CPA.net

More Thoughts on BRMC

I have spent considerable time now studying the case (see post of 11/16). As those of us trained in tax law learn, court decisions are case-fact specific. Without seeing the valuation report cited in the decision, it is not possible to know precisely what was done, but it seems clear that in the Court's view, factors cited in the report were consistent with the purchase of referrals, e.g., ""These statements, however, do not counter the record evidence that the analysis in the [CPA Valuation] Report was "based on the assumption that the Physicians would likely refer this business to the Hospital" and that Mr. Leonhardt‘s summary presentation showed an expected profit for BRMC from entering into the lease agreement that was based on receiving business from V&S." This suggests - although again we cannot be certain - that the valuation had as an underlying assumption that all the Nuclear Scans done in the physicians' office would be referred post-transaction to the acquiring hospital. If so, this suggests to me strategic value. Given the requirement of the Stark regulations defining the modifications to fair market value, a compliant Fair Market Value analysis would have considered the risk of the Hospital (and other potential competitors) not receiving all of the referrals, to wit: 420 CFR 411.351 states “Fair market value means the value in arm’s-length transactions consistent with general market value. ‘General market value’ means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party; [emphasis added] And from Stark II-Phase 2: "“Moreover, the definition of ‘‘fair market value’’ in the statute and regulation is qualified in ways that do not necessarily comport with the usage of the term in standard valuation techniques and methodologies. For example, the methodology must exclude valuations where the parties to the transactions are at arm’s length but in a position to refer to one another. In addition, the definition itself differs depending on the type of transaction: leases or rentals of space and equipment cannot take into account the intended use of the rented item; and in cases where the lessor is in a position to refer to the lessee, the valuation cannot be adjusted or reflect the value of proximity or convenience to the lessor." [emphasis added] Thus the cashflow analysis and the discount rate developed in connection with such a valuation would have to reflect something other than the actual relationship between purchaser and seller. The Court clearly believed that the actual relationship was the basis for the valuation. And, it is not clear from the Court's opinion that the clear modifications to "fair market value" spelled out in the above two quotes from the Stark Regulations were taken into account. The OIG's office has long expressed concern with the sale of ancillary DHS owned by physicians to a Hospital or other buyer when the DHS will remain in the selling physician's office and continue to be used by the physicians. Although it involved a surgery center, similar issues in the OIG's perspective can be seen in Advisory Opinion No. 07-05. As I (http://cpa.net/?p=245) and other observers noted at the time, this Advisory seemed to misconstrue fair market value, while emphasizing the focus on referrals. http://oig.hhs.gov/fraud/docs/advisoryopinions/2007/AdvOpn07-05C.pdf

US v BRADFORD REGIONAL MEDICAL CENTER et al

In this newly released case involving a whistleblower on whose behalf the government had intervened, both parties moved for Summary Judgment. The case involved the sublease of a Nuclear Camera by two physicians on the BRMC staff who were threatened with loss of provileges for competing with BRMC in the provision of Nuclear Medicine scans. More importantly, a Valuation of a "noncompete" prepared by a CPA appears to be at the center of the case. "Before entering into a final sublease, BRMC had a "fair market value" assessment prepared by an accountant, REDACTED. (Leonhardt Dep. at 54; BRMC 30(b)(6) Dep. at 146-148.) BRMC sought this report to determine whether BRMC was paying fair market value under the proposed sublease arrangement. (Leonhardt Dep. at 54-55; BRMC 30(b)(6) Dep. at 148-149.) In September 2003, the Board of BRMC received Mr. REDACTED‘s report . The report concluded that the amounts to be paid pursuant to the proposed sublease were reasonable. (BRMC 30(b)(6) Dep. Appx., at 146-149.)" "In performing his fair market value analysis, Mr. REDACTED compared the revenues BRMC expected to generate with the sublease in place to the revenues BRMC expected to receive without the sublease in place. (Report of REDACTED, C.P.A.; Leonhardt Dep. at 55-56.) The projections were based on the expectation that V&S would refer such business to the hospital if the sublease arrangement was approved. (Id.) According to Defendants, the basis of Mr. REDACTED‘s report was what benefits BRMC would have lost had it terminated the medical staff appointment and clinical privileges of Drs. Vaccaro and Saleh pursuant to BRMC‘s Policy. BRMC advised Drs. Vaccaro and Saleh that its valuation expert indicated that he could support the fair market value of the Sublease, however neither Vaccaro nor Saleh received or reviewed a copy of Mr. REDACTED‘s written valuation." The decision is 69 pages long and well worth reading. In denying both parties cross-motions for Summary Judgment the Court concluded "Again, the record evidence is not strongly in favor of Defendants [BRMC et al] as it tends to show that Defendants entered into the Equipment Sublease fully aware that the arrangement, which had at its core a non-compete payment roughly equal to the referral business BRMC would gain from the doctors and the business V&S would lose from abandoning its own camera, may not be permitted under the Stark Act and Anti-Kickback Act. However, we are unable to conclude as a matter of law that Defendants acted ?knowingly? for purposes of the False Claims Act." "For the foregoing reasons, we will deny Defendants' motions for summary judgment, and grant in part, and deny in part, Relators' motion for summary judgment." http://docs.justia.com/cases/federal/district-courts/pennsylvania/pawdce/1:2004cv00186/3406/145/

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

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

Articles and such

My article with longtime colleague and collaborator Kathie Wilson on Understanding and Using the Technical and Professional Component of Ancillary Revenue will be published in the April Edition of Business Valuation Update. I am also pleased to report that another article I wrote, Why Transaction Structure Affects Value and Other Nuances of Valuing Medical Practices, will be published in the Spring edition of CPA Expert. Both pieces address issues I will also discuss in the March 16 seminar for VPS.

Thought for the Day: Always stand upwind of the fan.

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.

Section 337(d)

I am working on a paper that will include significant information about the implications of the above when valuing a corporate entity for a stock acquisition by a tax-exempt.

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.