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Leading Topics Related to the FMV of Healthcare Arrangements

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Leading Topics Related to the FMV of Healthcare Arrangements Presenter: Daryl P. Johnson, HealthCare Appraisers, Inc. – PowerPoint PPT presentation

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Title: Leading Topics Related to the FMV of Healthcare Arrangements


1
Leading Topics Related to the FMV of Healthcare
Arrangements
  • Presenter
  • Daryl P. Johnson, HealthCare Appraisers, Inc.

2
Topic No. 1
  • Investment value vs. fair market value How do
    these standards of value differ, and how do the
    differences affect the valuation of healthcare
    transactions?

3
No. 1 - Investment Value vs. FMV
  • The fair market value standard is a hypothetical
    willing buyer/willing seller scenario. No
    consideration is given to any unique attributes
    or synergies of either party in reaching a
    determination of value.
  • The investment value standard takes into
    consideration the unique synergies or attributes
    that one or both parties may possess.
  • For example, if a hospital has more favorable
    reimbursement that will enhance the profitability
    of a diagnostic cath lab being considered for
    purchase by the hospital, any valuation
    consideration of this benefit would reflect
    investment value, and not FMV.

4
No. 1 - Investment Value vs. FMV(cont.)
  • While FMV is the applicable valuation standard
    for most healthcare transactions, commercial
    reasonableness may dictate a departure from the
    strict FMV definition. For example, if a
    hospital has purchasing economies related to
    med/surg supplies, any arrangement involving the
    hospitals acquisition of these items through an
    agreement with physicians should give
    consideration to the hospitals actual cost
    (which invokes investment value).

5
Topic No. 2
  • The OIG precludes the use of potentially
    tainted market values (i.e., those arrangements
    that involve physician ownership). What are some
    of the key implications of this OIG guidance in
    valuing healthcare transactions?

6
No. 2 - Tainted Market Values
  • In addition to healthcare regulations, general
    valuation theory requires the use of arms
    length market transaction data. Healthcare
    transactions are frequently suspect.
  • A market approach is the preferred valuation
    approach for many types of compensation
    arrangements.
  • For certain types of arrangements, virtually no
    non-tainted data is available.
  • Lithotripsy (to be discussed later)
  • On-call arrangements
  • Medical directorships
  • The valuator must consider alternate approaches.
  • Consider analysis of physician compensation data
  • Consider reimbursement rates from Medicare and
    commercial payors
  • Consider whether the arrangement can be
    crosswalked to a non-healthcare setting

7
Topic No. 3
  • What is the top down approach in the context of
    valuing under arrangements, and is such approach
    a valid valuation approach?

8
No. 3 - Top Down Approach
  • Non-traditional under arrangement agreements
    are emerging related to outpatient surgical
    departments, cath labs and other hospital
    services.
  • A top down approach passes through all of the
    hospital's reimbursement, less a portion retained
    by hospital related to billing, collections, and
    other hospital services.
  • This approach leaves open significant opportunity
    for challenge.
  • The actual services provided by the under
    arrangement entity must be FMV, and the valuation
    approach should primarily consider the value of
    such services
  • The level of reimbursement received by a hospital
    may have no bearing on the FMV of the services
  • Consider a crosswalk to non-healthcare
    scenarios
  • Under arrangements structures might not be
    available except where only components of the
    services (and not the entire service) are
    provided. This may preclude many of the existing
    and future arrangements of this type.

9
Topic No. 4
  • Is the concept of a physicians opportunity
    cost a viable valuation methodology?

10
No. 4 - Opportunity Cost
  • Not really. In fact, Stark III saysopportunity
    cost (i.e., the value of his/her clinical
    services) may not be an indicator of the value of
    a physicians administrative time.
  • This position is logical and consistent with the
    general definition of FMV (i.e., a willing
    buyer/willing scenario). Doesnt opportunity
    cost represent investment value ?
  • RBRVS specifically identifies that certain
    physician duties carry a higher relative worth
    than others. (Otherwise, the physician work
    component of RVUs would be time-based.)
  • Opportunity cost can be considered, along with
    market data related to administrative services
    (e.g., Clark Survey) and informed judgment as to
    relevant worth of one activity compared to
    another.
  • For certain physician specialties (e.g., PCPs),
    the value of administrative time may be higher
    than the value of clinical time.

11
Topic No. 5
  • Regarding compensated call coverage arrangements,
    what are current trends in payment methodologies,
    and how can these arrangements be valued?

12
No. 5 - On-Call Compensation
  • Payment for on-call services (or at least
    compensation for unfunded emergent care) has
    almost become a mandate of sorts for most
    hospitals.
  • Where possible, rather than simply paying for
    call with an auto-pilot mentality, hospitals
    should attempt to incorporate select quality
    standards to be met.
  • The most prevalent payment methodologies include
  • Payment for unfunded care (e.g., 80 to 120 of
    Medicare)
  • Provision of claims defense or indemnification or
    reimbursement for malpractice insurance
  • Per diem (typically a 24-hour period) or per diem
    plus payment for unfunded care
  • Activation fee (Payment only for days the
    on-call physician is activated)
  • Deferred compensation plans

13
No. 5 On-Call Compensation
  • On-call compensation pitfalls
  • See OIG Advisory Opinion 07-10
  • Paying above FMV (A better vehicle for
    overcompensating physicians than the medical
    directorship!)
  • Paying for call coverage absent a contractual
    commitment for defined periods of coverage
  • Paying for unnecessary or duplicative coverage
    (e.g., ortho hand and plastics hand)
  • Paying for back-up call when not supported by
    call frequency and/or the urgency of patient
    needs

14
Topic No. 6
  • What unique issues arise in connection with
    valuing lithotripsy and other per click
    arrangements, and what should cause concern?

15
No. 6 Per Click Arrangements
  • Breaking news Urologists Corner the U.S.
    Lithotripsy Market
  • Non-physician owned lithotripsy companies are a
    distinct minority. Therefore, non-tainted
    market data is extremely limited.
  • Without reliable market data, a cost approach
    is the most appropriate valuation approach.
    Invariably, a cost approach yields lower values
    than the urologist-investors seek.
  • Consider the possibility of a descending payment
    structure a fixed fee plus a per click and/or a
    payment cap to avoid windfall payments should
    volume escalate.
  • Notwithstanding, as a hospitals lithotripsy
    volume approaches a certain threshold, the
    commercially reasonable option is for the
    hospital to purchase its own lithotripter or to
    contract with a lithotripsy provider on
    comparable terms (whereupon the urologists
    lithotripsy referrals will make a beeline for
    another surgical facility).
  • A lithotripsy arrangement could be the poster
    child for regulatory abuse.

16
Topic No. 7
  • What impact does the elimination of the CMS safe
    harbor for personally performed physician
    services have on healthcare organizations?

17
No. 7 Elimination of the Hourly Safe Harbor
Hourly Rate (75th) Hourly Rate (90th) Hourly Rate CMS Safe Harbor
Cardiology 264 324 146
Nephrology 209 252 106
Neurology 168 217 96
OB/GYN 195 245 130
Oncology 287 508 116
Psychiatry 128 151 86
Rheumatology 145 200 92
18
Topic No. 8
  • Co-management arrangements typically involve
    physician/hospital ventures to manage hospital
    services lines, with compensation consisting of
    base and incentive components. What valuation
    approaches can be used to assess this new breed
    of management arrangements?

19
No. 8 Co-Management Arrangements
  • Compliance with FMV is critical for regulatory
    compliance, but also for the ultimate success of
    the project.
  • Available valuation methodologies are limited and
    somewhat subjective.
  • In considering the primary valuation approaches
    (cost, income and market), an income approach can
    likely be eliminated.
  • Using a cost approach, FMV of the management fee
    can be established by assessing the required
    number of work hours needed to provide the
    management services multiplied by a fair market
    value hourly rate.
  • However, the exact number of required work hours
    cannot reasonably be determined in advance.
  • Further, a key ideal of most co-management
    arrangements is to reward results rather than
    time-based efforts.

20
No. 8 Co-Management Arrangements
  • A market approach recognizes that each
    co-management arrangement is unique, and reflects
    specific market and operational factors which are
    singular to the specific setting.
  • Break the specific services down into specific
    tasks and objectives, and then compare to other
    arrangements
  • On an item specific basis, assess the relative
    worth of each task/objective, and determine
    necessary adjustments to the comparable
    arrangements.
  • The cost and market valuation methodologies
    described above must be reconciled to arrive at a
    final conclusion of value.
  • The FMV of the total management fee must be
    established, as well as the base and incentive
    components.
  • Rev Proc. 97-13 may limit the amount of the
    incentive fee in relationship to the base fee.

21
Topic No. 9
  • Discussion of CMS developments related to the
    permissibility of per click compensation
    arrangements.

22
No. 9 Status of Per Clicks
  • Stark III does not specifically affect per click
    arrangements, but the proposal in the physician
    fee schedule rule would prohibit such
    arrangements with an individual physician or
    physician group. Joint ventures would still be
    viable vehicles.

23
and lastTopic No. 10
  • In theory, local market data may be the most
    relevant market data in evaluating physician
    transactions. However, local data may be
    difficult to obtain. What implications does this
    have on the valuation process?

24
No. 10 Local Market Values
  • Most healthcare providers are reluctant to share
    their physician compensation data.
  • Even if a few local market values can be
    obtained, there will undoubtedly be insufficient
    information to allow reasonable comparisons to a
    subject arrangement (e.g., how productive is the
    OB/GYN being paid 340,000 in the local market?).
  • There is no assurance that local data points are
    free from overcompensation bias.
  • In comparison to the thousands of respondents to
    at least 6 national salary surveys, local data is
    generally anecdotal.
  • CMS specifically addresses situations when local
    data (e.g., with respect to real estate) is
    insufficient.
  • FMV of physician compensation may best be
    determined using national surveys as a starting
    point. Adjustments from the norm can then be
    made based upon differences in productivity,
    extent of call coverage and administrative
    duties, local economics, etc.

25
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