Presentation Uncovers Trends in the Unpredictable Healthcare Industry

Trends in Healthcare Consulting

November 13, 2013David McMillan, CPANew Orleans, Louisiana

David McMillan provides financial and strategic services to the Firm's healthcare clients. David's areas of concentration are: feasibility studies for various healthcare entities; mergers, acquisitions, and affiliations among providers; strategic planning and forecasting, clinical integration services; and valuations and operational analysis.

Speaker Biography

David W. McMillan, CPAPYA Principal

Agenda

Status of the Healthcare Industry

Current and Future State of Independent Physician Practices

Trends in Physician-Hospital Alignment

Healthcare Regulatory Issues

Valuation Methods and Other Physician Practice Issues

Physician Compensation Issues

Other Trends in Physician Compensation

Healthcare Has Changed!

Payers

Healthcare Facilities

Specialists

Primary Care Physicians

Patients

Moving from… Moving toward…

Patients

Primary Care Physicians

Healthcare Facilities

Specialists

Payers

American Institute of CPAs

1. The industry is learning to purchase value, not volume.

2. Providers and payers are struggling to find common solutions to universal challenges because healthcare continues to be a local and regional commodity.

3. Stakeholders are searching for their purpose and relevancy in a patient-centered healthcare continuum.

4. Consumerism is emerging as a driving force in healthcare.

5. Change is accelerating due to knowledge derived from disparate and dynamic data.

Healthcare 2.0


Pressures

Narrow Networks

New Payment Models

Hospital Employment

Quality ReportingInformation Technology

Industry Consolidation

New Care Models

Referral Relationships

Declining Reimbursement FFS

Regulations

Malpractice Insurance Costs

Non-Compliant Patients


Balancing Choices

Current Environment

Employment

Hospital Alignment

Reformed Environment

Independence

Physician Alignment

Economic Relationship

Clinical Relationship


Information Technology Investments

Consolidation and Alignment

Physician Employment

Other Innovations:• ACOs• PCMHs• CINs

Healthcare Reform Initiatives

New Payment Models

How are Hospitals and Physicians Responding to New Realities?


Current State of Physician Practices


Maintaining Physician Independence

How confident are you in your group’s ability to sustain

financial independence in the next 3 to 5 years?

Very confident 35.0%

Not confident 15.0%

Uncertain 50.0%

Source: PYA Physician Survey and Experience


Examining Independence

“Independence”

Scale

PerformanceExcellence

Strategies for Independence

Merge

Secure the primary care

docs in a multi-

specialty group

Get involved in politics

Maximize alternative

revenue sources

Enhance physicians recruitment

with intangible

perks

2

15

34

Maintaining Independence: Conclusion?

Maintaining independence is not easy.

Careful planning and documentation is key.

Some solo practices will survive but most will align with other providers.

Strategic thinkers will gain in the end.

One size does not fit all.


Current Hospital-Physician Alignment Environment


Hospital-Physician Alignment Transactions

#

Hospitals and physicians are actively seeking ways to strategically and financially align themselves.

Successful alignment transactions can result in substantial benefits to all parties including patients.• Improved efficiencies and quality of care• Reduce costs and waste• Better bargaining power with third party

payers

With what type(s) of healthcare entities do you work closely?

1. Hospital2. Health System3. Physician Practice4. Solo Practitioners5. Commercial Health

Insurer/Payer 6. Government Other 7. None (no healthcare entities)

0 / 0 Cross-tab label

1

1


Hospitals & Health Systems

Seeking efficiencies

Diversifying, focusing on outpatient and wellness care

Increasing emphasis on standardization, integration, and consolidation of services

Experiencing physician shortages in key specialties

Competition from other systems as well as physician-owned outpatient centers

Call coverage needs

Healthcare reform

Hospitals & Health Systems


PhysiciansFinancially squeezed - decline in reimbursement, increased overhead, and loss of income

Difficulty obtaining malpractice coverage at reasonable rates

Inability or unwillingness ($$) to recruit

Quality of life

Increasingly complex government oversight

Working capital requirements

Healthcare reform

Physicians

Exit strategy


Physicians Are Feeling the Pain

Financially squeezed• Decline in reimbursement and loss of income• Overhead, malpractice insurance, and working

capital requirements

Continuing uncertainty surrounding reimbursement

Pressure to demonstrate quality of services

Difficulty hiring “sophisticated” support staff


Physicians Are Feeling the Pain (Cont.)

Inability to recruit; succession planning

Decreasing quality of life

Increasingly complex government oversight

Healthcare reform


Strategic Responses to Changes

Merge with other medical practices.

Create mega-group IPAs.

Secure “primary care” referral sources.

Maintain leadership roles in hospital/community.

“Align” with hospitals – Employment, Service Line Management, ER Call, PSAs.


Physician Alignment Options

More IntegrationLess Integration

More Common

Less Common

Equipment JV

EMR

Co-Management

Medical Directorships

Shared Savings

Real Estate JV

Quality

Professional Services

Agreement

Physician Leasing

Arrangement

Physician Employment

Many attempts to align in the past have centered around physician employment.

Trends in Healthcare Alignment:Employment

• According to the Bureau of Labor Statistics, employment of physicians and surgeons by hospitals is expected to grow by 24% from 2010 to 2020.

Although the rate at which employment is growing has been debated, it is undeniable that the number of physicians who are “truly independent” is declining.

Trends in Healthcare Alignment:Employment

Sou

rces

: Acc

ent

ure

Ana

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s, M

GM

A, A

mer

ican

Med

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l Ass

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Employed Physician Estimate

% of Total US Physicians

Estimated % Employed

Weighted Estimate

Primary Care 48% 50% 24%

Specialty 52% 30% 15.6%

Total 100% 39.6%

Predicting the next five years…

• Increasing number of newly trained physicians seeking employment

• Nearly one-third of practicing physicians are 55 or older

• More than 40% of physicians still practice in groups of fewer than five

• AAMC analysis forecasting a shortage of 160,000 physicians by 2025

• Medicare program sustainability and healthcare reform impact


Practice Arrangements

Practice Owned by Practice Physicians - Owner (48.9)

Practice Owned by Practice Physicians - Non-Owner (11.1)

Practice Wholly Owned by Hospi-tal (14.7)

Practice Partially Owned by Hospi-tal (8.3)

Practice Owned by Not-for-Profit Foundation (6)

Direct employees of hospital or health system (5.6)


Trends in Physician Practice Acquisitions – the “Buy and Employ” Strategy

Hospitals and physicians are entering into acquisition and employment transactions at a torrid pace!

Transactions often make good business sense but also involve substantial risk.

• Regulatory risk• Financial risk (i.e., hospital’s

ability to successfully integrate and operate the practice without incurring substantial losses)

• Reputation risk (the two entities are now related)

Very competitive environment in many markets.

Buy and Employ


“Buy and Employ” Transactions

Typical Transaction:• Hospital buys the practice at fair market value (“FMV”)o Usually structured as an asset purchase o Cash and AR normally excluded

Physicians employed by the hospital • Generally under some type of productivity-based compensation

arrangement (wRVUs)• Commonly involves a period of guaranteed compensation

(assuming productivity does not decline substantially)• Often includes other types of arrangements as well (e.g., co-

management, call pay, quality incentives, etc.)

Healthcare Regulatory Considerations


Road100m

Menu

STARK LAWProhibited self-referrals for Medicare and Medicaid patients

Navigating the Regulatory Environment

ANTI-KICKBACK STATUTEKnowingly and willful

offers, payments, or receipts for referrals

IRS-NFP REQUIREMENTSIRC Section 501(c) 3 requirements


FAIR MARKET VALUE

Compliance Issues Regarding Hospital-Physician Financial Relationships

COMMERCIAL REASONABLENESS

Overall Arrangement

“WHY?”

SENSE CENTS

Range of Dollars Only

“HOW MUCH?”

Scope

Key Question


Factors in Determining CR

Business Purpose

Provider Analysis

Facility Analysis

Resource Analysis

Independence & Oversight

Commercial

Reasonableness

Determination

Commercial

Reasonableness

Determination


Fair Market Value – Key Concepts

Determined from the perspective of hypothetical buyers and sellers without the ability to refer business to one another.

No consideration for post-transaction buyer synergies. However, such synergies often exist!

The financial terms of the transaction must make economic sense based on the assets being sold/received.

Post-transaction compensation must be taken into consideration.

Valuation Methods and Issues Related to Physician Practices


Valuation Methodologies Typically Used for Physician Practices

Derives an indication of value based on the anticipated cost to replace, replicate, orrecreate the asset

Often considered a “floor” value

Net Asset Value Method

Asset (“cost”) Approach

Based on the entity’s earning power (i.e., ability to generate positive cash flow in excess of the physician’s fair market value compensation)

Primary methods include: o Discounted Cash Flow

Method

o Capitalized Income Method

Income Approach


Valuation Methodologies Typically Not Used for Physician PracticesMarket Approach – determines an indication of value based on multiples derived from similar businesses/interests that have been bought/sold. • Guideline Public Company Method• Merger and Acquisition Transaction Data Method

Not normally used for physician practices because:• No publicly traded physician practices • Lack of reliable transaction data involving practices that

are sufficiently similar


…does not have remaining profits after physician compensation

the NAV method will likely be appropriate.

…has profits remaining after FMV physician compensation

an income approach will probably be

required.

Which Method is Appropriate?

IT DEPENDS…

If the Practice…


Enterprise vs. Intangible Value

The sum total of the tangible and intangible assets can not exceed the entity’s total enterprise value.

Example: • If the enterprise value = $2 million (e.g., determined

from DCF Method)• AND the tangible assets (e.g., cash, accounts

receivable, equipment, etc.) = $1,200,000• THEN, (with limited exceptions) intangible assets can

not exceed $800,000.


Assessing Intangible Value

Determining whether a physician practice has intangible value (within the limitations of FMV) is primarily based upon cash flow. If intangible value exists, there should be an economic benefit of ownership (i.e., in excess of FMV compensation).

Physician groups that generate positive cash flow (above the physician’s “FMV” compensation) will normally have some level of intangible value.

Practices that do not produce such positive cash flow generally will have little or no intangible value.


Certain Practices Are More Likely to Have Intangible Value

Large multi-specialty practices with mid-level providers and/or significant ancillary services are more likely to have intangible value.

Small, highly-specialized practices (e.g., general surgeons) are less likely to have intangible value because substantially all revenue is comprised of professional fees generated by the physician(s).


Intangible Assets Acquired Should be Separable and Transferrable

For an intangible asset to be transferrable to a buyer, it must be separable from the seller.

Intangible assets that are separable generally have contractual or other legal rights (e.g., non-competition agreements, clinical trial contracts, etc).

Intangible assets that are not separable are generally components of goodwill (e.g., employee workforce).

Source: ASC 805-20-25-1 through 25-10.


Practice vs. Personal Goodwill

Practice goodwill is an asset of the entity that produces economic benefits to its owners apart from their personal goodwill.• Factors generally influencing enterprise goodwill include: the entity’s

name, reputation, location, phone number, etc.• Generally transferrable

Personal goodwill is an asset of the individual (i.e., physician).• Factors generally influencing personal goodwill include: personal

reputation, credentials, education, relationships, etc.• Generally not transferrable

Often difficult to distinguish in a physician practice.

Physician Compensation Issues

Key Elements of Successful Compensation Alignment

• Directly linked to

goals and objectives

• Encourage/reward

hard work and

production

• Balance individual

and team

responsibility

• Clarify performance

expectations

• Aligned with

reimbursement

environment

• Simple, understood,

and explainable

• Clearly defined and

consistently applied

• Open and

transparent

• Fiscally responsible

• Legally compliant


Components of Physician Compensation

Physician

Compensation

Philosophy

Physician

Compensation

Philosophy

Base Compensation

Incentive Component

Quality Measures

Good Citizenship

Leadership


Ancillary Services

If physician/clinic is a department of the hospital, then revenue from designated health services (“DHS”) cannot be shared with the providers.

If employment is structured to meet the “group practice exception” under the Stark regulations, then DHS revenue can be shared with providers as long as it is not allocated based on the volume or value of the provider’s ordered DHS services.• Allocations can range from equal to proportional based on professional

(not technical) services provided by the physician.


Compensation and Regulatory Issues

Post-transaction compensation should be factored into the practice valuation.• Must avoid double dipping by paying for the same income stream

twice – once with the “purchase” and then on-going in the physician compensation plan.

The fair market value and commercial reasonableness requirements apply to all components of the transaction (i.e., compensation and practice valuation).


Other Trends in Physician Compensation


SGR Fix: Physician Composite Performance Score and Other Value-to-Value Drivers

Due to the sustainable growth rate formula cap (“SGR”) – the statutory formula used to calculate Medicare Physician Fee Schedule (“MPFS”) payments on an annual basis – Medicare payments to physicians will be slashed by almost 25 percent on January 1, 2014, unless Congress intervenes.

On October 30, the Senate Finance Committee and the House Ways and Means Committee released a discussion draft of a SGR fix, offering a comprehensive approach to MPFS payment reform.

Key provisions include:• Payment freeze• Termination of payment penalty programs• New value-based performance (VBP) program• Alternative payment model (APM) participation• Complex chronic care management• Appropriate use criteria• Valuation of services



Payment freeze• Current MPFS payments maintained through 2023 . • In 2024, physicians participating in advanced APMs receive 2%

annual updates. All other physicians receive 1% annual updates.

Termination of payment penalty programs• After 2016, the following incentive programs end:

- 2% penalty for failure to report PQRS measures- Budget-neutral, value-based purchasing modifier based on

quality and resource use - 3-5% EHR meaningful use penalties


New value-based performance (VBP) program• Starting 2017, physicians would receive bonuses or penalties

based on their composite performance scores.• Scores calculated based on quality measures (30% of

composite score), resource use (30%), clinical practice improvement activities (15%), and EHR meaningful use (25%).

• In 2017, 8% of total payments reallocated based on composite scores. Percentage increases to 9% and then 10% in 2018 and 2019, respectively.

Alternative payment model (APM) participation• Physicians receiving a significant percentage of revenue

through a risk-sharing APM with a quality measurement component (such as an ACO) would not participate in the New VBP Program. Instead, they would receive a 5% bonus each year between 2016 and 2021.



Complex chronic care management• In 2015, Medicare would pay physicians for care management

services furnished to beneficiaries with certain chronic conditions.

• To be eligible for these payments, physicians must practice in a certified PCMH or comparable specialty practice.

Appropriate use criteria• Physicians ordering advanced imaging or electrocardiogram

services required to consult with appropriate-use criteria, to be developed in consultation with professional societies.

• Medicare would not pay for services when no consultation occurred.



Valuation of services• Between 2016 and 2018, CMS would systematically identify and

revalue misvalued services. • If CMS fails to meet certain annual targets, MPFS payments

reduced by the difference between target and actual amount of misvalued services identified.

• CMS would solicit information from selected physicians to support its valuation activities. Physicians who submit requested information would be compensated. Those who do not would face significant payment penalties.


Thank You!

David McMillanPrincipal

(865) 673-0844 ext. [email protected]

mailto:[email protected]

Presentation Uncovers Trends in the Unpredictable Healthcare Industry

Health & Medicine

Transcript of Presentation Uncovers Trends in the Unpredictable Healthcare Industry