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,
[email protected]
Don Barbo, CPA/ABV
Deloitte Financial Advisory Services LLP, Dallas, TX,
[email protected]
Donald H. Romano, JD
Foley & Lardner LLP, Washington, DC,
[email protected]
Moderator:
Joseph Wolfe, JD
Hall, Render, Killian, Heath & Lyman, P.C., Milwaukee, WI,
[email protected]
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
2
•
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
Today’s Panelists
•
Joseph N. Wolfe, Esq. (Moderator)
Hall, Render, Killian, Heath & Lyman, P.C.
Milwaukee, Wisconsin
• Don Barbo, CPA/ABV
Deloitte Financial Advisory Services LLP
Dallas, Texas
•
Donald H. Romano, Esq.
Foley & Lardner LLP
Washington, DC
• 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
•
•
•
•
•
8
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”)
Hypothetical Fact Pattern
•
Both valuation firms were engaged by legal counsel, under the
attorney-client privilege.
•
Additional BV Considerations:
–
–
–
•
Additional CV Considerations:
̶
̶
9
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.
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.).
Regulatory Framework
Stark Law - Fair Market Value
•
•
•
10
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.
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
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
19
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
25
•
When is it acceptable for compensation to exceed
collections?
•
How are multiple forms of “stacked” compensation
analyzed?
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, [email protected]
Donald H. Romano, Esq.
Foley & Lardner LLP, Washington, DC, [email protected]
Don Barbo, CPA/ABV
Deloitte Financial Advisory Services LLP, Dallas, TX, [email protected]
W. Lyle Oelrich, Jr., MHA, FACHE, CMPE
Pershing Yoakley & Associates, P.C., Knoxville, TN, [email protected]
27
Title © 2014 is published by the American
Health Lawyers Association. All rights reserved.
No part of this publication may be reproduced in
any form except by prior written permission
from the publisher. Printed in the United States
of America.
Any views or advice offered in this publication
are those of its authors and should not be
construed as the position of the American Health
Lawyers Association.
“This publication is designed to provide accurate
and authoritative information in regard to the
subject matter covered. It is provided with the
understanding that the publisher is not engaged
in rendering legal or other professional services.
If legal advice or other expert assistance is
required, the services of a competent
professional person should be sought”—from a
declaration of the American Bar Association
1517922v.3
28