life cycle of a physician practice

59
DAVID CRANFORD, CPA PRINCIPAL DECOSIMO SHANNON FARR, CPA·ABV·CFF DIRECTOR OF HEALTHCARE VALUATION DECOSIMO

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Page 1: Life Cycle of a Physician Practice

D A V I D C R A N F O R D , C P AP R I N C I P A LD E C O S I M O

S H A N N O N F A R R , C P A · A B V · C F FD I R E C T O R O F H E A LT H C A R E V A L U AT I O ND E C O S I M O

Page 2: Life Cycle of a Physician Practice

OVERVIEW

General Considerations Basic Issues In Employment Contracts Physician Practice Buy-in Considerations Compensation Within Group Practices Selling A Physician Practice Physician Practice Mergers Physician-Hospital Integration And Affiliation

Models

Page 3: Life Cycle of a Physician Practice
Page 4: Life Cycle of a Physician Practice

THE PARTIES

The Practice itself A physician being recruited/admitted to the

Practice An individual physician owner The Hospital Another Practice interested in merging

Page 5: Life Cycle of a Physician Practice

THE TEAM

Practice Administrator Attorney Accountant/CPA Practice Management Consultants Third-party Valuation Professionals

HEALTHCARE EXPERTISE REQUIRED

Page 6: Life Cycle of a Physician Practice

WHICH ALIGNMENT MODEL IS RIGHT FOR ME ?

Values And Goals Of Each Party Economics Of The Deal Facts And Circumstances; Terminology Alignment Process

Page 7: Life Cycle of a Physician Practice
Page 8: Life Cycle of a Physician Practice

EMPLOYMENT: GROUP PRACTICE VS. HOSPITAL

Current Trends and Drivers Who May Employ a Physician?—Corporate

Practice of Medicine Doctrine Physician Compensation by Hospitals Hospital Employment

Advantages/Disadvantages Group Practice Employment/Ownership

Advantages/Disadvantages Elements of an Employment Agreement

Page 9: Life Cycle of a Physician Practice

GROUP PRACTICE VS. HOSPITAL EMPLOYMENT

Current trends Increasing employment by hospitals or other

hospital-physician alignment models Increasing consolidation into larger groupsDrivers Healthcare reform

Bundled payment initiatives, Continuity of care initiatives,Accountable Care Organization (ACO) models, Qualitymeasures

Negotiating power Increasing IT investment / compliance measures Complexity of management

Page 10: Life Cycle of a Physician Practice

CORPORATE PRACTICE OF MEDICINE DOCTRINE

General Rule: Prohibition against unlicensed individuals or entities from providing professional services or employing licensed professionals to provide professional services

Ex. medicine, optometry, dentistry, law, accounting, engineering, etc.

Varies by state

Page 11: Life Cycle of a Physician Practice

PHYSICIAN COMPENSATION BY HOSPITALS

PhysicianBase Pay

(Salary and/or Production)

Other Arrangements

On-call Coverage

Medical Directorships

Commonly seen base models Salary wRVU-based arrangements (pay for

production)

Commonly seen add-ons Medical directorships On-call coverage arrangements Clinical co-management arrangements In university/teaching hospitals:

teaching componentEntire arrangement must meet regulatory requirements; independent FMV determination may be warranted

Page 12: Life Cycle of a Physician Practice

HOSPITAL EMPLOYMENT

Increasing regulatory and compliance burdens handled by the hospital

Hospital negotiates managed care contracts, and handles billing and collection

Risk of future reimbursement cuts may transfer to the hospital

Hospital may fund EMR initiatives

If aspects of compensation are based on practice financial results:

- Financial results no longer transparent- Two very different business

models

Hospitals traditionally do a poor job of collecting small patient balances

Less autonomy

Page 13: Life Cycle of a Physician Practice

GROUP PRACTICE

Independence; more control over patient treatment

More control over financial results: the practice or its medical billing provider handles billing and collection

More control: facilities / work schedule

Difficulty in recruiting new physicians

Shrinking profits

High IT/management costs

Concern about impact of bundled payments initiatives

Lack of leverage with payers

Page 14: Life Cycle of a Physician Practice

EMPLOYMENT AGREEMENT - LEGAL

Parties Whereas Clause Term Physician Services

Provided Day-to-Day

Operations Initial and Continuing

Qualification Terms Compensation /

Compensation Model

Benefits Restrictive

Covenants Representations &

Warranties Termination Items Post Termination

Items Ownership

Opportunity Miscellaneous

Provisions

Page 15: Life Cycle of a Physician Practice

ELEMENTS OF AN EMPLOYMENT AGREEMENT

Parties• Employer• Employee

Whereas Clause

• Tells the story• Not mandatory• Not legally part

of EA unless incorporated by reference

• Should state the consideration for parties entering into EA

Term

• Start date• Conditions

precedent—receipt of state licensure, board certification, hospital privileges, etc.

• Termination date• Renewal terms—

automatic (evergreen), notice requirements, etc.

Page 16: Life Cycle of a Physician Practice

ELEMENTS OF AN EMPLOYMENT AGREEMENTPhysician Services Provided

Day-to-Day OperationsDuties Clinical Administrative Hospital PreceptingWork schedule Full-time Part-time Minimum hours vs. maximum hours Night, weekend & holiday on-call rotationLocation of Services

Page 17: Life Cycle of a Physician Practice

• Duly licensed — maintain good standing for all State licenses, certifications and/or accreditations necessary to practice medicine in specialty

• DEA registration• CME obligations• Medical staff membership

& privileges• Compliance with federal,

state & local statutes, ordinances, rules & regulations

• Fully eligible to participate in Medicare, Medicaid and other governmental insurance programs

• Compliance with ethical & professional standards

• Compliance with practice specific documents

• Billing matters• Fee schedules• Assignment of fees• Medical record keeping• Accurate billing

requirements

Initial & Continuing Qualification TermsELEMENTS OF AN EMPLOYMENT AGREEMENT

Page 18: Life Cycle of a Physician Practice

Guaranteed Minimum Base SalaryProductivity Bonus wRVU-based arrangements (pay for production) BonusStart-up expenses Signing bonusMoving expense reimbursement Student loan repayment Board exam cost payment Employer Wants - No guaranteed minimum base salary,

collection-based productivity bonus, & no payment of start-up expenses

Employee Wants - everything on list

CompensationELEMENTS OF AN EMPLOYMENT AGREEMENT

Page 19: Life Cycle of a Physician Practice

CMEHealth insurance (medical,

dental, vision)Disability & life insuranceRetirement plans—401(k),

pensionMalpractice insuranceOccurrence based Claims-made policy

(need for tail-coverage)Vacation & sick leave (w/ or

w/out rollover)

Holiday PayMaternity leaveExpense reimbursements Automobile payments, gas

& parking Cell phone Pager Computer/Tablet License Fees Dues & staff fees Professional subscriptions

& journals Entertainment/marketing

BenefitsELEMENTS OF AN EMPLOYMENT AGREEMENT

Page 20: Life Cycle of a Physician Practice

Non-Solicitation—patients, employees, referral sources

Non-Competition—refer to State lawConfidentiality Employer Wants - everything on the list with no time limit

on non-solicitation & confidentiality provisions, maximum permitted by statute on non-competition provision

Employee Wants - none of the above, but will usually agree to non-solicitation provision & try to negotiate non-competition provision that does not apply if employer terminates without cause

ELEMENTS OF AN EMPLOYMENT AGREEMENT

Restrictive Covenants

Page 21: Life Cycle of a Physician Practice

ELEMENTS OF AN EMPLOYMENT AGREEMENT

Qualifications--duly licensed with no restrictions, DEA registration, and Board certification

Medical staff membership/clinical privileges never denied, suspended, revoked, terminated, voluntarily relinquished under threat of disciplinary action, or restricted

Provider not excluded from Medicare or Medicaid or other governmental insurance program

Not convicted of healthcare violation & no pending or threatened proceedings or investigations by State Board of Medical Examiners or otherwise

Never arrested /convicted of crime except routine traffic violation No restriction on entering into Employment Agreement Malpractice coverage for prior acts & no pending or threatened litigation Disclosed all financial relationships with healthcare entities Clean provider status with insurance carriers—not removed from panel for cause

Representations & Warranties of Employed Physician with Continuing Duty to Update Employer

Page 22: Life Cycle of a Physician Practice

ELEMENTS OF AN EMPLOYMENT AGREEMENT

Mutual agreementWithout cause by either side on 90 days noticeDeath of physicianDisability—needs to be well definedCause—needs to be well defined Employer Wants—very broad, immediate with no cure (ex.

failure to perform duties requested, maintain professional & collegial relationship, failure to document properly) Employee Wants—very specific, limited & 30 day cure period

(ex. felony conviction, exclusion from Medicare, Medicaid)

Termination Items

Page 23: Life Cycle of a Physician Practice

Severance/deferred compensationPatient records & filesFinal completion of chartsOwnership of patient recordsRight to copies of patient records & charts (local laws & costs)Patient notificationReturn of employer property (electronics,

medical records, etc.)

ELEMENTS OF AN EMPLOYMENT AGREEMENT

Post Termination Items

Page 24: Life Cycle of a Physician Practice
Page 25: Life Cycle of a Physician Practice

EMPLOYED PHYSICIAN BUY-IN

Is employee offered ownership opportunity?When?Typical to have waiting period of 2-5 years

What are the terms?Employer Wants — nothing in writing; at most an

open-ended, oral understandingEmployee Wants — firm, written option to become

owner with specific buy-in terms in Employment Agreement

Ownership Opportunity

Page 26: Life Cycle of a Physician Practice

DUE DILIGENCE

Documents, agreements and contracts need to be reviewed Certificate of Incorporation / other formation documents Bylaws, operating agreement, shareholder agreements Organization minutes Tax returns Payor agreements / fee schedules Hospital agreements Leases and subleases Employment agreements, consulting, management, other

service agreements (owners and non-owners) Other agreements – shared facilities, shared functions,

purchase/supply contracts, licenses

Page 27: Life Cycle of a Physician Practice

DUE DILIGENCEUnderstand the Practice and what is (or isn’t) driving value Basic financial information: balance sheets, profit

and loss statements, tax returns Real estate: owned or leased? Ancillary services Managed care contracts: access and rates Employee-physicians or midlevel providers? Many other factors may affect value

Page 28: Life Cycle of a Physician Practice

DUE DILIGENCE

Referral Sources Hospital employed Concentrated risk of one large group Age of referral source

Page 29: Life Cycle of a Physician Practice

DUE DILIGENCEUnderstand any related-party transactions or arrangements: are they at Fair Market Value? Real estate Equipment Employment of relatives Loans to / from related parties

Page 30: Life Cycle of a Physician Practice

PURCHASE PRICE AND PURCHASE AGREEMENT

Is the purchase price supported by anticipated future cash flows? Consider compensation package and

purchase price in tandem

What are the obligations of the seller-physician and the buyer-physician? How does the seller-physician plan to transfer

patients to the buyer-physician? Over what time period?

Page 31: Life Cycle of a Physician Practice

PHYSICIAN OWNER DISASSOCIATION

Ownership agreement – are buy-out terms specified? If so, documents control If not,

Refer to State statutory requirements, which may provide a default rule

Fair value appraisal may be necessary if parties cannot agree

Tax considerations Ownership (of practice and/or real estate) may extend

beyond period of employment/service period

Continuing commitments

Page 32: Life Cycle of a Physician Practice
Page 33: Life Cycle of a Physician Practice

Share Share &

Share Alike

Eat What

You Kill

COMPENSATION WITHIN GROUP PHYSICIAN PRACTICES

Commonly seen models – within a spectrum

Page 34: Life Cycle of a Physician Practice

ELEMENTS OF A COMPENSATION MODEL

Incentivize specific behavior

- What does practice want to reward?

Compliance with Stark Self-Referral Prohibition

- General prohibition (42 U.S.C. § 1395nn)- Exceptions (42 C.F.R. § 411.357)(c)

Compliance with Federal Anti-Kickback Statute- General prohibition (42 U.S.C. § 1320a-

7b(b))- Safe harbors (42 C.F.R. § 1001.952(i))

Compliance with state self-referral legislation

- Disclosure of ownership interests to patients- Ban on referrals to self-owned facilities

unless exception applies ***State specific***

Compensation Model

Page 35: Life Cycle of a Physician Practice

COMPENSATION WITHIN GROUP PHYSICIAN PRACTICES

Potential issues Sharing/splitting ancillary services collections

and expenses “Overpaid” compensation (production ≠

compensation) Treatment of hospital medical directorships,

expert testimony fees, honorariums, etc. Sharing or splitting physician assistant

collections and expenses

Page 36: Life Cycle of a Physician Practice
Page 37: Life Cycle of a Physician Practice

UNDERSTANDING THE PRACTICE

The range of services provided by the practice and whether those services are provided at the practice or at a hospital

Recent or planned changes in providers

Production considerations – if the entity has non-physician practitioners (NPPs) understand how they are tracked

Are there any planned changes with regards to production?

Page 38: Life Cycle of a Physician Practice

PHYSICIAN PRACTICE VALUATION SPECIFIC INFORMATION TO REQUEST AND CONSIDER

• Specialties, board certifications, length of time with practice, years to retirementThe physicians

• Is the practice operating at capacity?Office/physician schedule

• In/out of network (access)? Rates?Managed care contracts

• Understand the dynamics of historical physician compensation

Collections/charges by provider

Page 39: Life Cycle of a Physician Practice

PHYSICIAN PRACTICE VALUATION SPECIFIC INFORMATION TO REQUEST AND CONSIDER

• Mid-levels? Non-physician, licensed employees?

Non-physician employees

• Collections/charges by payerPayor mix

• Privileges, call group, medical directorships, etc.

Hospital affiliation

Page 40: Life Cycle of a Physician Practice

PHYSICIAN PRACTICE VALUATION SPECIFIC INFORMATION TO REQUEST AND CONSIDER

Patients in the practice• Zip code reports show the area

patients are drawn from • Referral reports show how new

patients have come into the practice.

• Other demographics – how long have patients been with the practice? How many new/recurring patients are seen?

Page 41: Life Cycle of a Physician Practice

PHYSICIAN PRACTICE VALUATION SPECIFIC INFORMATION TO REQUEST AND CONSIDER

CPT/HCPCS code analysis

• “Top 10” codes• Technical and professional components of

ancillary services

Page 42: Life Cycle of a Physician Practice

PRODUCTION MEASURES

Production Measures Issues to Consider

Office Visits Number of patients seen in an ambulatory (office) setting

Encounters Can mean ambulatory

Procedures Can mean every CPT submitted or the number of times a certain case is performed

Cases Often comprised of multiple CPT codes or procedures; assistant surgeon cases may be reflected

RVUs / wRVUs Impact of modifiers, multiple procedure discounts

Page 43: Life Cycle of a Physician Practice

PHYSICIAN PRACTICE VALUATION DRIVERS

The physician’s specialty(ies)

Possession of state-of-the-art technology and equipment

The range of services provided by the practice and whether those services are provided at the practice or at a hospital

A staff that is familiar with coding and runs the practice efficiently

Effective use of mid-level providers

Page 44: Life Cycle of a Physician Practice

PHYSICIAN COMP BENCHMARK COMPENSATION DATA

American Medical Group Association

(“AMGA”)

Medical Group Compensation and Financial Survey

Includes clinical compensation

Hospital & Healthcare Compensation

Service (“HHCS”)

Physician Salary & Benefits Report

Includes clinical and medical director compensation

Medical Group Management Association (“MGMA”)

Physician Compensation and Production Survey

Includes clinical compensation

AMGA HHCS MGMA

Page 45: Life Cycle of a Physician Practice

SALE OF A PRACTICE: TAX CONSIDERATIONSPhysician practice sales are typically “asset” sales, not “stock” salesThe purchase price allocation can have a significant effect on the after-tax cash of the seller: Long-term capital gains (2014 maximum federal rate for

individuals = 20%) rates generally apply to valueassociated with appreciated real estate, and to valueattributable to intangible assets (goodwill and otherintangibles)

Ordinary income rates apply to value allocated to accountsreceivable; depreciation recapture, if fixed assets arevalued above the NBV reported for tax purposes (2014maximum federal rate for individuals = 39.6%)

Page 46: Life Cycle of a Physician Practice

SALE OF A PRACTICE: TAX CONSIDERATIONSWhen a C corporation physician practice sells: The value of personal goodwill of the

physician potentially could be taxed as a capital gain (an asset of the individual physician)

Other assets and the business goodwill ownedby the entity taxed at corporate rates

Other Considerations: Physicians need to be familiar with potential

limitations on purchase price and subsequentemployment arrangements posed byMedicare regulations

Page 47: Life Cycle of a Physician Practice

GROUP PRACTICE DISSOLUTION & CLOSURE

Closure considerations Plan for patient continuum of care

Patient notification Patient records retention Payer contract termination steps Notification to hospitals where the physician has

privileges Filing final returns (income tax, payroll tax, etc.) State department of revenue requirements Filing entity dissolution documents Notify state board Notify malpractice carrier

Page 48: Life Cycle of a Physician Practice
Page 49: Life Cycle of a Physician Practice

THERE’S NO DENYING IT…

Page 50: Life Cycle of a Physician Practice

PHYSICIAN GROUP MERGERS / ROLL-UPS

Operational

Structural

Governance Clinical

Financial

Physical / Facility

Page 51: Life Cycle of a Physician Practice

MERGER ISSUES TO ADDRESS

Operational

Physician recruitment/retention

Staffing, personnel

Information technology

Structural

Physician income

distribution

Ancillary services

Governance

Name, marketing, branding

Board composition

Clinical

Protocols

Practice style

Financial

Managed care

contracting

Debt financing

Economies of scale

Physical Facility

Locations

Real estate leases

Page 52: Life Cycle of a Physician Practice

SPECTRUM OF INTEGRATION MODELS

FullLimited

Employment

Professional Services

Arrangements

Clinical Co-Management / Service LineManagement

ACO’s

IPAs

Clinically Integrated Network

Call Coverage

Medical Directorships

Synthetic Employment

Arrangements

Page 53: Life Cycle of a Physician Practice

CO-MANAGEMENT MODELS ARE EVOLVING

Traditional co-management model

Designed around one hospital-based service line:

- Cardiology- Orthopedics- Neurosurgery

Compensation awarded for:- Defined services (fixed fee)- Achievement of predetermined

metrics (variable fee)

Next-gen co-management model

Design is more complex/integrated

Compensation:- Management-related activities

(fixed/hourly rate)- Quality, outcomes and/or

efficiency (at-risk or variable component)

- Higher percentage of compensation placed at-risk

Page 54: Life Cycle of a Physician Practice

CLINICALLY INTEGRATED NETWORKS

Purpose: Improve care measurably

while reducing

costs

Not Medicare-

specific, but similar to

ACOs

Often includes a hospital partner

Active and ongoing clinical

initiatives

Effort among participating physicians

Page 55: Life Cycle of a Physician Practice

A FEW THINGS TO REMEMBER

Most integration relationships will be

formalized with a contract

Numerous laws affect integrated models

Each integration model has pros and cons

Process of integration may be just as important as the

form

Page 56: Life Cycle of a Physician Practice

Disclaimer: These materials are designed to provide general information. Although prepared by professionals, these materials should not be utilized as a substitute for professional legal or accounting advice in specific situations. If legal or accounting advice or other expert assistance is required, please consult with an attorney or certified public accountant.

Page 57: Life Cycle of a Physician Practice

David Cranford, CPAPrincipal(800) 782-8382 | [email protected]

David Cranford, a principal in the Decosimo HealthcarePractice, holds more than 25 years of experience as a seniorexecutive and financial manager in the healthcare field.Specializing in physician services and healthcare consulting,David is dedicated in the areas of physician practicemanagement, healthcare mergers and acquisition advisory,and healthcare financial consulting -- including outsourcedaccounting, compensation modeling, due diligence andfinancial forecasting. He also provides expert witnesstestimony as litigation support in healthcare cases involvingcontractual disputes. A graduate of the University ofTennessee at Chattanooga with a degree in BusinessAdministration, David is a certified public accountant licensedin Tennessee. He is a member of the National Association ofPublic Hospitals.

Page 58: Life Cycle of a Physician Practice

Shannon Farr, CPA·ABV·CFFDirector of Healthcare Valuation

(800) 782-8382 | [email protected]

Shannon Farr, Decosimo’s Director of Valuation Services,devotes her practice to valuations of healthcare entities whileoverseeing the Firm’s valuation group. Her practice hasfocused on business valuation and litigation support since2004. Her specialized expertise in healthcare valuation assistshospital and health system clients in ensuring their acquisitionsmeet industry regulations surrounding the concepts of fairmarket value and commercial reasonableness. Shannon alsoperforms fair value for financial reporting valuations to be usedin purchase price allocations and goodwill impairment testing.Shannon graduated with a Bachelor of Science in BusinessAdministration degree in accounting from the University ofTennessee. She is a member of the Tennessee Society ofCertified Public Accountants (TSCPA). She is also accreditedin business valuation (ABV) and certified in financial forensics(CFF).

Page 59: Life Cycle of a Physician Practice

Elliott Davis + Decosimo ($108M)