physician practice acquisitions by hospitals

40
Physician Practice Acquisitions by Hospitals Presented by W. James Lloyd, CPA/ABV, ASA Tennessee Society of CPAs 2010 Healthcare Conference November 30, 2010

Upload: jlloyd01

Post on 05-Jul-2015

2.639 views

Category:

Documents


5 download

DESCRIPTION

Tennessee Society of CPAs 2010 Healthcare Conference

TRANSCRIPT

Page 1: Physician Practice Acquisitions by Hospitals

Physician Practice Acquisitions by Hospitals

Presented by W. James Lloyd, CPA/ABV, ASA

Tennessee Society of CPAs2010 Healthcare Conference

November 30, 2010

Page 2: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Speaker Biography – W. James Lloyd

W. James (Jim) Lloyd is a shareholder and valuation services practice leader at Pershing Yoakley & Associates, P.C. Jim has valued hundreds of businesses and related intangible assets spanning a broad range of industries including healthcare, banking, manufacturing, real estate, and wholesale distribution among others. In addition to being a Certified Public Accountant, Mr. Lloyd has earned multiple professional credentials relevant to business valuation and dispute services including the Accredited in Business Valuation (ABV) credential from the American Institute of CPAs, Accredited Senior Appraiser (ASA) credential from the American Society of Appraisers, and the Certified Fraud Examiner (CFE) credential from the Association of Certified Fraud Examiners.

Jim is a frequent speaker at various national and regional conferences on valuation and litigation related topics and holds leadership roles with several professional organizations including the American Institute of CPAs and the American Society of Appraisers.

Expert testimony experience includes federal and various state and local courts and arbitration proceedings across the United States.

Page 2

Page 3: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Agenda

Page 3

Page 4: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Common Types of Physician Alignment Strategies

Page 4

Page 5: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Physician Practice Acquisitions - “Buy and Employ” Transactions

Page 5

Page 6: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Transaction Drivers

Lifestyle preference and practice

patterns

Increasing specialization/aging

Decreasing supply…

Increasing pressure…

Healthcare reform

Operating costs

Page 6

Page 7: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

“Buy and Employ” Transactions

• Typical Transaction:

– Hospital buys the practice at FMV

• Usually structured as an asset purchase

• Cash and AR normally excluded

– Physicians employed by the hospital – generally under some type of productivity based compensation arrangement

“Buy and Employ”

Transactions

Page 7

Page 8: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Buy and Employ Transactions – Key Issues

“Buy and Employ”

Transactions

• Key Issues:

­ Fair market value of the practice

­ Fair market value of the compensation arrangement

­ Commercial reasonableness

­ Buyer’s side due diligence

­ Accounting for the transaction

Page 8

Page 9: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Navigating the Regulatory Environment

IRS Stark

Anti-Kickback

Page 9

Page 10: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Compliance Issues Regarding Hospital-Physician Financial Relationships

Fair Market Value

________________________________________________________________________

Cents________________________________________________________________________

Scope: Range of Dollars Only

Key Question: “How Much”?

Commercial Reasonableness

________________________________________________________________________

Sense________________________________________________________________________

Scope: Overall Arrangement

Key Question: “Why”?

Two Components

Page 10

Page 11: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Commercial Reasonableness

• Department of Health and Human Services Definition1

– An arrangement which appears to be “a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”

• Stark Definition2

– “An arrangement will be considered ‘commercially reasonable’ in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential designated health services (“DHS”) referrals.”

• OIG Threshold

– Compensation arrangements with physicians should be “reasonable and necessary.”

1 63 Fed. Reg. 1700 (Jan. 9, 1998).2 69 Fed. Reg. 16093 (March 26, 2004).3“OIG Compliance Program For Individual and Small Group Physician Practices,” Notice, 65 Fed. Reg. 59434 (Oct. 5, 2000); OIG Advisory Opinion No. 07­10, September 20, 2007, pg. 6, 10; “OIG Supplemental Compliance Program Guidance for Hospitals,” Notice, 70 Fed. Reg. 4858 (Jan. 31, 2005).

Page 11

Page 12: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Factors in Determining CR

Business Purpose

Provider Analysis

Facility Analysis

Resource Analysis

Independence & Oversight

Commercial

Reasonableness

Determination

Page 12

Page 13: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Fair Market Value

• IRS Definition1

– Fair market value (“FMV”) is defined as the amount at which property would change hands between a willing seller and a willing buyer when neither is under compulsion and both have reasonable knowledge of the relevant facts

• OIG/Stark Definition2

– The value in arm’s­length transactions, consistent with the general market value

– The price that an asset would bring as the result of bona fide bargaining between well­informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well­informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement

1Estate Tax Reg. 20.2031.1­1(b); Revenue Ruling 59­60, 1959­1, C.B. 237.2Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations.

Page 13

Page 14: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

FMV of the Practice – Key Concepts

Page 14

Page 15: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Methods Typically Used to Value Physician Practices

Page 15

Page 16: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Which Method is Appropriate?

• If the practice has intangible value (such as goodwill), an income approach should be used

• If the practice does not have intangible value, the NAV method should be used

It Depends…

Page 16

Page 17: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Enterprise Value vs. Intangible Value

• The sum total of the tangible and intangible assets can not exceed the total enterprise value!

• Example:

– If the enterprise value = $2 million (e.g. determined from DCF Method)

– And the tangible assets (e.g. net working capital and fixed assets) = $1,200,000

– Then, intangible asset value can not exceed $800,000

Page 17

Page 18: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Assessing Intangible Value

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

Practices that do

not produce such

positive cash flow,

generally will not

have intangible

value

Page 18

Page 19: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Certain practices are more likely to have intangible value

Large multi­specialty practices with mid­level 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 physicians personal efforts

Page 19

Page 20: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Inappropriate Methods/Approaches

Page 20

Page 21: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

1992 Mac Thornton “no goodwill” letter

• The OIG has expressed anti­kickback concerns over hospitals paying any intangible value for physician practices.

• See: letter from D. McCarty Thornton(Associate General Counsel, Inspector General Division) to T.J. Sullivan (Office of the Associate Chief Counsel, IRS) dated December 22, 1992 regarding the OIG’s views concerning AKS and physician practice acquisition transactions. http://oig.hhs.gov/fraud/docs/safeharborregulations/acquisition122292.htm.

Page 21

Page 22: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Financial Analysis and Due Diligence

• Before choosing and applying one or more valuation methods, the practice should be analyzed to assess its operations and earnings capacity

• Appropriate buyer’s side due diligence should be performed to identify risk factors and opportunities for improvement

Page 22

Page 23: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Buyer’s Side Due Diligence

Page 23

Page 24: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Balance Sheet Analysis

Page 24

Page 25: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Balance Sheet Analysis

Key issues:

• Do the assets actually exist?

• Are the assets still being used in the practice?

• Condition of the equipment – upgrades and service agreements

• Often have very little “book value” and/or resale value

• However, will have “in­use” value as long as being used in the practice

Fixed Assets

Page 25

Page 26: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Balance Sheet Analysis

Page 26

Page 27: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Revenue Analysis

Net revenue per procedure

Trends (year­to­year comparisons)

Benchmark (e.g. against Medicare

rates for reasonableness)

Net revenue per provider (assess

risk)

Ancillary revenue

should normally be analyzed separately

(technical vs. professional revenue and expenses)

Page 27

Page 28: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Operating Expenses

Year­to­year and benchmark

comparisons

•Physician labor costs•Non­physician labor costs•Facilities •Medical supplies•Other

Physician compensation

should be “normalized”

based on productivity

(collections or wRVUs)

Physician compensation used to value the practice should be

reflective of the expected post­

transaction compensation

Page 28

Page 29: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Hospitals acquiring physician

practices must account for the

transaction under the

“acquisition” method.

Accordingly, the transaction price (including debt assumed) must

be allocated among the identifiable

assets acquired from the

transaction.

Goodwill is recorded as the

difference between the

transaction price and the

identifiable assets.

Accounting for the Transaction

Page 29

Page 30: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

ASC 805, Business Combinations (SFAS 141R)

Page 30

Page 31: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Key Terms and Definitions

Identifiable Intangible Asset –

•An intangible asset is considered identifiable if it either:

– Is separable, that is, capable of being separated or divided from the entity individually or together with a related contract, identifiable asset, or liability, regardless of whether the entity intends to do so; or

– Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights or obligations.

Source: ASC 805­20­25­1 through 25­10.

Page 31

Page 32: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Categories of Intangible Assets (Separable From Goodwill)

• Marketing related intangible assets

– Trademarks, trade names, service marks, etc

• Customer related intangible assets

– Customer lists, production backlog

• Artistic related intangible assets

• Contract related intangible assets

• Technology­based intangible assets

Page 32

Page 33: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Key Terms and Definitions

Fair Value Standard of Value

Defined as: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

– Accordingly, the price is based upon a hypothetical transaction for the subject asset or liability at the measurement date, considered from the perspective of a market participate that holds the asset or owes the liability

Source: ASC 820­10­20 (formerly SFAS 157, paragraph 5)

Page 33

Page 34: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Key Terms and Definitions

Market Participants

Are buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all the following characteristics:

– Independent of the reporting entity (non­related party)

– Knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information, and

– Willing and able to transact for the asset or liability

Source: ASC 820­10­20 (formerly SFAS 157, paragraph 10)

Page 34

Page 35: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Key Terms and Definitions

Exit Price

Fair value represents the price that would be received from selling the asset or paid to transfer the liability, which is an “exit” price concept.

•In contrast, the transaction price is referred to as an “entry” price.

•The exit price does not always equal the transaction price.Source: ASC 820­10­30­2 (formerly SFAS 157, paragraph 7)

Page 35

Page 36: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Key Terms and Definitions

Principal (or most advantageous) Market

Fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

•The principal (or most advantageous) market (and therefore, the market participants) should be considered from the perspective of the reporting entity.Source: ASC 820­10­35­5 (formerly SFAS 157, paragraph 8)

Page 36

Page 37: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Key Terms and Definitions

Highest and Best Use

Fair value assumes the highest and best use for the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date.

– Note: the “legally permissible” provision is particularly significant for healthcare entities and will most likely result in fair value = fair market value in many cases.

Source: ASC 820­10­35­12 (formerly SFAS 157, paragraphs 12 – 13)

Page 37

Page 38: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Applicability to Physician Practices

• Identifiable intangible assets encountered in connection with physician practice acquisitions are normally contractual in nature, such as:

– Non­competition agreements

– Clinical trial contracts

– Favorable lease agreements

– CONs (depending upon the type of practice)

• Does not include workforce in place (considered part of goodwill)

Page 38

Page 39: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Applicability to Physician Practices – Con’t

For physician practices with significant ancillary revenue, should free standing or hospital based reimbursement rates be used for purposes of measuring the fair value of the purchased intangible assets?

Page 39

Page 40: Physician Practice Acquisitions by Hospitals

Prepared for TSCPA – 2010 Healthcare ConferenceNovember 30, 2010

Questions?

Contact Information:

W. James Lloyd, CPA/ABV, ASA

Shareholder | PYA

[email protected] | 865-673-0844

www.pyapc.com

Page 40