on outliers in quality and cost

Composite scores for cost and quality

Three tiers – High, Average, and Low

Additional upward adjustment for care of sickest patients

Sum of upward adjustments will be offset by downward adjustments

Five-year

initiative

launched

January 31,

2013

Private

payers

already

using

bundled

payments

Bundled Payments for Care Improvement

Initiative

Based on Medicare ACE Demonstration Project –

free range ACO

Single payment for defined group of services within specified episode

of care

Pricing based on discount of payer’s historic total cost

Gain-sharing incentives

It sure looks that way…..

22 of the Pioneer ACOs remain – 699,000 covered

lives

As of January 2014, 351 MSSP ACOs covered

5.3 million lives

There are approximately 250 commercial ACOs

covering 12.4 million lives

ACOs – Here to Stay?

#AICPAhealth

Questions?


Carol Carden, CPA/ABV, ASA

PYA

(800) 270-9629

[email protected]

www.pyapc.com

Twitter: @carolcardenpya

Contact Information