CPA.net

Second Edition of the Guide to Healthcare Valuation

AHLA/BVR’s Guide to Healthcare Valuation is now available. The Guide, edited by Mark Dietrich, is co-published by the American Health Lawyers Association and Business Valuation Resources. http://cpa.net/?page_id=427

Healthcare Reform Seminars, June 4 and 10, 2010

I'll be leading a 4 hour seminar on the Healthcare Reform legislation, sponsored by the Mass Society of CPAs, on June 4. For location and registration information, visit www.mscpaonline.org.  This post contains links to various sources of additional information that attendees or others may find interesting.

After spending something north of 40 hours in the past several weeks studying the legislation and learned commentaries thereon, coupled with north of 30 years working in the industry, I feel ready for this undertaking.(!)

My BLOG Posts on Reform before the legislation passed are located here
http://cpanet.typepad.com/cpanet/healthcare-reform/#tp
On Medicare Advantage
http://cpanet.typepad.com/cpanet/2009/09/a-closer-look-at-medicare-advantage.html
On self-insuring employers - a MUST read!
http://cpanet.typepad.com/cpanet/2009/07/self-insurance-vs-health-insurance.html

Additional Sources of Information:

CBO letter to Congressman Lewis stating that "discretionary" costs in the range of $115 billion necessary to administer the Reform legislation were not included in the scoring of the legislation. This will increase the deficit and eliminate any claimed reduction in same.
http://www.cbo.gov/ftpdocs/114xx/doc11490/LewisLtr_HR3590.pdf

American Medical Association study of insurer market concentration http://www.ama-assn.org/amednews/2010/03/08/bil20308.htm, http://www.southernstudies.org/AMA%202007.pdf

Centers for Medicare and Medicaid 2009 Statistics containing detaled infromation about Medicare recipients, physicians, etc.
http://www.cms.gov/ResearchGenInfo/02_CMSStatistics.asp

Barclays Capital Managed Care Industry Analyst Joshua Raskin, one of most insightful individuals on Health Insurance and Medicare Advantage. Reports are available through brokerages such as Fidelity.

Health Affairs podcast of a webinar they did with four former CMS officials, including Bruce Vladek, Tom Scully and Gail Walensky, on CMS and Reform
http://www.healthaffairs.org/issue_briefings/2010_04_09_cms/2010_04_09_cms.php

FTC/DOJ July 2004 White Paper on Anti-Trust issues in the Healthcare Industry.
http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf

Tax Foundation Analysis: Health Care Reform: How Much Does It Redistribute Income?
http://www.taxfoundation.org/files/ff222.pdf

Law Firm Sonnenschein Summary, with an excellent topical summary of affected areas.
http://www.sonnenschein.com/docs/Health_Care_Reform_Side-by-Side.pdf

Kaiser Family Foundation on Reform, perhaps the best summaries of all non-tax aspects of the legislation.
http://healthreform.kff.org/ (generally)
The Best Summary!
http://www.kff.org/healthreform/upload/8061.pdf

Kaiser Family Foundation Subsidy Calculator where you can determine the government subsidy to individuals to purchase insurance
http://healthreform.kff.org/Subsidycalculator.aspx

Kaiser Family/Alliance for Health Reform Podcast on Private Insurance Changes, a superbly done summary of what the insurance reforms really mean.
http://www.kff.org/healthreform/ahr043010video.cfm

Controlling Health Care Spending in Massachusetts: An Analysis of Options
http://www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/09/control_health_care_spending_rand_08-07-09.pdf

Benefits firm Hewitt Associates' announcement of the results of their survey of companies taking advantage of a $5 billion Early Retiree Reinsurance Program in the Reform legislation to pay the cost of early retirees age 55-64.
http://www.hewittassociates.com/Intl/NA/en-US/AboutHewitt/Newsroom/PressReleaseDetail.aspx?cid=8475

Extract of the Reform legislation on the 10% Primary Care Bonus to be paid by Medicare for the 5 years 2011-2015 on defined E&M codes (99201-99215,99304-99340,99341-99340) and other related extracts.
http://www.stfm.org/Sec%205501-%20Primary%20Care%20Bonus%20Payment1.doc
http://www.stfm.org/advocacy/issues/reform.cfm

Discussion of the temporary increase in Primary Care payments for Medicaid patients to Medicare rates in 2013 and 2014.
http://www.kaiserhealthnews.org/Stories/2010/April/06/Medicaid-Expansion-And-Payment-Increase-Causes-Mixed-Feelings-For-MDs.aspx

New Book: Guide to Valuing Medical Practices!

Business Valuation Resources will be publishing a new book Guide to Valuing Physician Practices containing principal contributions by me along with several other authors on valuing medical practices, including a detailed look at various analytical approaches to such factors as CPT codes, RVUs, Technical Component Revenue and MGMA data. Here is the link

http://www.bvresources.com/physicianvaluation

The Market Approach and Market Data

I had several discussions today concerning alternatives to the Income Approach when valuing medical practices for sale to a hospital. At the risk of repeating myself, the hypothetical investor of the fair market value standard is interested in income returns; is risk adverse (see any text book discussion of the CAPM and diversification); views normalization adjustments cautiously, and does not anticipate synergistic opportunities from the investment, e.g., a lower cost of capital than the target entity on a stand alone basis, revenue to the acquirer over and above that available to the target on a stand alone basis, etc. Synergistic expectations are a feature of Strategic Value, not Fair Market Value. As such, they are not consistent with appraisal for the healthcare industry where Stark, the AKS, or tax exemption issues are present.

One issue that sometimes presents itself in an appraisal is the relevance of the Market Approach. My article Healthcare Market Structure And Its Implication For Valuation Of Privately Held Provider Entities: An Empirical Analysis appeared in the Summer 2008 Edition of Business Valuation Review and addresses many of the peculiar issues that exist with this Approach in the Healthcare Industry. In order to use "comparable" transactions in a regulated healthcare valuation, the appraiser must be cognizant of the underlying motivations of the parties who engaged in the reported transaction. If the value of past, present or future referrals were considered in the determination of the transaction price, the data would be "tainted" and not an appropriate source of a multiple, of course. For transactions that are not fully reported - which is just about all of them - there is insufficient data from which the appraiser can assess the motivations of the transacting parties. Furthermore, as I have said many times, "The Plural of Anecdote is not Data." Finally, there is a substantive question as to whether "market" data available only to a restricted audience is appropriate for use in a fair market value appraisal. "Market" data contemplates hypothetical buyers and sellers who have reasonable access to relevant facts. Confidential data is not consistent with that requirement.

"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)

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.

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.

National Health Insurance in the UK and CNN

Let me say that I enjoy Lou Dobbs and his independent streak, even if I do not agree with him. However, the Report on the UK health system tonight contained critical errors that need to be corrected.  First off, the Reporter (Kitty Pilgrim)  from the UK made the clearly incorrect statement that all health costs were paid for by the government :"All health services are publicly funded by the National Health Service, funded by taxes." This is wrong. As my May 25, 2009 post on this BLOG indicated, I lectured in the UK earlier that month about private health insurance and its impact on physicians. There is a rapidly growing private health insurance market in the UK because of the shortcomings of the National Health Service. On top of that, and sorely lacking from the CNN Report, there are a large number of PRIVATE hospitals, many of them operated by the American healthcare company HCA - which has the largest share of the private hospital market in London!

When the segment shifted back to the studio the Reporter (Kitty Pilgrim) indicated that if you purchase private health insurance, you have to opt out of the NHS:"Some in the U.K. have decided to opt out of the national health system and pay for private medical coverage. It is available. But anyone taking on private medical care has to opt out of the national health system, so a telling point is in the last decade some British companies are actually offering private health care as a recruitment perk for their employees..." - WRONG! My understanding is that the majority of the private health insurance policies actually INTERFACE with the NHS, in a manner not dissimilar to the way Medicare Supplemental Insurance interfaces with Medicare. For example, you may have to wait 6 weeks before claiming benefits under a private policy in order to see if you can get the same treatment from NHS.

The CNN Report also mentioned that France had one of the highest levels of private insurance after the US. Not surprisingly, the French Insurance Company AXA has the 2d largest share of the UK Private Health Insurance Market. After all, France is merely a Chunnel-ride across the Channel. Don't take my word for it, check it out for yourself. www.axappphealthcare.co.uk

The other major private insurer is BUPA www.bupa.co.uk/.

Healthcare Reform: Different Costs for Different Places

I have been watching some of the “talking heads” from both political parties waxing philosophical about Healthcare Reform.  On Sunday’s programs, there seemed to be a competition between “Medicare for All” (MFA (or Museum of Fine Arts?)) as seen at http://www.youtube.com/watch?v=f3BS4C9el98) and something I’ll call “Multi-State Health Insurance” (MUSHI or MUSH, for short) where federal law would trump state licensing of insurers operating within their borders.

Let’s dispense with Medicare for All (MFA).  Readers of this BLOG will be familiar with Medicare as it is followed and reported on closely.  Medicare Part A, which covers Hospital, Skilled Nursing Facilities (SNFs or Sniffs) and various other costs, is supposedly paid for out of the 2.90% payroll tax (charged on ALL payroll, irrespective of earnings), one-half of which is paid by the employer and one-half by the employee.  These taxes go into a “Trust Fund”, which will be bankrupt by 2019 according to the Trustees 2009 Report (http://www.cms.hhs.gov/ReportsTrustFunds/) (it has long been actuarially bankrupt, much like the Retirement Plans of many “old economy” employers and airlines).  Medicare Part B, which pays for Physicians Services, Outpatient Services etc. is in large part funded out of general tax revenues!  You can see what is covered by Part A and Part B at

http://www.medicare.gov/Library/PDFNavigation/PDFInterim.asp?Language=English&Type=Pub&PubID=10116.

More importantly from the standpoint of the insured or Medicare Beneficiary, the co-insurance, co-pays and deductibles work like this: For Part A, Beneficiaries generally pay no monthly premium since the costs are to be paid from the (bankrupt) Trust Fund.  The Deductible charged to the Beneficiary during the first 60 days of Hospitalization is $1,068; after 60 days and until 90 days it is $267 per day; after 90 days it is $534 per day.  For Skilled Nursing Facilities the Coinsurance is $133.50 per day for days 21 through 100 of each benefit period.

http://www.mymedicaresupplementinsurance.com/2009_Medicare_Deductibles_Copays.html. 

For “standard” beneficiaries, Part B insurance costs $96.40 per month; it can be as much as $308.30 if the Beneficiary is filing a joint return with more than $426,000 of Income.  The costs in excess of the premium paid by Beneficiaries are paid from general tax revenues of the U.S. Treasury, or more accurately, by adding to the Deficit.  The Part B deductible payable by each Beneficiary is $135.  The co-insurance, however, is 20% of ALL Medicare Allowed Charges and there is no ceiling on this co-pay.  There are also significant limitations on outpatient therapies (e.g., physical therapy) as well, for example.

http://www.cms.hhs.gov/apps/media/press/factsheet.asp?Counter=3272

 

It is not clear to me how attractive Medicare-style coverage would be to many employees of larger companies.  I would encourage you to express your view to your Congress-folk.  Speaking for myself, Medicare would be very unattractive as a coverage without Medicare Supplemental Insurance, which many Medicare beneficiaries pay a significant monthly premium for.

Onto MUSH. Speaking for myself, I would truly like to believe that if I lived in New York City I could buy health insurance at the same rate as folks living in rural Pennsylvania if only the licensing of insurance companies was a Federal Right and not a State Right, as one Congressman suggested Sunday.  Constitutional limitations notwithstanding, I am disinclined to believe that residents of one of NYC’s Five Boroughs could buy Health Insurance at, say, Kutztown, PA rates, irrespective of insurance company licensing.  It costs a lot more to live in Manhattan than Kutztown. Rent is higher, food is higher, wages are higher, and I recall that utilization of healthcare services is much higher.  Therefore, the cost for a given diagnosis is much higher in NYC than in Kutztown.  And, lo and behold, the cost of insurance reflects the higher costs (Duh).  This is easily borne out by Medicare data (See my article Healthcare Market Structure and Its Implication for Valuation of Privately Held Provider Entities: An Empirical Analysis, Business Valuation Review, Volume 27, Number 2 (Summer 2008) where Kings County (Brooklyn), New York County (Manhattan), and Nassau County (part of Long Island) are among the 20 most expensive counties for healthcare costs in the nation.  Or, you can read about different market areas in a report by the Government Accountability Office (GAO) at http://www.gao.gov/products/GAO-08-880.)

A quick and easy means of comparing cost differences is to look at Medicare Advantage rates by County.The 2009 Monthly Medicare Advantage rate for residents of Kutztown,which is part of Berks County,is $802.  For a resident of New York, it is $1,127, which is 25% higher.  This is not a perfect comparison as there are limitations built into the Advantage rates which would tend to understate New York cost in my experience.  Medicare has a different benefit structure than commercial or HMO polices for the non-Medicare population – and those policies have numerous benefit structures themselves!  If you have looked at the breakdown of insurance companies in a doctor’s medical billing system, you will often see dozens of different categories from the same insurance company reflecting different policies/benefits or the ASO policies described in the previous post below.

Upshot? Health insurance premiums are less in Pennsylvania because the cost of healthcare services is less.  Changing insurance laws is not going to change that, even in the long-term – unless local economies collapse and cost of living differentials disappear.

Bottom line is that you should not hire an actor to repair a fighter plane, even if he/she played a mechanic on TV or flew first class to LA.  You can fill empty space with noise, but the empty space will still be devoid of thought.

Other BLOG posts dealing with Healthcare Market structure implications are at http://cpanet.typepad.com/cpanet/market_approach/.

Self Insurance vs Health Insurance

I have been more than a little perplexed as the debate rages on Healthcare Reform.  There has been a lot of talk aimed at small business claiming that their rates will go down as they get combined purchasing power like the big employers.  No one seems to mention that large employers do not, in fact, buy health insurance: they self-insure.  Large employers utilize health insurance companies for their Provider Networks and claims processing but are responsible directly for the dollar amount of those claims, subject to purchase of Stop Loss insurance for catastrophic losses on individual employees. This line of business is known as "ASO" (Administrative Services Only) in the trade. 

The ability to self-insure depends upon what is commonly referred to as the "law of large numbers."  Populations oft-times (not always!) follow a statistical Normal Distribution that results in a "Bell Curve" of characteristics.  In a large group of insureds, one would expect the center of the Curve to contain the greatest number of individuals whose claims experience or medical costs would cluster around a value known as the median or midpoint in the distribution.  At the extreme ends of the curve would be very low cost individuals (left side) and high cost individuals (right side).  It is the high cost individuals whose added expenditures are insured with Stop Loss insurance (also called Re-insurance.)  The Stop Loss level could be $100,000, $250,000 or whatever number is actuarially or statistically viable, subject to the employing entity’s willingness to assume or not assume risk.  An analogy elsewhere in insurance is so-called Umbrella Liability insurance.

It is hard to believe that Healthcare Reform would outlaw Self Insuring and effectively require large employers to share risk with small employers – and one can be certain that large employers would set their PACs into high gear to prevent that.  Although I have not studied this particular issue in recent years, from prior consulting work in this area, I know that small employers do not have the same statistical distribution as large employers, even if a number of small employers are combined.  Thus, the Normal Distribution or Bell Curve with its related cost per employee does not look the same – costs are higher.  Similarly, the distribution of costs for a high tech company with many young employees tends to be different and lower than a manufacturing concern.  The employees of different sized employers and employers in different industries have very different healthcare cost characteristics.  The Chapter I wrote and annually update for Thompson (PPC’s) Guide to Healthcare Consulting discusses the implications of these Cost Distributions.

Another perplexing claim is that as millions of uninsured come into the healthcare system, costs will go down.  I must be missing something here as it seems to be saying that if you allow 100 extra people to eat dinner, it will cost less.  In the latter example, the only way dinner could even cost the same would be if everyone already at the Table ate less and new diners partook in their reduced intake.  How dinner for an extra 100 would cost less than dinner without that extra 100 is math I have not learned and therefore cannot posit a theory.