Fair Market Value in Health Care Transactions: Advanced (and Thorny) Issues, Part III: Commercial Reasonableness in Contrast with Fair Market Value: What s the Difference and Who Makes the Call? Thursday, March 6, 2014 1:00-2:30 PM Eastern This webinar is sponsored by the Fair Market Value Affinity Group of the Hospitals and Health Systems Practice Group and is co-sponsored by the In-House Counsel, Physician Organizations, and Teaching Hospitals and Academic Medical Centers Practice Groups. Panelists: W. Lyle Oelrich, Jr., MHA, FACHE, CMPE Pershing Yoakley & Associates, P.C., Knoxville, TN, loelrich@pyapc.com Don Barbo, CPA/ABV Deloitte Financial Advisory Services LLP, Dallas, TX, dbarbo@deloitte.com Donald H. Romano, JD Foley & Lardner LLP, Washington, DC, dromano@foley.com Moderator: Joseph Wolfe, JD Hall, Render, Killian, Heath & Lyman, P.C., Milwaukee, WI, jwolfe@hallrender.com 1
Fair Market Value Affinity Group Leadership Vice Chair of Hospitals and Health System Practice Group and Liaison to FMV Affinity Group: Claire Turcotte, Esq. Bricker and Eckler West Chester, Ohio Chair, FMV Affinity Group Gregory D. Anderson, CPA/ABV, CVA Horne LLP Hattiesburg, Mississippi Vice Chairs, FMV Affinity Group: Andrea M. Ferrari, Esq., MPH Health Care Appraisers, Inc. Delray Beach, Florida Kelly Anderson, Esq. Corporate Counsel, Baptist Health Louisville, Kentucky W. James Lloyd, CPA/ ABV, ASA Pershing Yoakley & Associates Knoxville, Tennessee Summer H. Martin, Esq. McKenna Long & Aldridge LLP Atlanta, Georgia 2
Today s Panelists Joseph N. Wolfe, Esq. (Moderator) Hall, Render, Killian, Heath & Lyman, P.C. Milwaukee, Wisconsin Donald H. Romano, Esq. Foley & Lardner LLP Washington, DC Don Barbo, CPA/ABV Deloitte Financial Advisory Services LLP Dallas, Texas W. Lyle Oelrich, Jr., MHA, FACHE, CMPE Pershing Yoakley & Associates, P.C. Knoxville, Tennessee 3
Introduction to the Webinar Series A follow up to last year s Fair Market Value ( FMV ) Bootcamp series. Focused on more in-depth discussion of questions and issues that were raised in the FMV series. A result of feedback and polling of the FMV series participants. This is the third installment of this follow-up series. The final installment is scheduled for Wednesday May 7, 2014 (Practice Valuation Hot Topics). 4
Webinar Objectives: Regulatory guidance and definitions of FMV and commercial reasonableness ( CR ). Comparing and contrasting the FMV and CR standards. Enforcement actions involving compliance with FMV and CR requirements. Perspectives on the roles of the attorney and valuator when evaluating FMV and CR. 5
General Disclaimer The views expressed in this presentation are the personal opinions of the speakers and are intended to facilitate a general discussion regarding legal and valuation issues that may arise in the context of health care transactions. This presentation contains general information only. It is not intended to be comprehensive and should not be relied upon as providing accounting, business, financial, investment, legal, tax, or other professional advice or services. 6
Webinar Agenda: Hypothetical Fact Pattern Regulatory Framework FMV and CR Legal Standards Recent Enforcement Actions FMV Valuation Overview Business Valuation ( BV ) Compensation Valuation ( CV ) Thorny FMV Issues Commercial Reasonableness BV and CV Considerations Thorny Commercial Reasonableness Issues Question and Answer Thorny Valuation Issues 7
Hypothetical Fact Pattern Acquisition of a cardiology group by a tax-exempt hospital. Includes significant ancillary designated health services ( DHS ). DHS will be converted to hospital outpatient department services, and will be billed as provider based. Structured as a two-step transaction: Step 1: Acquisition of the practice assets. Step 2: Direct employment of the cardiologists post-closing. Legal counsel has engaged experienced third-party valuation consultants to opine on the FMV and CR of both steps of the transaction. Step 1: Business Valuation ( BV ) Step 2: Compensation Valuation ( CV ) 8
Hypothetical Fact Pattern Both valuation firms were engaged by legal counsel, under the attorney-client privilege. Additional BV Considerations: The discounted cash flow valuation will not yield positive cash flows. The cardiology group will transfer all of its assets, including its medical records, and all of its employed workforce. The cardiology group intends to negotiate the purchase price based on a short letter it obtained from its accountant. Additional CV Considerations: The proposed compensation is projected to exceed the cardiologists professional collections. The cardiologists will be paid multiple forms of compensation (e.g., a retention bonus, a quality bonus, paid call and a medical director stipend, etc.). 9
Regulatory Framework Stark Law - Fair Market Value Fair market value means the value in arm's-length transactions, consistent with the general market value. "General market value" means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals. 10
Regulatory Framework Anti-Kickback Statute No definition in 42 C.F.R. 1001.2 Internal Revenue Service Revenue Ruling 59-60: The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. 11
Regulatory Framework Definitions - Commercially Reasonable No "real" definition in 42 C.F.R. 411.351 Language in the Stark exceptions is illustrative Commercially reasonable even if no referrals were made between the parties Commercially reasonable even if no referrals were made to the employer Reasonable and necessary for the legitimate business purposes of the arrangement(s) Commercially reasonable even if the physician made no referrals to the entity Commercially reasonable (taking into account the nature and scope of the transaction) and furthers legitimate business purposes of parties 12
Enforcement Activity Increased focus on FMV and commercial reasonableness Tuomey Gov t alleges that it is not commercially reasonable for hospital to lose money on their compensation of employed physicians Hospital paid physicians more than what it got from their professional fees Hospital would make up loss through facility fees Employment exception requires that employment arrangement be commercially reasonable in the absence of referrals 13
Enforcement Activity Increased focus on FMV and commercial reasonableness Covenant Medical Center Settlement ($4.5 million) Five Iowa employed specialists (orthopedic surgeons, neurosuregons, GIs) paid as much as $1.8 million Hospital reportedly lost money on physicians compensation 14
Enforcement Activity Per-click leases CMS recognizes that per-click arrangements such as those for lithotripsy can be FMV but questions whether they are commercially reasonable if patient volume is sufficiently large to justify lessee buying, instead of renting, the equipment As a further example, we would also have a serious question as to whether an agreement is commercially reasonable if the lessee is performing a sufficiently high volume of procedures, such that it would be economically feasible to purchase the equipment rather than continuing to lease it from a physician or physician entity that refers patients to the lessee for DHS. Such agreements raise the questions of whether the lessee is paying the lessor more than what it would have to pay another lessor, or is leasing equipment rather than purchasing it, because the lessee wishes to reward the lessor for referrals and/or because it is concerned that, absent such a leasing arrangement, referrals from the lessor would cease. In some cases, depending on the circumstances, such arrangements may also implicate the Anti-Kickback Statute. 73 Fed. Reg. at 48714. 15
In-House Counsel Concerns Physician employment Physician practice acquisition Joint venture arrangements Call coverage and other personal service arrangements Management services agreements with physicians or physician organizations Co-management arrangements with physicians or physician organizations...just about every arrangement with a physician requires a thorough analysis of FMV and commercial reasonableness 16
In-House Counsel Concerns Whose call is it? FMV Outside valuator Compensation tables Real estate broker estimates In-house (or outside) lawyer Commercial Reasonableness Corporate "business operations" team Outside valuator In-house (or outside) lawyer 17
Business Valuation Methodologies Income Approach sum of present values of expected future benefits Market Approach comparison to what is actually being paid in the market place Cost Approach value underlying assets or resources Application of valuation approaches to the hypothetical case study 18
19 Thorny Business Valuation FMV Issues Can the cost method be used to value intangible assets when the discounted cash flow method produces a value of zero? Can the cost approach independently support a value in excess of the tangible asset value (e.g., on a cost to recreate theory, etc.)? Would a hypothetical buyer ever purchase medical records or workforce in place? Can the future ancillary business be considered when assuming revenue streams under the discounted cash flow method? Does this require an assumption that physicians will continue to refer? Are BV and CV analyses aligned? Perspectives on the roles of the attorney and valuator when evaluating FMV
Compensation Valuation Methodologies Income Approach sum of present values of expected future benefits Market Approach comparison to what is actually being paid in the market place Cost Approach value underlying assets or resources Application of valuation approaches to the hypothetical case study 20
Thorny Compensation Valuation FMV Issues Illogical part-time employment arrangements Challenges with wrvu models On-call pay for employed physicians 21
Commercial Reasonableness vs. Fair Market Value Commercial reasonableness is different than fair market value. Does the agreement make cents (fair market value)/ sense (commercial reasonableness)? Fair market value: - What is the range of dollars you are going to pay for the services? Commercial reasonableness: - Was this a good business arrangement to enter into? - Was it commercially reasonable even if there are no referrals between the parties? - Do the underlying economics of the transaction make sense? 22
Commercial Reasonableness vs. Fair Market Value Thus, fair market value assesses the reasonableness of the range of dollars, while commercial reasonableness looks to the reasonableness of the business arrangement generally. Because of this differentiation, an arrangement may be at fair market value but not be commercially reasonable. 23
Commercial Reasonableness Approach Business Purpose Analysis Provider Analysis Facility Analysis Resource Analysis Independence and Oversight Analysis 24
Thorny Commercial Reasonableness Issues When is it acceptable for compensation to exceed collections? How are multiple forms of stacked compensation analyzed? 25
Other Thorny Valuation Issues Should FMV be based on local data, national data, or both? If there is a scarcity of physicians willing to provide a particular service, can the scarcity be factored into the FMV and CR analysis? What type of process and documentation would be necessary to document FMV and CR internally? What are the proper roles for the attorney and the valuation consultant when evaluating and documenting FMV and CR? Should FMV and CR be evaluated by the same consultant and in the same written opinion? 26
Additional Questions Joseph Wolfe, Esq. (Moderator) Hall, Render, Killian, Heath & Lyman, P.C., Milwaukee, WI, jwolfe@hallrender.com Donald H. Romano, Esq. Foley & Lardner LLP, Washington, DC, dromano@foley.com Don Barbo, CPA/ABV Deloitte Financial Advisory Services LLP, Dallas, TX, dbarbo@deloitte.com W. Lyle Oelrich, Jr., MHA, FACHE, CMPE Pershing Yoakley & Associates, P.C., Knoxville, TN, loelrich@pyapc.com 27
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