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And on a Lighter Note...

My colleague Kathie Wilson and I are working on an important new paper dealing with the interplay of reasonable compensation and intangible and goodwill value where a medical practice has revenue and profit from the Technical Component of Ancillaries. There are a myriad of reasons why this is important, including differentiating personal and enterprise goodwill in marital dissolution, determining reasonable compensation from MGMA data, and quantifying reasonable compensation when based upon work RVUs. We plan to include a checklist of items to consider as well as common examples including neurology and cardiology practices, the latter being of considerable import in the current wave of physician practice acquisitions.

I am also developing an equally important paper with another colleague on difficulties in, and solutions to, forecasting cashflow and assessing risk (discount rate) in healthcare industry valuation. More on this in a later post.

"Where ignorance is bliss, 'tis folly to be wise"

Attributed to Thomas Gray's poem, Ode on a Distant Prospect of Eton College and written in 1742 (!), the title of this Post seems to be the state of some segments of the Healthcare Industry valuation and appraisal community these days. Discretion being the better part of valor, I'll let it go at that. (paraphrasing Falstaff in Henry The Fourth, Shakespeare)

UMDNJ Retrospective

The current wave of practice acquisitons by hospitals after a hiatus of some 10 years has caused some of us who were witnesses to the last cycle of acquisitions, which ended in the 1990s, to look at the historical lessons learned.

As anyone familiar with hospital admissions knows, orthopedics and cardiology are the two specialties that account for the largest share of hospital admissions. They also tend to be the most proftable as the plethora of for-profit surgical specialty hospitals would suggest. For those readers not familiar with this,  http://www.merritthawkins.com/pdf/2007_Physician_Inpatient_Outpatient_Revenue_Survey.pdf contains the 2007 survey by physician recruiting firm Merritt Hawkins about revenue contribution by specialty. Thus, it is not surprising that the principal acquisition target of many hospitals is cardiolgy practices. Whether it be the Cardiac Intensive Care Unit (CCU), open heart surgery, blood chemistry lab, SPECT, ultrasound, cardiac CT or MR, cardiovascular admissions are the lifeblood of most hospitals.

My BLOG post http://cpanet.typepad.com/cpanet/2006/11/umdnj.html about this time 3 years ago was a result of stories in the trade press including Daily Dose about the Community Cardiology Program established at the University of Medicine and Dentistry in New Jersey when its accreditation for cardiac surgery was threatened due to insufficient surgical volume. The link to the Monitor's Report in that post is no longer valid, the Report can now be found here http://www.umdnj.edu/ethweb/federalmonitor/index.htm. You can follow the links yourself to see what happened, but there were a number of fines and criminal guilty pleas. Also of some interest, as my original BLOG post noted, is the e-mail record that then US Attorney - and now Governor-elect of New Jersey - Chris Christie obtained.

I have long-advised my colleagues in writing, lectures and personally that as a healthcare appraiser you are not a lawyer, but you best have a sufficient understanding of tax exemption, Stark, the AKS, False Claims Act, antitrust and administrative sanctions to enable you to make a reasonable evaluation of the regulatory underpinnings of a proposed acquisition as well as to assess the representations of any legal counsel involved in the acquisition. And, if you feel your personal knowledge base is short, seek your own, independent, legal counsel.

Looking at my Post http://cpanet.typepad.com/cpanet/2009/12/shades-of-future-past-.html earlier this month, it seems that knowingly, or unknowingly, attempting an end run around the longstanding regulatory and, indeed, professional literature on when the replication cost approach is appropriate is not a particularly good idea, at least when it comes to cardiology practices.

IRS Nonprofit Guidelines

The IRS has posted a Guide Sheet for Examining Agents to be used in audits of tax-exempt entities, including hospitals. Of particular note are items 13 and 14 with respect to approval of compensation arrangements.

Payments to existing physician staff members (or physicians already located in the catchment area) such as those based on replication cost of Intangibles in a practice acquisition where the Income Approach shows no value could run the risk of being considered as compensation. Something to think about.

http://www.irs.gov/pub/irs-tege/governance_guide_sheet.pdf

Meanwhile, "back at the ranch," the instructor in Fair Market Value 101 is asking the students: "How many of you would pay $500,000 to replicate a business from which business you could earn no income?" Sampling of answers to follow...

Clarification on Cost Approach

I updated yesterday's post to clarify that the Cost Approach was not appropriate for valuing Intangibles unless there was value under the Income Approach - a reader caught that miss before I could get to it this AM. As to other assets like equipment, value is typically paid based on the fair market value under a Cost Approach rather than the Income Approach. In those cases one needs to look at the premise of value - as part of a going concern, as part of a mass assemblage of assets, etc.

Shades of Future Past ...

...or more accurately, Through the Past Darkly. Other cliches that come to mind: History Repeats Itself and PT Barnum was Right.

Despite a well-established regulatory construct that dates back to the IRS CPE Texts in the early 1990s, using the Cost Approach to value practices for acquisition by hospitals is back in fashion again, primarily by healthcare-appraiser wannabes. Less there be any misunderstanding, unless there is value under the Income Approach as determined from a well-reasoned DCF, use of the Cost Approach to value Intangibles is not appropriate, period. That's a PERIOD. What could be clearer than the Derby case?

Here are prior posts that summarize the Rules

http://cpanet.typepad.com/cpanet/2009/06/ahla-tax-finance-practice-group-member-briefing.html
http://cpanet.typepad.com/cpanet/2009/03/exempt-organization-cpe-text.html
http://cpanet.typepad.com/cpanet/2008/10/derby-et-al-v-commissioner.html
http://cpanet.typepad.com/cpanet/2007/10/post-transactio.html
http://cpanet.typepad.com/cpanet/2006/11/umdnj.html (!)

More on Antitrust For Health Insurers

The following is a link to the American Medical Association study in 2007 on concentration in local health insurance markets - good reading.

http://www.ama-assn.org/ama1/pub/upload/mm/368/compstudy_52006.pdf

National Unemployment Statistics from the Bureau of Labor Statistics

I found the chart below fascinating: the unemployment rate has increased 34% since January of 2009:

2010 Medicare Physician Fee Schedule Final Rule

I will have some observations as I read through the document but meanwhile, here is the link.

http://www.federalregister.gov/OFRUpload/OFRData/2009-26502_PI.pdf

Impact of Antitrust Waiver for Health Insurers

Short post watching the morning talk shows. A Rep of AHIP suggested the antitrust waiver has a small impact on premiums. Doubtful if that is the case, but even if so, the antitrust waiver enables the health insurers to force down prices with providers - and is a major factor in the consolidation of providers looking to offset that negotiating power. More important, the lack of competition in health insurance within individual states has allowed insurers to reduce the amount spent on medical care - the Medical Loss Ratio (MLRs) - and increase the amount spent on administrative costs and allocated to profit. Studying the difference between MLRs of for-profit (most of the for profit industry is consolidated into Wellpoint, United and Aetna) and not for profit health insurers makes this painfully clear.

Upshot? The antitrust waiver has permitted unbridled consolidation amongst insurers, forced provider consolidation which contributes to cost increase, and permitted insurers to maintain their profit margins by simply passing the increases back to consumers. Breaking the cycle and really reigning in costs will require a wholesale reintroduction of competition into local healthcare markets.