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Gas Stations, Accounting Firms and Medical Practices

I continue to encounter resistance to the idea that a coding analysis is necessary to value a physician practice when you can get the data; codes indicate not only the source of revenue in the practice, e.g., office encounters versus tests, but also the character of services being provided and the underlying illness of the patient base.  A subspecialist who relies on referrals and therefore the consult codes for his or her income is in a very different position than a primary care physician who relies on codes 99212, 99213 and 99214 for his or her income.  Incorrect use of a higher level code can dramatically overstate the revenue in the practice while a lower level code can understate the revenue. Further, a Payor Analysis is necessary to see how much revenue comes from Medicare, Blue Cross, Medicaid and so on, and how much of each of those revenue sources is actually collected.

I recently analogized this to trying to value a gas station without knowing how much of the sales were for gas, how much for candy, soda, sandwiches and/or groceries, and how much for renting space to the Dunkin Donuts!  Similarly, I have never heard anyone suggest that you can value an accounting practice without knowing how much revenue came from accounting, bookkeeping, tax and consulting - and what the billing rates were for each staff member providing services in those areas and what portion of the billing was realized in cash collections!

Nuff said.

2008 National Conference Presentations

I will be speaking at the AICPA National Healthcare Industry Conference in September as well as at the AICPA/ASA National Business Valuation Conference in November.

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Accounting/IndustryspecificGuidance/HealthCare/PRDOVR~PC-CARE/PC-CARE.jsp

The National Healthcare Industry Conference is in San Diego this year and features a number of sessions devoted to valuation.  I will be particpating in a 4 hour pre-Conference session on FASB valuation issues with, among others, Jim Rigby, ABV, ASA one of the original contributors to FASB on Intangible Asset Impairment.  I will be sharing a session with Carol Carden, CPA/ABV, ASA on current issues in healthcare valuation as well as doing a Current Issues Confronting Physician Practice session with my colleague Reed Tinsley, CPA, CVA and several other experts. This marks my fifth consecutive invitation.

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/BusinessValuationandLitigationServices/Engagements/PRDOVR~PC-BVAL08/PC-BVAL08.jsp

Don Barbo, CPA/ABV and I will again share a microphone at the joint AICPA/ASA National Business Valuation Conference in Las Vegas in November.  Testifying to the heightened importance of healthcare valuation, Don and I have been granted two back to back sessions to cover a broad spectrum of industry issues, including subsectors, revenue trends and market-specific factors.

This will be the seventh time since 1999 that I have been privileged to speak at this Conference on healthcare valuation.

MedPAC's 2008 Report

I have been reviewing the Physician chapter of MedPAC's newly released Report to Congress http://www.medpac.gov/documents/Mar08_EntireReport.pdf.  There are a number of significant findings and recommendations, notably - again - aimed at the excessive growth in imaging. The growth rate in High Tech Imaging (MR, CT) has slowed considerably in the 2005 to 2006 year compared to prior years, particularly Brain MR. Importantly, MedPAC attributes this slowing to the actions taken by Congress aimed at same, such as the DRA.

An analysis of the Report and its recommendations for imaging give considerable insight into what future legislation might look like and MedPAC has an excellent batting average when it comes to getting its recommendations adopted.  Page 96 reminds one of the fact that the practice expense component of imaging will decline (by a total of 9%) thru 2010.  More significantly, MedPAC is now suggesting that the 50% utilization assumption for physician-based equipment be increased - a provision that was in one version of last year's SCHIP legislation - which would have a dramatic downward effect on technical component revenue. A short example helps illustrate the dramatic effect this provision could have.

For MR, the technical component represents about 80% of the global fee. That technical component assumes that the equipment is being used 50% of the time.  Last year's failed SCHIP legislation would have raised that 50% to 75%. Assume the fixed costs of an MR are $300,000 per year and expected volume at 50% is 1000 cases; this nets a reimbursement of $300 per case. If the volume assumption is raised to 75%, the expected cases are 1500 which nets a reimbursement of $200 per case, a drop of 33%!

Next, the Table at the top of page 100 and the recommendation immediately below it are what drive reimbursement decisions and therefore potential future cashflow growth rates. Bottom line is that the indicated 2.6% estimated increase in costs leads to a 1.1% increase in fees because of increased utilization; thus, increased utilization is offset by decreased fees because technical component costs are recovered over a higher volume - that is what also underlies the recommended change in the utilization assumption for physician-based equipment.

Finally, what might be considered an obscure observation if one was not familiar with MedPAC's successful track record also appears on page 97. Here, there is a suggestion that those portions (equipment and supplies!) of the practice expense component which do not vary geographically be dropped from the geographic adjustment! This could lead to considerable cuts in high cost areas such as Florida, New York, Boston, San Francisco and the like.