CPA.net

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 (!)

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

Fair Market Value and the OIG

There was some discussion of this topic at the Healthcare Conference to be sure. Here is a quote from Advisory Opinion 09-09, footnote 5:

"Our conclusion might be different if the valuation of the respective contributions of the investors included intangible assets. For example, given the circumstances of the Proposed Arrangement, we might be concerned if the valuation were based on a cash flow analysis of the Surgeon ASC as a going concern. Because the Surgeon Investors are referral sources for the Surgeon ASC, a cash flow-based valuation of that business potentially would include the value of the Surgeon Investors’ referrals over the time that their ASC was in existence prior to the merger with the Hospital ASC. The result might be that the Surgeon Investors would receive a greater return on their capital investment than the Hospital, which could reflect the value of their referrals to the Surgeon ASC. (In these circumstances, the Hospital ASC, being newly developed at the time of the proposed merger, may have little or no cash flow record, but we might be similarly concerned with a valuation based on a cash flow analysis of a hospital-owned ASC for which the hospital could influence referrals.) We do not assert that a cash flow-based valuation or other valuation involving intangible assets would necessarily result in a violation of the anti-kickback statute; the existence of a violation depends upon all the facts and circumstances of a particular case."
http://oig.hhs.gov/fraud/docs/advisoryopinions/2009/AdvOpn09-09.pdf

This comment harkens back to the Thornton letters (1992/1993) http://oig.hhs.gov/fraud/docs/safeharborregulations/acquisition110293.htm
http://oig.hhs.gov/fraud/docs/safeharborregulations/acquisition122292.htm 

and Advisory Opinion 07-05
http://oig.hhs.gov/fraud/docs/advisoryopinions/2007/AdvOpn07-05C.pdf,

the latter of which caused considerable consternation.    At issue is that the OIG appears to define "capital invested" as cash and tangible assets rather than the term used in "fair market value" (market value of invested capital) which includes intangible assets. As the quote indicates, intangible assets may be problematic from a AKS standpoint, given all the facts and circumstances.

Thanks to my colleague Tim Smith for elucidating my thinking on this.

Healthcarebv.com

Nearly 3 years ago, I indicated on this BLOG that I was hoping to launch the above website with a select group of my colleagues who specialize in Healthcare Industry Valuation. (Fanfare)  Took a little longer than we planned, but here it is: www.healthcarebv.com. And thanks to my old friend Reed Tinsley, who announced it first on his BLOG and in his e-newsletter.  www.rtacpa.com

2010 MPFS Proposed Rule: Practice Expenses RVUs

These proposed changes are pretty astounding and I wonder whether the intense lobbying by specialty societies before the release of the Final Rule in early November will leave them in place. There are truly dramatic reductions in the Practice Expense component for specialties including Cardiology, Interventional Radiology, Radiation Oncology, Radiology and Nuclear Medicine. Because RVU changes are required to be revenue neutral, these decreases are offset by not quite as dramatic increases for Ophthalmology, Optometry, Family Medicine, Internal Medicine and (surprise) Physical Therapy.

The data-file in the link below was exported to excel from the Proposed Rule using Adobe and then converted to pdf. I've highlighted the larger increases in yellow and the decreases in red.

Download Highlight 2010 MPFS Proposed Rule RVU Changes_0709