Health Value Group

What Every Healthcare Attorney Should Know About Appraisals

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When attorneys contract with appraisers to issue valuation opinions, there are 5 very important elements that the attorney must know and understand to ensure its proper and effective use.  These may sound elementary, but I find that these elements are commonly misunderstood which can ultimately affect the transaction or the purpose of the appraisal.

Subject of Valuation –

The attorney, client, and appraiser need to have a clear understanding and agree on the actual subject of the appraisal.

  1. Are we valuing a specific service?  If so, is it clearly defined, detailed and documented?
  2. Are we valuing a specific entity?  If so, are we valuing the invested capital of a business or the net equity?  Are we valuing a minority, fractional interest or one hundred percent?
  3. Are we valuing medical equipment? What peripherals are included? Who delivers and installs?
  4. Are we valuing an equipment lease rate?  What is included? Do we have all the details?

Purpose of Valuation –

The attorney should inform the appraiser exactly how the appraisal report will be used. The appraisal report can be used for any of the following:

  1.  Compliance with the Stark Law and Anti-Kickback Statue
  2. Compliance with the Private Inurement laws for 501(c)(3) organizations
  3. For federal tax compliance
  4. Buy/Sell agreement
  5. Litigation or dispute resolution

Standard of Value –

The purpose of valuation will dictate the standard of value.  The attorney and appraiser should discuss the various standards of value and both agree on the proper standard to use. The commonly used standards of value include:

  1. Fair Market Value – Revenue Ruling 59-60
  2. Fair Market Value (healthcare)  –  Stark Law
  3. Investment Value
  4. Fair Value

Premise of Value –

This is the unique set circumstances and assumptions pertaining to the asset, transaction, or situation.  The premise of value should also be discussed between the appraiser and client/attorney because this will have an impact on the appraisal value.  The common premises of value include:

  1. Value as a going concern
  2. Value as an assemblage of assets
  3. Value as an orderly disposition
  4. Value as a forced liquidation

Value Date –

Finally, the valuation date needs to be clearly understood among the parties.  The purpose of the appraisal will have the most bearing on this element.

If the attorney, client, and appraiser all have a clear understanding of these five elements and assumptions, then this will reduce compliance risk and ensure the appraisal is being properly used. 

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FMV Tip for Telemedicine

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The most common telemedicine arrangement is referred to as a “hub-and-spoke” arrangement. This involves an originating site (usually a rural hospital) with patients in need of care and a distant site (usually a larger health system) employing or contracting with specialists who deliver care.  

In some cases, a health system will have physicians on-call to respond to a telemedicine encounter.  At first, this telemedicine on-call arrangement appears to be very similar to a typical call arrangement for an emergency department.  However, utilizing per diems reported in benchmark surveys to determine a telemedicine FMV on-call rate is not exactly appropriate. It is important to remember that call coverage rates published in surveys like MGMA or Sullivan Cotter mostly represents emergency department call coverage.   If you are using these survey on-call rates for telemedicine on-call arrangements, the data will likely need to be adjusted.  Emergency department call coverage benchmarks are commensurate with the burden of responding in person to the emergency department to perform a consultation, surgery, or other procedure.  In a telemedicine arrangement, the on-call physician can likely deliver the consult or examination at his home, office or over the telephone, which is much less burdensome than having to come into the emergency department. In this case, the per diem on-call rates published in the compensation surveys should be discounted to account for the diminished burden. 

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Fair Market Value of DME Patient Leads and Legal Restrictions

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Durable Medical Equipment (DME) companies often purchase sales leads from third-party lead generation companies (LGC). However, DME suppliers need to be conscious and careful about how they pay for sales leads,  especially if their customers/patients participate in the Medicare or Medicaid program for their supplies.

dme, medical equipment

Federal healthcare laws are particular when it comes to how healthcare providers, including DME suppliers, obtain information on patients. These laws may come into play when DME suppliers attempt to generate new business by contracting with LGCs, which can cause suppliers to violate any number of healthcare law like the Anti-Kickback Statute (AKS).

As the AKS relates to the Durable Medical Equipment industry, it is acceptable for a DME supplier to “purchase a lead.” However, it is a violation of the AKS for the supplier to “pay for a referral.” So, when a DME supplier contracts with a lead generation company or another type of third-party marketing firm, it’s important to understand whether they are purchasing an “unqualified lead” or are they purchasing a “qualified lead” which can be considered a patient referral, making the purchase illegal.

DME suppliers can and should pay a set FMV price-per-unqualified lead. An unqualified lead is a prospect’s/patient’s name, phone number and address or email address.  A qualified lead/patient is a prospect with much more information, such as prescription, doctor’s name, Medicare information, etc.  Government regulators consider a qualified lead as a patient referral and paying a set price-per-qualified lead could be problematic. Therefore, it’s recommended to play it safe and pay a set FMV price-per-unqualified lead and then pay an FMV hourly rate to qualify the lead.

Feel free to contact me if you have any questions.

Chris David —  Cdavid@healthvaluegroup.com – 303-918-360

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Physical Therapy Clinics – Sector Overview & Fair Market Value

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The Physical Therapy sector is going through a period of growth and is expected to increase by 3.6% annually to become a $34.6 billion sector by 2020. The PT industry is experiencing heightened M&A activity from both strategic suitors and private equity investors. The PT business is highly fragmented with the 50 largest competitors comprising less than 25% of the market, which makes it ripe for consolidation.  This consolidation will be led by private equity backed firms as they continue to expand their footprint through add-on acquisitions to gain market share and improve margins by leveraging infrastructure and systems.   

physical therapy

Nine of the top twelve outpatient companies are private equity backed. The outpatient rehabilitation sector is highly fragmented with the three largest players controlling only 8.3% of the market share and 13.1% of the facility base.  While there are a few national companies, the industry consists predominantly of small to medium regional providers with annual revenue of slightly over $1 million per clinic. Physician-owned PT practices comprise an estimated 10% -15% of all PT clinics and represent a large compelling market opportunity for consolidation. 

Fair market valuation multiples are ranging from 5 to 6 time trailing EBITDA.  US Physical Therapy, the largest pure-play operator of outpatient physical therapy clinics has been an active acquirer in this space.  According to a number of their 8K filings since May 2005, US Physical Therapy has been acquiring private PT businesses at values averaging  1.6 times revenue. 

 

The information provided herein is of a general nature and cannot be substituted for an actual fair market valuation opinion, in which specialized knowledge is applied to a particular circumstance.  Therefore, nothing in this paper should be construed to offer or render a valuation of a physical therapy clinic, and neither Chris David or HealthValue Group can take any responsibility for an attempt to use or adopt the information or disinformation presented herein.
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Primary Care Physicians’ Compensation on the Rise

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According to data obtained from the physician recruiting firm, The Medicus Firm, starting pay for primary care physicians and family practice physicians was up in 2016.

Primary Care Physicians
• Primary care physician placement salaries were up 11.0% to $227,734
• Signing bonuses for primary care physicians were up 41.0% to $27,799
• Total compensation packages for primary care physicians were up 13.6% to $257,533

Family Medicine Physicians
• Average salary per placement of family medicine physicians was up 5.9% to $222,703
• Average signing bonus for a family practitioner was up 40.2% to $27,191

Internal Medicine
• Average total compensation package for internal medicine physicians was up 5.9% to $273,410
• Average base salary for an internal medicine physician was up 2.2% to $244,186

Many industry insiders believe that the intense competition for primary care physicians is causing employers to offer higher base salaries, extensive benefits and shorter work weeks to attract candidates. According to a recent survey by Merritt Hawkins, family physicians and internists were the top #1 and #3 requested physicians for placement in 2016.

Note: The salary data above includes base salary and signing bonus, where indicated. This salary information does NOT include any additional bonus compensation such as production bonus or quality/outcomes bonus. The base salaries quoted in this report are averages of salaries offered to candidates upon placement, representing the physicians’ minimum, base earnings for the year. Also, this placement salary data does not account for other perks or other benefits.

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Physician FMV Compensation & Best Practices for Using Survey Data

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Many hospitals, physician groups, and consultants use survey data from companies like MGMA, Sullivan Cotter and AMGA as a proxy for fair market value compensation. However, special care must be taken in applying and utilizing this data or you run the risk of developing a compensation that doesn’t meet fair market value.

1. Don’t assume the median compensation is a safe and conservative indication of fair market value compensation. It’s important to consider certain metrics such as services provided, experience, total hours worked, wRVUs and collections. If a physician is producing at levels below the median or they have limited experiences then paying a physician at the median compensation may not support fair market value.

2. Be careful when paying a physician a certain amount per wRVU. Use of wRVUs to measure provider productivity is common. Some people often mistakenly assume that if a physician’s work RVU volume falls within a certain percentile, they can apply the corresponding published percentile compensation per work RVU data and set a compensation level that is consistent with FMV. If you use compensation-per-wRVU above the median, your resulting compensation will likely exceed fair market value. For example, a cardiologist who generates 11,800 wRVUs annually would put him/her at the MGMA 75th percentile of productivity. Multiplying the 75th percentile of compensation per wRVU ($79.06) by the physician’s actual work RVUs produces compensation of nearly $933,000. This amount is 27% more than the 75th percentile compensation benchmark, and not consistent with FMV standards.

3. Don’t assume the 90th percentile compensation cannot be FMV. After all, the survey participants reported this data and we have no reason to believe it is not accurate or untruthful. However, it is worth noting that there is no assurance that the actual compensation being paid to a physician is consistent with FMV. But, if a physician’s productivity is thoroughly analyzed with respect to hours worked, WRVUs, professional collections and the metrics are within or near the 90th percentile, then there is a highly defensible case to pay that physician at the 90th percentile.

4. Finally, don’t rely on just one survey. Depending on the specialty and the survey respondents, there could be a very small number of participant responses for a particular category. Therefore, it is always a good idea to refer to multiple surveys. The larger the sample size and the more data points analyzed, the stronger case you have that your conclusion is representative of the “market”. Plus, there is regulatory guidance suggesting other sources should be considered. The Stark Law recommends that multiple, objective surveys are considered when determining the FMV of physician compensation.

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Physician Payment Sunshine Act and Fair Market Value Compliance: Best Practices

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The Physician Payment Sunshine Act puts pharmaceutical and medical device companies under intense scrutiny and exposure. Compensation paid to healthcare professionals (“HCP”) and healthcare institutions for various services, such as speaking, training, product development, R&D, advisory board service and consulting must be at fair market value (“FMV”) or risk being in violation of the Federal Anti-Kickback Statute.

It is paramount to know and remember that FMV compensation is for a specific service, not a specific professional. Therefore, it is essential to match the qualifications and experience of the HCP providing the service to the specific service/task itself.

Healthcare attorneys should encourage their clients to do following:

  • Identify and document the specific areas/departments where HCPs are utilized. This may include:
    1. Speaking
    2. Teaching/Training
    3. Product Development and/or R&D
    4. Board Advisor
    5. Strategic consulting
  • Define and document the specific duties, responsibilities and tasks for each area.
  • Identify and document the specific requirements and qualifications for each position. (i.e. medical specialty, years of specific experience, credentials, etc.)

Healthcare companies can choose to develop FMV rates internally or they can hire an outside third-party consulting firm. The FMV rates can be based on an hourly rate or for a specific activity. It is important that the company follows a consistent approach and methodology for developing the FMV rate for specific services.

More importantly, when the above framework is in place, the FMV rate is much more supportable and defensible.

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