Valuation of Physician Employment Contracts: Q&A with VMG Health’s Jonathan Helm

Hospitals and health systems are increasingly employing physicians, which makes it vital for healthcare organizations to understand valuations of physician employment contracts. Jonathan Helm, a certified valuation analyst and senior manager at VMG Health, discusses the different approaches to professional services valuations; policies for ensuring physicians are being compensated at fair market value; and best practices for hospitals to employ to protect themselves and employed physicians from legal problems associated with compensation arrangements. Click to continue to the full article.

Sound Practices in Imaging Valuations: What a Realistic Buyer/Seller Would Do

Published by ImagingBiz It’s no secret that freestanding imaging providers are expecting to see revenues decrease in 2014. The final rule for the 2014 Medicare Physician Fee Schedule, which was released by the Centers for Medicare and Medicaid Services (CMS) in November, announced significant reductions in reimbursement for imaging-heavy specialties, and these reimbursement cuts will have major effects on future revenue streams for imaging facilities all over the country. A noteworthy change in the 2014 final rule is that CMS has created separate cost-to-charge ratios for CT and MRI procedures and increased the utilization rate for CT and MRI from 75 percent to 90 percent. While this change has resulted in a positive reimbursement effect for many other diagnostic imaging modalities, it has a significant negative effect on CT and MRI reimbursement. This will result in an overall negative impact to revenue for all types of freestanding imaging providers but will have a more substantial impact on those imaging centers heavily dependent on CT and MRI. When valuing a business with recent or expected declines in reimbursement, it is important to understand the operating expenses and capital requirements at the disposal of management that can (and we should assume will) be reduced in order to maintain positive margins. Assuming the business has competent managers, there will be a reaction to declining revenue, and the inputs available to management to maintain margin are numerous. Some of the ways to maintain positive margins are soundly described by Howard Berger, CEO of RadNet, when describing how the publicly traded imaging company is expecting to reduce costs by an estimated $30 million in response to expected reimbursement declines. Click here to continue to the full article on imaging valuations.

Managing Expenses for Greater Cost Control

Published by ImagingBiz As Eric Heath from VMG pointed out in his article published on March 18, 2014, titled, “Effects of the Most Recent Reimbursement Cuts to Diagnostic Imaging”, there have been major cuts in 2014 physician fee schedules as compared to 2013.  Imaging centers are feeling top line reimbursement pressure which has directly impacted EBITDA growth over the past few years.  In response to negative growth in reimbursement rates and margins, centers will adapt to change what they have power over, namely expenses.  In this article, we will benchmark 30 freestanding, single site, multi-modality imaging centers for which VMG has had the privilege to provide valuation services. Click to continue to the full article.

ASC Transactions: Difference Between In-Network and Out-of-Network

Published by Becker's Hospital Review In markets where favorable managed care contracts are difficult to secure, ASCs have turned to an out-of-network primary billing strategy over the past decade. While an out-of-network strategy may be a lucrative alternative to less preferable contract reimbursement rates for some ASCs, the strategy often presents both buyers and sellers of ASCs with several challenges. To better understand the market for out-of-network surgery centers, we examined valuation multiples on both the minority and control levels for out-of-network ASCs. We then compared these multiples to in-network ASC multiples over the past five years. For our dataset, we examined the price paid for a surgery center relative to its total earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

Data Process

Over the past five years, VMG Health has valued more than 1,200 ASCs, ranging from single-specialty locations to large, multispecialty surgery centers. In the study, both in-network and out-of-network ASC transactions at both the minority and control levels were examined. The preliminary dataset consisted of both VMG Health’s internal transaction database and publicly disclosed ASC EBITDA multiples. The dataset was first narrowed by quality of data and then further scrubbed to remove outlier transactions. The final dataset included 192 ASC transactions across the country. After identifying the final dataset, each multiple was categorized by interest type (minority or control) and then by each center’s billing strategy (either in-network or out-of-network). Lastly, each multiple was categorized by year, each year’s multiple was averaged and the EBITDA multiples were valued over time.

Findings and Analysis

Our research resulted in a total of 106 minority-level valuations and 86 control-level valuations from 2007 to 2012. While the database of transactions contained hundreds of in-network valuations, out-of-network transactions were less common, thus limiting the sample size. As the data in Figure 1.2, found in the full article link below, the transaction market for out-of-network ASCs was most active in 2010 and 2011. Click here to continue to the full article.

The Details of Hospital Transactions and Real Estate Deals

Published by Becker's Hospital Review A recent report from PwC finds that for-profit and nonprofit hospitals across the country continue to look at strategic affiliations and acquisitions with a large appetite. The "bigger is better" mentality has led to a busy time for those who must valuate the deals. Frank Fehribach, director of real estate at VMG Health, discusses why he thinks hospital mergers have increased so much during the past half decade, what other real estate options hospitals are looking at and why the definition of "value" differs among the ranks of the C-suite. Click to continue to the full article.

Overcoming Reimbursement Hurdles for Single-site and Multi-platform Imaging Operators

Published by Imaging Biz Nationwide, imaging operators are beginning to feel the impact of reimbursement cuts from the 2014 Medicare Physician Fee Schedule (“MPFS”) primarily associated with Computed Tomography (“CT”) and Magnetic Resonance Imaging (“MRI”) modalities. The reimbursement changes reduce the technical component of imaging reimbursement in 2014 for MRI and CT from approximately 25 percent to 30 percent and 8 percent to 11 percent, respectively, depending on the types of scans performed. For Single Site Operators (“SSO”) and Multi-Platform Operators (“MPO”) which rely heavily on government payors, these reimbursement changes have the potential to adversely impact profitability and sustainability in 2014 and beyond. As a result, it is conceivable to predict the number of acquisitions of the SSO, and potentially MPO, will accelerate over the next 12 to 18 months as operators are challenged with maintaining margins with a high fixed cost, high capital business model. The following discussion highlights the potential risks each of these operators face in the changing landscape and illustrates the potential impacts to profitably and the likelihood of consolidation. Click to continue to the full article.

Evaluating the Fair Market Value of Pay-for-Performance

Published by HFMA A critical test for determining whether a pay-for-performance arrangement is effective and can pass regulatory scrutiny is to assess and document the fair market value of the arrangement. There has been a surge in new physician alignment strategies focused on cost savings and quality—and the result is evolving compensation models for physician services, including pay for performance. With these models, careful assessment of economic, market, and regulatory factors is required to decide how much of a financial incentive to offer physicians for their efforts in achieving high-quality care or reducing costs. Various bodies of law have indicated that pay-for-performance payments to physicians must be set in advance at fair market value (FMV), defined by the International Glossary of Business Valuation Terms as “the price, expressed in terms of cash equivalents, at which a property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s-length in an open and unrestricted market, when neither is under compulsion to buy nor to sell, and when both have reasonable knowledge of the relevant facts.” It is important to recognize that the FMV standard applies to the myriad payment models that are emerging in the shift toward value-based business models, not just pay for performance. Healthcare leaders should consider several factors when determining what to pay physicians under these models. They also should carefully document how FMV was determined in developing the methodology for such payment models.

Why FMV Is Important

In general, if a program drives referrals, the FMV standard should be considered. The implications of defining FMV correctly are crucial to most healthcare arrangements between hospitals and physicians. Regulatory constraints imposed by the IRS on tax-exempt organizations, by the Centers for Medicare & Medicaid Services (CMS) under the Stark law, and by the Office of Inspector General (OIG) under the antikickback statute require FMV as a standard. The OIG states that “the compensation must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician” (Federal Register, March 26, 2004). Furthermore, the OIG has provided guidance that creative arrangements should be carefully constructed. Click here to continue to the full article.

Health Insurance Company Executives on Healthcare Reform

Published by Becker's Hospital Review The rollout of the Patient Protection and Affordable Care Act continued with the introduction of the public individual insurance exchanges in October 2013. While problems with the exchange website, HealthCare.gov, have been well-publicized in the media, popular culture and the political punditry, little information has been disseminated on what the actual health insurance industry has to say. How many people have enrolled and paid actual premiums? What are the early returns on the makeup of the exchange patient populations? Is this a newly insured population, or have people just re-enrolled in the exchanges after having their existing policies canceled that did not meet the PPACA’s minimum coverage requirements? To answer these and more questions, we reviewed the latest fourth-quarter earnings calls from the nation’s largest commercial health insurance companies. These earnings calls have been some of the first public commentaries the industry has made regarding the exchanges. We have summarized the thoughts from the major health insurers below. Click here to continue to the full article.

Imaging Reimbursement: What We Knew Then & What We Know Now

Published by ImagingBiz As anyone who has been around medical imaging for any amount of time can tell you, the latest headwind is the same as it’s seemingly always been: reimbursement cuts. While this comes as no surprise, the magnitude of cuts and actual effect it will have on the imaging industry in the foreseeable future is the subject of much debate within the industry. To be sure, 2014 promises to be another year of soul searching as imaging operators, especially those more susceptible to Medicare reimbursement risks, struggle to offset fairly drastic cuts in reimbursement that are happening in 2014. See the full article for Figure 1, which includes a small sample of common CPT codes with corresponding 2013 and 2014 Medicare Physician Fee Schedule (“MPFS”) reimbursement, as reported by the American College of Radiology. This data reflects the technical component only, and includes all the known impacts to reimbursement. Based on our review of this information, approximately 483 CPT codes are receiving less technical reimbursement in 2014 than in 2013, while 64 CPT codes are receiving a higher level of reimbursement. Medicare reimbursement under the Hospital Outpatient Prospective Payment System (“HOPPS”) in 2014 continues to be impacted as well, as shown in Figure 2 (source: The Advisory Board company). Many HOPPS payments had already been reduced in prior years (e.g. 25% reimbursement decrease for APC 0331 in 2013). Declining HOPPS imaging reimbursement should come as no surprise, as the Medicare Payment Advisory Commission (“MedPac”) has repeatedly recommended to Congress that reimbursement for outpatient services should be aligned or equalized across the various outpatient settings. The declining HOPPS payment trend, and it’s impact, will be interesting to follow, as overall imaging equipment reinvestment has been waning in recent years. Continued decreases in reimbursement should be an additional disincentive for hospitals to reinvest and replace expensive imaging equipment, unless imaging equipment prices come down. The rationale behind the continued declines in reimbursement from Medicare is believed to be a reaction to the phenomenal growth in imaging services since 2000. Figure 3 presents the growth in volume of physician fee-schedule services from 2000 to 2011, and was taken from MedPac’s Data Book published June 2013. Click here to continue to the full article.

Public Company Reliance on Government Revenue Streams Must be Considered in Valuation

Published by Becker's Hospital Review As the chart illustrates, the percentage of business generated through government payers ranged from a low of 16.2 percent (Quest Diagnostics) to a high of 78.0 percent (Kindred Healthcare), with a median of 36.0 percent and a mean of 36.5 percent. Post-acute providers, such as Kindred Health, take care of patients of more advanced age. Lab companies, such as LabCorp and Quest Diagnostics, focus on commercial payers while deferring government lab studies to hospitals. There are many reasons to analyze the percentage of revenue generated by government payers, such as Medicare, when performing valuations in the healthcare industry. By understanding the percentage of revenue generated by government payers, one can benchmark that information to a subject company. Comparing the subject company to the industry averages can provide a better understanding of the subject company's strategy and patient demographics. In addition, government reimbursement for Medicare is directly affected by government policy. Changes to Medicare reimbursement rates have an immediate impact on reimbursement. Commercial payers often base payments on Medicare reimbursement rates. As a result, a change in governmental reimbursement rates will have not only an immediate effect on the revenues of a subject healthcare entity, but also a potential future change as the entity renegotiates contracts with commercial payers. Click to continue to the full article.