Practical Advice for Your Clients on Common FMV Issues

Published by American Health Lawyers Association To capitalize on the flood of alignment opportunities available with physicians, hospital executives must work closely with legal counsel to structure compliant physician service agreements (PSAs) that can withstand regulatory scrutiny. Whether a direct employment or contracting arrangement, one compliance topic presents itself in nearly every PSA: fair market value (FMV) compensation. The determination of FMV compensation entails a rigorous and analytical process. Without proper planning, communication, and support, this process can create frustration for both the hospital and the physician. To complicate matters, recent cases, such as the Tuomey case, caution hospitals to avoid unsupportable valuations and to carefully evaluate the methodology of the valuation expert (1). Undoubtedly, hospitals have and will continue to rely on legal counsel to assist in evaluating the opinions of independent appraisers. This purpose of this article is to provide legal counsel practical advice on avoiding common pitfalls of the valuation process and assessing valuation methodologies. Click here to continue to the full article.

3 Core Benchmarks for Every Surgery Center

Published by Becker's Hospital Review Chance Sherer, manager with VMG Health, discusses "must-have" benchmarks that every surgery center should use to track their progress. Q: Benchmarking takes time, and small centers can't benchmark everything. What are the can't-miss benchmarks that really tell you how you're doing? Chance Sherer: When considering the "must haves" for ASC administrators to benchmark, I think of the some of the most important statistics that will impact the value of an ASC — case volume, case volume by specialty, net revenue per case, and earnings before interest, taxes, depreciation and amortization ("EBITDA") margin. Case volume, case volume by specialty and net revenue per case benchmarks help [administrators] understand the specific components of net revenue for the ASC and can highlight areas of potential improvement in total revenue generation. EBITDA margin takes into consideration all the factors of revenue and operating expenses giving an indication of operating profitability. EBITDA provides an excellent metric of comparison because it eliminates the effects of financing and accounting decisions made by management. Please note that when comparing an ASC to the benchmarks mentioned above, an administrator should be careful to find themost comparable data set possible from a geographic, size, specialty mix, case volume, and payor mix perspective. For example, it would be inappropriate (and unhelpful) to compare a two operating room endoscopy center's staffing hours per case in California to an eight operating room multi-specialty surgery center in Florida. Click here to continue to the full article.

How to Help Your Clients Comply With the Sunshine Provision

Published by American Health Lawyers Association In October 2011, life sciences companies were expecting guidelines from the Centers for Medicare & Medicaid Services (CMS) regarding how they will report virtually any transfer of value or payment to physicians and/or teaching hospitals. This reporting requirement, established under Section 6002 of the Patient Protection and Affordable Care Act of 2010, is commonly referred to as the Physician Payment Sunshine Provision, or simply the Sunshine Provision.1 A major goal of the Sunshine Provision is to increase transparency by making information about certain payments to physicians available on a public, searchable website. In December 2011, CMS actually released its proposed rule for implementing the Sunshine Provision.2 The proposed rule establishes procedures for data collection and provides additional pertinent details. Most importantly, it clarifies that compliance with the law’s data collection and reporting requirements will not be required until ninety days following CMS’ issuance of the final rule. Other noteworthy information from the proposed rule reveals that the types of arrangements subject to the Sunshine Provision may be more expansive than originally thought. Specifically, the Sunshine Provision covers virtually any physician arrangement with a drug, device, biological, or medical supply manufacturer, direct and indirect. Comments on the proposed rule were due on February 17, 2012, and release of the final rule is expected in upcoming months.3 Click to continue to the full article.

4 Benchmarks That ASC Leaders Commonly Overlook

Published by Becker's Hospital Review Chance Sherer, manager with VMG Health, discusses several benchmarks that ASC administrators often forget to include in their data collection efforts. Q: Could you discuss several benchmarks that surgery center leaders overlook or under-use in their benchmarking efforts? Chance Sherer: All ASCs are different. They each have unique case mixes, different volumes and negotiated reimbursement schedules. They are sized differently, some with more operating rooms and others with larger medical staffs. While benchmarks provide meaningful comparable data points, the keys to successful benchmarking are identifying benchmarks and understanding variances. While there may be perfectly valid reasons for variances from a given benchmark, these variances may not necessarily signal under/over performance in a given area. By reviewing various statistics reported in various benchmarking studies, an ASC can determine which key factors to track and compare over time. This will help administrators and physicians bring to light any improvements or declines in operations over time. With that being said, there are several key financial and operations statistics that we examine in our valuation analyses that many administrators often do not track or do not utilize for benchmarking purposes. A few examples include: - Accounts receivable aging (percentage per period); - Staff hours per case, - Expenses as a percentage of net revenue; and, - Percentage of cases and revenue by physician. These benchmarks can be compared to the industry using the VMG 2011 Intellimarker™ Benchmarking Study, found on our website at vmghealth.com. Click to continue to the full article.

5 Fundamentals for a Physician Practice Valuation

Published by Becker's Hospital Review In order to coordinate care, many hospitals and health systems are acquiring physician practices. A key step in the process is the valuation of the practice. The valuation is a conclusion on how much a physician practice is worth. To determine the value, tangible and intangible components are considered. Tangible components are the hard assets of a practice such as working capital, furniture, fixtures and equipment. Examples of the intangible assets are a trained workforce, trademarks, medical records, trade name and contracts. There are three accepted methodologies for valuing a physician practice: the income approach, the market approach and the cost approach. All three approaches look at the value of intangible and tangible assets. Yet, each approach is distinct and can result in different value conclusions. "Although not all three approaches are typically utilized in the ultimate value determination of a physician practice, it is fundamentally sound for an appraiser to utilize all three methodologies in the process," says Clinton Flume, manager at VMG Health. "An appraiser should be able to provide support for the selection and weighting of the methodologies employed." Click to continue to the full article.

The Impact of Industry Trends on Imaging Center Valuation

Published by ImagingBiz Over the past few years, hospitals have been acquiring imaging centers at a brisk pace. Hospital and imaging center transactions require an independent opinion on fair market value to ensure regulatory compliance; a thorough fair-market analysis will incorporate macroeconomic industry trends, along with the facts and circumstances specific to the individual center. In 2011, Radiology Business Journal and SDI Health LLC published the results of their second annual survey¹ illustrating trends related to the top 20 imaging-center chains and the larger environment in which they operate. The data in this survey can assist the valuation analyst in formulating a basis for the future financial performance of a center that is used in the income approach (discounted–cash-flow) methodology of valuation. The industry information also assists the valuation analyst in determining the velocity, pricing, and strategic motivation behind comparable transactions within the industry, and can be very helpful when preparing an analysis of fair market value.

The Survey

In 2011, the economy stabilized in many areas of the country; however, imaging-center operators were hit with a new round of reimbursement cuts and were forced to run more efficient operations. Many of the imaging-center chains divested themselves of centers, and the largest integrated health networks (IHNs) did not increase their market shares. These negative data points are no surprise, given the challenges that the industry has endured through the past few years. Examples of negative industry trends shown in the survey are that 10 of the top 20 imaging chains reduced the number of centers owned and that more imaging centers were sold to IHNs, signifying a challenging operating environment. Many trends identified in the survey, however, are positive for the value of the remaining independent industry participants. For example, the total number of imaging centers, including single-site operators, increased during 2011. Demand for diagnostic-imaging services has increased as patient visits continued the upward trend. In addition, there is a well-capitalized universe of buyers of imaging centers, signifying confidence in the future of the industry. Overall, the data are conflicting, resulting in mixed effects on their application and impact on the valuation analysis of an imaging center. Click here to continue to the full article.

3 Steps to Navigate Through the Corporate Practice of Medicine

Published by Becker's Hospital Review What is the Corporate Practice of Medicine? While many Americans are aware of laws limiting the practice of medicine to licensed medical individuals, many may not have considered the impact these laws have on corporations. Many would agree that an individual who has not attended medical school, graduated with a professional medical degree and passed the required exams to obtain state licensure to practice medicine should not be trusted to provide the public with patient care. But how do these laws apply to corporations? In some cases, corporations are able to improve the quality of care by providing physician groups with significant capital and advancements in technology that might otherwise be out of reach. However, many believe that when corporations entangle themselves in the practice of medicine and are in a position to control physicians' compensation, they may also negatively influence patient care. Furthermore, the primary focus of any corporation is to achieve and increase profits, which is at odds with an industry that upholds patient care as its highest concern. This very issue was pondered by the American Medical Association at the turn of the nineteenth-century with the development of the Corporate Practice of Medicine Doctrine. Through the Doctrine, the AMA sought to ensure only licensed medical professionals practice medicine and prohibit the commercialization of medicine. Click to continue to the full article.

How to Avoid Mistakes in a Physician Acquisition: Q&A With Chris Gauvin of VMG Health

A hospital can improve physician group acquisitions by understanding key decision points of a physician group and criteria to assess the sale of the practice. An important element of an acquisition is the valuation. The valuation of a physician group begins with an assessment of current operations and assets through information provided by the practice. Ultimately, this provides a base for the valuation firm to understand future operations of the practice. Understanding the valuation process including key decision points will help hospital executives avoid mistakes during the acquisition. Through many circumstances, a physician group has not thought through the entire transaction process, so helping the group understand the post-transaction vision early on in the process is also helpful. If hospital executives can identify and avoid mistakes themselves, they can better guide physicians to avoid mistakes during the valuation. Here Chris Gauvin, manager at VMG Health, discusses areas ripe for mistakes in a physician practice valuation process as well as methods for hospitals to expedite a valuation. Click to continue to the full article.

4 Tips on Reducing the Frustrations of the FMV Process for Physician Service Agreements

Published by Becker's Hospital Review As hospital and health system executives continue to be flooded with physician alignment opportunities, one recurring compliance topic is present in nearly every physician service agreement: fair market value compensation. Mandated by industry regulations, FMV compensation remains an unavoidable element of a PSA that can easily develop into a source of frustration and misunderstanding for both the hospital and the physician. This article provides a few suggestions that can minimize the negative impacts of the FMV process during the negotiation of a PSA.

1. If a valuation expert cannot be involved early in the process, then structure a reasonable compensation offer.

Circumstances may prevent the involvement of a valuation expert early in the negotiations. In this situation, the best course of action is to develop a compensation offer that is reasonable and supportable. Here are a few valuation guidelines to consider:

• Compensation for clinical services should be correlated to physician productivity. For example, if a physician's professional collections are equal to the median, then a reasonable compensation rate for these services is the median.
• Compensation per work relative value unit is inversely correlated to work RVU volume. MGMA tells us that the higher a physician's work RVU volume, the lower the compensation rate per work RVU. Therefore, if a physician's work RVU volume is at the 90th percentile, a compensation rate per work RVU at the 90th percentile should not be selected.
• Be wary of developing a compensation proposal based solely on offers made by local, competing hospitals. Stark law provides guidance regarding the use of market data that reflects referral relationships. Although a local offer from a competing hospital might be considered, from a valuation standpoint it should not be the sole basis to support FMV compensation.
• When determining compensation for physician administrative services ensure that the compensation survey data matches the services being provided. Stark law guidance indicates that clinical compensation may not be an appropriate proxy for physician administrative services. Other sources of data (i.e., published medical director compensation surveys) should be considered.

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Valuation of Imaging Centers: 2012 Outlook

If one were to chart trends in physician employment over the past 15 years, the result would closely resemble the recent wild swings seen in the stock market: significant peaks followed abruptly by equally sharp declines, according to Kevin McDonough, CFA, a senior manager for VMG Health (Dallas, Texas). He recalls his initial experience in the industry in the early 2000s, saying, “My indoctrination into the health-care industry came at a time when hospitals and health systems were divesting themselves of previously acquired practices in droves, following the physician–practice-management company and integrated-delivery network bust.”

That trend has come full circle, McDonough observes; once again, the industry is seeing a tremendous amount of consolidation. At the heart of this consolidation is the acquisition of physician practices and physician-owned ancillary-service lines by hospitals. The driving forces for such consolidation are numerous. As hospitals continue to see their competitors securing referral sources in their markets, many believe that they have no choice but to make their own practice acquisitions, McDonough says. In addition to the pursuit of practice acquisition for defensive purposes, hospitals have increased their acquisition activity to position their institutions appropriately for the coming era of accountable care and shared-risk delivery models. All this has led to what McDonough calls the great reconsolidation in health care.

On the physician side, he notes, physicians are seeking shelter from market forces, reimbursement cuts, and cost increases, and they are experiencing an increasing desire for work–life balance. Physician demographics are also experiencing a shift. “Generally, we have an aging physician work force,” McDonough says. “For physicians in the twilight of their careers, it is often attractive to seek out stability by selling to a hospital.” McDonough anticipates that nearly 25% of all specialists will be hospital employed by the end of 2012. Thus far, in this era of consolidation, McDonough has observed a relatively small number of radiology practices pursuing a hospital-employment strategy. What he has observed are “a huge number of transactions involving physician-owned imaging centers and hospitals/health systems,” he says. When the cuts to imaging mandated by the DRA went into effect, a trend began of physicians (and specifically, radiology groups) selling their freestanding imaging centers to, or developing joint-venture relationships with, hospitals—and McDonough anticipates that this trend will continue to gain steam in 2012.