fair market value: what rural providers need to know

Prepared for National Rural Health Association

Valuations: What Rural Providers Need to Know

Tynan Olechny, MBA/MPH, AVA

Annapoorani Bhat, ASA


Agenda

1

2

3

4

Overview of Healthcare Regulatory Considerations

Special Considerations for Rural Healthcare Providers

Fair Market Value (FMV) and Commercial Reasonableness (CR) Defined

5 FMV Enforcement Cases

Key Industry Trends


Key Industry Trends


Times Are Changing…• Overall theme is consolidation and

integration.

• Significant trend of hospital/physician alignment.

• Increased focus on reducing healthcare costs while also improving quality of patient care.

• Changes in healthcare delivery system from healthcare reform package.

• Continued government focus on fraud and abuse.


Rural Health Differentiators• About 10% of physicians practice in rural areas, yet rural areas account for

about 25% of the patient population.

– There are 2,157 Health Professional Shortage Areas (HPSAs) in rural and frontier areas of all states and US territories compared to 910 in urban areas.

• Rural patients tend to be poorer, are less likely to have insurance coverage, and are more likely to have a chronic illness than patients in urban areas.

• Medicare payments to rural hospitals are much lower than to hospitals in urban areas for the same services.

• Rural hospitals tend to be much smaller, with lower patient volume than those in urban areas, but are still faced with providing the same broad range of services and high-quality care.

• More than 470 rural hospitals have closed within the past 25 years.

Source: National Rural Health Association; American Hospital Association.


Key Rural Health Issues• Insufficient patient volumes to cover high-fixed costs

– Problem: Maintaining healthcare access for rural residents comes with a high price tag, but low patient volumes do not generate sufficient revenues for providers to cover those costs.

– Band-Aid: Special Medicare and Medicaid payment enhancements to rural providers to cover the gap.

– Pain Point: Potential elimination of payment enhancements.

– Cure: Providers across multiple communities within a region work collaboratively to spread costs while maintaining services by strategically allocating resources.

– Prescription: Inclusive governance structure to foster trust relationships among providers: no trust, no spread.


Key Rural Health Issues

• Insufficient patient population over which to spread risk

– Problem: Rural providers are unable to pursue risk-based contracts because there is insufficient patient population over which to spread risks.

– Band-Aid: Exclude rural providers from value-based contracting opportunities.

– Pain Point: Growing pressure from payers to purchase value instead of volume; demand from rural communities for quality and efficiency.

– Cure: Providers serving multiple rural primary care service areas form network to aggregate populations for contracting purposes.

– Prescription: Sufficient clinical integration among network providers to survive antitrust scrutiny: no integration, no aggregation.


Trends in Rural Areas• Professional Service Agreement (PSA)

– Rural hospitals contract with physicians from urban areas to hold clinics and perform procedures.

• Medical Directorships

– Provide clinical and administrative leadership to a specific service line of the hospital.

• Clinical Co-management Arrangements

– Align physicians and hospital to achieve greater efficiencies and improve patient outcomes.

Key Concept: FMV is critical to determination of payment for transactions between physicians and hospitals.


Overview of Healthcare Regulatory Considerations


• Regulatory concerns affecting physician-hospital transactions, such as employment, can be daunting.

• Physicians are constrained by laws not applicable to other industries.

• Primary legal concerns are Stark Law, Anti-Kickback Statute, and False Claims Act.

• Transactions with 501(c)(3) hospitals bring heightened scrutiny from OIG and IRS.

Bottom Line: Physicians cannot receive compensation based on their referrals when reimbursed by federal (or state) healthcare dollars.

Key Regulatory Considerations


Stark Law

• Also called the “Physician Self-Referral Law.”

• Prohibits a physician from making referrals for designated health services to entities in which the physician (or a family member) has a financial relationship.

• Designated Health Services (DHS):

Currently 12 health services

Includes hospital inpatient and outpatient services, as well as clinical lab, physical and occupational therapy, radiology, certain imaging, DME, home health, and various other services and supplies


Stark Law (continued)

• Is a “strict liability” law

• Contains various “exceptions”

- Rural provider exception applies to physician ownership interests

• Enforced by the Centers for Medicare & Medicaid Services (CMS), although Department of Justice adjudicates false claims arising from violations of the Stark Law


Anti-Kickback Statute (AKS)

• Prohibits the payment or receipt of remuneration to induce or reward referrals for Medicare or Medicaid services.

• Criminal statute that requires proof of “intent,” i.e., knowingly and willfully paying for referrals.

• If one purpose of the payment is to induce referrals, then AKS is violated, even if there are other legitimate business reasons for the payment.

• Contains various “safe harbors.”

• Enforced by the Office of the Inspector General (OIG) and the Department of Justice (DOJ).


False Claims ActImposes liability on any person who submits a claim to the federal government that the person knows (or should know) is false.

Civil statute.

Often “piggy-backed” with the AKS and Stark.

Subject to qui tam (“whistle-blower”) suits.


IRS 501(c)(3) Anti-Inurement Rules501(c)(3) tax exempt entities must avoid “excess benefit” transactions.

Transactions must be at FMV and must be consistent with the entity’s charitable mission.

Violations can result in loss of tax exempt status.

Rules


Penalties for Violations of Key Healthcare Regulations

Penalties for violation can include:

• Denial of payment.

• Refund of payment.

• Civil monetary penalty up to $15,000 per claim.

• Civil monetary penalty up to $100,000 for each “scheme” designed to circumvent the law.

• Civil monetary penalty of up to three times the amount of claims.

• Possible criminal penalties, including jail time.

• Exclusion from the Medicare or Medicaid program.


Fair Market Value and Commercial Reasonableness Defined


What is Fair Market Value?

$

Willing Seller

Willing Buyer

$“Ground Rules”• Arm’s length transaction

• Bona fide bargaining

• Neither is under compulsion

• Reasonable knowledge of relevant facts


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

• No consideration for synergies. However, such synergies often exist!

• The financial terms of the transaction must make economic sense based on the services being provided.

• Determination of FMV involves both quantitative and qualitative analyses.

Fair Market Value – Key Concepts


Importance of FMV Opinions• Many regulatory exceptions require employment

arrangements to be at fair market value.

• FMV opinions ensure transactions are compliant with key regulatory considerations and serve to protect hospital and physicians from government scrutiny.

• Nearly two-thirds (65%) of organizations have established governance policies regarding physician compensation arrangements that may require an external review for FMV.

Of these, more than half (53%) conduct an external FMV review of physician compensation levels annually.

Source: Sullivan, Cotter and Associates, Inc. 2013 Physician Compensation and Productivity Survey.


What Are the Key Steps and Factors in the FMV Process?

• A comprehensive understanding of all aspects surrounding the proposed arrangement.

• Examples include:– Hospital staffing needs/full-time

equivalents (FTEs) required– Physician/practice specialty– Community-specific factors– Exclusivity of services– Coverage details– Billing specifics

Step 1:

Ascertain Key Facts

Surrounding the

Arrangement

Step 1:

Ascertain Key Facts

Surrounding the

Arrangement



• Physician experience

• Provider productivity

• Market comparables

• Quality measures

• Reimbursement trends

• Payer mix

• Practice performance

• Supply/demand

• Compensation trends

• HPSA and MUA/P designation

Step 2:

Determine Factors that May Impact

FMV

Step 2:

Determine Factors that May Impact

FMV



• Medical Group Management Association

• Sullivan, Cotter & Associates, Inc.

• Hospital & Healthcare Compensation Service

• American Medical Group Association

• The Delta Companies

• Merritt Hawkins & Associates

• Modern Healthcare

• Other “Objective” Survey Benchmarks

Step 3:

Identify Multiple

Objective Data Sources for

Benchmarking

Step 3:

Identify Multiple

Objective Data Sources for

Benchmarking



• Compensation survey data

• Cost to replace/build

• Locum tenens

• Market comparable analysis

• Productivity analyses

• Time studies

• Compensation per wRVU

• Collections per wRVU

• Other relevant analyses

Step 4:

Identify Analyses for Determining

FMV Compensation

Step 4:

Identify Analyses for Determining

FMV Compensation


What is Commercial Reasonableness?• Defined by the Department of Health and Human

Services (HHS) as an arrangement which appears to be “a sensible, prudent business agreement from the perspective of the particular parties involves, even in the absence of any potential referrals.”

• Many Stark exceptions require payment to be commercially reasonable.

Key Concept: In the absence of a referral relationship, is the arrangement one that makes “good business sense?”


Example Factors in Determining CR• Is each component of the proposed arrangement (as well as

the entire arrangement): A reasonable necessity that is essential to the functioning of the entities

involved? Reasonably necessary to accomplish a rational business purpose?

• Does any specialized training and/or experience of the provider exist that should be taken into account?

• Are the particular nature of the duties and the corresponding amount of accountability under the proposed arrangement clearly defined and reasonable?

• Are patient demand, the number of hospital patients, and/or the community need sufficient to justify the services?


FAIR MARKET VALUE

COMMERCIAL REASONABLENESS

Overall Arrangement

“WHY?”

SENSE CENTS

Range of Dollars Only

“HOW MUCH?”

Scope

Key Question

Differentiating Between FMV and CR


Special Considerations for Rural Healthcare Providers


When To Obtain a Third-Party Valuation

• FMV opinions can be expensive due to the time spent in research and discussion of difficult issues.

• May not make practical business sense for rural healthcare providers to obtain an FMV opinion for every proposed arrangement.

Key Concept: Seek outside assistance on riskier or more complex arrangements.


Evaluating Risk

• Is the arrangement commercially reasonable?

• Are you offering to pay at the median or at the 90th percentile of national survey benchmarks?

• Are there multiple components to the compensation arrangement? Could the physician be getting paid twice for the same services?

• Is there potential for a productivity or other bonus to push total compensation above the 90th percentile?


Proceeding Without an FMV Opinion• Though an FMV opinion will be your best defense if the

arrangement is ever called into question, rural healthcare providers may choose not to obtain a formal report for various reasons. Without an FMV report, it’s still important to:

– Document your clear, objective methodology in determining compensation for arrangement

– Establish and document appropriate need for services

– Document any other important factors – i.e. location in a Health Professional Shortage Area (HPSA) or Medically Underserved Area/Population (MUA/P), or recruiting difficulties


FMV Enforcement Cases


Contact Information:

[email protected]

[email protected]

(404) 266-9876

www.pyapc.com

Thank You!