PYA Principal Carol Carden presented on current issues in healthcare valuation at The Texas Society of Certified Public Accountants Business Valuation, Forensic, and Litigation Services Conference at the Hilton Fort Worth, October 14, 2014.

1. Current Issues in Healthcare
Valuation
Texas Society of Certified Public Accountants
Business Valuation, Forensic & Litigation Services Conference
October 14, 2014
Carol Carden, CPA/ABV, ASA, CFE
Prepared for Texas Society of Certified Public Accountants
Date: October 14, 2014 Page 0

2. Agenda
Understanding the context
Avoiding pitfalls in projecting cash flows
Sources of industry data
Common approaches and application
Latest trends in industry and M&A activity
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3. Understanding the Context
What makes a healthcare valuation
different than that of any other company?
• Highly regulated environment
• Less access to market data
• Significant fluctuation in trends between years –
constantly changing and evolving
• Complex interplay between patients, providers,
insurers and the government – can be tricky to
get your arms around
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4. Understanding the Context
Regulatory Environments
Stark Regulations
Impacts entities in
which a physician
has an ownership
interest
Anti-kickback
Prohibits the
consideration of
the value or
volume of
referrals
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IRS
Comes into play
with not-for-profit
entities
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5. Understanding the Context
Fair Market Value
The value in arm’s-length transactions, consistent with the general market
value.
General Market Value
The price that an asset would bring as the result of bona fide bargaining
between well-informed buyers and sellers who are not otherwise in a
position to generate business for the other party, or the compensation that
would be included in a service agreement as the result of bona fide
bargaining between well-informed parties to the agreement who are not
otherwise in a position to generate business for the other party, on the date
of acquisition of the asset or at the time of the service agreement.
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6. Understanding the Context
Buyers do not want
to chance
inheriting liability
related to
malpractice and
billing errors
Impacts working
capital projection
Deal
Structure
Healthcare
transactions are
generally
structured as asset
sales:
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Impacts analysis if
market
transactions are
incorporated into
analysis
Important to
understand when
projecting and
adjusting balance
sheet
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7. Projecting Cash Flows
Common Mistakes in Healthcare
x
x
x
x
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8. Projecting Cash Flows
Contributing Factors to Unrealistic Growth
Rates
Analysis of
the payer mix
is a must!
Identification
of industry
reimbursement
trends
Failure to
analyze
capacity
constraints
What does
perpetuity
really mean?
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Failure to
assess referral
sources
Concentrated in
a few
individuals?
Where are they
in their career
life cycles?
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9. Projecting Cash Flows
Analysis of Reimbursement Trends
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10. Healthcare Reform
ACOs
Healthcare
Reform
Incentives
Primary
Care
Medical
Home
Models
Increase
in Insured
Population
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Bundled
Payments
for
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11. Projecting Cash Flows
Consideration of Post-Transaction Factors
There is more at stake in
healthcare, up to and including
criminal charges!
For physician practice valuations, post transaction
compensation must factor into your analysis
Be careful about volume assumptions as well as
expense efficiencies and contract improvements
Bear in mind the definition of FMV, particularly as the
regulators define it
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12. Projecting Cash Flows
Inadequate Assessment of Risk Factors
• Increased regulation
• Possible criminal penalties
• Concentration of referral
sources or payers
• Technology can become
outdated very quickly
=
The more successful a company becomes, the more it shows up
on the radar screen for changes – just ask the imaging industry
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13. Sources for Industry Data
Reimbursement Trends
• MedPac Report
• Medicare Proposed and Final Physician Fee
Schedule
• Stock analysts’ reports for certain segments
Expense Benchmarking
• MGMA
• Intellimarker Survey (for ASCs)
• Ingenix (for hospitals)
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14. Sources for Industry Data
Industry Analysis
• First Research
• Industry associations such as
the American College of Cardiology,
National Cancer Institute,
American College of Radiology
Market Transactions
• Irving Levin Healthcare M&A Report
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15. Common Approaches
Asset Approach
• Used when company is not profitable enough
to result in a value greater than tangible
assets
• Used currently for many physician practice
valuations because hospitals are not paying
for goodwill or other intangible assets
because profits of the practice are generally
consumed in the form of compensation to the
physician
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16. Common Approaches
Asset Approach(Continued)
Can be complicated as many
smaller healthcare companies
are on a cash basis
Very common for many working
capital assets to be excluded,
so important to understand the
terms of the acquisition
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17. Economics of a Physician Practice
Collections
Practice staff expenses
Practice supply expenses
Practice overhead expenses
Therefore:
Use of the asset approach is common
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18. Common Approaches
Market Approach
• Not used very commonly for healthcare transactions
• Do not have publicly-traded companies in many segments
– Even when they exist, it is difficult to translate a business with
multiple segments across multiple geographies to a single
location, single specialty company
• Private transaction data is scarce
• Healthcare delivery is so market-specific, it is difficult to
translate transaction data from one market to another
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19. Illustration of Market Approach
AMSURG ASC
LOCATIONS Many Usually one
GEOGRAPHIC SPAN National Usually one
ACCESS TO CAPITAL Extensive Limited
ECONOMIES OF SCALE Extensive Very limited
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20. Common Approaches
Income Approach
• Used most frequently for healthcare companies other than practices
• Critical to appropriately project cash flows and assess risk
• Educational hurdles:
– Tax effecting
– Control over the referrals
• This approach is not without regulatory risk – OIG advisory opinion
not really in favor of income approach
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Date: October 14, 2014 Page 19

21. Common Approaches
Income Entity/Common Approach
(based on my experience and in order of preference)
Asset Income Market
Physician Practice + +
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(if there are ancillary
services or significant
physician extenders)
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-
Hospital + + +
Imaging Center + + +
Dialysis Clinic + + +
Cancer Center + + maybe
Hospital/Physician Joint Venture - + -

22. Trends in Industry and M&A Activity
– Single largest acquisition trend right now
– Involves primary care & specialty practices
– Generally only paying for tangible assets
– Post-transaction compensation is a key
assumption
Hospital
Acquisition of
Physician
Practices
Hospital/
Physician
Joint
Ventures
• Generally involves ASCs
• Likelihood of cash distribution is a key driver
• Many are structured as pass-through
entities so this becomes an important
component of the valuation
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23. Trends in Industry and M& A Activity
Management Agreements
• Many are structured as clinical co-management
agreements
• An alternative to an equity joint venture
• Involve specialty service lines of the hospital such as
cardiology and orthopedics where the hospital needs a
deeper level of clinical involvement
• Easier to unwind than equity joint ventures
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24. Trends in Industry and M&A Activity
•
• •
is that it will further
spur consolidation in
the industry between
hospitals, physician,
•
What about
healthcare
reform?
Current thinking…
and ancillary
providers, such as
imaging centers
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•
•
At a minimum…
it will make projection
of revenues
significantly more
difficult due to the
bundling of payments
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25. Trends in Industry and M&A Activity
Effect of PPACA on Primary Care
Enactment of provisions of
PPACA is expected to increase
the number of covered
individuals by 32 million.
By 2019, primary care visits are
predicted to increase between
15.07 million to 24.26 million.
Assuming stable levels of
physicians’ productivity, the
increased demand would require
between 4,307 to 6,940 primary
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care physicians.
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26. Trends in Industry and M&A Activity
Critical to the success of
an ACO or bundled
payment initiative
Care delivery will likely
shift to
mid-level practitioners
changing the cost
structure of practices
Will likely be a shortage
by 2014 – even more so
than currently
Work relative value unit
assignments likely to
increase over the next
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few years
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27. Trends in Industry and M&A Activity
ACOs – Where are They Now?
22 of the original organizations from the
Pioneer ACO program remain; represents
approximately 699,000 covered lives
As of January 2014, 351 ACOs provided care
to 5.3 million beneficiaries (up from 250 a year
ago).
Approximately 250 commercial ACOs
representing approximately 12.4 million
covered lives
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28. Trends in Industry and M&A Activity
Bundled Payments for Care
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Date: October 14, 2014 Page 27
Five-year
initiative
launched
January
31, 2013
Private
payers
already
using
bundled
payments
Based on Medicare
ACE Demonstration
Project – free range
ACO
Single payment for
defined group of
services within
specified episode of
care
Pricing based on
discount of payer’s
historic total cost
Gain-sharing
incentives

29. Trends in Industry and M&A Activity
Impact on valuations
We will be living in the “straddle” for several years
Benchmark compensation data will take 2 – 3
years to catch-up to changes in the industry and
will, therefore, not be as meaningful
As appraisers, the “art” part of our analysis will
become more prominent and we will have to
develop new approaches and be prepared to
defend them
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30. Questions
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31. Contact Information
Carol Carden, CPA/ABV, ASA, CFE
Shareholder
Pershing Yoakley & Associates, P.C.
(865) 673-0844
ccarden@pyapc.com
www.pyapc.com
Twitter: @carolcardenpya
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Date: October 14, 2014 Page 30