Panel Discusses Healthcare Facility Bankruptcy


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PYA Principal Jim Lloyd was among the faculty who spoke at the 2013 Mid-South Commercial Law Institute during a panel discussion on “Healthcare Facilities in Bankruptcy.” The presentation provided an overview of healthcare facilities and key issues, healthcare regulatory environment, valuation of healthcare facilities, and red flags for healthcare businesses in bankruptcy or distress.

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  • Stark:Exceptions typically require compensation to be set in advance, consistent with fair market value (FMV) and not determined in a manner that takes into account the volume or value of referrals.42 U.S.C. §1395nnAKS:Prohibits the knowingly and willful offer, payment, solicitation or receipt of remuneration for purposes of inducing or rewarding for referrals of services reimbursable by a federal health care program.42 U.S.C. §1320a-7b(b)IRS:Tax exempt hospitals/health systems must ensure that no part of its earnings “inure to the benefit of any private shareholder or individual. Transactions between tax exempt hospitals and physicians that are in excess of FMV could jeopardize the hospital’s tax exempt status.IRC Section 501(c)(3) and related regulations.
  • Panel Discusses Healthcare Facility Bankruptcy

    1. 1. Mid-South Commercial Law Institute December 6, 2013
    2. 2. Paul G. Jennings Bass, Berry & Sims, PLLC Michael R. Hill Harwell Howard Hyne Gabbert & Manner W. James Lloyd Pershing Yoakley & Associates, P.C. Page 1
    3. 3.  Paul G. Jennings serves as the chair of Bass, Berry & Sims PLC‟s Bankruptcy and Restructuring Practice. Paul has over 23 years of experience in bankruptcy, insolvency and distressed asset matters, including representing large corporate debtors, unsecured creditor committees, case trustees and plan trustees. Over the course of his practice, Paul has represented a number of purchasers of distressed assets, both in and out of bankruptcy proceedings, in several different industries. Paul has significant litigation experience in bankruptcy and insolvency related matters, including preference, fraudulent conveyance and board fiduciary duty matters.  A significant portion of Paul‟s work over the years has been in the healthcare industry, including restructurings and representing purchasers of healthcare businesses and facilities.  Paul is a member of the American Bankruptcy Institute, the Nashville Bar Association and the Tennessee Bar Association, where he was past president for the Section of Commercial, Bankruptcy and Banking Law. In 2005, he was named to the National Register's Who's Who in Executives and Professionals. Paul is listed in Best Lawyers,® has been named one of the best bankruptcy lawyers by Business Tennessee magazine since 2004 and one of Tennessee's leading bankruptcy litigation lawyers by Chambers USA. For the past four years, he has been listed in the Nashville Business Journal's Best of the Bar, a distinction earned exclusively by nominations from other attorneys. In 2006, Paul was listed in the Lawdragon 500 New Stars, New Worlds. In 2014, he was named Best Lawyers® 2014 Nashville Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law Lawyer of the Year. Page 2
    4. 4.  Mike Hill is leader of h3gm‟s Healthcare Practice Group. He focuses on business law matters primarily involving healthcare companies from start up to maturity and advises them on corporate, transactional and operational issues. In his transactional practice, Mike advises his clients on compliance with the broad range of regulation applicable to the healthcare field. He also regularly represents individual physicians and group practices on matters such as group formation and compensation formulas, joint ventures, employment agreements, recruiting agreements, and professional services arrangements.  He was a member of the inaugural class of the Nashville Health Care Council‟s Fellows Program, serves on the board for the Nashville Health Care Council and has been featured by Chambers USA: America‟s Leading Lawyers for Business, Nashville Medical news and the Nashville Business Journal as a leader in healthcare law. Page 3
    5. 5.  W. James (Jim) Lloyd is a Principal in the valuation and dispute services practice of Pershing Yoakley & Associates, P.C. Jim has over 25 years of experience providing valuation, economic damages, and other consulting services to a multitude of organizations across the U.S. Significant healthcare experience includes: Ambulatory Surgery Centers, Cancer Centers, Dialysis Centers, Hospitals, Imaging Centers, Pharmacies, Pharmaceutical Manufacturers, Physician Practices, and Retirement/Assisted Living Facilities, among others.  Jim is a frequent speaker at various national conferences and has authored/co-authored multiple articles on valuation and dispute-related topics. Mr. Lloyd is the past Chair of the American Institute of CPA‟s Accredited in Business Valuation Credential Committee, and past member of the American Society of Appraisers‟ Board of Examiners. Jim has substantial expert testimony experience in federal and various state and local courts and arbitration proceedings across the U.S.  Professional credentials include: Certified Public Accountant (CPA), Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), and Certified Fraud Examiner (CFE). Page 4
    6. 6.  Overview of Healthcare Facilities and Key Issues  Healthcare Regulatory Environment  Valuation of Healthcare Facilities  Red Flags for Healthcare Businesses in Bankruptcy or Distress Page 5
    7. 7. Healthcare Regulatory Environment and Key Definitions Page 6
    8. 8. STARK LAW Prohibited self-referrals for Medicare and Medicaid patients. ANTI-KICKBACK STATUTE 100 m Road Knowingly and willful offers, payments, or receipts for referrals. Menu IRS-NFP REQUIREMENTS IRC Section 501(c) 3 requirements Page 7
    9. 9.  Department of Health and Human Services Definition1 ◦ An arrangement which appears to be “a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”  Stark Definition2 ◦ “An arrangement will be considered „commercially reasonable‟ in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential designated health services (“DHS”) referrals.”  OIG Threshold 3 ◦ Compensation arrangements with physicians should be “reasonable and necessary.” 1 63 Fed. Reg. 1700 (Jan. 9, 1998). Fed. Reg. 16093 (March 26, 2004). 3“OIG Compliance Program For Individual and Small Group Physician Practices,” Notice, 65 Fed. Reg. 59434 (Oct. 5, 2000); OIG Advisory Opinion No. 07-10, September 20, 2007, pg. 6, 10; “OIG Supplemental Compliance Program Guidance for Hospitals,” Notice, 70 Fed. Reg. 4858 (Jan. 31, 2005). 2 69 Page 8
    10. 10.  IRS Definition1 ◦ Fair market value (“FMV”) is defined as the amount at which property would change hands between a willing seller and a willing buyer when neither is under compulsion and both have reasonable knowledge of the relevant facts.  OIG/Stark Definition2 ◦ The value in arm‟s-length transactions, consistent with the general market value ◦ The price that an asset would bring as the result of bona fide bargaining between wellinformed 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. 1Estate Tax Reg. 20.2031.1-1(b); Revenue Ruling 59-60, 1959-1, C.B. 237. Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations. 2Federal Page 9
    11. 11.  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. Page 10
    12. 12.  Federal statute ◦ Section 1128B of the Social Security Act is an intentbased statute that prohibits the knowing and willful offering, paying, soliciting or receiving of any remuneration to induce or to reward referrals of items or services payable by federal health care programs, including Medicare and Medicaid. [42 U.S.C. 1320a-7b(b)] Page 11
    13. 13. ◦ Section 1128B of the Social Security Act prohibits the offering, paying, soliciting or receiving of any remuneration to induce or to reward referrals of items or services payable by federal health care programs, including Medicare and Medicaid. [42 U.S.C. 1320a-7b(b)] ◦ Covers referrals for any item or service that might be paid for by Medicare or any other federal healthcare program ◦ Provides for criminal liability to both sides of an illegal transaction, even where only one purpose of the remuneration offered, paid, received, etc., is to obtain money in exchange for referrals or to induce referrals Page 12
    14. 14.  Section 6402(f) of the Patient Protection and Affordable Care Act (“PPACA”) added the following two sub-sections to the Anti-Kickback statute: ◦ Claims for items and services provided to federal health care program beneficiaries that violate the Anti-Kickback statute constitute false or fraudulent claims for purposes of the Civil False Claims Act [42 U.S.C. 1320(a)-7b(g)] ◦ A person does not need actual knowledge of the Anti-Kickback statute or specific intent to violate the Anti-Kickback statute [42 U.S.C. 1320(a)-7b(h)] Page 13
    15. 15.  [42 CFR 1001.952] ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ Investment interests Space rental Equipment rental Personal service and management contracts Sale of a practice Employees Practitioner recruitment Obstetrical malpractice insurance subsidies Investments in group practices Ambulatory surgical centers Page 14
    16. 16.  First Published October 30, 1998 (63 Fed. Reg. 58399).  Provides guidance on how to conduct investigation, quantify damages and report.  235 cases resolved between 2008 and April 2013.  Conduct at issue must constitute a potential violation of law, not merely on error or overpayment.  Primary benefit for providers is a reduction in the damages multiplier (1.5x instead of 3x).  OIG may consider a provider‟s ability to pay. Page 15
    17. 17.  The federal physician self-referral prohibition (“Stark Law”) prohibits a physician from referring Medicare patients for designated health services (“DHS”) to an entity with which the physician, or the physician‟s immediate family member, has a financial relationship, unless the relationship meets the specific requirements of a Stark exception. [42 U.S.C. 1395nn]  Prohibits the entity from submitting a claim (or causing a claim to be submitted) to Medicare  “Financial relationships” include both ownership and compensation relationships. ◦ Strict liability statute – no intent to violate necessary. Page 16
    18. 18.  [42 CFR 411.355] ◦ Clinical laboratory services ◦ Physical therapy, occupational therapy, and outpatient speechlanguage pathology services ◦ Radiology and certain other imaging services ◦ Radiation therapy services and supplies ◦ Durable medical equipment and supplies ◦ Parenteral and enteral nutrients, equipment, and supplies ◦ Prosthetics, orthotics, and prosthetic devices, and supplies ◦ Home health services ◦ Outpatient prescription drugs ◦ Inpatient and outpatient hospital services Page 17
    19. 19. ◦ General exceptions to both ownership and compensation: [42 CFR 411.355]  Physician services  In-office ancillary services  Academic medical centers ◦ Exceptions related to ownership or investment interests: [42 CFR 411.352 and 411.356]  Physician-owned hospitals  ACA prohibitions  Grandfathered hospitals and expansion prohibitions Page 18
    20. 20. ◦ Exceptions related to compensation arrangements: [42 CFR 411.357]           Rental of office space Rental of equipment Bona fide employment Personal service arrangements Physician recruitment Isolated transactions Fair market value compensation Indirect compensation arrangements Obstetrical malpractice insurance subsidies Retention payments in underserved areas Page 19
    21. 21.  Under prior Self Disclosure Protocol, provider had to indicate that fraud was involved.  Established under  Full investigation and report required.  Potential for significantly reduced damages.  Significant backlog of applicants. As of March 2013, CMS had received over 250 disclosures, and settled only 19. 6409 of ACA. Page 20
    22. 22. ◦ CON laws limit expansion of healthcare facilities and serve as barrier to market competition. ◦ Some state laws provide exemptions for relocations, capital expenditures subject to threshold, change of ownership, and acquisitions ◦ Because of restrictions on establishing certain types of healthcare facilities or offering of certain types of healthcare services, CON laws may have significant value [See 50 State Survey of Certificate of Need and Licensure: Nursing Homes, Assisted Living, Home Health, and Hospice, American Health Lawyers Association (2009)] Page 21
    23. 23.  CON / State Licensure Requirement ◦ Varies by state. ◦ May impact timing of closing. Many state licensing agencies require 30-60 day pre-closing notification requirements. In some states, CON approval may take several months. ◦ Not limited to main business line (i.e., hospitals have myriad licenses for various functions, departments and pieces of equipment). ◦ May vary by nature of transaction (stock sale v. asset sale).  Medicaid ◦ Varies by state. ◦ May include successor liability.  Medicare ◦ Consistent application regardless of state. ◦ Only applies to a sale of assets. Sale of equity results in a “Change of Information” filing. ◦ Part A Providers and Part B Suppliers treated differently. ◦ Potential for significant interruption in cash flow. ◦ ”Provider Number” issues. Page 22
    24. 24. ◦ State Anti-Kickback laws:  Applicability to state Medicaid services  Limitations of violations, duty to report, specific behavior  Availability of safe harbor protection ◦ State Stark Laws:  Applicable to specific payer or unlimited by payer type  Applicable to broad “practitioner” ◦ State corporate practice of medicine laws ◦ State non-profit and charity laws Page 23
    25. 25. Valuation of Healthcare Facilities Page 24
    26. 26.  There are three general approaches for valuing any business/asset, which are: ◦ Asset (“cost”) Approach ◦ Income Approach ◦ Market Approach Page 25
    27. 27.  Based on the anticipated cost to replace, replicate, or recreate the asset.  Generally used for non-operating type entities and/or businesses that generate no/nominal cash flow.  Net Asset Value Method. Page 26
    28. 28.  Assets and liabilities are adjusted to their respective current values, and then the liabilities are subtracted. Result = the entity‟s net equity (i.e. “net asset”) value.  Often requires third-party appraisals of the tangible assets.  Commonly used for businesses that lack positive cash flow (e.g., physician practices with no excess cash flow after subtracting the physicians‟ fair market value compensation. Page 27
    29. 29.  Based on the entity‟s earning power (i.e., ability to generate income/cash flow for the owners).  Generally most applicable for operating entities with positive earnings and growth prospects.  Primary methods include: ◦ Discounted Cash Flow Method ◦ Capitalized Income Method Page 28
    30. 30.  Provides an indication of value based on the entity‟s ability to generate positive net cash flow. ◦ Net cash flow = the excess above all necessary operating costs, working capital requirements, and capital expenditures. ◦ Amount available for distribution to the owner(s).  Cash flows must be projected for a discrete period of time and then discounted to present value utilizing a risk adjusted discount rate.  Terminal period cash flows are capitalized. Page 29
    31. 31.  Uses a single period measure of net cash flow as a proxy for future periods.  Value determined by capitalizing the single period cash flow stream with a capitalization rate. ◦ Capitalization rate = Discount rate – long term growth rate ◦ Assumes future cash flows will grow at the long-term growth rate  Primarily used for mature/low growth businesses.  Often difficult to use for healthcare entities. Page 30
    32. 32.  Based on market transaction data involving similar businesses/assets.  Often difficult to use for small/medium sized healthcare entities due to substantial differences across markets and other factors.  Primary methods include: ◦ Guideline Public Company (“GPC”) Method ◦ Merger and Acquisition Transaction (“M&A”) Method Page 31
    33. 33.  Utilizes valuation multiples developed from publicly traded guideline companies.  Guideline companies must be “sufficiently similar” to the subject entity but not necessarily the same.  Common multiples include: price/earnings (P/E), price/sales, price/beds, price/book value, etc.  Generally difficult to use for most small/medium sized businesses. Page 32
    34. 34.  Utilizes valuation multiples developed from similar entities that have been bought/sold.  Requires reliable transaction data involving similar businesses.  Valuation multiples must be closely correlated to the transaction price.  Irving Levin & Associates – good resource for healthcare transaction data. Page 33
    35. 35. IT DEPENDS… If the business… …has positive …does not cash flow, the have positive cash flow, the Income and NAV method market will probably be approaches will necessary. probably be appropriate. Page 34
    36. 36.  As a general rule, all applicable valuation methods should be utilized and the various indications of value reconciled (i.e. weighted) for purposes of determining the entity‟s value.  Weightings should depend upon the facts and circumstances and reliability of the underlying data/assumptions. Page 35
    37. 37. Red Flags for Healthcare Businesses in Bankruptcy or Distress Page 36
    38. 38.  Excessive compensation/distributions  Excessive debt/leverage  Insufficient cash/working capital  Operating metrics substantially different than peer group  Outdated facilities/equipment/technology  Declining physician base Page 37
    39. 39.  Physician Compensation ◦ Should make sense relative to professional productivity (e.g. collections, wRVUs) ◦ Multiple benchmark sources readily available (e.g. MGMA)  Executive Compensation ◦ Should be FMV for tax-exempt entities ◦ Multiple benchmark resources available Page 38
    40. 40.  Accounts Receivable ◦ Generally omitted from most physician practices and other small healthcare businesses (cash basis of accounting). ◦ Gross vs. net of contractual adjustments? ◦ Collectability.  Medical Supplies ◦ Generally expensed when purchased. ◦ Inventory or estimate based on purchase activity. Page 39
    41. 41.  Fixed Assets ◦ Often have very little “book value” and/or resale value. However, they will generally have “in-use” value as long as still being utilized. ◦ Often requires third party appraisal for large ticket items. ◦ Key issues:  Do the assets actually exist?  Are they still being used?  Condition of the equipment – upgrades and service agreements Page 40
    42. 42.  Accounts Payable/Accrued Expenses ◦ Often excluded from the balance sheet. ◦ Can generally be identified through inquiries, analysis of operating expenses, and subsequent payments. ◦ Prior year retirement plan contribution liability.  Other (Unrecorded) Obligations ◦ Future lease payments (equipment and/or facilities). ◦ Equipment service agreements. Page 41
    43. 43.  Debt obligations ◦ Third party loans – terms, security, purpose. ◦ Related party loans – debt vs. equity. ◦ Lease agreements.  Equipment  Facilities  FMV lease rates? Page 42
    44. 44.  Net revenue by type of service (service mix) ◦ Evaluate on per CPT code, encounters, etc. basis. ◦ Volume and reimbursement trends . ◦ Benchmark to Medicare fee schedule for reasonableness.  Net revenue by physician/provider ◦ Assess risk. ◦ Evaluate FMV compensation. Page 43
    45. 45.  Payer mix ◦ Net revenue per procedure should make sense relative to the Practice‟s payer mix.  Bell curve analysis ◦ To help identify “up coding” and similar compliance type problems. Page 44
    46. 46.  Operating expenses can generally be easily benchmarked for reasonableness (e.g. MGMA Cost Survey, etc.).  Trending and ratio analysis to help identify unusual transactions and possibly non-recurring expenses.  Not unusual to find some “personal” expenses in most physician practices and other small/closely-held healthcare businesses Page 45
    47. 47.  Trending and ratio analysis to help identify unusual transactions and possibly non-recurring expenses.  Not unusual to find some “personal” expenses in most physician practices and other small/closely-held healthcare businesses Page 46
    48. 48.  Governance ◦ Active and Engaged Board ◦ Recognizing distress early and moving to address ◦ Consider need for outside expertise, replacement management or CRO ◦ Directors & Officers Insurance Coverage and Indemnity  Communication ◦ ◦ ◦ ◦ ◦ Employees/medical staff Secured lenders Suppliers/vendors Payors Community/elected officials Page 47
    49. 49.  Restructuring Options ◦ Chapter 11 Reorganization ◦ Chapter 11 Liquidation ◦ Chapter 7/Closure Page 48
    50. 50.  Sale Transactions ◦ Government consent to transfer of provider number and inability to cut off recoupment (i.e. overpayments, etc.)  Financing Healthcare Receivables ◦ Medicare/Medicaid A/R may not be collected directly by a lender    Disposal of patient records Provider agreement – recoupment On-going fraud and abuse investigations may not be stayed Page 49
    51. 51.   Exclusion from Medicare or other governmental programs Expanded Administrative Expense Priority Claims ◦ For actual and necessary costs and expenses of closing – healthcare business and with regard to disposal of patients‟ records or transfer of patients  Patient Care Ombudsman ◦ 2-part test for appointment of ombudsman  (i) Whether debtor is a healthcare business  (ii) Whether totality of circumstances warrants the appointment of an ombudsman ◦ Duty is to monitor the quality of patient care and to represent the interests of patients Page 50
    52. 52. Page 51
    53. 53. W. James Lloyd, CPA/ABV, ASA, CFE Principal | Pershing Yoakley & Associates | (865) 673-0844 Paul G. Jennings, Esq. Member | Bass, Berry & Sims, PLLC | (615) 742-6267 Michael R. Hill, Esq. Shareholder | h3gm | (615) 251-1046 Page 52