Fundamentals of Healthcare ValuationOctober 21, 2015Carol Carden, CPA/ABV, ASA, CFE

Agenda* Healthcare Industry OverviewHealthcare Valuation ApproachesHealthcare Valuation Considerations and Trends

HEALTHCARE INDUSTRY OVERVIEW

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Understanding the Context*

What makes a healthcare valuation different than any other company?Highly regulated environmentLess access to market dataSignificant fluctuation in trends between years constantly changing and evolvingComplex interplay between patients, providers, insurers and the government can be tricky to get your arms around

Regulatory Environment*

Fair Market Value*

FMV vs. Commercial Reasonableness*

Commercial Reasonableness*Department of Health and Human Services Definition1An 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 Definition2An 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 3Compensation arrangements with physicians should be reasonable and necessary.

1 63 Fed. Reg. 1700 (Jan. 9, 1998).2 69 Fed. Reg. 16093 (March 26, 2004).3OIG 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).

Factors in Determining CR*

HEALTHCARE VALUATION APPROACHES

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Asset Approach in Healthcare*

Economics of a Physician Practice*

Income Approach for Healthcare*

Projecting Cash Flows*

Projecting Cash Flows*

Projecting Cash Flows*

Projecting Cash Flows*

Projecting Cash Flows*

Which Method is Appropriate?*

Market Approach for Healthcare*

Illustration of Market Approach*

Common Approaches*Common Approaches(based on our experience and in order of preference)

AssetIncomeMarketPhysician Practice++ (if there are ancillary services or significant physician extenders)-Hospital+++Imaging Center++ maybeDialysis Clinic+++Cancer Center++maybeHospital/Physician Joint Venture-+-

HEALTHCARE VALUATION CONSIDERATIONS AND TRENDS

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Largest Trends inMerger & Acquisition Activity*

Buy and Employ Transactions*

Buy and Employ Transactions*

Compensation and Regulatory Issues*Post-transaction compensation structure factors in to the practice valuation

Health systems cannot pay for a revenue stream twice once with the purchase and then on-going in the physician compensation planFair market value and commercial reasonableness must also be considered with regard to physician compensation

RECENT REFORM INITIATIVES

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Key Healthcare Reform Provisions*

Key Healthcare Reform Provisions*

Key Healthcare Reform Provisions*

Hospital Readmission Penalties*

Physician Value Modifier 2017 Quality Tiering*Based on 2015 Performance

Low QualityAverage QualityHigh QualityLow Cost0.0%+2.0x*+4.0x*Average Cost-2.0%0.0%+2.0x*High Cost-4.0%-2.0%0.0%*Eligible for an additional +1.0x if reporting clinical data for quality measures and average beneficiary risk score in the top 25% of all beneficiary risk scores.

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Contact Information*Carol Carden, CPA/ABV, ASA, CFEPrincipal(865) 673-0844 ext. 213

ccarden@pyapc.comhttp://twitter.com/carolcardenpya