life cycle of a physician practice
TRANSCRIPT
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
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
THE PARTIES
The Practice itself A physician being recruited/admitted to the
Practice An individual physician owner The Hospital Another Practice interested in merging
THE TEAM
Practice Administrator Attorney Accountant/CPA Practice Management Consultants Third-party Valuation Professionals
HEALTHCARE EXPERTISE REQUIRED
WHICH ALIGNMENT MODEL IS RIGHT FOR ME ?
Values And Goals Of Each Party Economics Of The Deal Facts And Circumstances; Terminology Alignment Process
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
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
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
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
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
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
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
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.
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
• 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
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
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
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
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
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
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
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
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
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
DUE DILIGENCE
Referral Sources Hospital employed Concentrated risk of one large group Age of referral source
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
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?
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
Share Share &
Share Alike
Eat What
You Kill
COMPENSATION WITHIN GROUP PHYSICIAN PRACTICES
Commonly seen models – within a spectrum
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
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
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?
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
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
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?
PHYSICIAN PRACTICE VALUATION SPECIFIC INFORMATION TO REQUEST AND CONSIDER
CPT/HCPCS code analysis
• “Top 10” codes• Technical and professional components of
ancillary services
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
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
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
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%)
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
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
THERE’S NO DENYING IT…
PHYSICIAN GROUP MERGERS / ROLL-UPS
Operational
Structural
Governance Clinical
Financial
Physical / Facility
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
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
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
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
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
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.
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.
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).
Elliott Davis + Decosimo ($108M)