CPA.net

Seminar Reminder

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.

The Grand Illusion!

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...

2008 ASC Final Rule

CMS published the Final Rule for the new Ambulatory Surgery Center payment system pegged to the Hospital OPPS rates, using a factor of 67% versus the 62% contained in the 2006 Proposed Rule.  Although the payments will be somewhat better than originally thought, the 5% spread is not indicative of the true difference because certain required adjustments have not yet been made.  One big winner in the Final Rule was the payment for cataract surgery, which was set at 8% higher than in the proposed rule and nearly 4% higher than the present payment.

Despite being pegged at the outset to OPPS rates, future increases in ASC rates will be based on the CPI for Urban Consumers while OPPS rate increases are based upon a separate "market basket" of cost inputs for hospital outpatient departments.  The market basket is usually higher than the CPI.

The new rates were supposed to be implemented using a 50-50 split with the old rates in 2008 and full implementation in 2009.  The Final Rule changed this to a 4-year phase-in using a 25-75, 50-50, 75-25 schedule.  Thus, those procedures who would lose under the new payments will lose less and those who would benefit will benefit less.

2008 Proposed Rule for Medicare Physician Fee Schedule

In July, CMS published the 2008 Proposed Rule for the Medicare Physician Fee Schedule reflecting a -9.9% negative update in the Conversion Factor, which would result in a value of $34.15 versus the $37.90 that has been in place for the last three years.  One of the surprises was that anesthesia received a 14% increase in relative value primarily due to a reevaluation of work RVUs.  Because of the budget neutrality requirements of the RVUs, this results in decreases in the RVUs for most of the other service areas paid thru the Conversion Factor.  Thus, most specialties will see a decrease in per unit reimbursement of greater than 10% unless Congress acts yet again to eliminate the cut.

Caracci

There will be a delay in publishing this article - when I know more, I will post it.

Delaware Open, Caracci

My article on the Delaware Open MRI case came out yesterday in Business Valuation Review. The article I wrote with Ken Patton of Mercer Capital on the Caracci case will be in the September edition of Valuation Strategies. I was blessed with excellent editorial comments on both pieces and I believe they are well worth the read. I will be addressing the topic matter of both articles in my appearances at the Arizona Society BV Conference this September and the AICPA Healthcare Conference in November and Business Valuation Conference in December.

OIG Advisory Opinion No. 07-05

Opinion No. 07-05 involves the sale of a 40% interest at fair market value in an existing ASC by certain physicians to a tax-exempt hospital.  The fact pattern includes 94% of the interest owned by orthopedic surgeons and 6% by gastroenterologists and anesthesiologists.  The subject 40% interest is owned by the orthopods; the sale proceeds would not be invested in the ASC entity itself but would go directly to the orthopods. 

The OIG concluded that the proposed transaction raised issues under the AKS since not all the physicians were selling interests and more importantly, “the return on the investment would not be directly proportional to the amount of the capital invested by each investor. The amounts payable to the investors would be proportional to their ownership interest in the Company; however, because the Hospital would pay more per ownership unit than the Orthopedic Surgeons paid, the Orthopedic Surgeons would receive a higher rate of return on their remaining shares than the Hospital would receive on its newly-purchased shares.”

On the surface, this Advisory raises serious concerns about sales of interests in ASCs (and just about anything else regulated by the AKS for that matter) since the OIG’s conclusion is that the transaction poses a risk under the AKS.  Particularly problematic from a valuation standpoint is the OIG’s failure to recognize one of the fundamental tenets of Fair Market Value: namely, that the cash proceeds of the sale are exactly equal to the present value of the future returns on the underlying investment.  Therefore, the premise for the OIG’s adverse conclusion that “the Orthopedic Surgeons would receive a higher rate of return on their remaining shares than the Hospital” for the OIG’s adverse conclusion” is entirely false.  ‘Return’ is based upon the fair market value TODAY of the underlying shares which is exactly what the Opinion states the hospital is paying and the orthopods are receiving.  ‘Return’ includes both cash distributions and appreciation.  The orthopods are receiving cash for the appreciation to date and foregoing future cash distributions on the portion sold.

 

One can only hope that something more was in the submitted documentation from those requesting the ruling that gave the OIG cause for concern.

Enterprise and Personal Goodwill

In preparing for my recent course on the topic of this post, I came across a Technical Advice Memorandum from the IRS - 200244009 - dealing with a Physician Practice Management Company Transaction that cited Martin Ice Cream as the basis for part of the decision - which was highly favorable to the taxpayer. Well worth the read if you happen to be structuring such a transaction, or in any event if you have an interest in the area.

In connection with an upcoming piece (TBA)  I have also been giving some thought to the implications of the 8th Circuit's decision in Exacto Spring on reasonable compensation under an independent investor test. At least for medical practices, service businesses in general and many small businesses, reasonable compensation is the key factor in determining the value of the business. The difference between personal and enterprise goodwill should be a key factor in reasonable compensation; it is also a key factor (Martin Ice Cream and Norwalk) in allocating sale proceeds. An Exacto Spring reasonable comp analysis should also consider who owns the underlying goodwill - the corporation or the key employee.

Inaugural Presentation of Valuing Goodwill Course

My first presentation of the 8 CPE hour version of my course on valuing goodwill and noncompete agreements was favorably received, with participants giving me a 4.8 score for knowledge on the 5.0 scale.

Cash Equivalence

In my previous post, I raised the problem with determining the cash-equivalence required by the definition of "fair market value" when using "deal-based" market data. Besides the database that bears his name, Dr. Shannon Pratt (and his co-authors) devotes a chapter (#27) in Valuing Small Businesses and Professional Practices to the topic. Of particular interest is the comment regarding personal guarantees on page 494 (suggesting an interest rate premium over bank lending rate of 3% where there is no personal guaranty) and the example on page 500 dealing with contingent buyout payments. In that example, the cash-equivalent price is 55% of the deal price.

Nuff said.