IQ from a QOE: Key Considerations When Performing a Quality of Earnings Analysis Involving Healthcare Companies
•Download as PPTX, PDF•
0 likes•808 views
Given the complexity of healthcare’s reimbursement environment, determining the quality of reported earnings during a transaction’s due-diligence process can prove challenging. In his presentation, “IQ from a QoE: Key Considerations When Performing a Quality of Earnings Analysis Involving Healthcare Entities,” PYA Pricipal Michael Ramey introduced key considerations when planning and performing effective QoE engagements for various healthcare entities.
Recommended
More Related Content
What's hot
What's hot (20)
Similar to IQ from a QOE: Key Considerations When Performing a Quality of Earnings Analysis Involving Healthcare Companies
Similar to IQ from a QOE: Key Considerations When Performing a Quality of Earnings Analysis Involving Healthcare Companies (20)
More from PYA, P.C.
More from PYA, P.C. (20)
Recently uploaded
Recently uploaded (20)
IQ from a QOE: Key Considerations When Performing a Quality of Earnings Analysis Involving Healthcare Companies
- 1. Tennessee Society of CPAs Health Care Conference November 26, 2018 Michael Ramey PYA Consulting Principal IQ from a QOE: Key Considerations When Performing a Quality of Earnings Analysis Involving Healthcare Companies
- 2. Prepared for Tennessee Society of CPAs Health Care Conference Page 1 Topics I. What is a Quality of Earnings Analysis? II. Benefits of a QOE in the Transaction Process III. Factors Affecting Net Revenue in Healthcare Provider Companies IV. Focus Areas In Evaluating Healthcare Provider Companies’ EBITDA V. Healthcare Compliance Implications on QOE VI. QOE Limitations and Other Due Diligence Considerations VII. Case Studies
- 3. Prepared for Tennessee Society of CPAs Health Care Conference Page 2 QOE Overview What is it? Analysis of the accounting policies and procedures used to prepare financial statements and detailed analysis of certain components of an organization’s revenue and expenses. Focuses on sustainable, quality earnings through: - Estimation of normalized operations presented on an accrual basis. - Identification of potential deviations to generally accepted accounting principles. - Identification of any one-time or extraordinary operating items. - Identification of significant changes in accounting policies. - Presentation of normalized historical earnings.
- 4. Prepared for Tennessee Society of CPAs Health Care Conference Page 3 QOE Overview What is it not? A Quality of Earnings Analysis Provides No Assurance Tax Due Diligence Compilation / Examination Assessment of Internal Controls to Prepare Financial Statements Agreed Upon Procedures Prospective Financial Statements Financial Statement Audit $ $ $ $ $ Valuation
- 5. Prepared for Tennessee Society of CPAs Health Care Conference Page 4 QOE Overview Implications - Valuations of a going concern are often based on historical and projected cash flows available to a potential buyer - EBITDA is an indicator of available cash flows used to assess return on investment Confidence Level Low High LowHigh Risk
- 6. Prepared for Tennessee Society of CPAs Health Care Conference Page 5 QOE Overview Drivers of QOE Needs in Healthcare 66 88 95 98 95 112 102 115 2010 2011 2012 2013 2014 2015 2016 2017 Hospital M&A Activity Total Deal Volume Increase in Physician Employment increase in hospital ownership of physician practices from 2012-2015 86% Source: The Advisory Board Emergence of Private Equity in Healthcare Healthcare has led all sectors in total returns since 1990 of the healthcare deal value was in the provider sector, totaling $18.9B ~44% 2017 healthcare private equity deals (29% increase from 2016) 265 Source: Bain & Company: Global Healthcare Private Equity and Corporate M&A Report 2018
- 7. Prepared for Tennessee Society of CPAs Health Care Conference Page 6 QOE Overview Entity Type For-Profit, Not-For-Profit, Governmental, S corp, C corp, Partnership? # of Entities/ Locations How many entities/locations are you assessing? Infrastructure and Management Are management, accounting, and billing functions centralized and on consistent information systems? Method of Accounting Accrual or cash basis? Recent financial statement audit? Acquisition Type Asset or Equity? If asset, what assets purchased/liabilities assumed? What do you need to know before beginning a QOE?
- 8. Prepared for Tennessee Society of CPAs Health Care Conference Page 7 QOE Overview Revenue Recognition Processes Historical Cash to Net Revenue Trends Key Volume and Operating Metrics Payer Mix Trends Revenue Trends by Type of Service Sources of Other Revenue Revenue Concentration Expenses Trended Operating Expenses Process for Monthly Accruals Historical Expenses Incurred to Generate Other Revenue Lease Accounting Practices Key Purchased Services Cash to Accrual Adjustments, if applicable Contingencies Outstanding Suits or Claims Governmental Inquiries/Audits Worker’s Compensation Losses Sample Scope of Work Revenue
- 9. Prepared for Tennessee Society of CPAs Health Care Conference Page 8 Factors Affecting Net Revenue Revenue Recognition Has the entity properly accounted for contractual allowances, bad debt expense, and discounts? Cash Collections Do cash collections and bank deposits reconcile to recorded revenue? What could be driving a variance? 1 2 $ $ $ $ $ Finance and Accounting Subject Matter Expert Accounts Receivable Based on a review of A/R aging and A/R credit balances, do adjustments to recorded revenue need to be made? 3
- 10. Prepared for Tennessee Society of CPAs Health Care Conference Page 9 Factors Affecting Net Revenue Collection Waterfall Sample Payment Month ServiceDate
- 11. Prepared for Tennessee Society of CPAs Health Care Conference Page 10 Factors Affecting Net Revenue Other Revenue Does other revenue include any non-recurring revenue (e.g., EHR incentives, expiring lease arrangements, etc.)? 6 Reimbursement Has the entity properly recorded reserves for cost report liabilities? Have estimates for governmental program funding been properly accrued? 5 Healthcare Coding Subject Matter Expert Finance, Information Technology, Real Estate, Etc. Subject Matter Expert Healthcare Reimbursement Subject Matter Expert Coding Distribution Based on industry standards, do the coding practices cause any concern for overstated/ understated revenue? 4 !
- 12. Prepared for Tennessee Society of CPAs Health Care Conference Page 11 Focus Areas in Evaluating EBITDA Operating Expenses Focus Area Subject Matter Expert 1 Salaries and Wages Supplies Expense Facilities Expense Overhead and General and Administrative Expenses Employee Benefit Programs2 Finance and AccountingUnusual and Extraordinary Items Self-Insured Health Plans Incurred But Not Reported Incentive Accruals Paid-Time Off/Sick Leave Defined Benefit Pension
- 13. Prepared for Tennessee Society of CPAs Health Care Conference Page 12 Focus Areas in Evaluating EBITDA Focus Area Subject Matter Expert Lease Accounting4 Finance and AccountingOperating vs. Capital (Standards Changing in 2019/2020) (FASB ASC 842) Real Estate Considerations5 Healthcare Real EstateFair Market Value Lease Rates Staffing Composition6 Healthcare Operations Clinical Operations
- 14. Prepared for Tennessee Society of CPAs Health Care Conference Page 13 What Does A Typical QOE Not Entail? Concealment of Fraud! Assessment of Management Capabilities Operational Assessments ― Revenue Cycle Optimization ― Staffing Optimization Quality of Patient Care Key Contract Assignment Terms Compliance Posture ― Detailed coding analytics ― Minimum components of an effective compliance program Valuation of Interests Held in the Entity $ $ $ $ $ Unrecorded Contingent Liabilities
- 15. Prepared for Tennessee Society of CPAs Health Care Conference Page 14 Compliance Implications Egregious Coding Practices Violations of fraud and abuse laws such as the False Claims Act and others may result in non-payment of claims, Civil Monetary Penalties, exclusion from Federal health care programs, and criminal and civil liabilities Governmental Inquiries/Audits $ Financial impacts often include: - Regulatory and legal penalties. - Payment refunds. - Material losses from failure to demonstrate compliance. Payor Audits Errors can range, on average, from 1 to 3% of total claims, potentially translating to hundreds of thousands of dollars paid back to payors
- 16. Prepared for Tennessee Society of CPAs Health Care Conference Page 15 QOE– A Holistic Approach HEALTHCARE AUDIT HEALTHCARE TAX HEALTHCARE REIMBURSEMENT HEALTH PLAN EXECUTIVE HOSPITAL ADMINISTRATORS COMPLIANCE OFFICER CHIEF INFORMATION OFFICER APPRAISERS DATA ANALYSTS PHYSICIANS CLINICAL CODING EXPERTS ATTORNEYS HEALTHCARE REAL ESTATE EXPERTS REGISTERED NURSES Due Diligence Team
- 17. Case Study #1
- 18. Prepared for Tennessee Society of CPAs Health Care Conference Page 17 Case Study #1 Background • Private equity firm purchasing an urgent care company. • The target is an urgent care company operating six urgent care centers. Additionally, the owner of the urgent care company owns and operates a physician practice. • Proposed purchase price based on management’s pro forma estimating $1M of annual adjusted EBITDA. Engagement Scope Quality of Earnings 1. Financial Reporting Processes and Procedures 2. Revenue Recognition Policies 3. Payer Mix Summaries 4. A/R Reserves and Contractual Adjustments 5. Operating Expenses 6. Key Commitments and Contingencies Affecting Earnings 7. EBITDA Normalizations 8. Estimated Impacts on Working Capital 9. Historical Financial Trends and Operating Indicators
- 19. Prepared for Tennessee Society of CPAs Health Care Conference Page 18 Case Study #1 Concerns • Reporting: - Financials between the urgent care and physician practice reported on a consolidated basis with little ability to distinguish between entities - Management allocation of revenue and expenses based on off- hand estimates with no substantive backing • Revenue: - Revenue, based on production reports, was approximately 5% below reported revenue in internally-prepared financial statements • Expenses: - The majority of lease expense and utilities at one facility is primarily related to physician practice - The target’s billing and management company acquired 10% of the business in lieu of charging a management fee - No physician compensation is recorded due to physician owner taking distributions rather than salary
- 20. Prepared for Tennessee Society of CPAs Health Care Conference Page 19 Case Study #1 EBITDA Adjustments TTM Revenue, as reported $ 4.1M EBITDA, as reported (QuickBooks) 0.1M Unreconciled Revenue Adjustment (0.2M) EBITDA, as adjusted after revenue adjustment $ (0.1M) Other EBITDA Adjustments Physician Practice Revenue $ (1.0M) Physician Practice Expense 0.5M Accounting & Legal Fees 0.3M Lease Adjustment 0.2M Staffing Adjustment 0.4M Management Fees (0.3M) Physician Compensation (0.2M) Other Adjustments 0.5M Total Other EBITDA Adjustments $0.4M EBITDA, as adjusted 0.3M Adjusted EBITDA = $0.3 million from Quality of Earnings
- 21. Prepared for Tennessee Society of CPAs Health Care Conference Page 20 Case Study #1 Purchase Price Impact TTM EBITDA: Proxy EBITDA Multiple: Purchase Price: QOE ResultsAssumed $1.0M $0.3M 7x $7.0M 7x $2.1M
- 22. Case Study #2
- 23. Prepared for Tennessee Society of CPAs Health Care Conference Page 22 Case Study #2 Background • Hospital acquisition by a Hospital Authority of a community hospital from a national hospital operator • Assume long-term lease arrangement of community hospital • Transaction Structure: - Agreed upon purchase price - + Working capital - - Assumed capital leases • Allocated corporate overhead from national hospital operator • Commercial payer cost-based reimbursement • Significant meaningful use proceeds
- 24. Prepared for Tennessee Society of CPAs Health Care Conference Page 23 Case Study #2 QOE Significant Findings $3.1M of A/R overstated due to local hospital’s accounting for self-pay reserves ! Additional leases deemed to be capital Normalization for changes to employee benefits over time, including 401k match policy $ $ $ $ $ Adjustments to prior period accruals for commercial payer cost- based reimbursement > $1M net reduction for non-recurring hospital and physician enterprise meaningful use payments Normalization for corporate overhead allocations
- 25. Prepared for Tennessee Society of CPAs Health Care Conference Page 24 Questions?
- 26. Prepared for Tennessee Society of CPAs Health Care Conference Page 25 Contact Information Michael Ramey PYA Principal mramey@pyapc.com 865-684-2709 www.pyapc.com
Editor's Notes
- Cash Collections – Could discuss situation where new billing and collecting company was hired for Medac and net revenue was overstated because DocuTAP was collecting on very old AR (they were cash basis)