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What the FMV? Do You Have a Commercial Reasonableness Problem?
August 4, 2022
By: Bartt B. Warner, CVA and Mallorie Holguin
The following article was published by the American Association of Provider Compensation Professionals
Hospitals and health systems have historically focused on fair market value (FMV) when there is a financial relationship with a physician. The reason for this is that the healthcare landscape is highly regulated and includes the Stark Law, the Antikickback Statute, the False Claims Act (FCA), and Internal Revenue Service 501(c)(3) status for tax-exempt entities whereas violations could result in exorbitant penalties, sanctions or even jail time. Meanwhile, these health systems are still reeling from the impact of COVID-19 and the recent changes to the Medicare Physician Fee Schedule (MPFS). In light of this, less focus has been placed on both defining and assessing commercial reasonableness.
As a result, hospitals and health systems may have commercial reasonableness issues that will further be exacerbated unless a fundamental shift happens and as much focus is placed on commercial reasonableness as is currently done with ensuring compensation arrangements are consistent with FMV. Part of the challenge stems from the fact that the process of determining commercial reasonableness is not as well defined and requires a thorough understanding of the specific facts, circumstances, and rationale of the arrangement. While the healthcare valuation community has refined the FMV process and determination of value over the past decade, the concepts, and methodologies for determining commercial reasonableness on its own terms have not yet been succinctly defined or standardized. However, increased government scrutiny underscores the need to understand and ensure that this requirement is met for all financial arrangements between referring parties.
How to Assess Medical Group Performance
June 14, 2022
By: Cordell Mack and Scott Ackman
The following article was published by the American Association of Provider Compensation Professionals
Organizations are revisiting medical group strategy and physician alignment in the face of private equity investment, growing medical group losses, and a decline in overall performance. Approaches on how to address medical group performance vary but can broadly be categorized as performance optimization (i.e., enhancing the current alignment vehicle) or pursuing a structure change to an existing model that improves sustainability. In lieu of performance-focused optimization, organizations are increasingly considering whether there are alignment models that are more sustainable and functional than traditional employment given the price transparency and site neutrality trends. The following article explores the evaluation of current medical group performance.
More health systems are taking a multi-faceted approach to maximize medical group performance. The exponential growth in physician and advanced practice provider employment and the growth in reimbursement tied to cost, quality, and access have heightened the importance of medical group strategy. However, many organizations continue to experience underperformance across several domains (cost, growth, access, etc.), and attempts to improve performance have stalled or been met with significant resistance. In most cases, the definition of performance is too narrow to identify the actionable strategies necessary for improvement.
Measurement of medical group performance and provider efficiency has historically been based on investment or operating loss per physician. In VMG Health’s experience, questions pertaining to a medical group optimization are complicated and require consideration of several indicators. Commonly used measures like investment per physician and provider FTE are helpful but can be misconstrued without proper context due to a myriad of factors. Some of these factors include but are not limited to medical group provider composition (e.g., primary care, hospital-based, pediatric subspecialties, etc.), medical group structure, care model, payor contracting strategy, overhead allocation, and payor mix.
ASC Reimbursement Considerations for a Transaction
April 25, 2022
By: Nick Taglioli and Dylan Alexander
The following article was published by Becker's ASC Review.
As buyers and sellers are considering a transaction in the ambulatory surgery center (ASC) marketplace, all involved parties must consider and quantify potential revenue impacts as they relate to that ASC’s contracted managed care reimbursement.
Payor contract reimbursement is a critical component of revenue, as is an understanding of the impact that an acquirer’s managed care contracts have on a target’s revenue. A “black box” reimbursement analysis can help assess the overall impact on revenue by comparing the target’s and acquirer’s managed care reimbursement (as applied to the target’s utilization data) while maintaining the confidentiality of each party’s payor contracts and allowable rates. In addition, black box analyses can offer insight into why an acquirer’s managed care contracts perform favorably or unfavorably when applied to a target’s utilization.
Contract Pitfalls: Why One Party’s Contracts Perform Better Than Another’s
There are several reasons why an acquirer’s contracts may perform more or less advantageously when applied to the target’s utilization data. Often, we hear expectations like, “we know our rates are better,” but there is far more to it than that. The primary reasons are: case mix, payor mix, and contract structure (payment logic).
Compensating Physicians for Graduate Medical Education Services
April 6, 2022
By: Matthew McKenzie, CVA
The following article was published by the American Association of Provider Compensation Professionals (AAPCP).
A growing and aging population is increasing the gap between physician demand and supply in the United States. A recent study published by the Association of American Medical Colleges (“AAMC”) indicates there will be a shortage of between 37,800 and 124,000 physicians by 2034. While some of the increased demand for healthcare services can be met by increasing utilization of nurse practitioners, physician assistants, and other advanced practice clinicians, expanding the output of graduate medical education (“GME”) programs will also be key to reducing the shortage.
GME refers to the period of training in a particular medical specialty (residency) or subspecialty (fellowship) following medical school. Residents and fellows undergoing GME typically require some form of oversight and proctoring by board-certified physicians. The physicians who supervise and train these students dedicate significant time and energy to the GME programs. However, determining how to compensate physicians for these supervision and teaching services can be a difficult exercise, as physicians are often able to bill and collect, generate compensated work RVUs (“WRVUs”), or log hours towards their clinical compensation model while simultaneously teaching residents and fellows. The following section describes various ways of compensating physicians participating in GME programs.
Medical Director Arrangements: FMV Considerations and Tips to Remain Compliant
April 1, 2022
By: Krista Patterson and Caroline Dean, CVA
The following article was published by the American Health Lawyers Association (AHLA) Fair Market Value Affinity Group.
As the health care industry shifts to value-based reimbursement, the benefits of including physicians in administrative roles are becoming more apparent. Medical director arrangements can be imperative to the smooth operation of a hospital or health care organization. Because physicians can provide firsthand knowledge and experience of providing patient care, utilizing physicians in leadership roles can provide immense benefits including improved quality and efficiency.
Physicians are knowledgeable about the current patient care landscape, as well as the nuances within their specialty and area of expertise. Additionally, they are typically respected and credible among their peers and can often assist in attracting new physician talent. As medical directors are in a position to generate or potentially steer referrals, there has been increased government scrutiny concerning these compensation arrangements. This article will discuss the various regulations surrounding medical director arrangements and key factors that organizations should consider in meeting the regulatory guidelines.
ASCs in 2021: A Year in Review
February 16, 2022
By: Jack Hawkins, Connor Green, and Colin Park, CPA/ABV, ASA
2021 has been an expansive year for the healthcare industry as it continued its rebound from the coronavirus (COVID-19) pandemic. While the healthcare industry as a whole has seen a speedy recovery, the Ambulatory Surgery Center (ASC) subindustry has seen an even more swift rebound to pre-COVID levels.
Along with expectations of an ongoing major, multi-site transaction in the ASC market in 2022, the ASC industry continued to consolidate throughout 2021. The ASC subindustry has seen recurring trends that started pre-pandemic: the shift of higher acuity procedures from the inpatient setting to the outpatient setting, increased Medicare reimbursement rates, consolidation of ASCs by management companies, and a push by hospitals to grow their ambulatory footprint with a particular focus on the outpatient setting.
COVID-19 Pandemic Recovery
For a detailed, macroeconomic analysis on the impact/recovery of the COVID-19 pandemic on healthcare M&A, please see VMG Health’s Healthcare M&A Report.
In March of 2020, the world was impacted by the spread of the COVID-19 pandemic, subsequently, 2021 was a hopeful year of rebuilding and recovering from the lasting effects brought on by the pandemic. ASC’s experienced a relatively quick recovery in 2020 with the hope that 2021 would reflect a full year of operations that mirrored pre-pandemic performance. Throughout 2021, additional variants of the original virus emerged presenting challenges for ASC’s. However, it appeared that ASCs learned from 2020 and were able to navigate the variants and continued to operate at a normal pace.
Hospital Subsidy Support for Exclusive Anesthesia Group Practices Expected to Rise
November 10, 2021
The percentage of hospitals financially subsidizing their anesthesia groups has been reported in excess of 80% for many years and is expected to rise even more. As a result, there has been an increased focused on this expense, along with fair market value requests from hospitals who are under pressure from their anesthesia groups to increase financial support. Looking into 2022, there are several factors which will likely put further pressure on an anesthesia group’s economics.
Anesthesia revenue per unit is likely to decline
The natural aging of America, and the corresponding change in payor mix, will have a disproportionately negative impact on anesthesia vs. most other specialty physician segments. The American Society of Anesthesia refers to the gap in commercial reimbursement to Medicare reimbursement as “the 33% problem.” The Medicare reimbursement for anesthesia is typically 33% of that for commercial payors. In modeling required financial support for an anesthesia service, one of the most important factors in determining the level of support is payor mix.
Compensating Physicians for APC Supervision
October 14, 2021
Published in partnership with the American Association of Provider Compensation Professionals (AAPCP). In recent years, demand for medical services has increased significantly due to a growing and aging US population. To aid in managing this increased demand, many healthcare providers have expanded utilization of nurse practitioners, physician assistants, and certified registered nurse anesthetists (“CRNAS”), commonly referred to as advanced practice clinicians (“APCs”). APCs are licensed practitioners, typically with an advanced or graduate level of education, who can provide clinical care and may bill insurers for their services. Evidence of increased APC utilization can be seen in the year-over-year changes in the number of Physicians vs. APCs billing Medicare between 2014-2019 is illustrated in the following charts.
Evaluating the risk of substituting fixed-asset NBV for FMV
June 10, 2021
Published by the Health Care Compliance Association (HCCA) Did you know that when comparing fair market value (FMV) to net book value (NBV), the difference in value could be as much as three times? Medical equipment, fixed assets, and other tangible personal property (capital assets) are commonly a significant element in healthcare transactions. Capital assets represent a diverse range of tangible asset investment, from general office furniture, fixtures, and equipment used in a professional medical practice to sophisticated equipment and technology systems operated in hospitals, ambulatory surgery centers, imaging centers, and radiation therapy facilities. When considering a potential transaction, the regulatory requirements with the Stark Law set a precedent of establishing FMV—defined as “opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date” —related to all components of a healthcare business that have financial relationships with physicians. Additionally, broader implications of a transaction may warrant support, for all parties involved, that asset value is consistent with current market levels. Depending on the healthcare business and facility, capital assets are often a material component of value when determining the following:
- Capital asset FMV in support of compliance and financial planning for acquisitions, mergers, divestitures, and asset transfers;
- Capital asset FMV in support of a broader business valuation;
- Capital asset FMV in support of financial planning for federal tax purposes; and
- Capital asset FMV in support of liquidations, bankruptcies, and collateral audits.
Three Questions to Consider Before Distributing Value-Based Payments to Physicians
June 2, 2021
Published in partnership with the American Association of Provider Compensation Professionals (AAPCP). With the growth in value-based care, many payor contracts now tie a portion of reimbursement to savings and quality outcomes. In addition, full risk contracts are becoming extremely prevalent in primary care, while bundled payments continue to evolve within orthopedic surgery. Plus, there are various forms of integrated healthcare delivery networks, including Clinically Integrated Networks (CINs), which often have risk-based contracts. As a result, healthcare leaders are thinking through this major question, how can I maximize reimbursement from value-based care contracts? Not surprising, the answer has something to do with physician alignment. Physicians have a significant impact on value-based care reimbursement and have proven to drive both savings and quality. Where it gets tricky is deciding how much of this value-based compensation can be allocated to the physicians for their contribution in earning those extra dollars. When a payor is able to tag reimbursement to incremental savings or quality, it is common for the contracting entity to allocate a percentage to physicians for their part in earning those dollars. The percentage often hovers around 50% in the market, although, it has been observed to be as low as 0% and as high as 100% based on historical Accountable Care Organizations (ACOs) payment data to providers. The appropriate percentage should consider factors related to the value added by the physicians, as well as expenses incurred by the contracting entity. Since physicians must be paid consistent with Fair Market Value, it is important to understand these factors. The following three questions and commentary can help you navigate what should be considered when determining how much can be allocated to the physicians for their contribution in maximizing your value-based care reimbursement, while being mindful of the Fair Market Value requirement.