Leading Topics Related to the FMV of Healthcare Arrangements

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Leading Topics Related to the FMV of Healthcare
Arrangements

• Presenter
• Daryl P. Johnson, HealthCare Appraisers, Inc.

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Topic No. 1

• Investment value vs. fair market value How do
  these standards of value differ, and how do the
  differences affect the valuation of healthcare
  transactions?

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No. 1 - Investment Value vs. FMV

• The fair market value standard is a hypothetical
  willing buyer/willing seller scenario. No
  consideration is given to any unique attributes
  or synergies of either party in reaching a
  determination of value.
• The investment value standard takes into
  consideration the unique synergies or attributes
  that one or both parties may possess.
• For example, if a hospital has more favorable
  reimbursement that will enhance the profitability
  of a diagnostic cath lab being considered for
  purchase by the hospital, any valuation
  consideration of this benefit would reflect
  investment value, and not FMV.

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No. 1 - Investment Value vs. FMV(cont.)

• While FMV is the applicable valuation standard
  for most healthcare transactions, commercial
  reasonableness may dictate a departure from the
  strict FMV definition. For example, if a
  hospital has purchasing economies related to
  med/surg supplies, any arrangement involving the
  hospitals acquisition of these items through an
  agreement with physicians should give
  consideration to the hospitals actual cost
  (which invokes investment value).

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Topic No. 2

• The OIG precludes the use of potentially
  tainted market values (i.e., those arrangements
  that involve physician ownership). What are some
  of the key implications of this OIG guidance in
  valuing healthcare transactions?

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No. 2 - Tainted Market Values

• In addition to healthcare regulations, general
  valuation theory requires the use of arms
  length market transaction data. Healthcare
  transactions are frequently suspect.
• A market approach is the preferred valuation
  approach for many types of compensation
  arrangements.
• For certain types of arrangements, virtually no
  non-tainted data is available.
• Lithotripsy (to be discussed later)
• On-call arrangements
• Medical directorships
• The valuator must consider alternate approaches.
• Consider analysis of physician compensation data
• Consider reimbursement rates from Medicare and
  commercial payors
• Consider whether the arrangement can be
  crosswalked to a non-healthcare setting

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Topic No. 3

• What is the top down approach in the context of
  valuing under arrangements, and is such approach
  a valid valuation approach?

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No. 3 - Top Down Approach

• Non-traditional under arrangement agreements
  are emerging related to outpatient surgical
  departments, cath labs and other hospital
  services.
• A top down approach passes through all of the
  hospital's reimbursement, less a portion retained
  by hospital related to billing, collections, and
  other hospital services.
• This approach leaves open significant opportunity
  for challenge.
• The actual services provided by the under
  arrangement entity must be FMV, and the valuation
  approach should primarily consider the value of
  such services
• The level of reimbursement received by a hospital
  may have no bearing on the FMV of the services
• Consider a crosswalk to non-healthcare
  scenarios
• Under arrangements structures might not be
  available except where only components of the
  services (and not the entire service) are
  provided. This may preclude many of the existing
  and future arrangements of this type.

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Topic No. 4

• Is the concept of a physicians opportunity
  cost a viable valuation methodology?

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No. 4 - Opportunity Cost

• Not really. In fact, Stark III saysopportunity
  cost (i.e., the value of his/her clinical
  services) may not be an indicator of the value of
  a physicians administrative time.
• This position is logical and consistent with the
  general definition of FMV (i.e., a willing
  buyer/willing scenario). Doesnt opportunity
  cost represent investment value ?
• RBRVS specifically identifies that certain
  physician duties carry a higher relative worth
  than others. (Otherwise, the physician work
  component of RVUs would be time-based.)
• Opportunity cost can be considered, along with
  market data related to administrative services
  (e.g., Clark Survey) and informed judgment as to
  relevant worth of one activity compared to
  another.
• For certain physician specialties (e.g., PCPs),
  the value of administrative time may be higher
  than the value of clinical time.

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Topic No. 5

• Regarding compensated call coverage arrangements,
  what are current trends in payment methodologies,
  and how can these arrangements be valued?

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No. 5 - On-Call Compensation

• Payment for on-call services (or at least
  compensation for unfunded emergent care) has
  almost become a mandate of sorts for most
  hospitals.
• Where possible, rather than simply paying for
  call with an auto-pilot mentality, hospitals
  should attempt to incorporate select quality
  standards to be met.
• The most prevalent payment methodologies include
• Payment for unfunded care (e.g., 80 to 120 of
  Medicare)
• Provision of claims defense or indemnification or
  reimbursement for malpractice insurance
• Per diem (typically a 24-hour period) or per diem
  plus payment for unfunded care
• Activation fee (Payment only for days the
  on-call physician is activated)
• Deferred compensation plans

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No. 5 On-Call Compensation

• On-call compensation pitfalls
• See OIG Advisory Opinion 07-10
• Paying above FMV (A better vehicle for
  overcompensating physicians than the medical
  directorship!)
• Paying for call coverage absent a contractual
  commitment for defined periods of coverage
• Paying for unnecessary or duplicative coverage
  (e.g., ortho hand and plastics hand)
• Paying for back-up call when not supported by
  call frequency and/or the urgency of patient
  needs

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Topic No. 6

• What unique issues arise in connection with
  valuing lithotripsy and other per click
  arrangements, and what should cause concern?

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No. 6 Per Click Arrangements

• Breaking news Urologists Corner the U.S.
  Lithotripsy Market
• Non-physician owned lithotripsy companies are a
  distinct minority. Therefore, non-tainted
  market data is extremely limited.
• Without reliable market data, a cost approach
  is the most appropriate valuation approach.
  Invariably, a cost approach yields lower values
  than the urologist-investors seek.
• Consider the possibility of a descending payment
  structure a fixed fee plus a per click and/or a
  payment cap to avoid windfall payments should
  volume escalate.
• Notwithstanding, as a hospitals lithotripsy
  volume approaches a certain threshold, the
  commercially reasonable option is for the
  hospital to purchase its own lithotripter or to
  contract with a lithotripsy provider on
  comparable terms (whereupon the urologists
  lithotripsy referrals will make a beeline for
  another surgical facility).
• A lithotripsy arrangement could be the poster
  child for regulatory abuse.

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Topic No. 7

• What impact does the elimination of the CMS safe
  harbor for personally performed physician
  services have on healthcare organizations?

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No. 7 Elimination of the Hourly Safe Harbor
Hourly Rate (75th) Hourly Rate (90th) Hourly Rate CMS Safe Harbor
Cardiology 264 324 146
Nephrology 209 252 106
Neurology 168 217 96
OB/GYN 195 245 130
Oncology 287 508 116
Psychiatry 128 151 86
Rheumatology 145 200 92
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Topic No. 8

• Co-management arrangements typically involve
  physician/hospital ventures to manage hospital
  services lines, with compensation consisting of
  base and incentive components. What valuation
  approaches can be used to assess this new breed
  of management arrangements?

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No. 8 Co-Management Arrangements

• Compliance with FMV is critical for regulatory
  compliance, but also for the ultimate success of
  the project.
• Available valuation methodologies are limited and
  somewhat subjective.
• In considering the primary valuation approaches
  (cost, income and market), an income approach can
  likely be eliminated.
• Using a cost approach, FMV of the management fee
  can be established by assessing the required
  number of work hours needed to provide the
  management services multiplied by a fair market
  value hourly rate.
• However, the exact number of required work hours
  cannot reasonably be determined in advance.
• Further, a key ideal of most co-management
  arrangements is to reward results rather than
  time-based efforts.

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No. 8 Co-Management Arrangements

• A market approach recognizes that each
  co-management arrangement is unique, and reflects
  specific market and operational factors which are
  singular to the specific setting.
• Break the specific services down into specific
  tasks and objectives, and then compare to other
  arrangements
• On an item specific basis, assess the relative
  worth of each task/objective, and determine
  necessary adjustments to the comparable
  arrangements.
• The cost and market valuation methodologies
  described above must be reconciled to arrive at a
  final conclusion of value.
• The FMV of the total management fee must be
  established, as well as the base and incentive
  components.
• Rev Proc. 97-13 may limit the amount of the
  incentive fee in relationship to the base fee.

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Topic No. 9

• Discussion of CMS developments related to the
  permissibility of per click compensation
  arrangements.

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No. 9 Status of Per Clicks

• Stark III does not specifically affect per click
  arrangements, but the proposal in the physician
  fee schedule rule would prohibit such
  arrangements with an individual physician or
  physician group. Joint ventures would still be
  viable vehicles.

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and lastTopic No. 10

• In theory, local market data may be the most
  relevant market data in evaluating physician
  transactions. However, local data may be
  difficult to obtain. What implications does this
  have on the valuation process?

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No. 10 Local Market Values

• Most healthcare providers are reluctant to share
  their physician compensation data.
• Even if a few local market values can be
  obtained, there will undoubtedly be insufficient
  information to allow reasonable comparisons to a
  subject arrangement (e.g., how productive is the
  OB/GYN being paid 340,000 in the local market?).
• There is no assurance that local data points are
  free from overcompensation bias.
• In comparison to the thousands of respondents to
  at least 6 national salary surveys, local data is
  generally anecdotal.
• CMS specifically addresses situations when local
  data (e.g., with respect to real estate) is
  insufficient.
• FMV of physician compensation may best be
  determined using national surveys as a starting
  point. Adjustments from the norm can then be
  made based upon differences in productivity,
  extent of call coverage and administrative
  duties, local economics, etc.

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Questions?