Page 0
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
2014 AHLA Transactions Conference
April 10 – 11,...
Page 1
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Agenda
Transaction Structure
Treatment of Ancill...
Page 2
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
1. Transaction Structure
• Choices: merger, asse...
Page 3
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
2. Treatment of Ancillary Service Lines
A. Globa...
Page 4
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
3. Fair Market Value – Transaction
Consideration...
Page 5
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Methods Typically Used to Value
Physician Practi...
Page 6
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
What Are You Buying?
Intangible Assets?
• Medica...
Page 7
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Assessing Intangible Value
The existence of
inta...
Page 8
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Certain Practices Are More Likely to
Have Intang...
Page 9
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Legal Constraints/Evaluation of
Increased Risks
...
Page 10
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
• OIG Work Plan – Provider-Based Services (FY 2...
Page 11
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
4. FMV - Compensation Stacking
Considerations
H...
Page 12
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Physician Compensation:
Multiple Layers
Clinica...
Page 13
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Physician Compensation:
Multiple Layers (Cont’d...
Page 14
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Physician Compensation:
Multiple Layers (Cont’d...
Page 15
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Legal Constraints/Evaluation of
Increased Risks...
Page 16
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
• Special Fraud Alert on Joint Venture Arrangem...
Page 17
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Legal Constraints/Evaluation of
Increased Risks...
Page 18
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Legal Constraints/Evaluation of
Increased Risks...
Page 19
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Legal Constraints/Evaluation of
Increased Risks...
Page 20
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Inside the Stack vs.
Outside the Stack
Base com...
Page 21
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
5. Antitrust Issues
• Important to document why...
Page 22
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
6. Planning for On-Boarding
• Understand timing...
Page 23
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
7. Post-Transaction Compensation
Compensation r...
Page 24
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
8. Post-Acquisition Losses and
Commercial Reaso...
Page 25
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
9. Compensation Upon Renewal
• How much “invest...
Page 26
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
10. Structure to Enhance
Other Initiatives
MSSP...
Page 27
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Questions?
Page 28
Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
Contact Information
Carol Carden, CPA/ABV, ASA
...
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Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice

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PYA Consulting Principal Carol Carden co-presented with Charlene McGinty of McKenna Long. They examined the top issues to address when acquiring a physician practice and some of the common and more complex issues hospitals face during the acquisition.

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Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice

  1. 1. Page 0 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 2014 AHLA Transactions Conference April 10 – 11, 2014 Carol W. Carden, CPA/ABV, ASA, CFE Charlene L. McGinty, Esq. Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice
  2. 2. Page 1 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Agenda Transaction Structure Treatment of Ancillary Service Lines FMV -- What Assets Are You Buying FMV -- Compensation Stacking Issues Antitrust Considerations Planning for On-Boarding Post-transaction Compensation Post-acquisition Losses and Commercial Reasonableness Compensation Issues Upon Renewal Enhancing Other Health Reform Initiatives
  3. 3. Page 2 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 1. Transaction Structure • Choices: merger, asset sale, stock/membership interest purchase. • Asset sales are much more common. • Asset sales can have significant income tax implications: – Personal goodwill vs. corporate goodwill. • Non-asset sale transactions can have significant risk management implications: – Requires much more extensive due diligence.
  4. 4. Page 3 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 2. Treatment of Ancillary Service Lines A. Global fee includes both technical and professional components. B. Direct and indirect expenses and cash flow considerations. A. Potentially problematic – purchase of ancillary service lines vs. post- transaction compensation. B. FMV/commercial reasonableness can be challenging. A. Appropriate to consider in the valuation? ROI considerations? B. Impact on patients; PR issues. C. Integration with Hospital - systems and processes. Impact on physician compensationCarved out and acquired Provider-based billing or not?
  5. 5. Page 4 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 3. Fair Market Value – Transaction Considerations Key Concepts • Determined from the perspective of hypothetical buyers and sellers without the ability to refer business to one another. • No consideration for post-transaction buyer synergies. However, such synergies often exist! • The financial terms of the transaction must make economic sense based on the assets being sold/received. • Post-transaction compensation must be taken into consideration.
  6. 6. Page 5 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Methods Typically Used to Value Physician Practices Asset (cost) Approach Based on the underlying assets and liabilities being acquired Net Asset Value (“NAV”) Method Income Approach Based on future income (cash flow) Discounted Cash Flow Method Capitalized Income Method
  7. 7. Page 6 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 What Are You Buying? Intangible Assets? • Medical Records • Favorable Contracts • Website/Phone Numbers • Established Workforce What Are You Buying? Cash? A/P? Equipment A/R?
  8. 8. Page 7 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Assessing Intangible Value The existence of intangible value primarily comes down to cash flow. Physician groups that generate positive cash flow (above the physician’s “normalized” compensation based on professional productivity) will normally have some level of intangible value. Practices that do not produce such positive cash flow, generally will not have intangible value.
  9. 9. Page 8 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Certain Practices Are More Likely to Have Intangible Value Large multi-specialty practices with mid-level providers and significant ancillary revenue are more likely to have intangible value. Reason: they generate revenue above and beyond the professional fees produced by the physician’s personal efforts. Small highly specialized practices (e.g., general surgeons) are less likely to have intangible value because all revenue is professional fees generated by the physician’s personal efforts.
  10. 10. Page 9 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Legal Constraints/Evaluation of Increased Risks Stark Law 42 U.S.C. § 1395nn; exceptions codified at 42 C.F.R. pts. 411 & 424 “Isolated Transaction” Federal Anti-Kickback Statute 42 U.S.C. § 1320a- 7b(b); safe harbors codified at 42 C.F.R. §1001.952 Sale of practice – practitioner to practitioner Sale to hospital – U.S. ex rel. Obert-Hong v. Advocate Health Care Tax Considerations private benefit and private inurement concerns; intermediate sanctions [Treas. Reg. §53.4958-4(b)(1)] Personal Goodwill vs. Corporate Goodwill
  11. 11. Page 10 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 • OIG Work Plan – Provider-Based Services (FY 2014) • Advisory Opinions and Fraud Alerts • Special Fraud Alert on Joint Venture Arrangements - 59 Fed Reg. 65372, 65373 (Dec. 19, 1994) • Special Advisory Bulletin on Contractual Joint Ventures - 68 Fed. Reg. 23148 (April 30, 2003) • Successor Liability: • Agreement to assume liabilities? • Transaction is a merger? De facto merger? • Purchaser is mere continuation? • Fraudulent attempt to avoid liabilities? GUIDANCE: Legal Constraints/Evaluation of Increased Risks (Cont’d) State Law Federal Case Law OIG Guidance • Successor Liability: • United States v. Vernon Home Health, Inc. – 21 F.ed 693 (5th Cir. 1994) – Medicare overpayments follow the Medicare provider number • Deerbrook Pavilion, LLC v. Shalala – 235 F.3d 1100 (8th Cir. 2000) – CMPs follow the Medicare provider number) • Delta Health Group, Inc. v. U.S. Dept. of Health and Human Services,, 459 F. Supp. 2d 1207 (N.D. Fla. 2006) – choice to assume the provider number (but check state law)
  12. 12. Page 11 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 4. FMV - Compensation Stacking Considerations Hospitals and other organizations are utilizing more complex compensation models, often with multiple layers of compensation for multiple services (sometimes referred to as “stacking”). With these types of models, it is important to: - Understand the various functional agreements and how they relate to each other. - Know when a “stacking” analysis is in order. - Be aware of the multiple benchmark compensation data sources available. - Be aware of the various forms of compensation that are included in clinical benchmark data. - Appreciate the increased legal and regulatory risks in stacking agreements. - Ensure that each component of compensation, and the components when viewed in their entirety, do not exceed fair market value and are commercially reasonable.
  13. 13. Page 12 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Physician Compensation: Multiple Layers Clinical Services Teaching Services or Research Activities Medical Directorships Call Coverage Co-management and Performance Management Mid-level Provider Supervision
  14. 14. Page 13 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Physician Compensation: Multiple Layers (Cont’d) In addition, physicians can receive compensation in many forms, such as: Real Estate Leases Base Salary Sign-on/Retention Bonuses Productivity- Based Incentives Quality-Based IncentivesPractice Profitability (Profit Sharing) Tail Insurance Excess Vacation Relocation Costs Excess Benefits
  15. 15. Page 14 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Physician Compensation: Multiple Layers (Cont’d) As new compensation models become more complex, in certain cases “the sum of the parts can exceed the whole” and create commercial reasonableness and FMV issues for the organization.
  16. 16. Page 15 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Legal Constraints/Evaluation of Increased Risks Stark Law 42 U.S.C. § 1395nn; exceptions codified at 42 C.F.R. pts. 411 & 424 Bona fide employee Indirect compensation Space Rental Federal Anti-Kickback Statute 42 U.S.C. § 1320a- 7b(b); safe harbors codified at 42 C.F.R. §1001.952 Bona fide employee Space Rental Tax Considerations – “reasonable compensation” private benefit and private inurement concerns; intermediate sanctions [Treas. Reg. §53.4958-4(b)(1)]; “only such amount as would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt) under like circumstances” - § 162 of IRC
  17. 17. Page 16 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 • Special Fraud Alert on Joint Venture Arrangements - 59 Fed Reg. 65372, 65373 (Dec.19, 1994) • Special Advisory Bulletin on Contractual Joint Ventures - 68 Fed. Reg. 23148 (April 30, 2003) • OIG Compliance Program For Individual and Small Group Physician Practices - 65 Fed Reg. 59434 (Oct. 5. 2000) • OIG Supplemental Compliance Program Guidance for Hospitals – 70 Fed. Reg. 4858 (Jan. 31, 2005) OIGGUIDANCE: Legal Constraints/Evaluation of Increased Risks (Cont’d) Compliance Program Guidance Advisory Opinions and OIG Work Plan Joint Ventures/Contractual Joint Ventures
  18. 18. Page 17 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Legal Constraints/Evaluation of Increased Risks (Cont’d) Civil False Claims Act - 31 U.S.C. § 3729(a) Civil Monetary Penalties Law - 42 U.S.C. § 1320a-7a(b) PPACA Provisions ENFORCEMENTTOOLS: • Mandatory compliance programs as a condition of enrollment – 6401 of PPACA; “core elements” yet to be established. • Payment suspensions – 6402(h) of PPACA; regulations at 76 Fed. Reg. 5862 (2/2/2011) – effective 3/25/2011. • 60-day repayment requirement – 6402 of PPACA; proposed rules at 77 Fed. Reg. 9179 (2/16/2012) – Medicare A/B; proposed rules at 79 Fed. Reg. 1918, 1995 (1/10/214) – Medicare C/D.
  19. 19. Page 18 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Legal Constraints/Evaluation of Increased Risks (Cont’d) U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center et al., Case No. 6:09-cv-ORL-31TBS (M.D. Fla. Nov. 13, 2013); but see Schubert case U.S. ex rel. Drakeford v. Tuomey, Case No. 3:05-2858-MBS (D.S.C. Oct. 2, 2013) U.S. v. Campbell, 2011 WL 43013 (D.N.J.) ENFORCEMENTACTIONS: FMV/COMMERCIALREASONABLENESS U.S. ex rel Singh v. Bradford Regional Medical Center, 2010 WL 4687739 (W.D. Pa) Covenant Medical Center settlement (2009, Waterloo, Iowa) Memorial Health University Medical Center settlement (2008, Savannah, Georgia); U.S. ex rel Kaczmarczyk v. SCCI Hospital Houston (2004); case settled
  20. 20. Page 19 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Legal Constraints/Evaluation of Increased Risks (Cont’d) Avoid double payment for the same service or payment for services not provided. Identify (or match) the compensation with each service to be provided. Can the physician perform all of the duties due to the number of hours required? Can quality be maintained? Model the individual compensation components to determine the total amount of compensation that could occur under the arrangement. Should consider placing caps on the amount of compensation that can be earned under each component.
  21. 21. Page 20 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Inside the Stack vs. Outside the Stack Base compensation Productivity Quality incentive Sign-on/retention Call pay-Maybe Medical Director pay-Maybe Supervision of mid-levels Benefits Co-management compensation Practice profitability sharing Call pay-Maybe Medical Director pay-Maybe
  22. 22. Page 21 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 5. Antitrust Issues • Important to document why acquisition is the best alternative • Implications for antitrust dependent upon the specialty to some extent – who influences care? • Evaluate the impact on the payer community with an acquisition vs. some other alignment initiative • Regulatory Scrutiny – Saint Alphonsus vs. St. Luke’s
  23. 23. Page 22 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 6. Planning for On-Boarding • Understand timing issues – can become an issue in protracted negotiations. • Group versus individual ID numbers; Form 855 filings; Medicaid enrollment. • Licensure considerations (e.g., business licenses, ICANL) • Allow for time for credentialing; private payor considerations. • Allow time for billing and coding audit. • Can have significant impact on cash flow in the short-term. • Need to work with operational/integration team at Hospital from outset.
  24. 24. Page 23 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 7. Post-Transaction Compensation Compensation related to services vs. related to ownership. Must be considered in the practice valuation to avoid the “double dip.” All other things equal, less compensation equals higher purchase price. 1 2 3
  25. 25. Page 24 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 8. Post-Acquisition Losses and Commercial Reasonableness • How were ancillary services treated? • Changes in payer mix. • Changes in expense structure: – Increased benefits costs? – Decreased supplies cost? • Changes in commercial insurance rates: – Increased or decreased? • What would the practice look like if it were still in private practice?
  26. 26. Page 25 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 9. Compensation Upon Renewal • How much “investment” is warranted. • Stacking issues in an employment context. – How much call is incorporated into salary? – Productivity level vs. administrative responsibilities.
  27. 27. Page 26 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 10. Structure to Enhance Other Initiatives MSSP initiatives Commercial ACO initiatives Bundled Payment Initiatives CIN Initiatives Align quality incentives accordingly
  28. 28. Page 27 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Questions?
  29. 29. Page 28 Prepared for 2014 AHLA Transactions Conference April 10 – 11, 2014 Contact Information Carol Carden, CPA/ABV, ASA PYA (800) 270-9629 ccarden@pyapc.com www.pyapc.com Charlene L. McGinty, Esq. McKenna Long & Aldridge LLP (404) 527-4660 cmcginty@mckennalong.com www.mckennalong.com

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