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Prepared for NACVA Healthcare Webinar
February 13. 2015
NACVA Healthcare Webinar
February 13, 2015
Darcy Devine, MBA, CVA, ASA
Don’t Stumble Coming Out of the Gate
–Top Ten Issues to Address When
Acquiring a Physician Practice
Page 1
Prepared for NACVA Healthcare Webinar
February 13. 2015
Agenda
Transaction Structure
Treatment of Ancillary Service Lines
FMV Considerations
What Assets are Included
Post-Transaction Compensation
Documentation for Legal/Regulatory Planning
Planning for On-Boarding
Post-Acquisition Losses and Commercial Reasonableness
Renewal Preparation
Structure for Health Reform Initiatives
Page 2
Prepared for NACVA Healthcare Webinar
February 13. 2015
1. Transaction Structure
Business: Asset v. stock transaction
• Asset transactions are much more common.
• Asset transactions can have significant income tax
implications for sellers.
• Stock transactions can have significant risk management
implications.
Real Estate: Will buyer be purchasing?
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Prepared for NACVA Healthcare Webinar
February 13. 2015
2. Treatment of Ancillary Service Lines
Clinical Laboratories
Diagnostic Imaging
Physical Therapy
Cath Laboratory
Research Entity
Aesthetics
Ambulatory Surgery Center
Endoscopy Center
Separable, distinguishable,
marketable?
Financial and operations data
– do they exist?
Global fee: technical and
professional components
Direct and indirect expenses
Cash flow considerations
Impact on physician
compensation
Restrictive covenants
Provider-based billing
Integration with hospital -
systems and processes
Risk
Due DiligenceExamples Major Issues
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Prepared for NACVA Healthcare Webinar
February 13. 2015
3. Fair Market Value 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.
Page 5
Prepared for NACVA Healthcare Webinar
February 13. 2015
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
Page 6
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February 13. 2015
4. What Assets Are Included?
Intangible Assets?
• Medical Records
• Favorable Contracts
• Website/Phone
Numbers
• Established Workforce
What Are
You
Buying?
Cash?
A/P?
Equipment
A/R?
Page 7
Prepared for NACVA Healthcare Webinar
February 13. 2015
Assessing Intangible Value
The existence of
intangible value
often 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
may not have
intangible value.
Page 8
Prepared for NACVA Healthcare Webinar
February 13. 2015
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.
Page 9
Prepared for NACVA Healthcare Webinar
February 13. 2015
5. 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
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February 13. 2015
Compensation Stacking ConsiderationsHospitals 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.
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February 13. 2015
Physician Compensation:
Multiple Layers
Clinical Services
Teaching Services or Research Activities
Medical Directorships
Call Coverage
Co-Management and
Performance Management
Mid-Level Provider
Supervision
Page 12
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February 13. 2015
Physician Compensation:
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
Page 13
Prepared for NACVA Healthcare Webinar
February 13. 2015
Physician Compensation:
Multiple Layers (Cont’d)
There needs to be a solid understanding of
“before” and “after” compensation. This
includes all sources of compensation and all
types of compensation.
Page 14
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February 13. 2015
6. Documentation for Legal/
Regulatory Reasons
• Document fair market value for compensation/payments and
the commercial reasonableness for the entire arrangement.
– Business assets, Compensation, Real Estate
• Document why the acquisition is the best alternative from an
anti-trust perspective
– Saint Alphonsus v. St. Luke’s
– Evaluate the impact on the payer community with an
acquisition vs. some other alignment initiative
Page 15
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February 13. 2015
Legal Constraints/Evaluation of
Increased RisksU.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.)
EN
FO
RC
EM
EN
T A
CT
ION
S:
FM
V/C
OM
ME
RC
IAL
RE
AS
ON
AB
LE
NE
SS
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
Page 16
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February 13. 2015
7. 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 payer 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.
Page 17
Prepared for NACVA Healthcare Webinar
February 13. 2015
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?
Page 18
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February 13. 2015
9. Renewal Preparation
• Employment contracts will be up for renewal in 3-5
years
• How to evaluate success?
• Fair market value considerations
• How much “investment” is warranted?
• Divestment planning
Page 19
Prepared for NACVA Healthcare Webinar
February 13. 2015
10. Structure for Health
Reform Initiatives
MSSP initiatives
Commercial ACO initiatives
Bundled Payment Initiatives
CIN Initiatives
Align quality incentives accordingly
Page 20
Prepared for NACVA Healthcare Webinar
February 13. 2015
Questions?
Page 21
Prepared for NACVA Healthcare Webinar
February 13. 2015
Contact Information
Darcy Devine
PYA
(404) 266-9876
www.pyapc.com
