The 2011 HealthCare Appraisers "2011 Report: A Review of 2010 Trends and Transactions" (downloadable by clicking here (pdf)) covers a wide variety of trends related to U.S. healthcare transactions observed during 2010. This article discusses several key concepts from that report.
1. Anti-Kickback cases and OIG activity. The report begins with discussions on certain OIG activity and two court cases relating to the Stark Act and Fraud and Abuse Statute. First, it analyzes two OIG advisory opinions as to "under arrangements" transactions. Here, the OIG approved the proposed transaction which was a per-click transaction but did not include marketing services while the OIG did not approve the transaction that included marketing services.
The report also reviews the Tuomey Hospital case. It states that this was a case where physicians were employed on a select, part-time basis to provide surgery. Here, there was a valuation performed supporting the price paid for employment. The government argued the valuation was not right and that their own valuation expert showed the valuation was above fair market value. The jury found that the agreements violated the Stark Law and the case is now being appealed as to various legal issues.
Finally, the report discusses the Bradford Regional Medical Center case. The Bradford case involved a situation where a hospital rented a nuclear camera from physicians. There, the valuation included a discussion of increased referrals and the CEO also indicated his thoughts on increased referrals. The court finally focused its review on the finding that the transaction was intended to obtain referrals. There, the court found that the valuation did take into account the volume or value of referrals. According to the HealthCare Appraisers report:
"The Court, in finding against the hospital, not only focused on the valuation and the hospital CEO's intent to pay for referrals, but also provided a lengthy discussion on the issue of whether the compensation was determined in a manner that 'takes into account the volume or value of referrals,' as that term is defined in the Stark regulations. There has been significant discussion and debate among lawyers about the Court's comments on that issue, and substantial question about what the ultimate impact of the case will be on healthcare valuation."
2. Call coverage. As to call coverage, HealthCare Appraisers notes an increase in call compensation arrangements. It also notes a wide range of compensation per diem for call coverage, ranging up to $2,080 for cardiology and $2,130 for general surgery down to a low amount of $90 for ophthalmology. In short, the range of services is all over the board. According to the HealthCare Appraisers report:
"Even in the face of increasing per diem payments, many hospitals reported continued difficulty in securing continuous call coverage, as more and more physicians are focused on balanced lifestyle issues. In our experience, this is particularly prevalent with certain specialties, including most notably, neurosurgery … We noted modest increases in rates paid for call coverage in 2010 as compare to 2009."
Note: For more information on call coverage, read "5 Trends Impacting Physician On-Call Compensation."
3. Hospital-based physicians. The report discusses subsidies in employment and guarantees for hospital-based physicians. In its summary of 2010 collections guarantee/subsidy arrangements, HealthCare Appraisers report the median guarantee amount per FTE for anesthesia was $426,000, radiology $750,000, for hospitalists $343,000 and for ER doctors $318,000. According to the report:
"An increasing number of hospitals are opting to employ hospital-based physicians. This model eliminates the need to provide income support through a collections guarantee to independent physician group practices or a physician staffing company, and provides the hospital with greater control over the physician services."
The report also notes the following as to hospitalists:
"Hospitals are continuing to implement hospitalist programs in order to treat unassigned patients and ensure the continuity of care of all patients. The increasing prominence of this practice specialty has resulted in further specialization among hospitalists towards specific types of care, such as after-hours care (nocturnists), obstetrics (laborists), neurology (neuro-hospitalist), and surgery (surgical hospitalist). Such hospitalist specialists allow physicians of the same specialty to focus on their own services while leaving the responsibility of pre and post-treatment care to the hospitalist. Although hospitalists provide hospitals with a vital option for reducing costs while improving quality, their professional revenue is often insufficient to cover practice costs. Therefore, collections guarantees will increasingly serve as a practical tool for securing the services of these physicians."
4. Service line co-management arrangements. HealthCare Appraisers reports an increase in service line management agreements, with data indicating a wide range of compensation —$200,000 for a cardiology agreement on the lower end to $6.4 million for a neurosurgery agreement on the high end, and plenty of other different situations. At the end of the day, the actual payments will depend largely on the defined services.
One must also be able to defend the payments as fair market value. In orthopedics, for example, total management fees range from $274,000 on the low end to $1,947,000 on the high end. HealthCare Appraisers provides the following analysis:
"Given the increasing size and complexity of service line co-management arrangements, it is important to consider the following items related to the structure and administration of co-management arrangements:Co-management arrangements must be established with consideration to tracking the actual performance of co-management tasks and incentives.
• Co-management arrangements must be established with consideration to tracking the actual performance of co-management tasks and incentives.
• Service line co-management tasks must be reviewed on an annual basis to ensure that they are still appropriate.
• Incentive metrics must (i) be set in advance and reset at the end of each year; (ii) be measurable; and (iii) reward improvement.
• Care must be taken to ensure that there are no compensated individuals providing services substantially similar to service line co-management tasks (e.g., traditional hospital medical directors and/or service line administrators).
• When utilizing hospital employed physicians as managers within the co-management arrangement, consideration must be given to the totality of the potential compensation, including the possibility that the physician has overcommitted him/herself.
Our analyses of proposed service line co-management (and management) arrangements in 2010 included service lines ranging from $2 million to over $429 million in net revenue. While the revenue size of the service line is only one of numerous metrics considered in the analysis of individual transactions, the following table provides a summary comparison of service line net revenue and total management fees from our database, listed by specialty."
5. Acquiring and employing physicians. In this section of the report, HealthCare Appraisers discusses issues related to stacking compensation. It notes stacking compensation incentives, such as clinical services, ER call, on-call pay, medical directorships and various types of incentive bonuses, continues as a significant trend for employment arrangements.
The report also discusses concepts of synthetic or professional services agreements and employment arrangements, noting difficult regulatory challenges faced by some models. Closely related to employment, the report analyzed physician practice acquisitions, noting a significant increase in such transactions. The most activity was seen in cardiology, primary care, obstetrics/gynecology and multi-specialty groups. HealthCare Appraisers reports that with smaller groups, there is often less real value, while larger groups, based on cash flow analysis, can have significant value.
As to compensation models, the report notes:
"Employment compensation in 2010 trended towards more productivity based compensation models, with compensation per work relative value unit ('wRVU') being the predominate model used for productivity-based compensation in employment.
Although many employers continued to offer salaries or base compensation as part of an initial employment term for physicians, we found the employers are also combining it with forms of incentive compensation, including sign-on, retention and quality bonuses, or requiring physicians to reach targeted levels of productivity in order to maintain their base compensation.
Physician groups employed en masse as part of an acquisition deal generally opted for group-level compensation models in which all the physicians in the group were placed on the same mode with the same pay rates. "Stacking" of various compensation incentives such as base compensation, compensation per wRVU, on-call pay, medical directorships, and various types of incentive bonuses, continued as a major trend for employment arrangements."
Note: For more information on acquiring and employing physicians, read "5 Steps to Successful Hospital-Physician Integration," "Physician Integration: Hospital Medical Leaders Share Challenges, Strategies" and "Physician Employment & Beyond: The Current State of Physician Integration."
6. Ambulatory surgery centers. For ASCs, the report indicated HealthCare Appraisers saw a significant increase in acquisition activity. As to minority interest valuations, the company often saw a 3-3.5 times EBITDA. For majority interests, valuation multiples were generally 6-7 times EBITDA minus debt, with top quality centers approaching an 8 multiple in some markets.
The report also notes an increase in de novo development, but most of that is retrading situations where physicians were part of one center and are now joining another center.
Finally, HealthCare Appraisers reports the resulting valuation multiples for out-of-network ASCs are often very low, sometimes in the 1-3 times EBITDA range. It also refers to some industry experts predicting the final days of the out-of-network model.
Note: For more information on ASC transaction activity, listen to the free webinar presented by Scott Becker on "Key Issues for ASCs: ASC Purchase and Sale Transactions — National Chain and HOPDs, JVs, ACOs, Co-Management and Other Issues" by clicking here and read "ASC Transactions and Pricing During 2010: 4 Key Concepts".
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