AICPA NATIONAL HEALTHCARE CONFERENCE · AICPA HEALTHCARE CONFERENCE 34 STARK LAWS - FINAL REGS A...

AICPA HEALTHCARE CONFERENCE 1

AICPA NATIONALHEALTHCARECONFERENCE

Mark O. Dietrich, CPA/ABVDietrich & Wilson, PC

508 [email protected]

Slides Downloadable at www.cpa.net/resources


RULE #1

• Fair Market Value cannot be determined ina void

• The Valuator must understand anddocument the current state of the HealthcareEconomic Environment in order to chooserealistic assumptions


EMERGING ISSUES ANDTRENDS AFFECTING FMV

• Medicare Modernization Act• Limits on unit prices• The Underwriting Cycle• Noncompete Agreements• AKS• Stark II, Phase 2


RULE #1, COROLLARY #1

•• Probably the most common mistake inProbably the most common mistake inHealthcare Valuation is overestimating theHealthcare Valuation is overestimating thegrowth rate in future revenuesgrowth rate in future revenues


UNIT PRICES• Physicians

– Significant amount of physician reimbursementis from Medicare; for medical specialists such ascardiologists and most surgeons, percentagemuch higher

– Pre-MMA, Medicare payments to physicianscould not grow at a rate greater than GDP, eventhough demand grows much more rapidly

– Physicians generally lack negotiating clout withHMOs due to anti-trust provisions


MEDICAREMODERNIZATION - MMA

• Physicians will receive Medicare ConversionFactor increases of 1.5% for both 2004 and2005.– Physician payment update formula changed to use 10-

year rolling average measure of GDP instead of thecurrent single year measure; unfortunately, little effecton future increases.


PAYMENTS RVU CHANGE DOLLARS INTVTNL RAD 191,000 3.00% 5,730 OPHTH 4,566,000 -1.00% (45,660) PATH 846,000 2.00% 16,920 VASC SURG 487,000 4.00% 19,480 NPs 556,000 -1.00% (5,560) PT/OT 998,000 -2.00% (19,960) LAB 452,000 6.00% 27,120 DIAG 879,000 2.00% 17,580 CHIRO 658,000 -1.00% (6,580)ALL OTHERS 56,170,000 -0.02% (9,070)TOTAL 65,803,000 -0.00% 0

RVUs: IT’S A ZERO SUM GAME

2005 MEDICARE PHYSICIAN FEE SCHEDULE2005 MEDICARE PHYSICIAN FEE SCHEDULECHANGESCHANGES


PRODUCER PRICE INDEX

Physician PPI

2.85%

0.00%

1.51%1.76%

2.25%

3.89%

0.75%1.30%

2.11%1.82%

00.0050.01

0.0150.02

0.0250.03

0.0350.04

0.045

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Annual Compound


MEDICAREMODERNIZATION - MMA

• Major changes and radically reduced revenue andprofits for Oncologists administeringchemotherapy– Change from 95% of Average Wholesale Price to

106% of Average Sales Price– Enhanced Administration fees just announced for 2005

• Commercial Laboratory rates frozen for fiveyears

• Prescription Drug Benefit? It’s not effectiveuntil 20062006


THE UNDERWRITING CYCLE


RULE #1, COROLLARY #2•• The Government The Government giveth giveth ... and... and•• the Government the Government takethtaketh away! away!

– Lab Corp of America– Columbia/HCA– HealthSouth– Tenet Healthcare– Chemotherapy/Oncologists– ASCs?– PET Scanners, Cath Labs?


NONCOMPETEAGREEMENTS

• Traditionally used in sale transactions toprotect buyer purchase of assets

• Healthcare entities and their attorneys areincreasingly looking to Noncompetes toavoid limitations of Stark and AKS– E.g., purchasing a noncompete as part of a

consulting contract• Several advisory opinions from OIG, e.g.,

No. 03-2


NONCOMPETEAGREEMENTS

• Valuation of noncompetes requires identifyingprofits lost in event covenantor competes

• Stark and AKS forbid paying for referrals• Noncompete seems to be paying for not

referring to, or establishing, another entity• Query: Is this any different?• Don’t accept these engagements without

thorough knowledge of method & OIG


RULE #2

•• The Valuator has to understand whatThe Valuator has to understand what Fair FairMarket Value Market Value means within the regulatorymeans within the regulatoryframework of the Healthcare Industryframework of the Healthcare Industry


FAIR MARKET VALUE• FMV means one thing to a general business

valuation expert and quite another under theAKS or Stark– Dunkin Donuts in a Home Depot vs. MRI in a

Medical Office Building with OrthopedicSurgeons, Neurologists, Cardiologists

• A BV Expert with no training in the AKS orStark is unlikely to present a correct ordefensible valuation conclusion


RULE #3

•• Valuation is based upon establishedValuation is based upon establishedTheories and Rules of applicationTheories and Rules of application


VALUATION BASICS

• No cashflow, no value• Cashflows are generally after-tax• Money has Time Value• Present Value of future cash flows = Value• Present Value is based on Risk of cashflow• Risk is reflected in the Discount Rate


VALUATION BASICS

• Development of Discount Rate is, in part,based on Objective Elements, in part onSubjective Elements

• The Higher the Discount Rate, the Lower theValue, and vice versa– Similar to a Home Mortgage: The higher the

interest (discount) rate, the lower the mortgage youcan buy for a given monthly payment


RULE #4

•• Not all Values are “Fair Market” valuesNot all Values are “Fair Market” values


MARKET VALUE

• “Market” value is supposed to represent thebuyer/seller consensus as to the present valueof the future cashflows from the investment

• Previous Transactions or “Market Data” maynot be indicative of Fair Market Value– Absent inside knowledge, you have no way of

knowing if the assumptions made by buyer andseller violate the AKS or Stark


MARKET VALUE

• Synergy: Whole greater than sum of parts• Most real world transactions outside

regulated healthcare involve Synergisticassumptions that may fail to qualify underAKS or Stark– This is why so many corporate takeovers are at

a price in excess of that the Target’s stockpreviously traded at.


• Prohibited Synergy– Charging higher rent to Tenant Imaging

Provider due to proximity of space toLandlord’s Patients

• Allowable Synergy?– Paying Target for anticipated operating cost

reductions to be made by Acquirer– Such a payment may fail FMV test but does not

appear to raise “referral” issues

SYNERGY=FMV


ANTI-KICKBACK STATUTE& STARK LAWS

“Federal Eye on the BV Guy”

Now Appearing for the First Time on Court TV!

Starring Roles Still Undetermined at Press Time ...


• Practices of Business Consultants• “Consultants may explicitly or implicitly promise or

guarantee specific results that are unreasonable orimproper… This misconduct potential subjects both theconsultant and the provider to liability under the FalseClaims Act.” (A criminal statute: “reckless disregard”)

•• e.g., “A valuation consultant promising or assuring that itse.g., “A valuation consultant promising or assuring that itsappraisal of a physician’s practice will yield a fair marketappraisal of a physician’s practice will yield a fair marketvalue that satisfies the client’s need for a particularvalue that satisfies the client’s need for a particularvaluation, regardless of the actual value of the practice.”valuation, regardless of the actual value of the practice.”

OIG SPECIAL ADVISORYBULLETIN, JUNE, 2001JUNE, 2001

http://oig.hhs.gov/fraud/docs/alertsandbulletins/consultants.pdf


AKS

• The Statute has been interpreted to coverany arrangement where one (that’s 1)purpose of the remuneration was to obtainmoney for the referral of services or toinduce further referrals.

• There is very little guidance as to what FairMarket Value means for purposes of theAnti-Kickback Statute


AKS

• Studying the rationale behind AdvisoryOpinions, Fraud Alerts and otherpronouncements offers insight into areas ofvaluation risk

• As the next slides indicate, anything thatrings of a “discount” raises the specter ofthe AKS.


AKS

• “We are aware of cases where laboratories offer adiscount to physicians who then bill the patient, but donot offer the same discount to the Medicare program. Insome of these cases, the discount offered to thephysician is explicitly conditioned on the physician'sreferral of all of his or her laboratory business. Such a"discount" does not benefit Medicare, and is thereforeinconsistent with the statutory intent for discounts to bereported to the programs with costs and charges reducedappropriately to reflect the discounts.” OIG AdvisoryOpinion No. 99-2


AKS

• In essence, such price reductions create a risk that asupplier may be offering remuneration in the form ofdiscounts on business for which the purchaser pays thesupplier, in exchange for the opportunity to service andbill for higher paying Federal health care programbusiness reimbursed directly by the program to thesupplier. In such circumstances, neither Medicare norMedicaid benefits from the discount; to the contrary,Medicare and Medicaid may, in effect, subsidize theother payer's discounted rates.


AKS

• Moreover, suppliers may have an incentive toinappropriately increase utilization or engage inabusive billing practices to recoup losses on thediscounted business. Accordingly, the discount safeharbor specifically excludes "a reduction in priceapplicable to one payor but not to Medicare or a Statehealth care program.”


PROBLEMATIC AREAS

• Paying suppliers “under arrangement” forservices covered under the PPS, particularlyif supplier also receives non-PPS business

• Day or Partial Day Rentals of Imaging orCath Lab facilities, particularly if onetenant/user treats only Federal Programpatients, while second tenant/user treatsonly non-federal patients


PROBLEMATIC AREAS

• Failure to rigorously test volumeassumptions when setting a fair marketvalue rent for a DHS or other facilitysubject to AKS– Overestimating potential volume in an imaging

facility with multiple time slot lessors couldresult in one lessor paying more than fairmarket value while another pays less than fairmarket value


PROBLEMATIC AREASEXAMPLE

Forecast #1 Forecast #2 ActualProjected Volume Lessee #1 1,250 1,500 2,000Lessee #2 1,250 1,500 1,000

2,500 3,000 3,000 Fixed Expenses 800,000 800,000 800,000Rent per Click, Computed 320 267 267Rent per Click, Charged 320

Lessee #1 Lessee #2Actual Volume 2,000 1,000 3,000Rent per Click 320 320 320

640,000 320,000 960,000Actual Fixed Expenses Prorata 533,333 266,667 800,000Excess Payments 106,667 53,333 160,000

•Lessee #1 Non-federal patients only, referring MDs, OwnsLessor

•Lessee #2 Federal patients only, non-referring MDs


STARK LAWSProhibits Referral for Designated Health

Services (DHS) (short list) where physicianhas a Financial RelationshipFinancial RelationshipClinical laboratory servicesPhysical & Occupational therapy servicesInpatient hospital servicesRadiology or other diagnostic servicesRadiation therapy servicesDurable medical equipment - DME


STARK LAWS - FINAL REGSA FEW HIGHLIGHTS

• Fair Market Value, Phase 1• “Fair market value means the value in arm’s-length

transactions consistent with general market value.‘General market value’ means the price that an asset wouldbring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in awho are not otherwise in aposition to generate business for the other partyposition to generate business for the other party; or thecompensation that would be included in a serviceagreement as a result of bona fide bargaining betweenwell-informed parties to the agreement …



• Fair Market Value, Phase 1• “… who are not otherwise in a position to generate businesswho are not otherwise in a position to generate business

for the other party for the other party on the date of acquisition or at the time ofthe service agreement. Usually the fair market price is theprice at which bona fide sales have been consummated forassets of like type, quality, and quantity in a particularin a particularmarket at the time of acquisitionmarket at the time of acquisition, or the compensation thathas been included in bona fide service agreements withcomparable terms at the time of the agreement.”

• This is very different than the definition Valuators areaccustomed to!



• Fair Market Value, Phase 2• “Moreover, the definition of ‘‘fair market value’’ in the

statute and regulation is qualified in ways that do notnecessarily comport with the usage of the term in standardvaluation techniques and methodologies. For example, themethodology must exclude valuations where the parties tothe transactions are at arm’s length but in a position torefer to one another. In addition, the definition itselfdiffers depending on the type of transaction: leases orrentals of space and equipment cannot take into accountthe intended use of the rented item;



• Fair Market Value, Phase 2• and in cases where the lessor is in a position to refer to the

lessee, the valuation cannot be adjusted or reflect the valueof proximity or convenience to the lessor. Our Phase Idiscussion made clear that we will consider a range ofmethods of determining fair market value and that theappropriate method will depend on the nature of thetransaction, its location, and other factors. While goodfaith reliance on a proper valuation may be relevant to aparty’s intent, it does not establish the ultimate issue of theaccuracy of the valuation figure itself.”


“FAIR” MARKET VALUE?• One way to assess whether Market Value is

“Fair” is to ask– If looking at an actual transaction, can a

forecast be constructed where the cashflowshave a present value equal to negotiated price?

– Can the forecasted results be achieved if theEntity or Project is operated on a stand alonebasis with no prohibited referrals or synergies?

– Is Discount Rate realistic given the Risk Level?


SUMMARY

• Identifying and quantifying Valuationcashflow forecast assumptionscashflow forecast assumptions that do notviolate relevant provisions is a Key to adefensible conclusion of Fair Market Value

• If the forecast assumptions are unrealistic orviolate relevant provisions, the Valuation islikely worthless



• Arrangements with Medical Directors etc.– “An hourly payment for a physician’s personal services

(that is, services performed by the physician personallyand not by employees, contractors, or others) shall beconsidered to be fair market value if the hourlypayment is established using either of the following twomethodologies:

• (1) The hourly rate is less than or equal to the average hourlyrate for emergency room physician services in the relevantphysician market, provided there are at least three hospitalsproviding emergency room services in the market.



• Arrangements with Medical Directors etc.– (2) The hourly rate is determined by averaging the 50th

percentile national compensation level for physicians withthe same physician specialty (or, if the specialty is notidentified in the survey, for general practice) in at least fourof the following surveys and dividing by 2,000 hours. Thesurveys are:

– Observation: Independent Contractors usually get a higherhigherrate than Employees since they must bear, at a minimum,their own social security taxes and business expenses.



• Arrangements with Medical Directors etc.– Sullivan, Cotter & Associates, Inc. - Physician Compensation and

Productivity Survey– Hay Group - Physicians Compensation Survey– Hospital and Healthcare Compensation Services - Physician Salary

Survey Report– Medical Group Management Association - Physician

Compensation and Productivity Survey– ECS Watson Wyatt - Hospital and Health Care Management

Compensation Report– William M. Mercer - Integrated Health Networks Compensation

Survey”


HIPAA

• The Health Insurance Portability and AccountabilityAct prohibits disclosure of Personal Health Information(PHI) except in specified circumstances

• Obtaining information to value a medical/dentalpractice - particularly in litigation - can be problematic– Example: Attorney for non-dentist spouse suspects cash

payments for services are unreported. To determine if this isthe case, forensic valuator desires to trace services providedaccording to patient dental lab records. Opposing counseldenies access based on HIPAA.


HIPAA• The Privacy rule permits a covered entity to

disclose Protected Health Information to aBusiness Associate who performs a function oractivity on behalf of the covered entity thatinvolves the creation, use or disclosure ofprotected health information, so long as thecovered entity enters into a contract with thebusiness associate containing specific safeguards.

• Valuation should be a relevant function onbehalf of covered entity


DETERMINATIONS OF FMV• FMV of Noncompete

– Probability adjusted, referrals excluded• Paying physicians for referrals lost to JV if they

competed is analogous to paying them to refer!• Given their investment in JV, what is probability that

physicians establish competing facility?

• FMV of Joint Venture Capitalization– Actual cost incurred to capitalize

• Use of debt and leasing minimizes capital– Discounted Cash Flow analysis

• Invested capital value versus Equity value


HYPOTHETICAL – MRI LEASE

• MRI facility leases to physician on a one day perweek basis the following:– MRI on per-click basis– Space and supplies– MRI technicians

• Physician supervises the techs and bills for thetechnical and professional components.

• Focus on FMV, not on “same building” and in-office ancillary requirements of Phase II Regs


One Day perWeek Rental

MD

MR Facility

Space

Supplies, Personnel

ProfessionalComponent $$TechnicalComponent $$

MD

FMV of Real Property

FMV of Intangibles

License, CON

Rent $

FMV

Equipment

FMV of Lease


DETERMINATIONS OF FMV• FMV of Real Property

– Rent per Sq Foot per Day• FMV of Intangibles

– Royalty• FMV of Supplies, personnel

– Cost, Cost +


DETERMINATIONS OF FMV

• FMV of Equipment,– Cost + fair return

• Roll up into single “per click” rental• “Fully Loaded” Cost + return

– Forecasted annual expenses divided by annualvolume, + profit

• Farther away actual volume is from forecastedvolume, more this will miss “hindsight” FMV


DETERMINATIONS OF FMV

• “Fully Loaded” Cost + return– Need to estimate expected volume– Divide fully loaded cost by expected volume– User purchases fixed slots/cases per day– Purchase of slots has effect of shifting risk from

Facility to MD for presence of cases– Influences reasonable return calculation


WHERE MOST VALUATORSFALL SHORT-

UNDERSTANDINGPHYSICIAN PRACTICE

REVENUE


MEDICARE PAYMENTHow It Works

TwoTwo Key Items Key ItemsConversion FactorConversion Factormultipliedmultiplied bybyRVUsRVUs equalsequalsFeeFee

RVUs - RVUs - 3 Components3 ComponentsPhysician WorkPhysician WorkPractice ExpensePractice ExpenseMalpractice InsuranceMalpractice Insurance

36.6934.7336.61

38.2636.2 36.79 37.34 37.90

05

10152025303540

1998 1999 2000 2001 2002 2003 2004 2005

Conversion FactorEst


PRACTICES WITH GREATESTMEDICARE EXPOSURE

General Surgery (cancer)Orthopedic Surgery (hips, knees)Cardiac Surgery (CABG)Vascular SurgeryNeurosurgeryCardiology (cath, angioplasty, stents)Ophthalmology (cataracts)


ESTABLISHED PATIENT VISITSService Complexity Level 1 or 99211 minor Level 2 or 99212 low Level 3 or 99213 medium Level 4 or 99214 medium to high Level 5 or 99215 high Preventive Medicine Comprehensive These constitute the bulk of the income for the typical

internal medicine, pediatric or family medicinephysician, and a significant portion for medicalspecialists such as cardiologists. Coding is the

Principal Determinant of Physician Income - andlends itself to Manipulation!

CPT Codes©

AmericanMedical

Association


ESTABLISHED PATIENTCODING ALL PHYSICIANS

16.94%20.72%

3.25%5.46%

53.63%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Level 1 Level 2 Level 3 Level 4 Level 5http://www.hcfa.gov/stats/spcuimp.exe


ESTABLISHED PATIENTCODING IM & CARDIOLOGY

22.11%

10.34% 7.64%

30.48%

4.33%

10.06%

59.07%

4.43%

48.52%

3.03%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Level 1 Level 2 Level 3 Level 4 Level 5

IM

Cardio


REPRESENTATIVE FEESESTABLISHED PATIENTS

Old New Change Old-Fac New-Fac Change99203 Office/outpatient visit, new $92.70 $95.96 4% 70.26 71.69 2%99204 Office/outpatient visit, new $132.06 $135.53 3% 103.74 105.66 2%99205 Office/outpatient visit, new $168.48 $172.13 2% 137.58 140.39 2%99211 Office/outpatient visit, est $20.60 $21.28 3% 8.83 8.96 1%99212 Office/outpatient visit, est $36.42 $37.71 4% 23.17 23.52 2%99213 Office/outpatient visit, est $51.13 $52.65 3% 34.58 35.47 3%99214 Office/outpatient visit, est $79.82 $82.14 3% 56.65 57.87 2%

Fac = Facility, allowed in Federal Clinic settings


REPRESENTATIVE FEESESTABLISHED PATIENTS

$21.28

$37.71

$52.65

$82.14

$119.11

0 20 40 60 80 100 120 140

LEVEL 1

LEVEL 2

LEVEL 3

LEVEL 4

LEVEL 5


BEWAREBEWAREYou Shouldn’t Miss This OneYou Shouldn’t Miss This One

• Coding pattern that fails the Norm• Example: All office consults in a

cardiology practice coded Level 5– You can find this by looking at the

Encounter Form, or at the ServiceAnalysis

– A client buying this practice may bebuying trouble


OFFICE CONSULT CODINGCARDIOLOGY

18.71%

50.16%

27.44%

3.31% 0.39%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Level 1 Level 2 Level 3 Level 4 Level 5


BEWAREBEWAREYou Shouldn’t Go Looking For This OneYou Shouldn’t Go Looking For This One

• Unusual (illegal) Billing Practices• Example: Services of physician not

enrolled in a managed care plan arebilled under another physician’sprovider number– You might find this by transfers of

revenue from one MD to another inthe compensation system


WHY IS THIS STUFF MYPROBLEM?

• The GovernmentGovernment seems tothink it is - more on this shortly

• My BookBook says you should dothis type of analysis

• The ClientClient believes that fairmarket value is based on thereported revenue - and if it isoverstated, so is the valuation


CONCLUSION

• The change in Physician payment per unitof service has been and will continue to beless than the rate of inflation

• Being on top of current changes in the lawand reimbursement rates is critical for ameaningful valuation

• HIPAA is a new problem for Valuation in aLitigation Context

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AICPA NATIONAL HEALTHCARE CONFERENCE · AICPA HEALTHCARE CONFERENCE 34 STARK LAWS - FINAL REGS A...

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