Written by Holden Godat, CVA; Taylor Harville; and Trent Fritzsche

In the traditional sense, call coverage was a mutual obligation for physicians in addition to their clinical duties. Many physicians would provide uncompensated call coverage to a hospital to secure hospital privileges, build their own practices, and ensure proper patient care with specialized services when needed. Due to the passage of the Emergency Medical Treatment and Labor Act of 1986 (EMTALA), which requires Medicare-participating hospitals to provide sufficient levels of physician coverage to their emergency departments, hospitals are facing difficult task of determining the appropriate level of physician coverage. Several factors—including physician work-life balance, growing uninsured patient populations, increasing professional liability insurance costs, and a declining supply of physicians—have contributed to a decline in uncompensated call coverage and a significant increase in compensated call coverage stipends. 

The healthcare sector has seen an increasingly high demand for physicians over the past decade, and projections show that there is a shortfall in supply that does not appear to be going away any time soon. According to The Complexities of Physician Supply and Demand: Projections From 2019 to 2034, a report released by the Association of American Medical Colleges (AAMC), “the U.S. faces a projected shortage of between 37,800 and 124,000 physicians within 12 years.” Such a significant shortage of physicians has left health systems and hospitals with few options to remedy the potential lapse in patient care. To combat this problem, many care organizations have turned to concurrent call coverage arrangements as a potential, efficient solution. As these arrangements become more common, it is important to ensure organizations are compliant from a fair market value perspective.  

Defining Concurrent Call Coverage 

Concurrent call coverage is an arrangement whereby a physician may provide on-call coverage services to multiple locations and/or to multiple specialty panels simultaneously. These arrangements seek to provide an even distribution of work and ensure patients receive a sufficient level of care. Although concurrent call arrangements help to provide an efficient continuum of care, there are a few important considerations to weigh with each arrangement. Setting fair market value physician compensation for any concurrent call coverage arrangement brings forth a new set of difficulties and regulatory scrutiny that must be properly addressed.  

Key Considerations

Burden of Call

In determining appropriate compensation for a call coverage shift, it is important to establish the actual burden of being on call. Factors impacting call burden include: 

• Collections Responsibility: A physician’s compensation structure, ability to collect, and exposure to emergency department payor mix are primary drivers in a call burden. 

• Volume: The number of times a physician is required to respond in person and over the phone to provide coverage are key drivers to establishing a call burden. 

• Acuity: Understanding that certain panels and trauma designations will lead to different types of procedures, resulting in different levels of acuity, can have meaningful impacts on a call burden. 

• Physician Supply and Demand: Lastly, the availability of additional physicians qualified to provide the expected coverage services has a direct impact on the call burden. If a physician is the only qualified individual who can provide the required coverage, that provider must constantly be available. Therefore, the burden is inherently greater for an individual physician when compared to a physician in a multi-provider group that has other providers available for back-up or substitute call coverage. 

When determining appropriate compensation in a concurrent call coverage arrangement, it is important to consider the combined burden of call. 

Required Specialty  

An important value driver for any call coverage arrangement is understanding the required specialty needed to perform the coverage. Typically, concurrent call arrangements are required due to the need for one group of specialized physicians to provide coverage for two or more unique, call coverage panels. Due to the nature of these arrangements, the physicians providing the concurrent services must be able to effectively provide both panels of coverage. Select the appropriate specialty for the subject services to ensure the physician can adequately cover multiple panels and to ensure the physician is appropriately compensated for the services being provided.

Physician Availability 

In a typical call coverage arrangement, the ultimate compensation rate contemplates the unrestricted availability of a physician for a given amount of time. When stacking panels or facilities to be covered in a concurrent setting, be aware of this availability and ensure the overall compensation does not account for the same time twice. Since physician availability is already being covered by an initial panel, stacking compensation related to additional panels could create overpayment concerns. Furthermore, concurrent arrangements often create additional efficiencies for an emergency department that should be reflected in the ultimate compensation. To ensure providers are appropriately compensated for the time they are providing coverage, it is common to use a discounted coverage rate on top of the existing stipend to account for the incremental coverage of additional panels or facilities.  

To illustrate this point, consider a hypothetical Panel A and Panel B. Independently, Panel A and Panel B may be worth $500 per 24-hour shift and $600 per 24-hour shift, respectively. That does not necessarily mean that the concurrent coverage of Panel A and Panel B equals $1,100 per 24-hour shift. Each panel independently contemplates 24 hours of availability. When combined, there must be assurances that the availability of the physician is not compensated twice.  

Sources of Compensation 

One of the last and most critical pieces of setting up any concurrent call coverage arrangement is to fully understand the compensation terms for the services. While these do not drive value for the services in the way other factors might, the specific terms relating to the compensation are critical to understand in providing an appropriate valuation. Factors like whether the physician is employed or an independent contractor, understanding who retains the rights for billing and collection under each individual arrangement, and a thorough review of whether providers receive production credit toward outside employment agreements are all vital pieces of structure to consider when evaluating a concurrent call coverage arrangement.  

Conclusion

The many unique considerations of concurrent call arrangements, such as establishing the appropriate burden of call, determining the correct specialty for services being provided, contemplating physician availability in a shift, and sources of compensation, often make these arrangements tricky to structure in a compliant manner. Although it may seem as simple as adding two shifts together, this is a major misconception. Increased scrutiny from regulators and the tricky healthcare landscape has made it more important than ever to obtain third-party fair market value guidance to ensure you meet a compliant call compensation system. 

Sources

Association of American Medical Colleges. (2021). The Complexities of Physician Supply and Demand: Projections from 2019 to 2034. Retrieved from https://www.aamc.org/media/54681/download ssociation of American Medical Colleges. (2021). The Complexities of Physician Supply and Demand: Projections from 2019 to 2034. Retrieved from https://www.aamc.org/media/54681/download 

Written by Christa Shephard

VMG Health’s own Lukas Recio joined Scott Becker on the Becker Private Equity & Business podcast to discuss the rise in private equity acquisitions in physician practices. Lukas, who is a leader in VMG Health’s Financial Due Diligence division, broke down the key factors driving the surge in private equity investments and its impact on healthcare professionals.

Private equity companies’ interest in the healthcare sector has flourished over the past 15 years, and private equity purchases of physician practices have increased by over 600% from 2012 to 2022. That statistic, Lukas says, reflects the “growth of healthcare spend as a percentage of GDP… [In the last five years], we’ve really seen the dollars, allocated specifically to investment in the healthcare space, really take off alongside those investment figures.”

Those changes and trends already taking place were exacerbated by 2020’s global pandemic. “2020, 2021, and 2022, we really saw deals happening at a frenetic pace,” Lukas says. In the wake of the global pandemic, the healthcare industry experienced a seismic shift in priorities. With the urgent need to meet unprecedented demand for care, the prevailing mentality became “grow at all costs.” Against this backdrop, healthcare buyers and sellers began requesting VMG Health’s services earlier in the transaction process than usual.

However, healthcare margins are growing thinner thanks to inflation and increasing operational costs, forcing organizations to navigate a landscape where growth opportunities must be balanced against heightened regulatory limitations. “When we think about deals themselves,” Lukas says, “2023 was definitely a down year as far as deal volume. But what we found was that quality assets in attractive markets were still experiencing healthy multiples.”

Despite the challenges posed by regulatory scrutiny, there are still ample opportunities for innovation and expansion. However, achieving sustainable growth in this environment requires a strategic approach that emphasizes compliance with evolving regulations. States are now noticing that anti-trust and access to healthcare services are not currently aligned, which has prompted some states to begin reviewing healthcare transactions.

Lukas explains, “You can easily imagine a world where it becomes more difficult to execute an investment in these states that are imposing these regulatory reviews because, in some cases, they could take months review the information before they let you know whether or not it’s been green-lighted.”

On top of these dynamic changes, Lukas urges listeners, especially those in physician-owned practices, not to view private equity partnerships as a silver bullet: “Private equity can be a really great partner, but there are also things that you need to consider that are going to have their challenges—as with any other relationship that you’re going to be in, whether it’s personal or professional.”

For more of this insightful discussion, listen to the episode, The Rise of Private Equity in Healthcare: Challenges, Opportunities, and Regulations. VMG Health is dedicated to helping healthcare entities big and small through their transaction, strategy, and compliance needs. Contact our industry experts or visit our website for more information.

Written by Ashleigh Surgeon and Caroline Dean, CVA

In recent years, the anesthesiology market has seen many changes in compensation trends and practice models. With continued provider shortages and a growing demand for anesthesia services, providers in this specialty are becoming increasingly valuable. Specifically, certified registered nurse anesthetists (CRNAs) have become some of the most sought-after advanced practice providers in the industry, leading to significant increases in compensation for these providers. In addition, hospitals and health systems are shifting to expanded CRNA utilization as opposed to physicians due to the ongoing push for cost-effective treatment options. Understanding the factors impacting CRNA compensation trends is crucial to anticipating and addressing potential challenges in the pursuit of CRNA arrangements. 

Overview of CRNA Compensation  

According to Becker’s ASC Review, the anesthesiology market is facing a projected shortage of 12,500 providers by 2033. As basic economic principle rules, a decrease in supply of any healthcare provider drives demand upward, forcing costs of anesthesia services and provider compensation upward as well. In 2023, median compensation for CRNAs in the United States was reported at $221,300, an increase in total cash compensation of 11.3% from 2022.  

Source: Sullivan, Cotter and Associates, Inc. 2019-2023 Physician Compensation and Productivity Survey and 2019-2023 Advanced Practice Provider Compensation and Productivity Survey

This is a significant rise as compared to general physician assistants and nurse practitioners, who saw only a 5% increase on average from 2022 to 2023. This level of compensation is mostly accredited to the additional education and training required for the certification, as well as the increased risk and level of independence associated with their standard practice.

To receive certification from the National Board of Certification and Recertification for Nurse Anesthetists (NBCRNA), a candidate must first complete registered nurse training and the appropriate clinical experience. Then CRNAs complete a Nurse Anesthesia program, which grants the candidate a master’s degree. Program length varies from two to four years and includes a clinical experience requirement in addition to coursework. In total, the process of becoming a certified nurse anesthetist takes at least seven years to complete, surpassing a standard registered nurse by an average of three years in education and experience. As with any advanced degree, CRNAs often receive increased compensation due to a higher level of education and training than a standard practicing registered nurse.  

Because of their advanced training, CRNAs have an increased level of independence in a clinical setting. Though anesthesiologists may manage high-acuity surgeries, CRNAs in many states and facilities may be responsible for primary patient care, including informing the patient, completing examinations, developing pain management plans, prescribing medications, administering and monitoring medications, and responding to adverse reactions or emergencies. A CRNA’s involvement in responsibility for patient care puts the provider in higher-risk scenarios when compared to other registered nurse professions. In 23 states, CRNAs may operate independently without the supervision of a medical doctorate. CRNAs are also typically the sole anesthesia provider in many plastic surgery centers, eye surgery centers, dental surgery centers, and gastrointestinal surgery centers. Additionally, in the U.S., many facilities in rural areas with limited healthcare providers use CRNAs for routine surgical services in the specialties of general surgery, obstetrics, and pain management. According to the American Association of Nurse Anesthesiology, CRNAs comprise over 80% of anesthesia providers in rural areas. 

Drivers of Increased CRNA Compensation 

Though CRNAs’ level of autonomy may vary depending on location, state government regulations and a facility’s scope of services, the importance of CRNAs is often constant across markets. With their ability to operate nearly identically to an anesthesiologist in most general cases, CRNAs also incur the same level of risk as physicians and the increased costs associated with such risk. Increased utilization, higher malpractice insurance expenses, and reimbursement difficulties play a large role in these higher costs for CRNAs, which create a competitive environment amongst healthcare systems when considering compensation in recruitment efforts.  

Historically, anesthesiology services have been provided by a mix of physicians and CRNAs together. However, with continued physician shortages and health systems and facilities seeking more profitable provider options, CRNA-heavy care team models have risen to the forefront. In a care team model, one physician typically supervises between one and four CRNAs, allowing the facilities to rely on CRNAs as opposed to more expensive physician coverage. As CRNA utilization grows, so grows CRNA compensation as facilities are forced to offer more lucrative recruitment packages, inclusive of commencement bonuses and higher-dollar salaries to retain top CRNA talent and stay competitive. In addition, as many U.S. lawmakers are pushing to expand the scope of CRNA independent practice, it is likely CRNA utilization will continue to increase.  

Additionally, according to the Centers of Medicare and Medicaid Services (CMS), average CRNA malpractice insurance in 2024 is $5,968—nearly 50% higher than the average for all other midlevel providers. This is most likely attributed to the large number of CRNAs practicing independently, and therefore solely liable for any case complications. The most common malpractice claims involving CRNAs include subpar performance during procedures, poor patient monitoring and improper positioning. All three of these claims are extremely serious and can result in recovery complications, severe injury, and even death. As a result, CRNAs face higher medical malpractice premiums than providers not solely responsible for a patient’s care. Health systems and facilities must consider this expense when employing CRNAs’ services, whether they reimburse, subsidize, or include the expense in compensation.  

Lastly, anesthesia has seen a downward trend in reimbursement based on the CMS Medicare Physician Fee Schedules as Anesthesia Base Units (ASAs) reimbursement have decreased from $22.27 per unit in 2019 to $20.44 in 2024. In the states where CRNAs can practice independently, CMS will reimburse services provided by CRNAs at these rates. This reduction in reimbursement can impact a provider’s ability to collect sufficient revenue based on professional services alone, often requiring additional compensation or subsidization from a facility to sustain operational costs. This issue is commonly present for providers in a community highly comprised of governmental payors. Public payor rates, such as Medicare and Medicaid, reimburse medical services at a significantly lower rate than private insurance, less than 28% of median commercial rates in 2022. As such, facilities serving a population with a significant amount of governmental insured patients must offer providers a compensation plan not only to offset the practice’s operational costs, but also as an alluring salary serving as incentive to relocate to the market. With a CRNA shortage looming, these underserved areas must stay competitive in compensation offers to recruit and retain the essential services CRNAs provide to the community. This level of competition contributes largely to the upward drive of average CRNA compensation, as majority of the CRNAs are operating in the U.S. in lower-income markets.  

The VMG Health Experience

In summary, the CRNA compensation market will continue to evolve in the coming years, and health systems and facilities must understand and address these changes to capitalize on the benefits associated with CRNA utilization. VMG Health is frequently engaged to provide fair market value and consultative services to ensure CRNA compensation packages are both competitive and compliant with government regulations. Utilizing in-depth analyses of revenue, market data, costs and recruitment expenditures, and expert experience in similar arrangements, VMG Health can assist in navigating the increasingly important CRNA market.  

Sources

Becker’s ASC Review. (June 28, 2022). Weathering the storm in Anesthesiology: making the business case and demonstrating the value of Anesthesiology. https://www.beckersasc.com/asc-news/weathering-the-storm-in-anesthesiology-making-the-business-case-and-demonstrating-the-value-of-anesthesiology.html

Sullivan Cotter. 2019-2023 Physician Compensation and Productivity Survey and 2019-2023 Advanced Practice Provider Compensation and Productivity Survey

O’Brien, E. Health eCareers. (January 23, 2023). How Long is CRNA School? https://www.healthecareers.com/career-resources/nurse-credentialing-and-education/how-long-is-crna-school

Munday, R. Nurse Journal. (November 16, 2023). CRNA Supervision Requirements by State. https://nursejournal.org/nurse-anesthetist/crna-supervision-requirements/

AMN Healthcare. (June 23, 2023). CRNAs Practice Updates and Trends. https://www.amnhealthcare.com/blog/physician/locums/crnas-practice-updates-and-trends/

Centers for Medicare & Medicaid Services. 2019-2024 Anesthesia Conversion Factors. https://www.cms.gov/medicare/payment/fee-schedules/physician/anesthesiologists-center

Baxter Pro. (May 6, 2022). The 3 Most Common CRNA Malpractice Claims. https://baxterpro.com/the-3-most-common-crna-malpractice-claims/#:~:text=Do%20CRNAs%20Get%20Sued%20More,the%20benefits%20of%20the%20job

American Society of Anesthesiologists. (December 2022). Anesthesia Payment Basics Series: #3 Payment, Conversion Factors, Modifiers. https://www.asahq.org/quality-and-practice-management/managing-your-practice/timely-topics-in-payment-and-practice-management/anesthesia-payment-basics-series-3-payment-conversion-factors-modifiers#:~:text=In%202022%2C%20the%20Medicare%20anesthesia,conversion%20factor%20survey%20was%20%2478.00.&text=Overall%2C%20Medicare%20was%20paying%20less,commercial%20rates%20in%20that%20year

Liao. C, et. all. Semantic Scholar (2015). Geographical Imbalance of Anesthesia Providers and its Impact on the Uninsured and Vulnerable Populations. https://www.semanticscholar.org/paper/Geographical-Imbalance-of-Anesthesia-Providers-and-Liao-Quraishi/77112f1f7ca09a86142b4f5e7c065ae9a073dec2

Written by Grayson Terrell, CPA

The following article was published by Becker’s Hospital Review.

In today’s complex healthcare environment, mergers and acquisitions (M&A) are proving to be more challenging than ever, with heightened governmental regulations impacting both the operation of an entity and the purchase and sale of an entity.

To successfully navigate a transaction in the healthcare sector, it is paramount that buyers and sellers make informed decisions through all of the tools made available to them. For sellers, this can come in the form of understanding how their business operates, understanding inefficiencies and growth opportunities, and even understanding what their business is worth. For buyers, informed decision making relies heavily upon understanding the markets in which they are investing, including governmental regulations in some states that may impact their ability to invest and operate; understanding the key operating metrics of similar companies in similar industries; and ensuring that they are paying an appropriate amount for the business. This is especially important because, in healthcare transactions, the capital used to purchase is often provided by investors who are counting on timely positive returns. 

Financial due diligence (FDD) is pivotal to the success of any healthcare transaction, as it requires detailed investigation and analysis of a company’s financial information and is used to validate a company’s true run-rate operating potential. With most healthcare M&A transactions, purchase price is based on a multiple of a company’s salable earnings before interest, taxes, depreciation, and amortization (EBITDA). As such, the buyer and seller must perform the appropriate financial due diligence procedures prior to executing a transaction. Below are five vital aspects of the financial due diligence process.

1) Quality of Earnings

The Quality of Earnings (QofE) process consists of making adjustments to the entity’s reported financial statements to normalize EBITDA. The bulk of these adjustments involve adjusting or removing impacts of non-recurring and one-time items from earnings to arrive at an adjusted EBITDA figure that represents a more accurate view of the entity’s true cashflows. This process also gives the FDD team the opportunity to pose pointed questions related to the entity’s operations, finances, and accounting functions, highlighting key information that could negatively or positively impact adjusted earnings. Specific to healthcare transactions, some of the relevant areas of interest with respect to potential EBITDA adjustments are:

• Cash-to-accrual conversion of revenues and expenses
• Removal of any non-recurring or out-of-period revenues or expenses
• Normalization of specific revenue and expense accounts
• Quality of Revenue analysis

2) Quality of Revenue

The Quality of Revenue (QofR) analysis may be the most important part of the FDD process when it comes to healthcare-related transactions, given the unique characteristics and nuances of healthcare revenue. During this process in many middle-market healthcare deals, the conversion of revenue from cash basis to accrual basis is a fundamental exercise with respect to the QofE analysis. The cash waterfall approach is the gold standard and therefore the most common method for accomplishing the cash-to-accrual conversion. With this method, detailed billing data is obtained from the entity’s revenue cycle management (RCM) system, which includes charges by date of service and payments by date of service and by date of payment. In this analysis, payments are adjusted back to their specific date of service (accrual basis), and outstanding collections on charges billed during the period under analysis are estimated based on historical collection patterns cut by payor, CPT code, or various other means.

3) Pro Forma Considerations

Pro forma adjustments are forward-looking projections on certain aspects of the business, which are layered back in across the historical financial statements. These assumptions can help buyers understand potential areas of future direction and growth opportunities for the company; however, these adjustments should be thoroughly scrutinized during buy-side FDD procedures to ensure the adjusted EBITDA and purchase price are not over- or understated. These estimations tend to lean more in favor of the seller and are often a primary area of focus by the opposing buy-side FDD team. As such, a seller should understand all aspects of the business, especially as they relate to these forward-looking projections, and should be able to support the key inputs utilized to derive these pro forma adjustments. If properly supported, these adjustments often increase the sale price of the business enough to cover the cost of FDD procedures incurred by the seller, if not many times over. Some examples of commonly observed pro forma adjustments in healthcare related QofE reports include:

• Hiring/ramping of new providers on staff
• Opening/closing of facilities
• Renegotiation of payor contracts
• Implementation/expansion of service lines.

4) Net Working Capital

Another common analysis in FDD procedures is a Net Working Capital analysis, which is used to determine the working capital (current assets less current liabilities, excluding cash and debt) required to operate a business in the post-transaction environment. This subsection of FDD typically involves substantial negotiation between buyers and sellers when approaching the close of a deal, as both parties will view various inputs differently, often striving to set a working capital peg that is more favorable for themselves. As a miscalculation of this peg can cost a seller on a dollar-for-dollar basis if the agreed-upon level of net working capital is not met, it is imperative that management and their advisors are involved and knowledgeable on this calculation.

5) Debt and Debt-Like Items

Most of the time, healthcare transactions occur on a cash-free, debt-free basis. Standard with any cash-basis business, many debt and debt-like items have the potential to be inaccurately reflected within a company’s balance sheet. As such, a Debt and Debt-Like Items analysis can assist buyers and sellers in understanding a company’s debts and liabilities as of the date of sale. These items can include potential tax-related exposures, outstanding litigation and legal settlements, deferred compensation, notes payable, and others.

Conclusion

In closing, FDD is a necessary step in ensuring that sellers have the keys to sell their businesses at the best possible price, and buyers can protect the money of their companies, firms, or investors by making a sound investment in the target company. This proactive approach creates trust between all parties and leads to more lucrative transactions for all.

Written by Grayson Terrell, CPA; Joe Scott, CPA; Lukas Recio, CPA; Wayne Prior, CPA; and the Baker Tilly team

The M&A healthcare industry presents a unique set of challenges, and it is important to have the proper M&A professionals involved to assist with identifying potential deal issues. In addition to financial due diligence experts, M&A tax professionals should assist with understanding and identifying the transactional tax consequences, as the identified tax issues may impact the overall deal structure or may be used to negotiate in the purchase agreement. During the M&A due diligence lifecycle, financial and tax due diligence teams must collaborate closely. This collaboration often uncovers synergies between their processes, enhancing completeness and efficiency. As their work is often completed first, the financial due diligence team may act as the first line of defense and can assist with identifying potential exposures earlier in the process. M&A tax advisors can assist with vetting and quantifying these exposures, which can assist with limiting the identified risks during the purchase negotiations. Tax considerations often influence the structure of a sale, determining whether it’s taxable or tax-free, whether assets or equity are bought, and whether taxable gains can be delayed through methods like earn-outs, installment sales, and debt.

The starting point for tax diligence is understanding the tax entity type of the target included in the transaction. Different tax issues may arise depending on how the entity is treated for tax purposes. The common tax entity types are:

S corporation:

• Though S corporations are flow-through entities—meaning items of income and loss are generally subject to tax, at the federal level, on the shareholders’ individual income tax returns—there is still the possibility of state income/non-income and indirect taxation at the entity level. As such, potential adverse tax implications exist for the buyer. Minor issues that may have flown under the IRS’ radar for years are much more likely to surface during a transaction.

Partnership:

• While partnerships are flow-through entities—meaning items of income and loss are generally subject to tax on the members’ individual income tax returns, at the federal level—there is still the possibility of state income/non-income and indirect taxation at the entity level. As such, potential adverse tax implications exist for the buyer. Conducting detailed due diligence on a target you’re considering acquiring is a must in today’s complex tax environment.

C corporation:

• In-depth tax due diligence in a C corporation acquisition is vital. As C corporations pay federal and state income taxes at the entity level, unexpected tax liabilities (including those from before the deal) could remain with the buyer and create very unpleasant surprises.

Common Healthcare Tax Due Diligence Issues

Improper independent contractor classification (applicable to all tax entity types). While some employers misclassify their employees as independent contractors in error, others do it intentionally to avoid paying state and federal payroll taxes by passing that responsibility onto the employee. Employers found to have misclassified their employees are subject to payroll tax and penalties that could succeed to the buyer. During due diligence, it’s important to determine whether independent contractors should be considered full-time employees. A common healthcare tax due diligence issue is the misclassification of certified registered nurse anesthetists (CRNAs), doctors, and other healthcare professionals as independent contractors. It is important to request IRS Form 1099 and understand the services performed by the independent contractors. Depending on the time dedicated to the business, level of pay, direction from the employer, and several other factors, there may be contractors who could be misclassified, resulting in potential payroll tax exposures. The IRS provides a 20-factor test to help make that determination with considerations related to direction and control.

Unclaimed property (applicable to all entity types). Each state has an unclaimed property statute governing when and what types of property must be remitted to it. Examples of unclaimed property include uncashed or unclaimed refund checks, patient overpayments, insurance overpayments, payroll checks, or vendor checks. If unclaimed after a certain period (dormancy period), those checks must be turned over to the state. This is a common issue amongst healthcare providers, as there may be instances where a patient’s insurance covers more than what was originally estimated for an appointment or procedure, resulting in a patient overpayment. In a situation where a healthcare provider sees non-recurring patients, the patients are less likely to use a credit balance toward a future appointment. It is important to review the target’s accounts payable and accounts receivable aging schedules to determine whether there are any balances that give rise to an unclaimed property risk. Financial due diligence teams will likely have access to the target’s financials and can assist with pulling the documentation necessary to evaluate these potential risks. To avoid possible unclaimed property liability, buyers should determine whether the target is properly addressing its escheatable property.

Improper treatment of owner personal expenses (applicable to S and C corporations). Is the S corporation owner using a corporate account for any personal expenses? If so, these payments may be considered compensation and subject to payroll tax. If the employer’s share of payroll tax is unpaid, the buyer could be held liable for the amount owed after the acquisition, including interest and penalties. In parallel, if a C corporation shareholder is conducting similar activities, the IRS or state revenue service may classify these expenses as dividends, which are non-deductible for income tax purposes.

Unreasonable owner compensation (applicable to S and C corporations). Since an S corporation shareholder’s distributive share of income is not subject to self-employment or payroll tax, owners are often motivated to minimize their salary in favor of non-wage distributions. However, if the IRS determines an owner’s salary to be too low based on multiple factors—including profits, business activities, and the shareholder’s involvement in the business—non-wage distributions could be reclassified to wages subject to employment taxes. The buyer may be responsible for this tax if it isn’t resolved before the acquisition. Conversely, if a C corporation shareholder’s salary is too high relative to the available facts, the IRS or state revenue service may deem the compensation to be excessive and reclassify a portion to dividends.

Related-party transactions (applicable to all entity types). A related-party transaction takes place between two parties that hold a pre-existing connection prior to a transaction. There are many types of transactions that can be conducted between related parties, such as sales, asset transfers, leases, lending arrangements, guarantees, and allocations of common costs. These transactions can become problematic when an S corporation utilizes them as a vehicle to get extra cash out of the business. If a shareholder owns both Company A and Company B, and Company A pays the shareholder a below-market salary while also renting a building from Company B (an LLC taxed as flow-through) at inflated rates, it may be considered disguised compensation to avoid payroll taxes. It is important to request copies of the lease agreements and understand the fair market value of the square footage and rent of the property to determine a potential disguised compensation risk as it relates to related-party transactions. Problematic related-party transactions should be addressed during due diligence.

Cash vs. accrual accounting method (applicable to all entity types). The IRS prefers the accrual method, but if a company is on the cash basis of accounting for tax purposes, the buyer should determine whether they meet the requirements to continue using that method. The change in accounting method from cash to accrual may result in additional income that could be recognized in the post-closing period. By identifying the issue and quantifying the potential exposure, the buyer and seller can negotiate who will bear the tax on the additional income.

Pass-through entity tax (PTET) (applicable to S corporations and partnerships). In certain states, eligible S corporations can make PTET elections, whereby the entity is responsible for paying the shareholder’s share of tax at the entity level. States began enacting responses to state and local tax deduction limitation because of the 2017 Tax Cuts and Jobs Act (TCJA), which limited the allowable deduction for state and local taxes on an individual’s tax return to $10,000. The primary benefit is reduction of federal income taxes; however, use caution when evaluating whether benefit exists on state returns. PTET elections may shift the successor liability for state income taxes from the shareholder to the entity. Most of the elections are irrevocable. During due diligence, determine whether the company has made these elections for the states that have enacted these rules. Given the ever-changing PTET rules, companies should maintain a process to review company’s PTET elections.

20 Percent Deduction Under Section 199A (applicable to S corporations and partnerships). Section 199A was enacted as part of the TCJA and provides a deduction for qualified business income (QBI) from a qualified trade or business operated directly or through a pass-through entity. For healthcare providers, the application of Section 199A can be complex due to the nature of healthcare services being classified as a non-qualifying Specified Service Trade or Business (SSTB). However, certain healthcare-related businesses may qualify, such as a dermatology practice’s sales of skincare products or certain laboratories whose tests benefit the healthcare industry but aren’t independently viewed as health services. Additionally, while a doctor, nurse, or dentist is in the field of health, someone who merely endeavors to improve overall well-being, such as a personal trainer or the owner of a health club, is not in the field of health.

Built-in gains tax (applicable to S corporations). When a corporation has converted its status from C corporation to S corporation, or has acquired assets from a C corporation in a tax-free transaction and has a recognition event within five years, it may be subject to a corporate-level, “built-in gains” tax in addition to the tax imposed on its shareholders from the transaction. The buyer can leverage its knowledge of a potential, built-in-gains tax liability, as identified in the due diligence process, to negotiate with the seller such that the buyer would not inherit said liability.

Non-resident withholding (applicable to S corporations and partnerships). State and local governments are permitted to tax the income of their residents and the income of nonresidents if that income is derived from sources within their state or locality. It’s important to ensure that the S corporation or partnership complies with state and local income tax withholding regulations.

Principal Insights

When it comes to healthcare acquisitions, it is important to consider the above items from a tax perspective. Financial and tax due diligence teams should work together to help buyers and sellers avoid tax liabilities, identify unrealized tax savings, and structure the transaction in a tax-efficient manner. Baker Tilly’s M&A tax team can assist in identifying the related risks and opportunities associated with healthcare acquisitions, all in an effort to maximize value. If you have any questions or would like additional information, please contact:

Baker Tilly Team

Michael O’Connor, Partner Emeritus: Michael.OConnor@bakertilly.com

Michael DeRose, Senior Manager: Michael.DeRose@bakertilly.com

Peter Dewan, Manager: Pete.Dewan@bakertilly.com

Kendra Nowak, Senior Associate: Kendra.Nowak@bakertilly.com

At VMG Health, we’re dedicated to sharing our knowledge. Our experts present at in-person conferences and virtual webinars to bring you the latest compliance, strategy, and transaction insight. Sit down with our in-house experts in this blog series, where we unpack the five key takeaways from our latest speaking engagements.

1. Can you provide a high-level overview of what you spoke about at the Ambulatory Surgery Center Association Conference and Expo? 

The title of my presentation was Anatomy of a Deposition.  My co-speaker, Will Miller, from Higgs Fletcher & Mack in San Diego, and I discussed what a deposition is and how it fits into the steps of a lawsuit from patient injury to subpoena, the discovery phase and the trial itself.  We discussed how to prepare for a deposition, the possible ramifications of not utilizing an attorney in the process, and how to answer questions during a trial honestly while learning from your lawyer’s cues. For example, if you’re asked a question and your lawyer objects and says the question is vague and ambiguous, you might take that as a hint that you need to ask for the question to be rephrased before you respond.

2. What do you think the audience was the most surprised to learn from your presentation?

I received feedback from someone who was there, and they said that the presentation was a great reminder to pay attention to their documentation practices. It’s important not to get complacent with the documentation and to ensure nursing staff document what they need to while watching the scope of practice and licensure of themselves and other employees at the facility. You must always be cognizant of whether they’re functioning within their licensure or certification, and this course was a great reminder of that. 

3. How do you think your presentation helped healthcare leaders better prepare for challenges? 

I’ve already heard from a few people who are taking this information back to their surgery centers, and they’re educating their staff on proper nursing documentation as well as risk management, and giving them a little taste of what a deposition might be like. The two cases we highlighted in our presentation included documentation issues, such as not documenting on the correct form, not adding post-op score accurately, and lack of physician orders. These issues highlight why staff must pay attention to what they document and be sure their medical record tells the story of the patient experience. Leaders can use this information to show their staff what improper documentation looks like to a jury, how it ruins credibility, and the importance of proper documentation.

4. What resources would you suggest for those interested in learning more? 

ESupport is an annual subscription for ambulatory surgery centers (ASCs), and it includes a host of resources: updated policies and procedures, a forum where they can write to and learn from a consultant, tools they can use in just about every aspect of their ASCs, and continuing education modules. Specific to this issue, we have a one-page training document on nursing documentation and an hour-long webinar that dives deeper into the topic.

Within ESupport, there’s also a risk management page that talks about more than just depositions; it provides a nice overview of what risk management is and some of the tools that people can use in their risk management program.

Our parent companies, BSM Consulting and VMG Health, also provide excellent resources for ASCs, from certification and accreditation to transaction valuation.

5. If someone takes only one message from your presentation, what would you want it to be?  

Go back to Nursing Documentation 101. The rules have not changed, so go back to the basics. Make sure you document everything going on with your patients. Your documentation should reflect a patient’s story; if I read your medical record, it should tell me everything that happened with that patient during their episode with you. 

Our team serves as the single source for your valuation, strategic, and compliance needs.  If you would like to learn more about VMG Health, get in touch with our experts, subscribe to our newsletter, and follow us on LinkedIn.  

At VMG Health, we’re dedicated to sharing our knowledge. Our experts present at in-person conferences and virtual webinars to bring you the latest compliance, strategy, and transaction insight. Sit down with our in-house experts in this blog series, where we unpack the five key takeaways from our latest speaking engagements.

1. Can you provide a high-level overview of what you spoke about at the American Bar Association Emerging Issues in Healthcare Law Conference? 

I spoke with King and Spalding attorney Kim Roeder on different, hot-button issues that arise when structuring and valuing different value-based arrangements. It started off as a presentation of different case studies and focused on what Roeder has encountered from a legal perspective and what I have encountered from a valuation perspective. We often receive questions when it comes to structure or even value drivers, and we wanted to present solutions to what we saw or clients struggling with so that they could develop a better understanding of them.  

2. What do you think the audience was the most surprised to learn from your presentation?

The focus on the metrics themselves and how carefully they need to be considered seemed to be the most surprising. Recent regulations have been really focused on metrics, and that’s what we get the most questions about. I think our audience was also surprised to learn that Kim had experienced those questions as well, and metrics aren’t just a consideration on the valuation perspective. Both legal and valuation perspectives must carefully consider metrics. 

3. How do you think your presentation helped healthcare leaders better prepare for challenges? 

Our presentation was a very pragmatic way of illustrating six key issues that often come up during valuation. It’s a great resource for healthcare leaders to reference as they go through and check the boxes to ensure they have thought through all of the considerations that we often see as eleventh-hour issues. 

4. What resources would you suggest for those interested in learning more? 

I co-wrote a section of the 2023 Physician Alignment: Tips and Trends Report that discusses quality incentives for providers. It captures key factors to consider, from a valuation perspective, when looking to enter value-based arrangements and where to start.  

5. If someone takes only one message from your presentation, what would you want it to be?  

Value-based arrangements require a very orchestrated balance between legal and compliance, operational champions, and valuation teams. Operational teams should be able to focus on what changes and improvements they want to implement, valuation teams must have an understanding of those goals, and legal and compliance must be involved to ensure the approach is appropriate and compliant. Without cohesion between these three groups, we see those eleventh-hour issues pop up. 

Our team serves as the single source for your valuation, strategic, and compliance needs.  If you would like to learn more about VMG Health, get in touch with our experts, subscribe to our newsletter, and follow us on LinkedIn.  

At VMG Health, we’re dedicated to sharing our knowledge. Our experts present at in-person conferences and virtual webinars to bring you the latest compliance, strategy, and transaction insight. Sit down with our in-house experts in this blog series, where we unpack the five key takeaways from our latest speaking engagements.

1. Can you provide a high-level overview of what you spoke about at the American Society of Ophthalmic Administrators/American Society of Cataract and Refractive Surgery Annual Meeting? 

The course itself, Physician Compensation Trends for Employed and Owner Providers, had two main focal points. We discussed current compensation and benefits trends for employed providers in group practices, as well as tips for assessing the feasibility of adding new providers in today’s challenging recruitment environment. We also discussed common income and expense sharing models for owner providers in group practices. 

2. What do you think the audience was the most surprised to learn from your presentation?

The biggest surprise for attendees was just how competitive the current recruitment environment is for practices looking to hire new providers. There truly is a supply and demand imbalance, meaning that there are more practices looking to hire providers than there are available ophthalmologists looking for positions. The combination of this challenge with influences from private equity–backed companies has resulted in higher, guaranteed starting salaries for providers on the job market.

All of this is happening while practices are facing declining reimbursement and ever-increasing operating expenses, making the challenging decision to hire a new provider even more complicated.

Many practices I work with feel that this is a challenge to them specifically, based on geography or practice situation. However, the reality is that ophthalmic practices across the country are all struggling to recruit.

3. How do you think your presentation helped healthcare leaders better prepare for challenges? 

One of the key topics of discussion focused on developing a thorough feasibility analysis when determining whether the timing is right to hire a new provider. Practices can exponentially increase their likelihood of making the right decision by taking a disciplined approach in assessing the revenue opportunity for the new provider, their estimated compensation, and other incremental overhead costs. The hiring decision should not be made based on a gut feeling, but instead through a review of objective data points given the potential positive (or negative) impact to the practice.

4. What resources would you suggest for those interested in learning more? 

BSM Connection for Ophthalmology has a several fantastic resources for practices in the recruitment process, including the New Provider Feasibility Analyzer and the Key Contract Considerations Guide for ophthalmologists and optometrists, which provide guidance on compensation and benefit trends. The Provider Recruitment section of the website also includes a Contract Review Worksheet and a sample Letter of Understanding, although we always recommend practices work with legal counsel to ensure appropriate documentation is completed.

For information regarding income and compensation models, our experts have written articles related to income-sharing models for group practices. VMG Health also offers a Provider Needs Assessment.

5. If someone takes only one message from your presentation, what would you want it to be?  

With all areas of practice management, leaders must make business decisions using a disciplined approach. That starts with being educated and realizing the challenges that exist right now when it comes to provider recruitment.

As it relates to owner income and expense-sharing models, the takeaway is the need for transparency. Practice administrators and executives are often the ones charged with administering the compensation model, so the key is to remain neutral and transparent throughout the entire process.

Our team serves as the single source for your valuation, strategic, and compliance needs.  If you would like to learn more about VMG Health, get in touch with our experts, subscribe to our newsletter, and follow us on LinkedIn.  

At VMG Health, we’re dedicated to sharing our knowledge. Our experts present at in-person conferences and virtual webinars to bring you the latest compliance, strategy, and transaction insight. Sit down with our in-house experts in this blog series, where we unpack the five key takeaways from our latest speaking engagements.

1. Can you provide a high-level overview of what you spoke about at Caribbean Eye?

I was part of a panel discussion called, “Regulatory Compliance and Insurance Trends for ASCs.” Representing Progressive Surgical Solutions (PSS): A Division of VMG Health, I focused on two new regulatory issues in the ambulatory surgery center (ASC) space: the new water quality standard and putting together a whole program for water quality inspection, testing, and maintenance requirements throughout the year; and then I gave an update on Medicare’s mandatory quality reporting requirements for surgery centers.

The big thing that I focused on is the Outpatient Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) requirement, which is now 34 questions. This assessment will be mandatory as of January 1, 2025, and ASCs must work with a vendor approved by the Centers for Medicare & Medicaid Services (CMS). There are only so many CMS-approved vendors, and there are thousands of surgery centers, so it’s important to get on it and decide which vendor you’re going to work with, and then start the implementation process.

2. What do you think the audience was the most surprised to learn from your presentation?

I think many people were just unaware of this new water quality standard, and I don’t think they had a good grasp on what is involved in administering this survey. ASCs must work through one of the CMS-approved vendors, and there is a process to getting set up to be able to implement it.

3. How do you think your presentation helped healthcare leaders better prepare for challenges? 

Knowledge is key. Many attendees took pictures of my slides, and I provided resources for them to find the most updated information of the OAS CAHPS program. It was imperative to give them that knowledge and empower them to stay a step ahead as the new requirements are implemented.

4. What resources would you suggest for those interested in learning more? 

Our eSupport membership program contains a wide array of resources. The PSS team has intimate knowledge of ASC operations from years of hands-on experience. We constantly update eSupport so ASCs can remain compliant, successful, and confident—even when regulations change.

To dive into the continued evolution of ASCs, check out VMG Health’s ASCs in 2023: A Year in Review article, which includes everything from market dynamics to provider reimbursement.

5. If someone takes only one message from your presentation, what would you want it to be?  

Be prepared. The downside of being unprepared with this water management program is that you could get a deficiency citation on a survey, announced or unannounced. As for the OAS CAHPS survey, if an ASC fails to submit the required number of surveys in 2025, it will be hit with a 2% penalty on its Medicare reimbursement in 2027. Both situations should be avoided at all costs, and staying prepared is key.

Our team serves as the single source for your valuation, strategic, and compliance needs.  If you would like to learn more about VMG Health, get in touch with our experts, subscribe to our newsletter, and follow us on LinkedIn.  

At VMG Health, we’re dedicated to sharing our knowledge. Our experts present at in-person conferences and virtual webinars to bring you the latest compliance, strategy, and transaction insight. Sit down with our in-house experts in this blog series, where we unpack the five key takeaways from our latest speaking engagements.

1. Can you provide a high-level overview of what you spoke about at AHLA’s webinar, “University Brand Value and Health Care Transactions”?

My portion of the presentation was about the valuation of academic healthcare brands. I talked through different valuation methodologies, which are the income cost and market approach, by discussing the specifics related to brand valuation. Additionally, I spoke about the key things to consider in a brand valuation or in a transaction involving a brand, like how to structure the payment—whether it’s through a variable or fixed license rate—and some of the pros and cons to different affiliation structures.

2. What do you think the audience was the most surprised to learn from your presentation?

In academic brand valuations, the owners of the academic brands tend to think their brand is extremely valuable. However, from an actual fair market value transaction perspective, the value of that brand is based on the licensee’s return, even if the brand is powerful and may drive allocations higher. If the licensee can’t make a monetary return on it, there won’t be a huge value that they have to pay. Otherwise, they’d be negative.

3. How do you think your presentation helped healthcare leaders better prepare for challenges? 

Leaders can look for opportunities with this knowledge. Brands are not a common part of a joint venture arrangement. Adding a health system’s brand to a joint venture may result in an additional return or credit for something that the system is contributing to the joint venture. Historically, leaders may not have valued brands, but they can.

4. What resources would you suggest for those interested in learning more? 

The blog, Healthcare Brand Valuation: Purpose, Strategy, and FMV Implications, is a great supplemental resource for those looking to learn more about incorporating brand in healthcare transactions. Additionally, another article is coming to the VMG Health website soon, and it will focus on brand valuation. Watch our site for that upcoming content.  

5. If someone takes only one message from your presentation, what would you want it to be?  

Brands can and should be considered, and possibly included, in healthcare transactions.

Our team serves as the single source for your valuation, strategic, and compliance needs.  If you would like to learn more about VMG Health, get in touch with our experts, subscribe to our newsletter, and follow us on LinkedIn.