Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician...

Prepared for 2014 AHLA Transactions Conference

April 10 – 11, 2014

2014 AHLA Transactions Conference

April 10 – 11, 2014

Carol W. Carden, CPA/ABV, ASA, CFE

Charlene L. McGinty, Esq.

Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When

Acquiring a Physician Practice


April 10 – 11, 2014

Agenda

Transaction Structure

Treatment of Ancillary Service Lines

FMV -- What Assets Are You Buying

FMV -- Compensation Stacking Issues

Antitrust Considerations

Planning for On-Boarding

Post-transaction Compensation

Post-acquisition Losses and Commercial Reasonableness

Compensation Issues Upon Renewal

Enhancing Other Health Reform Initiatives


April 10 – 11, 2014

1. Transaction Structure

• Choices: merger, asset sale, stock/membership interest purchase.

• Asset sales are much more common.

• Asset sales can have significant income tax implications:

– Personal goodwill vs. corporate goodwill.

• Non-asset sale transactions can have significant risk management implications:

– Requires much more extensive due diligence.


April 10 – 11, 2014

2. Treatment of Ancillary Service Lines

A. Global fee includes both technical and professional components.

B. Direct and indirect expenses and cash flow considerations.

A. Potentially problematic –purchase of ancillary service lines vs. post-transaction compensation.

B. FMV/commercial reasonableness can be challenging.

A. Appropriate to consider in the valuation? ROI considerations?

B. Impact on patients; PR issues.

C. Integration with Hospital -systems and processes.

Impact on physician compensationCarved out and acquired

Provider-based billing or not?


April 10 – 11, 2014

3. Fair Market Value – Transaction Considerations

Key Concepts

• Determined from the perspective of hypothetical buyers and sellers without the ability to refer business to one another.

• No consideration for post-transaction buyer synergies. However, such synergies often exist!

• The financial terms of the transaction must make economic sense based on the assets being sold/received.

• Post-transaction compensation must be taken into consideration.


April 10 – 11, 2014

Methods Typically Used to Value Physician Practices

Asset (cost) Approach

Based on the underlying assets and liabilities being

acquired

Net Asset Value (“NAV”) Method

Income Approach

Based on future income (cash flow)

Discounted Cash Flow Method

Capitalized Income Method


April 10 – 11, 2014

What Are You Buying?

Intangible Assets?• Medical Records• Favorable Contracts• Website/Phone

Numbers• Established Workforce

What Are You

Buying?

Cash?

A/P?

Equipment

A/R?


April 10 – 11, 2014

Assessing Intangible Value

The existence of intangible value primarily comes

down to cash flow.

The existence of intangible value primarily comes

down to cash flow.

Physician groups that generate

positive cash flow (above the physician’s

“normalized” compensation

based on professional

productivity) will normally have some level of

intangible value.

Physician groups that generate

positive cash flow (above the physician’s

“normalized” compensation

based on professional

productivity) will normally have some level of

intangible value.

Practices that do not produce such positive cash flow, generally will not have intangible

value.

Practices that do not produce such positive cash flow, generally will not have intangible

value.


April 10 – 11, 2014

Certain Practices Are More Likely to Have Intangible Value

Large multi-specialty practices with mid-level providers and significant ancillary revenue are more likely to have intangible value.

Reason: they generate revenue above and beyond the professional fees produced by the physician’s personal efforts.

Small highly specialized practices (e.g., general surgeons) are less likely to have intangible value because all revenue is professional fees generated by the physician’s personal efforts.


April 10 – 11, 2014

Legal Constraints/Evaluation of Increased Risks

Stark Law

42 U.S.C. § 1395nn; exceptions codified at 42 C.F.R. pts. 411 &

424

“Isolated Transaction”

Federal Anti-Kickback Statute

42 U.S.C. § 1320a-7b(b); safe harbors

codified at 42 C.F.R. §1001.952

Sale of practice – practitioner to

practitioner

Sale to hospital – U.S. ex rel. Obert-Hong v.

Advocate Health Care

Tax Considerations

private benefit and private inurement

concerns; intermediate sanctions [Treas. Reg.

§53.4958-4(b)(1)]

Personal Goodwill vs. Corporate Goodwill


April 10 – 11, 2014

• OIG Work Plan – Provider-Based Services (FY 2014)• Advisory Opinions and Fraud Alerts

• Special Fraud Alert on Joint Venture Arrangements - 59 Fed Reg. 65372, 65373 (Dec. 19, 1994)

• Special Advisory Bulletin on Contractual Joint Ventures - 68 Fed. Reg. 23148 (April 30, 2003)

• Successor Liability:• Agreement to assume liabilities?• Transaction is a merger? De facto merger?• Purchaser is mere continuation?• Fraudulent attempt to avoid liabilities?

GU

IDA

NC

E:

Legal Constraints/Evaluation of Increased Risks (Cont’d)

State Law

Federal Case Law

OIG Guidance

• Successor Liability:• United States v. Vernon Home Health, Inc. – 21 F.ed 693 (5th Cir.

1994) – Medicare overpayments follow the Medicare provider number

• Deerbrook Pavilion, LLC v. Shalala – 235 F.3d 1100 (8th Cir. 2000) – CMPs follow the Medicare provider number)

• Delta Health Group, Inc. v. U.S. Dept. of Health and Human Services,, 459 F. Supp. 2d 1207 (N.D. Fla. 2006) – choice to assume the provider number (but check state law)


April 10 – 11, 2014

4. FMV - Compensation Stacking Considerations

Hospitals and other organizations are utilizing more complex compensation models, often with multiple layers of compensation for multiple services

(sometimes referred to as “stacking”).

With these types of models, it is important to:

Understand the various functional agreements and how they relate to each other.

Know when a “stacking” analysis is in order. Be aware of the multiple benchmark compensation data sources available. Be aware of the various forms of compensation that are included in clinical

benchmark data. Appreciate the increased legal and regulatory risks in stacking

agreements. Ensure that each component of compensation, and the components when

viewed in their entirety, do not exceed fair market value and are commercially reasonable.


April 10 – 11, 2014

Physician Compensation:Multiple Layers

Clinical Services

Teaching Services or Research Activities

Medical Directorships

Call Coverage

Co-management and

Performance Management

Mid-level Provider

Supervision


April 10 – 11, 2014

Physician Compensation:Multiple Layers (Cont’d)

In addition, physicians can receive compensation in many forms, such as:

Real Estate Leases

Base Salary

Sign-on/Retention Bonuses

Productivity-Based

Incentives

Quality-Based IncentivesPractice

Profitability (Profit Sharing)

Tail Insurance

Excess Vacation

Relocation Costs

Excess Benefits


April 10 – 11, 2014

Physician Compensation:Multiple Layers (Cont’d)

As new compensation models become more complex, in certain cases “the sum of the parts can exceed the whole” and create commercial

reasonableness and FMV issues for the organization.


April 10 – 11, 2014

Legal Constraints/Evaluation of Increased Risks

Stark Law

42 U.S.C. § 1395nn; exceptions codified at 42 C.F.R. pts. 411 &

424

Bona fide employeeIndirect compensation

Space Rental

Federal Anti-Kickback Statute

42 U.S.C. § 1320a-7b(b); safe harbors

codified at 42 C.F.R. §1001.952

Bona fide employeeSpace Rental

Tax Considerations – “reasonable

compensation”

private benefit and private inurement

concerns; intermediate sanctions [Treas. Reg.

§53.4958-4(b)(1)];“only such amount as

would ordinarily be paid for like services by like enterprises (whether

taxable or tax-exempt) under like

circumstances” - § 162 of IRC


April 10 – 11, 2014

• Special Fraud Alert on Joint Venture Arrangements - 59 Fed Reg. 65372, 65373 (Dec.19, 1994)

• Special Advisory Bulletin on Contractual Joint Ventures - 68 Fed. Reg. 23148 (April 30, 2003)

• OIG Compliance Program For Individual and Small Group Physician Practices - 65 Fed Reg. 59434 (Oct. 5. 2000)

• OIG Supplemental Compliance Program Guidance for Hospitals – 70 Fed. Reg. 4858 (Jan. 31, 2005)

OIG

GU

IDA

NC

E:


Compliance Program Guidance

Advisory Opinions and OIG Work Plan

Joint Ventures/Contractual

Joint Ventures


April 10 – 11, 2014


Civil False Claims Act - 31 U.S.C. § 3729(a)

Civil Monetary Penalties Law - 42 U.S.C. § 1320a-7a(b)

PPACA Provisions

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• Mandatory compliance programs as a condition of enrollment – 6401 of PPACA; “core elements” yet to be established.

• Payment suspensions – 6402(h) of PPACA; regulations at 76 Fed. Reg. 5862 (2/2/2011) – effective 3/25/2011.

• 60-day repayment requirement – 6402 of PPACA; proposed rules at 77 Fed. Reg. 9179 (2/16/2012) – Medicare A/B; proposed rules at 79 Fed. Reg. 1918, 1995 (1/10/214) – Medicare C/D.


April 10 – 11, 2014


U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center et al., Case No. 6:09-cv-ORL-31TBS (M.D. Fla. Nov. 13, 2013); but see Schubert case

U.S. ex rel. Drakeford v. Tuomey, Case No. 3:05-2858-MBS (D.S.C. Oct. 2, 2013)

U.S. v. Campbell, 2011 WL 43013 (D.N.J.)

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U.S. ex rel Singh v. Bradford Regional Medical Center, 2010 WL 4687739 (W.D. Pa)

Covenant Medical Center settlement (2009, Waterloo, Iowa)

Memorial Health University Medical Center settlement (2008, Savannah, Georgia); U.S. ex rel Kaczmarczyk v. SCCI Hospital Houston (2004); case settled


April 10 – 11, 2014


Avoid double payment for the same service or payment for services not provided.

Identify (or match) the compensation with each service to be provided.

Can the physician perform all of the duties due to the number of hours required? Can quality be maintained?

Model the individual compensation components to determine the total amount of compensation that could occur under the arrangement.

Should consider placing caps on the amount of compensation that can be earned under each component.


April 10 – 11, 2014

Inside the Stack vs.Outside the Stack

Base compensation

Productivity

Quality incentive

Sign-on/retention

Call pay-Maybe

Medical Director pay-Maybe

Supervision of mid-levels

Benefits

Co-management compensation

Practice profitability sharing

Call pay-Maybe

Medical Director pay-Maybe

Inside…

VS

Outside…


April 10 – 11, 2014

5. Antitrust Issues

• Important to document why acquisition is the best alternative

• Implications for antitrust dependent upon the specialty to some extent – who influences care?

• Evaluate the impact on the payer community with an acquisition vs. some other alignment initiative

• Regulatory Scrutiny – Saint Alphonsus vs. St. Luke’s


April 10 – 11, 2014

6. Planning for On-Boarding

• Understand timing issues – can become an issue in protracted negotiations.

• Group versus individual ID numbers; Form 855 filings; Medicaid enrollment.

• Licensure considerations (e.g., business licenses, ICANL)

• Allow for time for credentialing; private payor considerations.

• Allow time for billing and coding audit.

• Can have significant impact on cash flow in the short-term.

• Need to work with operational/integration team at Hospital from outset.


April 10 – 11, 2014

7. Post-Transaction Compensation

Compensation related to services vs. related to ownership.

Must be considered in the practice valuation to avoid the “double dip.”

All other things equal, less compensation equals higher purchase price.

1

2

3


April 10 – 11, 2014

8. Post-Acquisition Losses and Commercial Reasonableness

• How were ancillary services treated?

• Changes in payer mix.

• Changes in expense structure:

– Increased benefits costs?

– Decreased supplies cost?

• Changes in commercial insurance rates:

– Increased or decreased?

• What would the practice look like if it were still in private practice?


April 10 – 11, 2014

9. Compensation Upon Renewal

• How much “investment” is warranted.

• Stacking issues in an employment context.

– How much call is incorporated into salary?

– Productivity level vs. administrative responsibilities.


April 10 – 11, 2014

10. Structure to Enhance Other Initiatives

MSSP initiatives

Commercial ACO initiatives

Bundled Payment Initiatives

CIN Initiatives

Align quality incentives accordingly


April 10 – 11, 2014

Questions?


April 10 – 11, 2014

Contact Information

Carol Carden, CPA/ABV, ASA

PYA

(800) 270-9629

[email protected]

www.pyapc.com

Charlene L. McGinty, Esq.

McKenna Long & Aldridge LLP

(404) 527-4660

[email protected]

www.mckennalong.com

mailto:[email protected]

http://www.pyapc.com/

mailto:[email protected]

http://www.mckennalong.com/

Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician...

Healthcare

Transcript of Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician...