With the healthcare industry in a state of flux, not much is known about what lies ahead; but trends across the industry have become apparent and are likely to stick. These trends were the subject of a presentation given by PYA Principal David McMillan at the PKF North America Healthcare Fly-In.

1. Trends in Healthcare Consulting
November 13, 2013
David McMillan, CPA
New Orleans, Louisiana

2. Speaker Biography
David W. McMillan, CPA
PYA Principal
David McMillan provides financial and strategic
services to the Firm's healthcare clients. David's areas
of concentration are: feasibility studies for various
healthcare entities; mergers, acquisitions, and
affiliations among providers; strategic planning and
forecasting, clinical integration services; and
valuations and operational analysis.

3. Agenda
Status of the Healthcare Industry
Current and Future State of Independent Physician Practices
Trends in Physician-Hospital Alignment
Healthcare Regulatory Issues
Valuation Methods and Other Physician Practice Issues
Physician Compensation Issues
Other Trends in Physician Compensation

4. Healthcare Has Changed!
Moving from…
Payers
Healthcare Facilities
Specialists
Primary Care Physicians
Patients
Moving toward…

5. Healthcare 2.0
1. The industry is learning to purchase value, not
volume.
2. Providers and payers are struggling to find
common solutions to universal challenges because
healthcare continues to be a local and regional
commodity.
3. Stakeholders are searching for their purpose and
relevancy in a patient-centered healthcare
continuum.
4. Consumerism is emerging as a driving force in
healthcare.
5. Change is accelerating due to knowledge derived
from disparate and dynamic data.
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6. Pressures
Non-Compliant Patients
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Regulations

7. Balancing Choices
Current
Environment
Reformed
Environment
Economic Relationship
Employment
Independence
Clinical Relationship
Hospital Alignment
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Physician Alignment

8. How are Hospitals and Physicians
Responding to New Realities?
Consolidation and
Alignment
Information
Technology
Investments
Physician
Employment
Other Innovations:
• ACOs
• PCMHs
• CINs
Healthcare Reform
Initiatives
New Payment
Models
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9. Current State of
Physician Practices
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10. Maintaining Physician Independence
How confident are you in your
group’s ability to sustain
financial independence in the
next 3 to 5 years?
Very confident
35.0%
Uncertain
50.0%
Not confident
15.0%
Source: PYA Physician Survey and Experience
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11. Examining Independence
“Independence”
Performance
Excellence
Scale
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12. Strategies for Independence
2
Secure the
primary care
docs in a
multispecialty
group
1
Merge
3
Enhance
physicians
recruitment
with
intangible
perks
4
Maximize
alternative
revenue
sources
5
Get involved
in politics

13. Maintaining Independence:
Conclusion?
Maintaining independence is not easy.
Careful planning and documentation is key.
Some solo practices will survive but most
will align with other providers.
Strategic thinkers will gain in the end.
One size does not fit all.

14. Current Hospital-Physician
Alignment Environment
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15. Hospital-Physician
Alignment Transactions
#
Hospitals and physicians are actively
seeking ways to strategically and
financially align themselves.
Successful alignment transactions can
result in substantial benefits to all
parties including patients.
• Improved efficiencies and quality of care
• Reduce costs and waste
• Better bargaining power with third party
payers
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16. With what type(s) of healthcare entities
do you work closely?
1.
2.
3.
4.
5.
Hospital
Health System
Physician Practice
Solo Practitioners
Commercial Health
Insurer/Payer
6. Government Other
7. None (no healthcare entities)
1
1
0/0
Cross-tab label

17. Hospitals & Health Systems
Seeking efficiencies
Diversifying, focusing on outpatient and wellness
care
Increasing emphasis on standardization,
integration, and consolidation of services
Hospitals &
Health Systems
Experiencing physician shortages in key
specialties
Competition from other systems as well as
physician-owned outpatient centers
Call coverage needs
Healthcare reform
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18. Physicians
Financially squeezed - decline in reimbursement,
increased overhead, and loss of income
Difficulty obtaining malpractice coverage at
reasonable rates
Inability or unwillingness ($$) to recruit
Quality of life
Physicians
Increasingly complex government oversight
Working capital requirements
Healthcare reform
Exit strategy
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19. Physicians Are Feeling the Pain
Financially squeezed
• Decline in reimbursement and loss of income
• Overhead, malpractice insurance, and working
capital requirements
Continuing uncertainty surrounding
reimbursement
Pressure to demonstrate quality of services
Difficulty hiring “sophisticated” support staff
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20. Physicians Are Feeling the
Pain (Cont.)
Inability to recruit; succession planning
Decreasing quality of life
Increasingly complex government
oversight
Healthcare reform
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21. Strategic Responses to Changes
 Merge with other medical practices.
 Create mega-group IPAs.
 Secure “primary care” referral sources.
 Maintain leadership roles in hospital/community.
 “Align” with hospitals – Employment, Service Line
Management, ER Call, PSAs.
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22. Physician Alignment Options
More Common
Physician Employment
Physician
Leasing
Arrangement
Medical
Directorships
Real Estate JV
Professional
Services
Agreement
Co-Management
Equipment JV
More Integration
Less Integration
EMR
Quality
Shared Savings
Less Common
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23. Trends in Healthcare Alignment:
Employment
Many attempts to align in the past have centered
around physician employment.
• According to the Bureau of
Labor Statistics,
employment of physicians
and surgeons by hospitals
is expected to grow by 24%
from 2010 to 2020.

24. Trends in Healthcare Alignment:
Employment
Sources: Accenture Analysis, MGMA, American Medical Association
Although the rate at which employment is growing has
been debated, it is undeniable that the number of
physicians who are “truly independent” is declining.

25. Employed Physician Estimate
% of Total US
Physicians
Estimated %
Employed
Weighted Estimate
Primary Care
48%
50%
24%
Specialty
52%
30%
15.6%
Total
100%
39.6%
Predicting the next five years…
• Increasing number of newly trained physicians seeking employment
• Nearly one-third of practicing physicians are 55 or older
• More than 40% of physicians still practice in groups of fewer than five
• AAMC analysis forecasting a shortage of 160,000 physicians by 2025
• Medicare program sustainability and healthcare reform impact
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26. Practice Arrangements
Practice Owned by Practice
Physicians - Owner (48.9)
Practice Owned by Practice
Physicians - Non-Owner (11.1)
Practice Wholly Owned by
Hospital (14.7)
Practice Partially Owned by
Hospital (8.3)
Practice Owned by Not-for-Profit
Foundation (6)
Direct employees of hospital or
health system (5.6)
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27. Trends in Physician Practice Acquisitions – the
“Buy and Employ” Strategy
Hospitals and
physicians are
entering into
acquisition and
employment
transactions at a
torrid pace!
Transactions often make
good business sense but
also involve substantial risk.
• Regulatory risk
• Financial risk (i.e., hospital’s
ability to successfully integrate
and operate the practice without
incurring substantial losses)
• Reputation risk (the two entities
are now related)
Buy and Employ
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Very competitive
environment in
many markets.

28. “Buy and Employ” Transactions
Typical Transaction:
• Hospital buys the practice at fair market value (“FMV”)
o Usually structured as an asset purchase
o Cash and AR normally excluded
Physicians employed by the hospital
• Generally under some type of productivity-based compensation
arrangement (wRVUs)
• Commonly involves a period of guaranteed compensation
(assuming productivity does not decline substantially)
• Often includes other types of arrangements as well (e.g., comanagement, call pay, quality incentives, etc.)
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29. Healthcare Regulatory
Considerations

30. Navigating the
Regulatory Environment
STARK LAW
Prohibited self-referrals
for Medicare and
Medicaid patients
ANTI-KICKBACK
Knowingly and willful
STATUTE
offers, payments, or
receipts for referrals
IRS-NFP
IRC Section 501(c) 3
REQUIREMENTS
requirements
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100
m
Road
Menu

31. Compliance Issues Regarding
Hospital-Physician Financial Relationships
COMMERCIAL
REASONABLENESS
FAIR MARKET
VALUE
SENSE
CENTS
Overall
Arrangement
“WHY?”
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Scope
Range of
Dollars Only
Key Question
“HOW
MUCH?”

32. Factors in Determining CR
Business Purpose
Provider Analysis
Commercial
Facility Analysis
Reasonableness
Determination
Resource Analysis
Independence & Oversight
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33. Fair Market Value – 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.
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34. Valuation Methods and Issues
Related to Physician Practices

35. Valuation Methodologies Typically Used
for Physician Practices
Asset (“cost”)
Approach
Income Approach
- Often considered a
“floor” value
- Based on the entity’s
earning power (i.e.,
ability to generate
positive cash flow in
excess of the
physician’s fair market
value compensation)
- Net Asset Value Method
- Primary methods include:
- Derives an indication
of value based on the
anticipated cost to
replace, replicate, or
recreate the asset
o Discounted Cash Flow
Method
o Capitalized Income Method
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36. Valuation Methodologies Typically
Not Used for Physician Practices
Market Approach – determines an indication of
value based on multiples derived from similar
businesses/interests that have been
bought/sold.
• Guideline Public Company Method
• Merger and Acquisition Transaction Data Method
Not normally used for physician practices
because:
• No publicly traded physician practices
• Lack of reliable transaction data involving practices that
are sufficiently similar
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37. Which Method is Appropriate?
IT
DEPENDS…
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…does not have
remaining profits
after physician
compensation
an income
approach will
probably be
required.
If the
Practice…
…has profits
remaining after
FMV physician
compensation
the NAV method
will likely be
appropriate.

38. Enterprise vs. Intangible Value
The sum total of the tangible and intangible
assets can not exceed the entity’s total
enterprise value.
Example:
• If the enterprise value = $2 million (e.g., determined
from DCF Method)
• AND the tangible assets (e.g., cash, accounts
receivable, equipment, etc.) = $1,200,000
• THEN, (with limited exceptions) intangible assets can
not exceed $800,000.
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39. Assessing Intangible Value
Determining whether a physician practice has intangible
value (within the limitations of FMV) is primarily based upon
cash flow. If intangible value exists, there should be an
economic benefit of ownership (i.e., in excess of FMV
compensation).
Practices that do not produce such positive cash flow
generally will have little or no intangible value.
Physician groups that generate positive cash flow (above
the physician’s “FMV” compensation) will normally have
some level of intangible value.
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40. Certain Practices Are More Likely to
Have Intangible Value
Large multi-specialty practices with midlevel providers and/or significant ancillary
services are more likely to have intangible
value.
Small, highly-specialized practices
(e.g., general surgeons) are less likely to
have intangible value because substantially
all revenue is comprised of professional fees
generated by the physician(s).
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41. Intangible Assets Acquired Should
be Separable and Transferrable
For an intangible asset to be transferrable to a
buyer, it must be separable from the seller.
Intangible assets that are separable generally
have contractual or other legal rights (e.g., noncompetition agreements, clinical trial
contracts, etc).
Intangible assets that are not separable are
generally components of goodwill
(e.g., employee workforce).
Source: ASC 805-20-25-1 through 25-10.
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42. Practice vs. Personal Goodwill
Practice goodwill is an asset of the entity that produces
economic benefits to its owners apart from their personal
goodwill.
• Factors generally influencing enterprise goodwill include: the entity’s
name, reputation, location, phone number, etc.
• Generally transferrable
Personal goodwill is an asset of the individual (i.e., physician).
• Factors generally influencing personal goodwill include: personal
reputation, credentials, education, relationships, etc.
• Generally not transferrable
Often difficult to distinguish in a physician practice.
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43. Physician Compensation
Issues

44. Key Elements of Successful
Compensation Alignment

45. Components of
Physician Compensation
Base Compensation
Incentive Component
Physician
Quality Measures
Compensation
Philosophy
Good Citizenship
Leadership
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46. Ancillary Services
If physician/clinic is a department of the hospital, then
revenue from designated health services (“DHS”)
cannot be shared with the providers.
If employment is structured to meet the “group practice
exception” under the Stark regulations, then DHS
revenue can be shared with providers as long as it is not
allocated based on the volume or value of the provider’s
ordered DHS services.
• Allocations can range from equal to proportional based on professional
(not technical) services provided by the physician.
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47. Compensation and
Regulatory Issues
Post-transaction compensation should be factored into
the practice valuation.
• Must avoid double dipping by paying for the same income stream
twice – once with the “purchase” and then on-going in the physician
compensation plan.
The fair market value and commercial reasonableness
requirements apply to all components of the transaction
(i.e., compensation and practice valuation).
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48. Other Trends in
Physician Compensation
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49. SGR Fix: Physician Composite Performance
Score and Other Value-to-Value Drivers
Due to the sustainable growth rate formula cap (“SGR”) – the
statutory formula used to calculate Medicare Physician Fee
Schedule (“MPFS”) payments on an annual basis – Medicare
payments to physicians will be slashed by almost 25 percent
on January 1, 2014, unless Congress intervenes.
On October 30, the Senate Finance Committee and the House
Ways and Means Committee released a discussion draft of a
SGR fix, offering a comprehensive approach to MPFS payment
reform.
Key provisions include:
•
•
•
•
•
•
•
Payment freeze
Termination of payment penalty programs
New value-based performance (VBP) program
Alternative payment model (APM) participation
Complex chronic care management
Appropriate use criteria
Valuation of services
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50. SGR Fix: Physician Composite Performance
Score and Other Value-to-Value Drivers
Payment freeze
• Current MPFS payments maintained through 2023 .
• In 2024, physicians participating in advanced APMs receive 2%
annual updates. All other physicians receive 1% annual
updates.
Termination of payment penalty programs
• After 2016, the following incentive programs end:
- 2% penalty for failure to report PQRS measures
- Budget-neutral, value-based purchasing modifier based on
quality and resource use
- 3-5% EHR meaningful use penalties
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51. SGR Fix: Physician Composite Performance
Score and Other Value-to-Value Drivers
New value-based performance (VBP) program
• Starting 2017, physicians would receive bonuses or penalties
based on their composite performance scores.
• Scores calculated based on quality measures (30% of
composite score), resource use (30%), clinical practice
improvement activities (15%), and EHR meaningful use (25%).
• In 2017, 8% of total payments reallocated based on composite
scores. Percentage increases to 9% and then 10% in 2018 and
2019, respectively.
Alternative payment model (APM) participation
• Physicians receiving a significant percentage of revenue
through a risk-sharing APM with a quality measurement
component (such as an ACO) would not participate in the New
VBP Program. Instead, they would receive a 5% bonus each
year between 2016 and 2021.
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52. SGR Fix: Physician Composite Performance
Score and Other Value-to-Value Drivers
Complex chronic care management
• In 2015, Medicare would pay physicians for care management
services furnished to beneficiaries with certain chronic
conditions.
• To be eligible for these payments, physicians must practice in a
certified PCMH or comparable specialty practice.
Appropriate use criteria
• Physicians ordering advanced imaging or electrocardiogram
services required to consult with appropriate-use criteria, to be
developed in consultation with professional societies.
• Medicare would not pay for services when no consultation
occurred.
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53. SGR Fix: Physician Composite Performance
Score and Other Value-to-Value Drivers
Valuation of services
• Between 2016 and 2018, CMS would systematically identify and
revalue misvalued services.
• If CMS fails to meet certain annual targets, MPFS payments
reduced by the difference between target and actual amount of
misvalued services identified.
• CMS would solicit information from selected physicians to
support its valuation activities. Physicians who submit
requested information would be compensated. Those who do
not would face significant payment penalties.
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54. Thank You!
David McMillan
Principal
(865) 673-0844 ext. 120
dmcmillan@pyapc.com