The group asserted that a subsidy was warranted due to their inability to cover service costs associated with the arrangement solely through collected revenues, despite past feasibility. This shift was attributed to trending, declining reimbursement rates and rising costs for physician salaries. A trending decline in reimbursement rates has been observed across the industry for radiology, in part due to CMS’ reductions in radiology reimbursement and the introduction of the No Surprises Act. The group sought to assess the need for a subsidy based on an FMV assessment of the services rendered, considering both the market compensation norms for the required coverage services and the reimbursement rates received for those services.
VMG Health conducted an FMV analysis of the radiology coverage services, which consisted of an estimation of provider cost based on market compensation data for radiology physicians, and an analysis of the level of physician full-time equivalents (FTEs) that would be required to service the coverage schedule and productivity generated under the arrangement. This required an analysis of the coverage schedule being requested under the arrangement and a benchmarking analysis of expected productivity against market survey data to determine total physician cost of services. VMG Health also considered overhead expenses that the group would be expected to incur in servicing the arrangement (e.g., billing/collection, practice management, etc.). As a final step, the analysis deducted anticipated annual professional collections from the projected group costs to determine what level of subsidy might be supportable under the arrangement.
VMG Health held discussions with the client to help their understanding of the FMV document and the critical inputs to the analysis. Additionally, VMG Health illustrated the analysis results using various reasonability tests for better understanding of the FMV conclusion and its appropriateness for the requested services being provided. This educational process helped the client understand and interpret the findings for more effective discussions with the hospital.
VMG Health determined whether a subsidy could be paid for the services and, if so, what level of a subsidy was supportable by considering the specific details of the subject arrangement, market conditions, and trends in radiology compensation.
The Provider contracts directly with a physician to provide hospice medical director services to the Provider. The Provider was seeking a fair market value analysis of the services to ensure compliance and negotiate contract terms. Additionally, the Provider wanted to engage an independent, third-party valuation firm with extensive experience surrounding hospice arrangements and who understood the uniqueness of these arrangements as well as local market compensation trends.
VMG Health conducted a fair market value analysis of the hospice medical director services consisting of cost and market approaches, including an analysis of local market dynamics affecting physician compensation, review of the proposed agreement, analysis of both hospice clinical compensation and medical director services compensation market survey data, review of VMG Health’s internal database of similar arrangements and of the unique experience, and qualifications and expertise of the physician providing the services. In addition, VMG Health’s analysis applied a locality premium, as the locality where the subject services take place is associated with a higher cost of living and has higher physician compensation requirements than the national average. VMG Health also conducted an in-depth review of the job duties and responsibilities associated with the medical directorship, which were used to derive the final fair market value indications.
VMG Health determined the fair market value compensation for the physician’s provision of hospice medical director services considering the specific details, facts, and circumstances of the arrangement. The Provider used VMG Health’s determination to aid in the contract negotiation process and for regulatory and compliance purposes.
BSM Consulting (BSM) and Progressive Surgical Solutions (PSS), divisions of VMG Health, assessed the clinical and ASC operations, identifying potential risks and opportunities before finalizing the transaction.
BSM conducted a comprehensive operational assessment, meticulously analyzing provider production, revenue, and operational compliance. BSM and PSS performed a thorough utilization analysis and chart audit in the clinic and ASC to identify provider CPT code utilization variances and pinpoint billing and coding risks, mainly focusing on potential over- or under-coding. PSS completed an ASC operational assessment, mock survey, and Life Safety audit, outlining physical areas needing improvement and estimating costs for necessary updates to the ASC building.
This ophthalmology buy-side due diligence assessment revealed several areas of risk and opportunity. Billing and coding compliance issues for ophthalmic diagnostic testing were identified, highlighting several codes utilized at levels exceeding CMS norms and others well below. There were also instances of potential under-coding, misapplication, or misunderstanding of coding principles. Additionally, opportunities to expand specialty services, including oculoplastic and cosmetic surgery, were uncovered, opening new avenues for growth and development. The need for better integration of MD and OD services to enhance surgeon yield rates and expand optometric services was also identified, alongside structural deficiencies in the ASC requiring attention pre-transaction, providing the buyer with critical insights.
Based on BSM Consulting’s findings, the buyer was able to make well-informed decisions and adjust their purchase agreements. They also received tangible recommendations to deploy during integration to make future improvements, providing reassurance and confidence in the decision-making process.
A Portfolio Company (PortCo), backed by a private equity group, acquired a high-profile private practice in the field of plastic surgery and medical aesthetics, including a certified surgery center. New to the sector, PortCo sought to enhance the practice's growth strategy and operational efficiency. Despite a strong team, the practice's EBITDA growth was stagnant, necessitating an operational assessment. The practice's growth had plateaued, primarily due to an outdated management style that diminished accountability and staff motivation. A stark performance discrepancy among providers was also evident, with one provider performing at the 90th percentile while others lagged at the 25th percentile, creating an obstacle in expanding med spa services.
BSM Consulting, a division of VMG Health, was engaged to conduct a comprehensive operational assessment, focusing on the patient experience from initial contact to post-care follow-up. The evaluation led to several key initiatives:
Implementing a culture of accountability has significantly reduced the need for micromanagement. The practice has undergone a remarkable transformation, with a unified clinical support team driving productivity, patient engagement, and retention. This cultural shift and development of standard operating procedures have resulted in a doubling of top-line revenue within two years, marking a significant success in the practice's transformation.
Urgent care centers are a convenient access point into the health system. Demand for urgent care services has increased significantly over the past several years as patients demand accessible, convenient health services at a lower cost of care compared to emergency rooms. However, many markets are saturated with urgent care centers, and the ability to develop a successful urgent care platform takes time, capital, and a focused management team.
The health system had conversations with multiple potential partners for urgent care services. VMG Health assisted in the initial evaluation of potential partners, including a review of post-transaction, contractual terms; potential purchase price; and geography. The health system selected a strategic partner that had an established platform of existing locations in a region where the health system also has a reputable presence within the market. The two entities jointly retained VMG Health to perform a fair market value analysis of the strategic partner’s existing urgent care platform to support the health system’s investment.
Additionally, VMG Health assisted with the valuation of several post-transaction, contractual arrangements, including a management services agreement where the strategic partner will continue to manage the locations and a royalty agreement related to the post-transaction branding of the locations.
The parties signed a definitive agreement in which the health system invested in the existing urgent care platform to establish a new joint venture for urgent care services. In addition to the purchase agreement, the parties signed a royalty rate agreement and a management services agreement. The strategic partner benefits from the brand and scale of the health system. The health system has achieved additional, convenient access points of care through a large platform of established urgent care locations within their market.
CINs are collaborative networks of healthcare providers, including hospitals, physicians, specialists, and other healthcare professionals, working together to improve patient care quality, efficiency, and coordination. As part of a value-based care strategy, CINs can offer many benefits, such as reducing overall healthcare costs, lowering insurance premiums, and providing an increased quality of care to the patient population while delivering shared savings back to providers. CINs can be complex entities with unique revenue streams and earnings opportunities. Additionally, significant investment may be required to bring CINs to full maturity across several years. The parties needed an accurate measure of each CIN’s contribution value to the larger joint venture.
The Clients engaged VMG Health to determine the contribution value that each CIN would bring to a potential partnership. To achieve an effective integration between entities, VMG Health compiled analytical projections and scenarios that advised the Clients on differences between each CIN’s relative revenues and earnings opportunities, life stage, service offerings, payment models of shared savings back to the providers, and opportunities for growth and collaboration given the dynamics of the target market.
After considering the potential opportunities the CINs had on an individual basis absent a potential partnership, VMG Health completed independent valuations focusing on business enterprise value and the contribution value each entity would bring to a partnership.
The Clients agreed to combine their respective CINs into one entity by forming a joint venture (JV). The JV allowed each health system to access a larger platform that supports growth and investment in the region, promoted full economic alignment between providers and the CIN, and delivered quality focused, value-based care to each health system’s patient population.
The Physicians, a well-established group in the community, noticed a gap in women's imaging services, with existing facilities lacking personal connections and causing long wait times, resulting in low patient satisfaction scores. The Physicians also realized the tailwinds associated with payors steering patients to lower-cost sites of care and patients becoming more cost-conscious amidst a surge of high-deductible health insurance plans and self-funding. Recognizing an opportunity, they developed a business plan to establish the first outpatient diagnostic imaging center exclusively for women, securing a convenient site in a Medical Office Building on the hospital campus. After setting up the facility, securing contracts, and hiring staff, they expanded scheduling availability, resulting in a profitable $3 million in annual revenue in the second year.
With the success of their venture, the local hospital approached them for a joint venture to expand services further, indicating the growing recognition and value of their offerings in the community.
VMG Health was jointly engaged by the Physicians and the hospital to provide a fair market value opinion of an ownership interest in the business. VMG Health conducted an in-depth analysis of the current operations to understand the net operating revenue, payor mix and reimbursement, operating expenses, staffing metrics, competition in the local marketplace, and other available market data. VMG Health worked closely with both parties to understand the operational history and go-forward performance expectations for the business. Through detailed analysis, discussions and assistance from both parties, a pro forma was created and a fair market value analysis was completed. This analysis informed negotiations and adherence to regulatory compliance.
Ultimately, the Physicians and the hospital successfully negotiated a transaction that included the hospital’s purchase of an ownership interest in the business, relying upon the results of VMG Health’s fair market value opinion. The parties are now exploring their options to grow the services offered by their joint venture through expanding the capacity of their current service lines, adding additional service lines, and consideration for additional sites of service in the local marketplace.
The Operator contemplated the purchase of land in the desired market to develop real estate and operate post-acute services. One of the defining analytics was to consider the viability of obtaining referrals from local hospitals and health systems. The feasibility study allowed the Operator to understand the market utilization, capacity constraints, and forecasted demand for additional post-acute services. Each factor was considered within the framework of population growth trends and competitor analysis. Additionally, the Operator asked VMG Health to create a 10-year, multiscenario, financial forecast with detailed revenue and expense buildups to determine whether the Operator’s required internal rate of return (IRR) would be met through the selected post-acute market strategic plan.
To determine demand in the desired market, VMG Health focused on three distinct categories in our analysis: demographics; competitors, potential referral sources, and market-share opportunities; and analytical approaches. VMG Health conducted demographic analysis for the targeted and surrounding geographic areas, sourcing statistics including population, age, Medicare beneficiaries, Medicare Advantage population, household income, and unemployment from multiple databases covering Hospital Referral Regions (HRRs), Metropolitan Statistical Areas (MSAs), and Public Use Microdata Areas (PUMAs). Additionally, competitor locations and services in the post-acute market were determined within a selected radius of the Operator’s target location, followed by compiling statistics such as bed count, discharges, patient days, and occupancy to assess post-acute need and potential market share opportunities. VMG Health also employed proprietary quantitative approaches, considering Medicare beneficiary discharges in the market’s hospital referral region and the market’s ability to support incremental capacity given competitive dynamics, to assist in scenario analytics supporting the Operator’s targeted IRR.
After determining market demand and service need and confirming IRR requirements in the selected geography, VMG Health presented its conclusions to aid the Operator in gaining board approval to seek financing and development for the de novo, post-acute site of service. Through the feasibility process and methodology, the Operator successfully identified and executed multiple de novo locations over a three-year period. While this engagement was specifically tailored to the post-acute market, VMG Health has successfully assisted clients with feasibility studies in the behavioral health, physician practice, ambulatory surgery center, and proton therapy industries.
A large regional health system was considering a joint venture with a large orthopedic practice (“Practice”) to expand its service offerings and position itself strategically in the market. In its assessment of the potential transaction, the health system needed assistance understanding the impact of billing and collecting for the Practice’s services, post-transaction, under the health system’s managed care contracts. As the parties cannot share their managed care contract rate information with one another, there was a lack of clarity around proforma revenue and provider compensation on a go-forward basis. To further complicate matters, the health system was in ongoing negotiations with certain payors regarding its contracted rates throughout the transaction process, which may also have a material impact on proforma revenue.
The health system engaged VMG Health to perform a “black box” reimbursement analysis, proforma sensitivity, and valuation analysis of the Practice. VMG Health completed the reimbursement analysis to provide insight into the expected impact on Practice revenue, assuming the health system’s managed care rates. Further, VMG Health worked closely with the health system’s managed care team to develop multiple scenarios modeling the potential revenue impact associated with the health system’s ongoing payor negotiations.
Based on VMG Health’s findings, the health system was able to clearly evaluate the impacts of their current and estimated managed care rates on revenue and provider compensation at the Practice. This accurate evaluation enabled the health system to manage expectations with the Practice throughout the deal process, and ultimately led to a successful transaction between the parties.
A regional health system was evaluating an offer they had received for their outreach lab business from a national operator. Unsurprisingly, the health system experienced several challenges in evaluating the offer, all driven by the internal structure and reporting of the organization. Such challenges are not uncommon when evaluating any departmental information across the health system enterprise.
This included fragmented and incomplete departmental financial and operating data, which, while useful in some contexts, were not helpful in determining the real economics of the outreach lab business.
The regional health system retained VMG Health to perform a reimbursement benchmarking, proforma sensitivity, and valuation analysis of their outreach lab business. VMG Health completed the benchmarking exercise and identified revenue at risk within the existing outreach lab business. Additionally, VMG Health performed a valuation of the outreach lab business enterprise, accounting for both a “market participant” perspective and various business case expectations as a sensitivity analysis, in the event that the health system did not pursue a transaction. Part of the VMG Health assignment included collecting, validating, and analyzing data from disparate sources, creating much-needed clarity around the historical outreach lab economics and outcomes.
Based on VMG Health’s findings, the health system was able to both evaluate the proposed transaction economics relative to the existing outreach lab business and evaluate the potential outreach lab business economics and revenue at risk if they did not pursue the transaction. Equipped with this perspective, the health system pursued the transaction and successfully received a significant increase in the negotiated deal price.
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Financial Due Diligence in Healthcare Transactions
Written by Colin Haslett and Grayson Terrell, CPA Healthcare transactions are known for their complex nature, given their rigorous regulatory...
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