Presentation Uncovers Trends in the Unpredictable Healthcare Industry

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With the healthcare industry in a state of flux, not much is known about what lies ahead; but trends across the industry have become apparent and are likely to stick. These trends were the subject of a presentation given by PYA Principal David McMillan at the PKF North America Healthcare Fly-In.

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  • Healthcare has been flipped on its head in a 180 degree turn of financial incentives. As U.S. healthcare costs associated with fee-for-service (“FFS”) skyrocket, significant efforts have been taken to link payment to the quality and efficiency of care provided instead of volume of patients / services provided.
  • Image Source: http://media-cache-ec0.pinimg.com/736x/4c/73/94/4c73948c76ea741653ae71ec2b86da14.jpg
  • Image Source: http://www.bing.com/images/search?q=physician+employment+by+hospitals&qs=n&form=QBIR&pq=physician+employment+by+hospitals&sc=0-35&sp=-1&sk=#view=detail&id=0D8050C65E028276859EADA0E140DE7B8102974F&selectedIndex=12
  • 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.
  • Presentation Uncovers Trends in the Unpredictable Healthcare Industry

    1. 1. Trends in Healthcare Consulting November 13, 2013 David McMillan, CPA New Orleans, Louisiana
    2. 2. Speaker Biography David W. McMillan, CPA PYA Principal David McMillan provides financial and strategic services to the Firm's healthcare clients. David's areas of concentration are: feasibility studies for various healthcare entities; mergers, acquisitions, and affiliations among providers; strategic planning and forecasting, clinical integration services; and valuations and operational analysis.
    3. 3. Agenda Status of the Healthcare Industry Current and Future State of Independent Physician Practices Trends in Physician-Hospital Alignment Healthcare Regulatory Issues Valuation Methods and Other Physician Practice Issues Physician Compensation Issues Other Trends in Physician Compensation
    4. 4. Healthcare Has Changed! Moving from… Payers Healthcare Facilities Specialists Primary Care Physicians Patients Moving toward…
    5. 5. Healthcare 2.0 1. The industry is learning to purchase value, not volume. 2. Providers and payers are struggling to find common solutions to universal challenges because healthcare continues to be a local and regional commodity. 3. Stakeholders are searching for their purpose and relevancy in a patient-centered healthcare continuum. 4. Consumerism is emerging as a driving force in healthcare. 5. Change is accelerating due to knowledge derived from disparate and dynamic data. American Institute of CPAs
    6. 6. Pressures Non-Compliant Patients American Institute of CPAs Regulations
    7. 7. Balancing Choices Current Environment Reformed Environment Economic Relationship Employment Independence Clinical Relationship Hospital Alignment American Institute of CPAs Physician Alignment
    8. 8. How are Hospitals and Physicians Responding to New Realities? Consolidation and Alignment Information Technology Investments Physician Employment Other Innovations: • ACOs • PCMHs • CINs Healthcare Reform Initiatives New Payment Models American Institute of CPAs
    9. 9. Current State of Physician Practices American Institute of CPAs
    10. 10. Maintaining Physician Independence How confident are you in your group’s ability to sustain financial independence in the next 3 to 5 years? Very confident 35.0% Uncertain 50.0% Not confident 15.0% Source: PYA Physician Survey and Experience American Institute of CPAs
    11. 11. Examining Independence “Independence” Performance Excellence Scale American Institute of CPAs
    12. 12. Strategies for Independence 2 Secure the primary care docs in a multispecialty group 1 Merge 3 Enhance physicians recruitment with intangible perks 4 Maximize alternative revenue sources 5 Get involved in politics
    13. 13. Maintaining Independence: Conclusion? Maintaining independence is not easy. Careful planning and documentation is key. Some solo practices will survive but most will align with other providers. Strategic thinkers will gain in the end. One size does not fit all.
    14. 14. Current Hospital-Physician Alignment Environment American Institute of CPAs
    15. 15. Hospital-Physician Alignment Transactions # Hospitals and physicians are actively seeking ways to strategically and financially align themselves. Successful alignment transactions can result in substantial benefits to all parties including patients. • Improved efficiencies and quality of care • Reduce costs and waste • Better bargaining power with third party payers American Institute of CPAs
    16. 16. With what type(s) of healthcare entities do you work closely? 1. 2. 3. 4. 5. Hospital Health System Physician Practice Solo Practitioners Commercial Health Insurer/Payer 6. Government Other 7. None (no healthcare entities) 1 1 0/0 Cross-tab label
    17. 17. Hospitals & Health Systems Seeking efficiencies Diversifying, focusing on outpatient and wellness care Increasing emphasis on standardization, integration, and consolidation of services Hospitals & Health Systems Experiencing physician shortages in key specialties Competition from other systems as well as physician-owned outpatient centers Call coverage needs Healthcare reform American Institute of CPAs
    18. 18. Physicians Financially squeezed - decline in reimbursement, increased overhead, and loss of income Difficulty obtaining malpractice coverage at reasonable rates Inability or unwillingness ($$) to recruit Quality of life Physicians Increasingly complex government oversight Working capital requirements Healthcare reform Exit strategy American Institute of CPAs
    19. 19. Physicians Are Feeling the Pain Financially squeezed • Decline in reimbursement and loss of income • Overhead, malpractice insurance, and working capital requirements Continuing uncertainty surrounding reimbursement Pressure to demonstrate quality of services Difficulty hiring “sophisticated” support staff American Institute of CPAs
    20. 20. Physicians Are Feeling the Pain (Cont.) Inability to recruit; succession planning Decreasing quality of life Increasingly complex government oversight Healthcare reform American Institute of CPAs
    21. 21. Strategic Responses to Changes  Merge with other medical practices.  Create mega-group IPAs.  Secure “primary care” referral sources.  Maintain leadership roles in hospital/community.  “Align” with hospitals – Employment, Service Line Management, ER Call, PSAs. American Institute of CPAs
    22. 22. Physician Alignment Options More Common Physician Employment Physician Leasing Arrangement Medical Directorships Real Estate JV Professional Services Agreement Co-Management Equipment JV More Integration Less Integration EMR Quality Shared Savings Less Common American Institute of CPAs
    23. 23. Trends in Healthcare Alignment: Employment Many attempts to align in the past have centered around physician employment. • According to the Bureau of Labor Statistics, employment of physicians and surgeons by hospitals is expected to grow by 24% from 2010 to 2020.
    24. 24. Trends in Healthcare Alignment: Employment Sources: Accenture Analysis, MGMA, American Medical Association Although the rate at which employment is growing has been debated, it is undeniable that the number of physicians who are “truly independent” is declining.
    25. 25. Employed Physician Estimate % of Total US Physicians Estimated % Employed Weighted Estimate Primary Care 48% 50% 24% Specialty 52% 30% 15.6% Total 100% 39.6% Predicting the next five years… • Increasing number of newly trained physicians seeking employment • Nearly one-third of practicing physicians are 55 or older • More than 40% of physicians still practice in groups of fewer than five • AAMC analysis forecasting a shortage of 160,000 physicians by 2025 • Medicare program sustainability and healthcare reform impact American Institute of CPAs
    26. 26. Practice Arrangements Practice Owned by Practice Physicians - Owner (48.9) Practice Owned by Practice Physicians - Non-Owner (11.1) Practice Wholly Owned by Hospital (14.7) Practice Partially Owned by Hospital (8.3) Practice Owned by Not-for-Profit Foundation (6) Direct employees of hospital or health system (5.6) American Institute of CPAs
    27. 27. Trends in Physician Practice Acquisitions – the “Buy and Employ” Strategy Hospitals and physicians are entering into acquisition and employment transactions at a torrid pace! Transactions often make good business sense but also involve substantial risk. • Regulatory risk • Financial risk (i.e., hospital’s ability to successfully integrate and operate the practice without incurring substantial losses) • Reputation risk (the two entities are now related) Buy and Employ American Institute of CPAs Very competitive environment in many markets.
    28. 28. “Buy and Employ” Transactions Typical Transaction: • Hospital buys the practice at fair market value (“FMV”) o Usually structured as an asset purchase o Cash and AR normally excluded Physicians employed by the hospital • Generally under some type of productivity-based compensation arrangement (wRVUs) • Commonly involves a period of guaranteed compensation (assuming productivity does not decline substantially) • Often includes other types of arrangements as well (e.g., comanagement, call pay, quality incentives, etc.) American Institute of CPAs
    29. 29. Healthcare Regulatory Considerations
    30. 30. Navigating the Regulatory Environment STARK LAW Prohibited self-referrals for Medicare and Medicaid patients ANTI-KICKBACK Knowingly and willful STATUTE offers, payments, or receipts for referrals IRS-NFP IRC Section 501(c) 3 REQUIREMENTS requirements American Institute of CPAs 100 m Road Menu
    31. 31. Compliance Issues Regarding Hospital-Physician Financial Relationships COMMERCIAL REASONABLENESS FAIR MARKET VALUE SENSE CENTS Overall Arrangement “WHY?” American Institute of CPAs Scope Range of Dollars Only Key Question “HOW MUCH?”
    32. 32. Factors in Determining CR Business Purpose Provider Analysis Commercial Facility Analysis Reasonableness Determination Resource Analysis Independence & Oversight American Institute of CPAs
    33. 33. Fair Market Value – 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. American Institute of CPAs
    34. 34. Valuation Methods and Issues Related to Physician Practices
    35. 35. Valuation Methodologies Typically Used for Physician Practices Asset (“cost”) Approach Income Approach - Often considered a “floor” value - Based on the entity’s earning power (i.e., ability to generate positive cash flow in excess of the physician’s fair market value compensation) - Net Asset Value Method - Primary methods include: - Derives an indication of value based on the anticipated cost to replace, replicate, or recreate the asset o Discounted Cash Flow Method o Capitalized Income Method American Institute of CPAs
    36. 36. Valuation Methodologies Typically Not Used for Physician Practices Market Approach – determines an indication of value based on multiples derived from similar businesses/interests that have been bought/sold. • Guideline Public Company Method • Merger and Acquisition Transaction Data Method Not normally used for physician practices because: • No publicly traded physician practices • Lack of reliable transaction data involving practices that are sufficiently similar American Institute of CPAs
    37. 37. Which Method is Appropriate? IT DEPENDS… American Institute of CPAs …does not have remaining profits after physician compensation an income approach will probably be required. If the Practice… …has profits remaining after FMV physician compensation the NAV method will likely be appropriate.
    38. 38. Enterprise vs. Intangible Value The sum total of the tangible and intangible assets can not exceed the entity’s total enterprise value. Example: • If the enterprise value = $2 million (e.g., determined from DCF Method) • AND the tangible assets (e.g., cash, accounts receivable, equipment, etc.) = $1,200,000 • THEN, (with limited exceptions) intangible assets can not exceed $800,000. American Institute of CPAs
    39. 39. Assessing Intangible Value Determining whether a physician practice has intangible value (within the limitations of FMV) is primarily based upon cash flow. If intangible value exists, there should be an economic benefit of ownership (i.e., in excess of FMV compensation). Practices that do not produce such positive cash flow generally will have little or no intangible value. Physician groups that generate positive cash flow (above the physician’s “FMV” compensation) will normally have some level of intangible value. American Institute of CPAs
    40. 40. Certain Practices Are More Likely to Have Intangible Value Large multi-specialty practices with midlevel providers and/or significant ancillary services are more likely to have intangible value. Small, highly-specialized practices (e.g., general surgeons) are less likely to have intangible value because substantially all revenue is comprised of professional fees generated by the physician(s). American Institute of CPAs
    41. 41. Intangible Assets Acquired Should be Separable and Transferrable For an intangible asset to be transferrable to a buyer, it must be separable from the seller. Intangible assets that are separable generally have contractual or other legal rights (e.g., noncompetition agreements, clinical trial contracts, etc). Intangible assets that are not separable are generally components of goodwill (e.g., employee workforce). Source: ASC 805-20-25-1 through 25-10. American Institute of CPAs
    42. 42. Practice vs. Personal Goodwill Practice goodwill is an asset of the entity that produces economic benefits to its owners apart from their personal goodwill. • Factors generally influencing enterprise goodwill include: the entity’s name, reputation, location, phone number, etc. • Generally transferrable Personal goodwill is an asset of the individual (i.e., physician). • Factors generally influencing personal goodwill include: personal reputation, credentials, education, relationships, etc. • Generally not transferrable Often difficult to distinguish in a physician practice. American Institute of CPAs
    43. 43. Physician Compensation Issues
    44. 44. Key Elements of Successful Compensation Alignment
    45. 45. Components of Physician Compensation Base Compensation Incentive Component Physician Quality Measures Compensation Philosophy Good Citizenship Leadership American Institute of CPAs
    46. 46. Ancillary Services If physician/clinic is a department of the hospital, then revenue from designated health services (“DHS”) cannot be shared with the providers. If employment is structured to meet the “group practice exception” under the Stark regulations, then DHS revenue can be shared with providers as long as it is not allocated based on the volume or value of the provider’s ordered DHS services. • Allocations can range from equal to proportional based on professional (not technical) services provided by the physician. American Institute of CPAs
    47. 47. Compensation and Regulatory Issues Post-transaction compensation should be factored into the practice valuation. • Must avoid double dipping by paying for the same income stream twice – once with the “purchase” and then on-going in the physician compensation plan. The fair market value and commercial reasonableness requirements apply to all components of the transaction (i.e., compensation and practice valuation). American Institute of CPAs
    48. 48. Other Trends in Physician Compensation American Institute of CPAs
    49. 49. SGR Fix: Physician Composite Performance Score and Other Value-to-Value Drivers Due to the sustainable growth rate formula cap (“SGR”) – the statutory formula used to calculate Medicare Physician Fee Schedule (“MPFS”) payments on an annual basis – Medicare payments to physicians will be slashed by almost 25 percent on January 1, 2014, unless Congress intervenes. On October 30, the Senate Finance Committee and the House Ways and Means Committee released a discussion draft of a SGR fix, offering a comprehensive approach to MPFS payment reform. Key provisions include: • • • • • • • Payment freeze Termination of payment penalty programs New value-based performance (VBP) program Alternative payment model (APM) participation Complex chronic care management Appropriate use criteria Valuation of services American Institute of CPAs
    50. 50. SGR Fix: Physician Composite Performance Score and Other Value-to-Value Drivers Payment freeze • Current MPFS payments maintained through 2023 . • In 2024, physicians participating in advanced APMs receive 2% annual updates. All other physicians receive 1% annual updates. Termination of payment penalty programs • After 2016, the following incentive programs end: - 2% penalty for failure to report PQRS measures - Budget-neutral, value-based purchasing modifier based on quality and resource use - 3-5% EHR meaningful use penalties American Institute of CPAs
    51. 51. SGR Fix: Physician Composite Performance Score and Other Value-to-Value Drivers New value-based performance (VBP) program • Starting 2017, physicians would receive bonuses or penalties based on their composite performance scores. • Scores calculated based on quality measures (30% of composite score), resource use (30%), clinical practice improvement activities (15%), and EHR meaningful use (25%). • In 2017, 8% of total payments reallocated based on composite scores. Percentage increases to 9% and then 10% in 2018 and 2019, respectively. Alternative payment model (APM) participation • Physicians receiving a significant percentage of revenue through a risk-sharing APM with a quality measurement component (such as an ACO) would not participate in the New VBP Program. Instead, they would receive a 5% bonus each year between 2016 and 2021. American Institute of CPAs
    52. 52. SGR Fix: Physician Composite Performance Score and Other Value-to-Value Drivers Complex chronic care management • In 2015, Medicare would pay physicians for care management services furnished to beneficiaries with certain chronic conditions. • To be eligible for these payments, physicians must practice in a certified PCMH or comparable specialty practice. Appropriate use criteria • Physicians ordering advanced imaging or electrocardiogram services required to consult with appropriate-use criteria, to be developed in consultation with professional societies. • Medicare would not pay for services when no consultation occurred. American Institute of CPAs
    53. 53. SGR Fix: Physician Composite Performance Score and Other Value-to-Value Drivers Valuation of services • Between 2016 and 2018, CMS would systematically identify and revalue misvalued services. • If CMS fails to meet certain annual targets, MPFS payments reduced by the difference between target and actual amount of misvalued services identified. • CMS would solicit information from selected physicians to support its valuation activities. Physicians who submit requested information would be compensated. Those who do not would face significant payment penalties. American Institute of CPAs
    54. 54. Thank You! David McMillan Principal (865) 673-0844 ext. 120 dmcmillan@pyapc.com

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