All Eyes on DSH Payment Cuts: The Future of DSH Payments in Healthcare Reform

Published by Becker's Hospital Review Healthcare reform, with its potential to reduce levels of uncompensated care, may seem like a way for hospitals to increase their bottom lines. However, the Patient Protection and Affordable Care Act (PPACA) decreases Medicare and Medicaid Disproportionate Share Hospital (DSH) payments — adjustments made to hospitals that serve a higher-than-average number of low-income patients. That, coupled with customary CMS cuts, could further erode revenue for facilities in states with their own support funding for uninsured patients.

History of DSH payments

For almost 25 years, the Medicare/Medicaid program has classified hospitals that treat large numbers of low-income patients as DSH program facilities and, as such, offered higher payments for treatment. The government determines whether a hospital qualifies for DSH payments using a series of formulas that consider the ratio of Medicaid patient days to total patient days, and the ratio of patient days for Medicare beneficiaries receiving Supplemental Security Income to total Medicare patient days.[1] Click to continue to the full article.

Why Hospitals Buy Imaging Centers

While hospitals have always been significant players in the market for freestanding imaging centers, volume for hospitals purchasing all or part of the ownership interest in freestanding imaging centers has increased dramatically over the past few years. For hospitals already involved in joint ventures with physicians or entrepreneurial companies, we have seen a flurry of transaction activity around hospitals buying out their joint-venture partners. In many cases, hospitals desire to maintain consistent subspecialized professional coverage across all inpatient and outpatient radiology. This is not only beneficial from a quality standpoint, but also may allow the hospital strategically to expand opportunities for the radiologists with whom it maintains exclusive arrangements. While the benefits of a transaction are mutual, discussions are most often initiated by the freestanding imaging center’s owners, consisting of radiologists, referring physicians, and even entrepreneurs. The effects of reimbursement cuts; increasing regulatory restrictions on the operation of referral-source imaging; lack of access to credit; the hassle of running a small business; and large, pending capital requirements for equipment have driven many freestanding imaging centers’ owners from a position of strength to one of weakness, relative to hospitals. Click to continue to the full article.

Is There ‘Hidden Value’ in a Poorly Performing ASC?

Published by Becker' ASC Review Struggling ASCs come in all shapes and sizes. Some ASCs have enjoyed success in the past and now find their prosperity has taken a significant hit due to the many headwinds confronting the ASC industry. Others have struggled from day one due to inadequate volume levels, high fixed costs, too much debt or altogether mismanagement. Regardless of their method of arrival, these ASC owners find themselves in a position where decisive action must be taken to right the ship. Often, in an effort to accomplish this, existing owners make the choice to sell a controlling interest in their ASC to a third-party investment group, management company, hospital or some combination thereof. When pursuing such action, it is crucial for existing owners to realize where the value in their center may reside and fully comprehend what can, and cannot, be considered by acquiring entities when determining purchase price. The first thing to note is it is highly likely that the acquiring entity will not legally have the ability to pay an amount that exceeds fair market value (FMV). Without going into great detail, when determining FMV, an accurate and reliable appraisal should analyze your ASC from a "hypothetical" or "typical" buyer's perspective. Approached from this perspective, there very well may be hidden value in your center that is not readily apparent by analyzing historical financial performance. The following are some discussion points to consider: Click to continue to the full article.

Do Mandated Growth Restrictions Destroy Physician Owned Hospital Value?

Published by PHA Pulse The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “Legislation”) contain controversial and well publicized regulations that significantly restrict the growth capabilities of physician owned hospitals (“POHs”). For certain POHs, including the 60 or so currently under development, this legislation could have devastating implications. For the approximately 270 existing POHs that are grandfathered and allowed to operate under the legislation, the ultimate question for the physician, hospital or corporate shareholder is: Does this legislation negatively impact the value of my POH, and if so, by what magnitude? Although determining the cumulative effect of the Legislation in its totality, including restrictions on aggregate physician ownership and the moratorium on new development, is crucial when contemplating individual POH value, this discussion focuses exclusively on the growth restrictions levied against POHs and the impact of these restrictions on value. Click here to continue to the full article.

Acquisition Accounting for Not-for-Profit Systems Becoming More Taxing: Preparing for SFAS 164

Published by Becker's Hospital Review Passage of the Health Care Reform Act in March has caused a dramatic increase in merger and acquisition volume within the healthcare services market. Now that the bill has become law, not-for-profit hospitals have entered the marketplace looking for merger and acquisition targets. The level of acquisition activity is expected to continue to rise with the gradual implementation of health care reform. To add further complexity to the current operating environment, accounting for these mergers and acquisitions has recently become much more challenging for NFP hospitals.

What happened

The Financial Accounting Standard Board (FASB) released new accounting guidance for NFPs through the Statement of Financial Accounting Standards (SFAS) 164, Not-for-Profit Entities: Mergers and Acquisitions, which will significantly change the accounting procedures for NFP combinations. FASB believes that NFPs should be held to the same standard of disclosure as for-profit enterprises. According to the FASB, "The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a not-for-profit entity provides in its financial reports about a combination with one or more other not-for-profit entities, businesses, or nonprofit activities." The additional regulations on NFP will resemble the existing rules for for-profit companies and increase the financial reporting burden for NFPs. Click to continue to the full article.

3 Surprising Factors That Impact an ASC’s Value

Published by Becker's Hospital Review Participants in the ASC industry are generally keenly aware of the common factors that can impact ASC valuation. Amongst others, these can include the number and age of physician owners, competition in the market, availability of new recruits, reimbursement pressure, facility and equipment needs and specialty mix. There are, however, a number of lesser known dynamics that can ultimately impact ASC value. 1. Historical marketability of the ASC's ownership units. An important, however often overlooked, component of risk, the center's historical ability to market it shares and recruit new doctors provides a telltale sign of the availability of physicians in the market as well as management's skill in recruiting new doctors. It has been well documented that there is an increasing shortage of available physician investors in many markets. Despite this trend, an ASC that has demonstrated the ability to consistently recruit new physicians will be more likely than its competitors to garner new physician investment in the future. As such, when determining value it is just as important to look at the frequency of past transactions as it is to forecast future trends. Click to continue to the full article.

The Reconsolidation of Imaging Centers

Published by ImagingBiz Significant market trends, over the past few years, have affected the competitive environment between hospitals and physician-owned freestanding imaging centers. The primary drivers of these trends are the relative weaknesses of a large number of freestanding imaging centers (caused by changes in reimbursement and regulation) and the sensitivity of these businesses to the economic crisis. These changes in the landscape have created the ideal environment for a reconsolidation of imaging centers that can bring them back into hospital operations through acquisitions, perhaps at depressed market values. Hospitals are using their newfound relative strength in certain key strategic areas opportunistically to acquire freestanding imaging centers in their markets. Some hospital advantages include reimbursement, access to capital, vendor relationships, and physician employment. Our company, VMG Health, has experienced a significant increase in the demand for valuation services, in the past year, in support of hospital acquisitions of freestanding imaging centers.

A Challenging Past

The loss of imaging services, over the years, has caused myriad unpleasant dynamics for hospitals. There has been a consistent and continuing migration of imaging services out of the hospital setting, mostly to physician-owned or entrepreneurial businesses. Often, the imaging services that remain in the hospital have low margins, combined with a high remaining cost structure. The result has been a deterioration of capacity in imaging services due to the inability to reinvest in imaging equipment and infrastructure; this, in turn, has caused a loss of market share and a loss of business to more efficient competitors in the marketplace. Click here to continue to the full article.

Call Coverage Payments: Trends, Regulations, Statistics and Valuation Considerations

Published by Becker's ASC Review Establishing FMV for call coverage compensation is becoming increasingly difficult as arrangements are evolving and survey data is unreliable. The following will discuss recent trends in paying for call coverage, market statistics and the valuation considerations surrounding certain payment structures.

Growing expenses, industry trends driving call coverage payment growth

In the past, ED call coverage was typically provided by physicians in exchange for admitting privileges. Now, more physicians are demanding payments for call coverage due to:

• Rising costs associated with covering the ED
  • Growth in the uninsured patient population.
  • Fear of malpractice lawsuits.
  • Higher premiums associated with emergency departments.
• Fundamental industry changes
  • Work-life balance has become more important to today's physicians.
  • There is a decreasing physician supply.
  • Physicians are less reliant on hospitals to build practice with other options for office-based procedures and outpatient facilities.
  • Physicians are seeking equity with other physicians who are being paid for call coverage.

Although the majority of call coverage arrangements are based on a daily or hourly stipend, payment structures are evolving and are more often including additional payments for the uninsured patient population. Click to continue to the full article.

Finding Value in Imaging Center Valuations

Published by ImagingBiz After unprecedented growth over the past two decades, freestanding imaging providers have found the past few years challenging. Increased regulatory oversight, negative reimbursement changes, tighter access to financing, and general business uncertainty have all taken their toll, and pessimism within the industry runs rampant. In response, some freestanding imaging providers have consolidated, downsized, restructured, or closed—trends that have undoubtedly altered the competitive landscape in many saturated markets. With all of the pessimism in the freestanding imaging market today, it is more important than ever to ensure that your valuation consultant considers all factors, positive and negative, when performing an analysis of fair market value. Most imaging-center transactions must have the support of an independent opinion of fair market value. Understandably, many business-valuation experts who perform imaging-center valuations fail to consider the freestanding imaging industry’s many positive dynamics adequately, and they therefore undervalue the business. With the negative headlines and heightened uncertainty, it is too easy to focus on these concerns at the expense of the more complex (and less obvious) factors that the analysis should also consider. Forced change sometimes results in positive outcomes. Many imaging providers have emerged from this challenging period leaner and more efficient, having adapted well and adopted a survivor’s mentality, rising to overcome the industry’s new obstacles. In valuing an imaging center, it is important to recognize and consider the current environment’s potential benefits and how they affect the center in question. Click to continue to the full article.

Valuation of Radiation Oncology Practice is a Moving Target

Published by Hematology & Oncology News & Issues This year’s proposed rules for 2010 have caused quite a stir in the health-care sector. Radiation oncology is no exception. If the proposed rules of 2010 were to be finalized, numerous freestanding facilities throughout the country – especially those in certificate of need states – have given notice that they may be forced to close their doors. While that news is not exciting to the authors of this article or to the cancer patients and communities served by those facilities, the closing of one door might actually open another.

Opportunity to Collaborate

This could be the “opportunity” to collaborate with those that may have been one time or current competitors. Hospitals around the country appear to be having a softer landing in store for the reimbursement changes than freestanding clinics if the proposed rules are any indication of the actual final rules. Of course, this is based on the 2010 proposed rule information available at the time of this article being written. A follow-up article next month will complete this two-part series by analyzing the implications of the final rules. Nonetheless, it is certainly a time to give consideration to what the possible routes that owners/partners in freestanding cancer centers may take. A short list is provided below and is by no means all inclusive:

1. Actually close doors and cease providing life-saving treatments (not the favorite choice)
2. Partner with that hospital down the road or across the street to allow for hospital-based therapy
3. Sell to larger outfits that can operate on lower margins due to economies of scale
4. Sell to the hospital outright and become physician professional providers or employees
5. Stick it out to see what happens next year 6. Grow market share by adding physicians or creating a multispecialty group
6. Hybrids of the above

Of course, each of the above has a common theme: before any route is chosen you need to make sure you have data on your side. Reimbursement has been a highly volatile target in recent years and certainly appears to be the same going forward. In this year’s “proposed” rules for Medicare Physician Fee Schedule (MPFS) for 2010, a Prostate IMRT patient that would get approximately $39,737 per course in 2009 Medicare Global national average dollars would be reduced in 2010 to $18,231. That is a negative variance of $18,566 per patient or a little more than 50 percent assuming proposed RVUs and the conversion factor is set at 21.5 percent reduction. Using the same data but substituting breast 3D treatment, the 2009 Global Average is approximately $13,673 with a “proposed” reduction to $9,151 or $4,522 per patient. As you can imagine, these types of changes can have a dramatic effect on valuations. This may or may not be horrible news depending on which side of the negotiating table you are sitting. It may just be an opportune time to go on a shopping spree much like some did when the stock market took a nose-dive over the last year. Do not guess at the worth of your practice and worse yet, do not count on the valuation or the same multiples you had three years ago. With the changes we have seen in reimbursement, and the draconian proposed rules this year, a material financial impact can happen in a single year as illustrated above, and current information is critical. Knowledge is leverage and power in negotiations. Ideally, you would get an independent valuation at a time when you aren’t under pressure to make a change and, of course, when you are under pressure it is an absolute requirement. Please take note of a few of the experiences shared in this article where appropriate and apply this information to your particular setting.

Data Collection

The pure blocking and tackle aspects of data collection are not surprising, you will need to have numerous things available in order to effectively carry out a timely and well organized valuation, among them are:

• Partnership agreement
• Listing of owners and their percentage ownership
• Financial statements
• Volume reports
• Actual collections by course of treatment
• Managed care contractual rates
• Accurate payer mix
• Diagnosis mix
• Source of referrals (summary information)
• Same market current and future planned competitors
• Staffing detail, including salary by position and benefits level
• Facility detail, summary of lease terms
• Age and type of equipment, leased owned, depreciation status etc.
• Maintenance agreements
• Summary of debt

Future Earnings and Risk

Simply stated, the valuation of health-care-services businesses – radiation centers included – are dependent upon two major inputs: future earnings and risk. Any input that affects future earnings or risk related to the realization of the projected earnings is an important aspect to the valuation of a radiation center. Many mistakenly believe that a “multiple” of historical earnings is the primary method to value a radiation center. This could not be further from the truth. It is true that multiples are utilized as a discussion point to simplify a valuation of a center (aka, rules of thumb for value). The value of a radiation center, if performed appropriately, is based upon the assessment of the expected future earnings or cash flow of a center on a present value basis with consideration of the relative risk associated with attaining those projected earnings. The higher the risk associated with future cash flows yields a lower present value. High risk=lower value and visa versa. The methodology related to the valuation of future earnings is called a discounted cash flow analysis or DCF. Some of the major factors that should be considered in the DCF related to a radiation center include:

• Volume: where do the centers’ patients originate and how sustainable is that referral base;
• Utilization: over utilization of IMRT can create an unsustainable level of high reimbursement volume. Properly considering the reduction of that utilization is very important in developing reasonable values; Reimbursement: Very important to understand both Medicare and Commercial reimbursement trends: Growth: What is a reasonable estimate of future volume growth and why/where does it originate;
• Competition: What other competitors exist in the market and what are their strengths and weaknesses; Certificate of Need (CON): Are there any barriers to entry;
• Cost structure: How well are staffing, supplies, facility, and other operating expenses being managed. Are there any expense improvement or efficiency opportunities;
• Capital Investment: In a capital intensive business that requires high tech equipment, it is important to reasonably project ongoing cost of reinvestment in new technology. This is a direct reduction from the cash flow of the business, but necessary to stay competitive in a technology-driven service;
• Consideration of the overall relative scale of conservatism or aggressiveness of the projections of future cash flow. The more aggressive the projections that are utilized the higher the risk rate that should be applied.

It is important that one who is both knowledgeable in the area of business valuation, but also in the specific segment of health-care services being valued, perform the valuation. The health-care market is unique in terms of both business and regulatory matters. First and foremost, physicians and physician referrals are central to the success or failure of any healthcare business, this simple fact must be considered in any valuation. Knowledge regarding the source of the referral base and the sustainability of the referral base is critical in the determination of future volume and risk.

Government Influence on Valuation

The federal government has a significant amount of influence on radiation businesses in terms of both reimbursement and regulatory matters. As discussed previously, the reimbursement of radiation for freestanding centers is projected to decrease. This must be factored into a reasonable projection of future cash flows and as might be expected will have a negative impact on value. The Stark laws and federal anti-kickback statutes have great deal of impact on how radiation center partnerships are structured and how they conduct business. Without a full understanding of how these laws impact the structure and operations of radiation centers, a reasonable valuation cannot be performed. As required by both Stark and the Anti-Kickback Statutes, all transactions in the radiation center business must be at “fair market value.” Fair market value is a legal term that is defined as “the price at which a business or asset would transact if both buyers and sellers had reasonable possession of the relevant information and facts, and neither were under any compulsion to buy or sell.” The fair market value standard requires the need for someone with focus and expertise in the area of business valuation. However, without very specific knowledge and experience with radiation centers and their operation, the valuation results could be suspect. For example, if a valuation were performed on a center with an abnormally high level of IMRT utilization without consideration of the sustainability of that IMRT volume and the proposed reimbursement reductions, an appraiser could reasonably miss the valuation by significant dollar amounts. As providers consider participation in acquisitions, joint ventures, and divestitures of radiation businesses it is vital that all parties understand what is required of them by both state and federal regulatory guidelines. It is also important to involve parties that have expertise in the operations and valuation of radiation centers. Success or failure in valuing, structuring, and completing a transaction are, in many cases, determined by the expertise of the third parties (legal, operational, and valuation) that assist in the completion of a transaction. The valuations of radiation centers in our current environment are truly moving targets. The uncertainty regarding regulatory changes, reimbursement changes, healthcare insurance reform, and other factors that impact value is significant. Proper consideration of the risk and reward of future earnings will dictate whether the moving target has been properly identified and hit.