Post on 09-Jul-2015
transcript
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Hospital Affiliation Models That Preserve Private Practice
Presented by:Michael L. Blau, Esq. Kelley D. Simpson, Senior PartnerFoley & Lardner LLP Oncology Solutionsmblau@foley.com ksimpson@oncologysolutions.com617-342-4040 404-836-2000
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Fact Pattern• Southwick Hospital– Non-for-profit– 300 bed hospital in community of 350,000– Qualifies for 340B– Plans to build cancer center; Contemplating building
medical oncology and supportive care adjacent to existing radiation oncology facility
• Allied Oncology Associates, P.C.– 7 physician MO group; 5 owners– Offices in Southwick, Wattstown, Hinchendon and
Rottingham• Infusion• Lab• Pharmacy• Retail pharmacy• Non-chemo infusion business which competes with Hospital
infusion service
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Fact Pattern
• Suburban Radiation Associates, P.C.– 3 physician FTE RO group• Treats approximately 800 patients annually• Owns its own facility (10,000 sq. ft.)• Equipment: Three linear accelerators and supporting
equipment
– Hospital currently contracts with a solo RO who is retiring
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Current Oncology Service Financials
• Southwick Hospital• Allied Oncology Associates• Suburban Radiology Associates
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Southwick HospitalOncology Service Line “Virtual Budget”
MEDICAL ONCOLOGY AMISSIONS $ 4,200,000
SURGICAL ONCOLOGY ADMISSIONS 9,400,000
RADIATION ONCOLOGY 3,750,000
MEDICAL ONCOLOGY CLINIC 1,110,000
ONCOLOGY RELATED OUTPATIENTS & ANCILLARIES 14,600,000
ESTIMATED NET REVENUE $ 33,060,000
ESTIMATED TOTAL DIRECT COSTS $ 20,250,000
CONTRIBUTION MARGIN $ 12,810,000
CONTRIBUTION PER NEW CANCER CASE (850 Cases) $ 15,071
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Allied Oncology Associates2010 Financial Position
• New Patients: 1,600• Net Collections: $21,000,000• Drug Cost: $14,000,000• Staff Cost: $3,500,000• Last three years, AOA is
experiencing steady declines (5% or so) in income most notably due to Medicare and non-Medicare rate declines and increased management of drug cost
Net CollectionsLess Practice Expenses: Drugs & Med Supplies Staff Salaries & Benefits Rent EMR: Computer Software & Reporting General & Administrative
$22,150,000
$14,000,0003,500,000
250,00090,000
850,000
Income Before Physicians’ Salaries $3,460,000
Less: Physicians’ Salaries Pension
3,160,00050,000
Net IncomeAdd: Retained Earnings, BeginningLess: Distribution to Shareholders
$250,00025,000
(225,000)
Retained Earnings, Ending -0-
Income Per Physician with Pension $526,429
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Suburban Radiology Associates2010 Financial Position
• New Patients: 850• Net Collections: $9,000,000• Staff Cost: $2,270,000• Space & Equipment:
$3,957,000• With SH committed to build
its own cancer center, SRO is considering what options are available, recognizing a new era of competition.
• SRA’s existing facility is state-of-the-art with room for expansion to include other cancer center program components
Net CollectionsLess Practice Expenses: Staff Salaries & Benefits Medical Supplies & Drugs Equipment Resources & Maintenance Facility Depreciation & Amortization General & Administrative
$9,000,000
$2,270,000100,750
2,620,0001,337,000
500,000
Total Expenses $6,827,750
Net Income/(Loss) $2,172,250
Income Per Physician $724,083
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Trends in Hospital-Physician Collaboration
• Employment• Practice acquisitions and charitable
contributions• Community oncologists moving on-campus or
into hospital-affiliated groups• Integration and alignment for quality and
efficiency improvement and for multi-disciplinary care
• Legal developments narrow somewhat options for collaboration
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CurrentlyEmploy
No Plan to
Employ
Plan to Employ in Next 2-3
Years
Hospital Employment of Oncologists
n = 126
Hospital Employment of Oncologists
The Advisory Board Company, 2009 Oncology Roundtable
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Percentage of Hospitals Having Implemented or Considering Alignment Models1
n = 107
Continued Interest in Collaborative Arrangements
The Advisory Board Company, 2009 Oncology Roundtable
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CommunityCancer Center
AlliedOncologyAssociates
SouthwickHospital
Payors
Hospital provides:• License• Provider-based status•Space/equipment• Non-physician clinicians (off-campus)
Oncology Groups provide:• Physician staffing•Non-physician clinicians (on campus)• Non-clinical staff• Medical directorship• Management services
Notes:• Medical directorship services provided on fixed fee basis• Physician staffing and management services provided on - Budget-based guarantee - Fee for service - Cost plus or - Fixed fee basis• Must be fair market value (independent appraisal)• Financial terms can be adjusted annually or periodically within decision-making/deadlock resolution framework
ProFees
• Site of servicedifferential
Lease andServices Agreement
$
Medical Director
and Physician
Staffing
$
Hospital
Facility
Fees
SuburbanRadiationAssociates$
Model 1: Hospital (Modified) Under Arrangement Model
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Payors
AlliedOncologyAssociates
SouthwickHospital
ProFees
Lease andServices Agreement
$
Medical Director
and Physician Staffing
$
Hospital
Facility Fees
PrivatePracticeSpace
CommunityCancer Center(Hospital)
Notes:• Same as Model 1, except: - Groups lease private practice space in Cancer Center - Group responsible for practice overhead in private practice space - No site of service differential for private practice services
Model 2: Hybrid (Modified) Under Arrangement Model
SuburbanRadiationTherapy
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SouthwickHospital
Payors
New CancerCenter
(Hospital)
Hospital• License• Provider-based status•Acquires AOA/Suburban equipment/space• Leases AOA/Suburban mid-levels (on-campus)• Employs mid-levels/techs (off-campus)• Leases non-clinical staff
ProfessionalServicesAgreement
$WRVU
$
Staffing/ManagementServices
AOA/Suburban provides:• Physician staffing• Non-clinical staff• Mid-levels/techs to Southwick (on-campus)• Transfer of mid-levels/techs to Southwick (off-campus) • Management services
Model 3: Professional Services Agreement
Off-Campus
Sites
AlliedOncologyAssociatesSuburbanRadiationAssociates
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Key PSA Issues
• Qualification for Medicare provider-based status– Physical space standards for licensure/
accreditation– Can’t lease mid-levels/techs at off-campus sites– Hospital reporting lines– CON issues
• Increased patient co-pays• Payor pushback
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Key PSA Issues• wRVU Valuation
– Relation to existing physician compensation/margins on drugs, labs, pharmacy
– Practice expense component– New physicians/NPs/PAs
• Exclusivity– Existing relationships
• Expansion– Right of first opportunity
• Noncompetes/restrictive covenants• Term/Termination
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Key PSA Issues
• Unwind rights– Asset repurchase– Lease assignment/real estate repurchase– Solicitation of employees– Data/records access/transfer– Systems issues
• Dispute resolution/arbitration– Perform during pendency
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PSA Financial ModelingMedical Oncology Business
BEFORE TRANSACTION: Physician Rates
Payer Class Gross Chgs Collections
Medicare $12,400,000 $8,400,000
Non-Medicare 20,600,000 13,750,000
TOTAL $33,300,000 $22,150,000
AFTER TRANSACTION: Hospital Rates
Payer Class Gross Chgs Collections
Medicare $18,500,000 $7,980,000
Non-Medicare 31,500,000 20,475,000
TOTAL $50,000,000 $28,455,000
Estimated Financial Impact
$6,305,000 +
AOA Drug Cost: $14MMx 20-25% 340B
Drug Pricing Program Discount
$2.8 to 3.5MMDrug Purchasing Savings
TOTALEstimated
Financial Impact$9 to 10MM
TOTALEstimated
Financial Impact$9 to 10MM
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PSA Financial ModelingMedical Oncology: Southwick Hospital
SHBefore
Transaction
SHAfter
Transaction
Net Revenue
Less: Direct Operating Expenses
$33,060,000
$20,250,000
Net RevenueAdd: Incremental Revenue AOA PSA340B Drugs Savings
Less: Direct Operating Expenses Med Onc Incremental Ops Cost AOA PSA Payment Capital Enhancement Costs Addt’l Laboratory Staff Research Program Investment
$33,060,00028,455,000
2,800,000
$20,250,00016,291,000
5,350,650 665,000
48,000148,500
Contribution Revenue $12,810,000 Contribution Revenue $21,561,850
Contribution RevenuePer New Cancer Case $15,017
Contribution RevenuePer New Cancer Case $25,367
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PSA Financial ModelingAllied Oncology Associates
AOABefore
Transaction
AOAAfter
Transaction
Net Collections
Less Practice Expenses: Drugs & Med Supplies Staff Salaries & Benefits Rent EMR: Computer Software & Reporting General & Administrative
$22,150,000
$14,000,0003,500,000
250,00090,000
850,000
PSA: wRVU Payment ($85/wRVU)Billing Services (5% Collections)
Clinical Staff Lease O/H Rate (Cost +3%)Leadership Activities ($150/1,500 Hrs)
Drugs & Medical SuppliesStaff Salaries & Benefits
RentEMR: Software & Maintenance
General & Administrative
$2,724,5051,422,7501,493,500
225,000
$ 0 600,000
50,00090,000
170,000
Income Before Physicians’ Salaries $3,460,000 Income Before Physician Salaries $4,955,755
Less: Physicians’ Salaries Pension
3,160,00050,000
Less: Physicians’ SalariesPension
$4,905,75550,000
Net IncomeAdd: Retained Earnings, BeginningLess: Distribution to Shareholders
$250,00025,000
(225,000)
Net Income Add: Retained Earnings
Less: Distribution to Shareholders
-0--0--0-
Retained Earnings, Ending -0- Retained Earnings, Ending -0-
Income Per Physician with Pension $526,429 Income Per Physician with Pension $707,965
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PSA Financial ModelingRadiation Oncology Business
BEFORE TRANSACTION
Medicare $6,875,000 $2,268,750
Non-Medicare 5,625,000 6,731,250
TOTAL $12,500,000 $9,000,000
AFTER TRANSACTION
Medicare $13,750,000 $1,928,438
Non-Medicare 11,250,000 8,817,938
TOTAL $25,000,000 $10,746,376
Estimated Financial Impact
$1.7MM
• Additionally: Purchase of SRA radiation
oncology business requires valuation of FMV purchase price
Three methodologies typically utilized:
Asset purchase Discounted cash flows Industry multiple of
EBITDA—very generally 3-5x EBITDA
• Assumption is SRA business Assumption is SRA business buyout at 3x EBITDA or $6.5MMbuyout at 3x EBITDA or $6.5MM
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PSA Financial ModelingSuburban Radiology Associates
SRABefore
Transaction
SRAAfter
Transaction
Net Collections
Less Practice Expenses: Staff Salaries & Benefits Medical Supplies & Drugs Equipment Resources & Maintenance Facility Depreciation & Amortization General & Administrative
$9,000,000
$2,270,000100,750
2,620,0001,337,000
500,000
SH Buyout of SRA Rad OncPSA: wRVU Payment ($65/wRVU)
Billing Services (5%) Leadership Activities
Staff Salaries & Benefits Medical Supplies & Drugs
Equipment Resources & Maintenance Facility Depreciation & Amortization
General & Administrative
$6,500,0001,755,000
537,320150,000
$227,000-0-
50,000133,700
50,000
Net Income/(Loss) $2,172,250 One-Time Buyout IncomeIncome Before Physician Salaries
$6,500,0001,981,620
Income Per Physician:Professional & Technical Income $724,083
Buyout Income Per Physician
Income Per Physician:Professional ONLY Income
$2,167,667
$660,540
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PSA Financial ModelingRadiation Oncology: Southwick Hospital
SHBefore
Transaction
SHAfter
Transaction
Net Revenue
Less: Direct Operating Expenses
$33,060,000
$20,250,000
Net RevenueAdd: SRA Incremental Revenue Less: Direct Operating Expenses Rad Onc Incremental Ops Cost SRA PSA Payment Miscellaneous IT & Other
$33,060,00010,746,376
$20,250,0006,367,050 2,442,320
150,000
Contribution Revenue $12,810,000 Contribution RevenueLess: One-Time BuyoutAdjusted Contribution Revenue
$14,597,006(6,500,000)$8,097,006
Contribution RevenuePer New Cancer Case $15,017
Contribution RevenuePer New Cancer Case $9,526
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Southwick HospitalOncology Service Line “Virtual Budget”
MEDICAL ONCOLOGY AMISSIONS $ 4,200,000 $ 4,200,000
SURGICAL ONCOLOGY ADMISSIONS 9,400,000 9,400,000
RADIATION ONCOLOGY 3,750,000 14,496,376
MEDICAL ONCOLOGY CLINIC 1,110,000 32,365,000
ONCOLOGY RELATED OUTPATIENTS & ANCILLARIES 14,600,000 14,600,000
ESTIMATED NET REVENUE $ 33,060,000 $ 75,061,376
ESTIMATED TOTAL DIRECT COSTS $ 20,250,000 $ 49,712,520
SRA BUYOUT -0- 6,500,000
CONTRIBUTION MARGIN $ 12,810,000 $ 18,848,856
CONTRIBUTION PER NEW CANCER CASE (850 Cases) $ 15,071 $ 22,175
ADJUSTED CONTRIBUTION PER CASE(After Radiation Oncology Buyout)
$ 15,071
$ 29,822
SHBefore
Transaction
SHAfter
Transaction
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Model 4: Service Line Co-Management Arrangements
• The purpose of the arrangement is to recognize and appropriately reward participating medical groups/physicians for their efforts in developing, managing, and improving quality and efficiency of the hospital’s service line
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SouthwickHospital
MOService
Line
Hospital-licensedservices
Other Group (s) ?
SuburbanRadiation
Associates
Allied OncologyAssociatesCo-Management
Agreement
• Multi-party contract• Allocates effort and reward between groups
OperatingCommittee
Designees
DesigneesPayors
$
Model 5: Service Line Co-Management Direct Contract Model
ROService
Line
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MOService
LineCo-ManagementAgreement
• Capital Contributions• Management Infrastructure
Payors
$
Service LinePhysicians/
Groups
JVManagement
Company
SouthwickHospital
ProfitDistribution
ProfitDistribution
Service Line Co-Management Joint Venture Model
ROService
Line
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Service Line Co-Management Arrangements
• There are typically two levels of payment to oncologists under the service line contract:– Base fee – a fixed annual base fee that is
consistent with the fair market value of the time and efforts participating oncologists dedicate to the service line development, management, and oversight process
– Bonus fee – a series of pre-determined payment amounts contingent on achievement of specified, mutually agreed, objectively measurable, program development, quality improvement and efficiency goals
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Service Line Co-Management Arrangements
• Pays participating oncologists 3-6% of service line revenues– Fixed, fair market value; independent appraisal
advisable
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Regulatory Considerations• Legal constraints on Service Line Co-
Management Agreements– No stinting– No Steering– No cheery-picking– No gaming– No payment for changes in volume/referrals– No payment for quicker-sicker discharge– Must by FMV; independent appraisal required
• Proposed Stark Law Exception for Incentive Payment and Shared Savings Programs
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Key Service Line Co-Management Issues
• Scope of service line under management– Separate/combined MO/RO service line
• Service line co-management services– No overlap with PSA or Employee Lease– Documentation
• Performance standards and targets– Validation– Achievability– Reset
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Key Service Line Co-Management Issues
• Term/durability– Rev. Proc. 97-13 (3 years)
• Dilutive effect of adding physicians• Independent appraisal of fair market value• Cost of independent monitor, valuation,
security offering (for JV)• Some irreducible legal risk
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Financial Model of Service Line Co-Management Arrangement
MEDICAL ONCOLOGY AMISSIONS $ 4,200,000 $ 4,200,000 $ 4,200,000
SURGICAL ONCOLOGY ADMISSIONS 9,400,000 9,400,000 9,400,000
RADIATION ONCOLOGY 3,750,000 14,496,376 14,496,376
MEDICAL ONCOLOGY CLINIC 1,110,000 32,365,000 32,365,000
ONCOLOGY RELATED OUTPATIENTS & ANCILLARIES 14,600,000 14,600,000 14,600,000
ESTIMATED NET REVENUE $33,060,000 $ 75,061,376 $ 75,061,376
ESTIMATED TOTAL DIRECT COSTSSRA BUYOUTCO-MANAGEMENT SERVICES AGMT (3.5%)
$20,250,000 $ 49,712,5206,500,000
-0-
$ 49,712,5206,500,000
3,002,455
CONTRIBUTION MARGIN $12,814,000 $ 18,848,856 $ 15,846,401
CONTRIBUTION PER NEW CANCER CASE (850 Cases) $15,070 $ 22,175 $ 18,643
ADJUSTED CONTRIBUTION PER CASE(After Radiation Oncology Buyout) $15,070 $ 29,822 $ 26,290
SHAfter PSA
Transaction
SHAfter PSA
& Co-MgmtTransactions
SHBefore
Transactions
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AlliedOncologyAssociates
SouthwickHospital
Payors
Employee Lease Agreement
$
Professional Services
Agreement
$
Notes:• Same as Model 3, plus• Service Line Co-Management Agreement (3-6% of Service Line revenue) - PSA component – WRVU rate equal to aggregate current physician compensation - Employee lease – cost plus - Co-management component – fixed fair market value fee - Incentive component contingent on meeting specified quality and efficiency improvement standards – fixed FMV fee per standard
Service LineCo-ManagementAgreement
New CancerCenter
(Hospital)
PSA with Service Line Co-Management Agreement
SuburbanRadiationAssociates
Off-Campus
Sites
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Financial Model of Combined PSA/Service Line Co-Management Arrangement
Income: $6,269,483Per Doc: $895,640
Incremental Income:• PSA: $ 1,495,755• Clinical productivity• Leadership activities• Billing services• Clinical staff lease
• Co-Mgmt: $1,313,728
MEDICALONCOLOGY
BEFORE
Income: $3,460,000Per Doc: $526,429
AFTER
Buyout: $6,500,000Per Doc: $2,166,667
Income: $1,981,620Per Doc: $1,098,449 + Buyout $$$
Incremental Income:• Business Acquisition• Co-Mgmt: $1,313,728
RADIATIONONCOLOGY
BEFORE
Income: $2,172,250Per Doc: $724,083
AFTER
Contribution: $15,846,401Per Case: $18,643
After Buyout: $22,346,401Per Doc: $26,290
Incremental Income:• Tangible, medical oncology• Tangible, radiation oncology• Intangibles: Efficiencies from co-
mgmt; greater leadership participation; market penetration/lessen outmigration; ancillary services; etc.
SOUTHWICKHOSPITAL
BEFORE
Contribution: $12.8MMPer Case: $15,070
AFTER
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Financial Modeling Assumptions
• 7 FTE medical oncologists• Practice mix of 50/50 Medicare
and non-Medicare • Median MGMA wRVUs per doc
of 4,579• Payment of $85 per wRVU • Billing services at 5% of SH net
collections ($28.4MM)• Clinical staff lease for 50% of
staff (on campus) at cost plus 3%• Leadership activities for 1,000
hours annually at $150 per hour• AOA retains non-clinical staff
and related space and equipment cost to provide billing and management services
• 3 FTE radiation oncologists• Practice mix of 55/50 Medicare
and non-Medicare • Median MGMA wRVUs per doc of
9,032• Payment of $65 per wRVU • Billing services at 5% of SH net
collections ($10.7MM)• Radiation oncology facility is
located off-campus; therefore all clinical staff must be directly employed by SH• Leadership activities for 1,000
hours annually at $150 per hour• SRA retains non-clinical staff and
related space and equipment cost to provide billing and management services
• Incremental medical oncology expenses of $22,503,150
–Operations: $16,291,000PSA Payment: $5,350,650Capital Enhancements: $665,000 Addt’l Lab Staff: $48,000Research: $148,500
• Incremental radiation oncology expenses of $6,959,370
–Operations: $6,367,050PSA Payment: $2,442,320Enhancements IT & Other: $150,000 –One-Time Buyout: $6,500,000
• Co-Management Agreement at 4% of overall oncology service line revenues less leadership activities of $375,000. Distribution of co-management fees assumed at a 50/50 split of medical oncology to radiation oncology
Medical Oncology Radiation Oncology Hospital