Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice

Prepared for 2014 AHLA Transactions Conference
April 10 – 11, 2014
2014 AHLA Transactions Conference
April 10 – 11, 2014
Carol W. Carden, CPA/ABV, ASA, CFE
Charlene L. McGinty, Esq.
Don’t Stumble Coming Out of the Gate
–Top Ten Issues to Address When
Acquiring a Physician Practice

April 10 – 11, 2014
Agenda
Transaction Structure
Treatment of Ancillary Service Lines
FMV -- What Assets Are You Buying
FMV -- Compensation Stacking Issues
Antitrust Considerations
Planning for On-Boarding
Post-transaction Compensation
Post-acquisition Losses and Commercial Reasonableness
Compensation Issues Upon Renewal
Enhancing Other Health Reform Initiatives

April 10 – 11, 2014
1. Transaction Structure
• Choices: merger, asset sale, stock/membership interest
purchase.
• Asset sales are much more common.
• Asset sales can have significant income tax implications:
– Personal goodwill vs. corporate goodwill.
• Non-asset sale transactions can have significant risk
management implications:
– Requires much more extensive due diligence.

April 10 – 11, 2014
2. Treatment of Ancillary Service Lines
A. Global fee includes both
technical and
professional components.
B. Direct and indirect
expenses and cash flow
considerations.
A. Potentially problematic –
purchase of ancillary
service lines vs. post-
transaction
compensation.
B. FMV/commercial
reasonableness can be
challenging.
A. Appropriate to consider in
the valuation? ROI
considerations?
B. Impact on patients; PR
issues.
C. Integration with Hospital -
systems and processes.
Impact on physician
compensationCarved out and acquired
Provider-based billing or
not?

April 10 – 11, 2014
3. Fair Market Value – Transaction
Considerations
Key Concepts
• Determined from the perspective of hypothetical buyers and
sellers without the ability to refer business to one another.
• No consideration for post-transaction buyer synergies.
However, such synergies often exist!
• The financial terms of the transaction must make economic
sense based on the assets being sold/received.
• Post-transaction compensation must be taken into
consideration.

April 10 – 11, 2014
Methods Typically Used to Value
Physician Practices
Asset (cost)
Approach
Based on the underlying
assets and liabilities being
acquired
Net Asset Value (“NAV”)
Method
Income Approach
Based on future income
(cash flow)
Discounted Cash Flow
Method
Capitalized Income Method

April 10 – 11, 2014
What Are You Buying?
Intangible Assets?
• Medical Records
• Favorable Contracts
• Website/Phone
Numbers
• Established Workforce
What Are
You
Buying?
Cash?
A/P?
Equipment
A/R?

April 10 – 11, 2014
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.

April 10 – 11, 2014
Certain Practices Are More Likely to
Have Intangible Value
Large multi-specialty practices with mid-level 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 physician’s personal
efforts.

April 10 – 11, 2014
Legal Constraints/Evaluation of
Increased Risks
Stark Law
42 U.S.C. § 1395nn;
exceptions codified at
42 C.F.R. pts. 411 &
424
“Isolated Transaction”
Federal Anti-Kickback
Statute
42 U.S.C. § 1320a-
7b(b); safe harbors
codified at 42 C.F.R.
§1001.952
Sale of practice –
practitioner to
practitioner
Sale to hospital – U.S.
ex rel. Obert-Hong v.
Advocate Health Care
Tax Considerations
private benefit and
private inurement
concerns; intermediate
sanctions [Treas. Reg.
§53.4958-4(b)(1)]
Personal Goodwill vs.
Corporate Goodwill

April 10 – 11, 2014
• OIG Work Plan – Provider-Based Services (FY 2014)
• Advisory Opinions and Fraud Alerts
• Special Fraud Alert on Joint Venture Arrangements - 59 Fed Reg.
65372, 65373 (Dec. 19, 1994)
• Special Advisory Bulletin on Contractual Joint Ventures - 68 Fed.
Reg. 23148 (April 30, 2003)
• Successor Liability:
• Agreement to assume liabilities?
• Transaction is a merger? De facto merger?
• Purchaser is mere continuation?
• Fraudulent attempt to avoid liabilities?
GUIDANCE: Legal Constraints/Evaluation of
Increased Risks (Cont’d)
State Law
Federal Case Law
OIG Guidance
• Successor Liability:
• United States v. Vernon Home Health, Inc. – 21 F.ed 693 (5th Cir.
1994) – Medicare overpayments follow the Medicare provider
number
• Deerbrook Pavilion, LLC v. Shalala – 235 F.3d 1100 (8th Cir.
2000) – CMPs follow the Medicare provider number)
• Delta Health Group, Inc. v. U.S. Dept. of Health and Human
Services,, 459 F. Supp. 2d 1207 (N.D. Fla. 2006) – choice to
assume the provider number (but check state law)

April 10 – 11, 2014
4. FMV - Compensation Stacking
Considerations
Hospitals and other organizations are utilizing more complex compensation
models, often with multiple layers of compensation for multiple services
(sometimes referred to as “stacking”).
With these types of models, it is important to:
- Understand the various functional agreements and how they relate to each
other.
- Know when a “stacking” analysis is in order.
- Be aware of the multiple benchmark compensation data sources available.
- Be aware of the various forms of compensation that are included in clinical
benchmark data.
- Appreciate the increased legal and regulatory risks in stacking
agreements.
- Ensure that each component of compensation, and the components when
viewed in their entirety, do not exceed fair market value and are
commercially reasonable.

April 10 – 11, 2014
Physician Compensation:
Multiple Layers
Clinical Services
Teaching
Services or
Research
Activities
Medical
Directorships
Call Coverage
Co-management
and
Performance
Management
Mid-level
Provider
Supervision

April 10 – 11, 2014
Multiple Layers (Cont’d)
In addition, physicians can receive compensation in many forms, such as:
Real Estate Leases
Base Salary
Sign-on/Retention
Bonuses
Productivity-
Based
Incentives
Quality-Based
IncentivesPractice
Profitability
(Profit Sharing)
Tail Insurance
Excess
Vacation
Relocation Costs
Excess
Benefits

April 10 – 11, 2014
Multiple Layers (Cont’d)
As new compensation models become more
complex, in certain cases “the sum of the parts
can exceed the whole” and create commercial
reasonableness and FMV issues for the
organization.

April 10 – 11, 2014
Increased Risks
Stark Law
42 U.S.C. § 1395nn;
exceptions codified at
42 C.F.R. pts. 411 &
424
Bona fide employee
Indirect compensation
Space Rental
Federal Anti-Kickback
Statute
42 U.S.C. § 1320a-
7b(b); safe harbors
codified at 42 C.F.R.
§1001.952
Bona fide employee
Space Rental
Tax Considerations –
“reasonable
compensation”
private benefit and
private inurement
concerns; intermediate
sanctions [Treas. Reg.
§53.4958-4(b)(1)];
“only such amount as
would ordinarily be paid
for like services by like
enterprises (whether
taxable or tax-exempt)
under like
circumstances” - § 162
of IRC

April 10 – 11, 2014
• Special Fraud Alert on Joint Venture Arrangements - 59
Fed Reg. 65372, 65373 (Dec.19, 1994)
• Special Advisory Bulletin on Contractual Joint Ventures
- 68 Fed. Reg. 23148 (April 30, 2003)
• OIG Compliance Program For Individual and Small
Group Physician Practices - 65 Fed Reg. 59434 (Oct.
5. 2000)
• OIG Supplemental Compliance Program Guidance for
Hospitals – 70 Fed. Reg. 4858 (Jan. 31, 2005)
OIGGUIDANCE: Legal Constraints/Evaluation of
Compliance Program
Guidance
Advisory Opinions
and OIG Work Plan
Joint
Ventures/Contractual
Joint Ventures

April 10 – 11, 2014
Civil False Claims Act - 31 U.S.C. § 3729(a)
Civil Monetary Penalties Law - 42 U.S.C. § 1320a-7a(b)
PPACA Provisions
ENFORCEMENTTOOLS:
• Mandatory compliance programs as a condition of enrollment –
6401 of PPACA; “core elements” yet to be established.
• Payment suspensions – 6402(h) of PPACA; regulations at 76 Fed.
Reg. 5862 (2/2/2011) – effective 3/25/2011.
• 60-day repayment requirement – 6402 of PPACA; proposed rules
at 77 Fed. Reg. 9179 (2/16/2012) – Medicare A/B; proposed rules
at 79 Fed. Reg. 1918, 1995 (1/10/214) – Medicare C/D.

April 10 – 11, 2014
U.S. ex rel. Baklid-Kunz v. Halifax Hospital Medical Center et al., Case No.
6:09-cv-ORL-31TBS (M.D. Fla. Nov. 13, 2013); but see Schubert case
U.S. ex rel. Drakeford v. Tuomey, Case No. 3:05-2858-MBS (D.S.C. Oct. 2,
2013)
U.S. v. Campbell, 2011 WL 43013 (D.N.J.)
ENFORCEMENTACTIONS:
FMV/COMMERCIALREASONABLENESS
U.S. ex rel Singh v. Bradford Regional Medical Center, 2010 WL 4687739
(W.D. Pa)
Covenant Medical Center settlement (2009, Waterloo, Iowa)
Memorial Health University Medical Center settlement (2008, Savannah,
Georgia); U.S. ex rel Kaczmarczyk v. SCCI Hospital Houston (2004); case
settled

April 10 – 11, 2014
Avoid double payment for the same service or payment
for services not provided.
Identify (or match) the compensation with each service
to be provided.
Can the physician perform all of the duties due to the
number of hours required? Can quality be maintained?
Model the individual compensation components to
determine the total amount of compensation that could
occur under the arrangement.
Should consider placing caps on the amount of
compensation that can be earned under each component.

April 10 – 11, 2014
Inside the Stack vs.
Outside the Stack
Base compensation
Productivity
Quality incentive
Sign-on/retention
Call pay-Maybe
Medical Director pay-Maybe
Supervision of mid-levels
Benefits
Co-management compensation
Practice profitability sharing
Call pay-Maybe
Medical Director pay-Maybe

April 10 – 11, 2014
5. Antitrust Issues
• Important to document why acquisition is the best
alternative
• Implications for antitrust dependent upon the
specialty to some extent – who influences care?
• Evaluate the impact on the payer community with
an acquisition vs. some other alignment initiative
• Regulatory Scrutiny – Saint Alphonsus vs. St.
Luke’s

April 10 – 11, 2014
6. Planning for On-Boarding
• Understand timing issues – can become an issue in protracted
negotiations.
• Group versus individual ID numbers; Form 855 filings; Medicaid
enrollment.
• Licensure considerations (e.g., business licenses, ICANL)
• Allow for time for credentialing; private payor considerations.
• Allow time for billing and coding audit.
• Can have significant impact on cash flow in the short-term.
• Need to work with operational/integration team at Hospital from
outset.

April 10 – 11, 2014
7. Post-Transaction Compensation
Compensation related to services vs.
related to ownership.
Must be considered in the practice
valuation to avoid the “double dip.”
All other things equal, less compensation
equals higher purchase price.
1
2
3

April 10 – 11, 2014
8. Post-Acquisition Losses and
Commercial Reasonableness
• How were ancillary services treated?
• Changes in payer mix.
• Changes in expense structure:
– Increased benefits costs?
– Decreased supplies cost?
• Changes in commercial insurance rates:
– Increased or decreased?
• What would the practice look like if it were still in private practice?

April 10 – 11, 2014
9. Compensation Upon Renewal
• How much “investment” is warranted.
• Stacking issues in an employment context.
– How much call is incorporated into salary?
– Productivity level vs. administrative responsibilities.

April 10 – 11, 2014
10. Structure to Enhance
Other Initiatives
MSSP initiatives
Commercial ACO initiatives
Bundled Payment Initiatives
CIN Initiatives
Align quality incentives accordingly

April 10 – 11, 2014
Questions?

April 10 – 11, 2014
Contact Information
Carol Carden, CPA/ABV, ASA
PYA
(800) 270-9629
ccarden@pyapc.com
www.pyapc.com
Charlene L. McGinty, Esq.
McKenna Long & Aldridge LLP
(404) 527-4660
cmcginty@mckennalong.com
www.mckennalong.com

Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (16)

Similar a Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice

Similar a Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice (20)

Más de PYA, P.C.

Más de PYA, P.C. (20)

Último

Último (20)

Don’t Stumble Coming Out of the Gate –Top Ten Issues to Address When Acquiring a Physician Practice