Understanding & Valuing the Medical Practice
My course named above was favorably received in Arizona this past September, with the participants giving me a 4.76 for knowledge and 4.41 for presentation on the 5.0 scale.
My course named above was favorably received in Arizona this past September, with the participants giving me a 4.76 for knowledge and 4.41 for presentation on the 5.0 scale.
I received a question the other day inquiring as to the basis for my statement in the November 2005 Journal of Accountancy that "the IRS says physician compensation in a valuation model should agree with any post-transaction employment contract." I thought my response to that question would assist a lot of other appraisers.
This concept originally appeared in a letter attached to the valuation submitted in connection with the exemption ruling for the Friendly Hills Transaction as described below:
Quote from my book:
“The Friendly Hills HealthCare Foundation was the first ruling by the IRS in favor of tax exemption for an Integrated Delivery System (IDS) involving physician compensation in tax-exempt settings. Certain aspects of the Ruling, including the use of the Discounted Cashflow Method, were later elaborated upon in the 1995 Exempt Organization Continuing Professional Education Technical Instruction Program Textbook. Notably, the value determined in Friendly Hills was based, in part, on an agreed-upon reduction in physician compensation.”
“In fact, the valuation submitted in connection with the Friendly Hills transaction contains a letter signed by the managing partner stating that the partners recognized they were selling a portion of their earnings and that their future incomes would be less by virtue of that sale. In relevant part he states “... It has been clearly stated to the partners that, in the past, their compensation reflected not only the value of their medical services, but also the profits attributable to their ownership of the Network; that the latter element will be replaced by a cash payment, which they can invest ... that the Medical Group’s income will thereafter be derived from arms-length contract for medical services; and that these rates will necessarily be significantly lower than the total historical income they have been receiving ...” (emphasis added). (Friendly Hills Valuation Report)”
See the 1994 Exempt Organization CPE text INTEGRATED DELIVERY SYSTEMS (eotopicn94.pdf) and 1995 Exempt Organization CPE text INTEGRATED DELIVERY SYSTEMS AND JOINT VENTURE DISSOLUTIONS UPDATE (eotopicl95.pdf). Note in particular bottom of page 8 forward in 1994 text and the general discussion of compensation in 1995. You can obtain these at http://www.irs.gov/pub/irs-tege/. These are still cited as recently as 2004.
Fundamentally, why would a hospital buy a practice for a value based upon the physicians receiving X compensation for their future services, when the Employment contract provided they would be paid X+? You would not buy my practice, or I yours, for a $1 million and continue to pay me/you everything it generates, I suspect. For a hospital to do so raises serious inurement and excess benefit issues, and more importantly, Stark and AKS issues.
Imaging remains under attack on all fronts it seems. CMS suggested in the 2008 Proposed Rule that it may limit the applicability of the in-office ancillary services exception and prohibit use of per click mechanisms where physician-lessors of equipment also refer to the facility-lessee; perhaps more significant, so-called "under arrangements" structures would be constrained or eliminated.
Legislation currently in Congress would replace the current single conversion factor with six - with a lower one for imaging! - and pay for the SCHIP expansion with further reductions in imaging reimbursement.
All of these potential changes increase the risk of future cashflow from Medicare-sourced procedures and need to be considered in an appraisal or valuation.
Purchasers of my now sold-out book and those who purchase the updated chapter on valuation methods in Adobe .pdf format have received a free copy of my most recent Report on the Healthcare Economy. Many of the statistical studies cited in that Report are released between June and September each year, and as such the new edition is only now available. It reflects updates from: the Census Bureau's just released report on health insurance, the National Center for Health Statistics reports on Ambulatory Medical Care and Hospital Utilization, MedPAC's 2007 Report to Congress, Physician Utilization and Specialty Distribution, trends in Average Length of Stay, Inpatient Utilization and Cost per Day and Phase 3 of the Stark II regulations, released August 27, 2007. Many of the readers of my book find this helpful in their valuation practice.
Future editions of the Report on the Healthcare Economy will generally be released in November or December after the publication of the final Medicare Physician Fee Schedule Rule by CMS; in February after the publication of the annual National Health Expenditures projections; and again in the Spring. These are currently available for $20 each; prior editions can also be purchased.
Phase 3 of the Stark regulations came out yesterday (thanks to colleague Reed Tinsely for the early heads up). I am still plowing through the 500 or so pages, but the Safe Harbor for physician compensation based on the various compensation surveys is gone. Seems as though CMS received numerous comments from affected parties that the Safe Harbor was not workable - and they agreed! Now we are back to traditional tests of fair market value compensation rather than the artificial Safe Harbor.
http://www.cms.hhs.gov/PhysicianSelfReferral/04a_regphase3.asp#TopOfPage
In the next edition of Financial Valuation and Litigation Expert I will have an article summarizing the changes in ASC payments by Medicare, the Medicare Physician Fee Schedule Proposed Rule and most importantly, CMS' hinted changes in the Stark law regulations, which will likely have significant impact on discount rates and/or cashflow forecasts for the affected sectors.
I am pleased to report that the article I wrote with Ken Patton of Mercer Capital on the Caracci case will be published in an upcoming edition of the AICPA's CPA Expert. Ken and I worked hard to maintain the point-counterpoint structure of the article which takes two different perspectives on the appropriateness of the market approach in valuing single market entities by reference to multi-market public companies, as well as the import of MVIC or right-hand side of the balance sheet approaches to valuation versus left-hand or asset side approaches.
I received notification this week that I have been appointed to the AICPA's Healthcare Expert Panel for the upcoming year. One of this Panel's key tasks is to provide assistance with respect to the Healthcare Industry Audit and Accounting Guide. With the pending expansion of SFAS 141 and 142 to the not for profit sector, valuation issues are likely to be significant for the Healthcare Industry Expert Panel in the coming year.
In the only offering of the year, I will be teaching my all-day course Understanding & Valuing the Medical Practice on September 13, 2007 in Phoenix for the Arizona Society of CPAs.
If you would like to attend but are unable, you can e-mail me about purchasing my course materials along with the current version of the Chapter on valuing medical practices from my book. The book is sold out, but I am working on the third edition and hope to have it available sometime in the Fall of 2008.
A song by the super-group Styx in the 70's lives on in spirit in the valuation world today, both in the market approach and the income approach. During my abbreviated "concert" tour this year in Phoenix (September), Las Vegas (November) and New Orleans (December) I'll be rolling out the shortcomings of market data and the industry risk premium in healthcare.
In another historical crossover between Rock and Valuation, November 2007 is "10 Years After" the Balanced Budget Act of 1997 - and there is clearly no "goin' home." 2007 is also the 10 year anniversary of my 1997 national tour of 24 cities (with Atlanta counted twice). Flying was a lot more fun in those days, and USAir even held the final flite to Boston out of Pittsburgh for me one night at close to 10 PM as I arrived 45 minutes late from Nashville. Yet again, today there would be no "goin' home." I'd be lucky to get a cot on the terminal floor...
