Bridging Business & Healthcare : Healthcare Management Consultants for Dispute Resolution, Valuation & Clinical Compliance

There is no doubt that cost control will be a major component of efforts to overhaul the current healthcare system.  These efforts are now only vaguely spelled out in the Patient Protection and Affordable Care Act (PPACA) and include such approaches as the development of accountable care organizations (ACOs), implementation of patient-centered medical homes (PCMH) and utilization of global payment methods (perhaps a new and improved version of capitation).  Quality of care will continue to be a driving factor, which incidentally means that pay-for-performance (or value-based purchasing) will be emphasized in payment reform.  For example, the PPACA outlines the implementation of the hospital value-based purchasing program with a proposed effective date of October 1, 2012.  Acute care hospitals will receive bonus payments for performance in five measures.  In the following year, hospitals will also be evaluated utilizing efficiency measures such as Medicare spending per beneficiary in addition to the five core measures. 

Similar to the Balanced Budget Act of 1997 (BBA), it is also quite likely that a reduction in physician payment for services may also become necessary (termed "productivity adjustments" in the PPACA).  However, while physicians did see a cut in payment during the initial years of the BBA, payment was increased in subsequent years.  The report issued by the CMS actuary determined that "projected Medicare cuts could drive about 15 percent of hospitals and other institutional providers into the red."  It seems that it would be somewhat counterproductive to open up healthcare coverage to additional millions while jeopardizing coverage for others.  Another potential impact of cutting payment to physicians, other than its effect on current physician practices, hospitals and Medicare beneficiaries, is fewer physicians entering the field of medicine in the future.  Should the proposed payment cuts actually be enacted, it is probable that fewer graduates will commit to practice medicine.  This would be very detrimental to healthcare access. 

It seems that cutting costs while attempting to improve quality and increase access to care will require extensive creativity and great sacrifice on many fronts.  The Rolling Stones said it best - You can't always get what you want.  I just hope that as we try very hard as a nation to find the best solution to our healthcare issues we will get what we need. 

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The patient-centered medical home (PCMH) is not a new concept, but it's getting increased attention as a result of the Patient Protection and Affordable Care Act (PPACA).  Under the PPACA, the newly funded Center for Medicare & Medicaid Innovation will evaluate the effectiveness of medical home models.  Many healthcare providers have already begun to implement the medical home model in an effort to provide more coordinated care, improve quality and decrease overall healthcare costs (read about Blue Cross Blue Shield of Texas and Carillion's implementation of a medical home model). 

Some say that the PCMH model is just a new version of the "gatekeeper" model even though there are significant distinctions between the two.  Under the new legislation, it is very likely that primary care physicians will play a more central role in the healthcare delivery system - more playing time on the field.  So, what are the key tenets of a PCMH?  The AAFP and the NCQA both lay out some basic requirements in their extensive checklists - but here are a few to get you thinking.

• On-going relationship with a personal physician
• Physician-directed medical practice
• Whole person orientation - care across all stages of life
• Coordinated care across all facets of the healthcare system and the patient's community
• Emphasis on quality and safety
• Enhanced access to care
• Payment reflective of various components - i.e. support adoption and use of health IT, e-mail and telephone consultation, separate fee-for-service payments for face-to-face visits, share in savings from reduced hospitalizations, additional payments for quality improvement

It will be interesting to see if a shift to PCMH models on a nationwide scale will in fact reduce healthcare costs while improving quality and outcomes.  A shift in the paradigm, a procedurally-based payment system emphasizing the role of specialists to that of a primary care physician playing a larger role in the delivery of care across the healthcare spectrum, will require more primary care physicians.  Do we have the necessary resources to build this medical home?  Time will tell....

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I read a few interesting articles regarding planned expansions by the nation’s largest retail pharmacies in Business Week and this one in Health Leaders. CVS, Walgreens and Wal-Mart have all announced plans to greatly expand their in-store clinics in anticipation of primary care shortages due to healthcare reform and the increase in the number of Americans with insurance coverage.

While the clinics themselves do not typically generate a profit, the additional foot traffic will likely improve profits for retail pharmacies resulting in increases in their value. It will be interesting to see if the regional and local pharmacies (to the extent these still exist) follow suit resulting in an overall upward movement in acquisition multiples for pharmacies across the nation.

For those of us involved in the healthcare valuation industry, we will need to keep this shift in operations and its potential impact on the valuation of not only pharmacies, but also on primary care practices in mind.

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Approximately 4 years ago, a family friend who was a practicing attorney in his early 60's had a moderately complex valve surgery performed at a reputable hospital. He was told he would eventually need the surgery, but it was not critical to have immediately. He decided to proceed with the surgery.  He was in relatively decent health. He survived the surgery and recovered well, getting moved from CCU to private room within a couple of days. Then he acquired an infection (sepsis). He never returned home, leaving a widow and many loved ones.
 
Risks are inherent in any invasive procedure. But the incidence of hospital-acquired sepsis and pneumonia are preventable and manageable. Without doing so, the costs are extraordinary. For example, Healthcare Financial Management Magazine recently reported that in 2006 alone there were 48,000 people "killed" due to these two hospital-acquired infections. The cost of these infections totaled 8.1 billion dollars....and this does not include the cost associated with the loss of a productive life, as in the case of my friend.
 
The ultimate face of real healthcare reform will likely include more accountability for these types of results as, indeed, government payers such as Medicare have already begun to reduce payments for such infections. Clinical outcomes must be the centerpiece of real reform. Time will tell if PPACA will accomplish this or not. But rest assured that a central tenet  of any health system strategic plan we are privileged to lead will include a focus on improving clinical outcomes. Consumers cannot easily discern quality in healthcare (see Michael Millenson's post about misunderstood Joint Commission data.), but numerous efforts are under way to provide real direction for consumers. This will, of course, eventually impact market share, as it should.
 
We are interested to learn more from our clients and friends about how they discern quality. Are there websites you utilize? Reports you read? Let us know. We will of course keep you posted on all things Quality, Strategy, and Finance related to healthcare, so check our healthcare blog often for updates.

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We are  frequently asked to value ASCs and comment on “typical” multiples of EBITDA for ASC transactions. As those in the industry know, the value of an ASC is highly dependent on the procedure mix, with some procedures much more lucrative than others. This variability makes quoting a “typical” multiple of EBITDA tricky and a somewhat dangerous proposition.

An interesting article on the Becker’s ASC Review website discusses multiples in three different tiers, based on the risk characteristics of the ASC.

While I would be hesitant to quote a specific multiple of EBITDA based on the Becker guidance,  I believe it does provide an interesting framework to see where your specific ASC might fall. In the final analysis, three primary factors drive the value in the ASC setting:

1. Procedure mix
2. Payor mix and managed care contracting leverage
3. Medical supply expense management.

If you perform well in these three areas, you can expect your ASC to sell at multiples at the higher end of the ranges expressed in the Becker article. 

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Now that federal healthcare legislation has been signed in to law, I hope that the fiscal impact of the legislation does not imitate that of other reform efforts made at state and regional levels. What appeared to start as an expressed effort to contain rising healthcare costs now appears to expand access while failing to include enough remedies to contain costs. Increasing access is an admirable and worthy goal; failing to recognize and prepare for the total financial impact can be hazardous to fiscal health.

In 1994, the state of Tennessee enacted TennCare as a Medicaid waiver program to expand access to Medicaid coverage to total approximately 1.4 million Tennesseans while controlling rising state healthcare expenditures.  It was a commendable goal, but an action that led to massive increases in state healthcare funding obligations. The resulting budget crisis jeopardized the State’s bond rating. The crisis was a catalyst that forced bipartisan efforts to contain costs by slashing enrollment and reducing benefits. Leadership by Tennessee’s current governor, Phil Bredesen, a former managed care health insurance company executive, was instrumental in defusing the crisis. Some who closely observed that crisis wonder if our federal branches, executive, legislative and judicial, will be facing similar challenges within this decade. 

Immediately upon passage of TennCare, numerous efforts were made through the judicial system to expand benefits. Such efforts were surprisingly successful, causing providers to face legal risks if they denied any form of care as medically unnecessary. Utilization of services, including emergency rooms and inpatient hospital facilities, exploded. Physicians “closed” their practices to new patients to avoid the escalating legal and financial risks. Evidence of the inability for providers to manage utilization was Tennessee’s quick ascension to first in the nation in prescriptions per capita for psychotropic drugs. One provider network, established to be a “model” program was initially successful in balancing the management of care and resources while increasing quality and member satisfaction scores. It promoted public health initiatives such as increased vaccination rates and annual checkups while establishing  “medical homes” for its membership through a strong primary care network. It was enormously successful in its first two years as it addressed many of the challenging and perplexing issues of balancing provider resources with patient needs. However, a federal judge’s ruling regarding TennCare program benefits and coverage made it apparent that it would be impossible to manage utilization of resources without being exposed to enormous financial and legal risks. The “model” network soon elected to shut down operations as it foresaw the inevitable financial collapse it would face if it attempted to meet unrestrained demands for medical services.

One definitive difference between the current federal initiative and Tennessee’s program is the federal government’s ability to pay for its legislation by borrowing through budget deficits. By constitutional mandate, Tennessee must balance its budget annually, as must most states. That “limitation” probably saved the economic well being of the state. Legislators could not reportedly “kick the can” down the road for the next legislative session or administration to fix. Thus, the funding crisis never grew to an overwhelming magnitude. Our federal government has no such imposed discipline. 

Some may say, “This time it’s different.” Some have even pointed to the Massachusetts’ initiative, a state much different than Tennessee. Massachusetts’ universal insurance program was adopted in 2006 at an expected annual cost to taxpayers of $88 million annually. Timothy P. Cahill, State Treasurer of Massachusetts, recently wrote in The Wall Street Journal that the program “has been a fiscal train wreck.”  Massachusetts’ governor has just recently announced a $294 million shortfall related to healthcare costs. In his editorial letter to The Journal, Mr. Cahill wrote:

If not for federal Medicaid reimbursements and commitments from Washington to prop up this plan, Massachusetts would be broke. The only reason MassCare has survived is that we have been repeatedly bailed out by the federal government. But that raises the question: Who will bail America out if we implement a similar program? 

Many who have worked on various state and regional reform efforts also ask that question. We desire meaningful, affordable reform. Some, like me, fear those who have crafted this federal reform do not grasp the frightening enormity of possible unintended consequences. Our national leaders would not be the first to make such a mistake. Just ask Massachusetts. Just ask Tennessee. The scale of the federal initiative is exponentially larger than those of Tennessee and Massachusetts combined. Unfortunately, and frighteningly, so are the possible unintended consequences.

So, what’s my point? The need for healthcare reform is irrefutable. Even the leaders of both parties agree on that! Now that we have a starting point, the just passed legislation, let’s demand bipartisan efforts to effectively implement the plan. When problems arise, and they will, don’t stand on the sideline pointing out the issues. Jump in and be part of the solution.

Learn from Tennessee’s experiences. TennCare has trod a rocky road, but our state and its residents are better for it having been implemented. Its evolution has been painful at times. However, Tennesseans now have an affordable program that does provide much needed coverage for 1.2 million residents. Children have benefited enormously. TennCare, and now CoverKids, effectively serves kids at greatest risk. I do not know how one “puts a price”on that. It seems priceless to me. 

I think we all should follow the example of Tennessee Governor Phil Bredesen, who deserves praise for his effective leadership in transforming TennCare to the program it is today. Governor Bredesen, who opposed the federal reform legislation that just passed recently, said he’s “going to get on with the business of figuring out how to make this work.” Sound advise for all, both those who supported the federal reform legislation and those who opposed it. When unintended adverse consequences arise, all should try to address and mitigate such. And when unforeseen benefits for our country appear, let’s gratefully acknowledge those as well.

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As mentioned in my last post, hospitals are increasingly buying physician practices and then entering into productivity based employment arrangements with the individual physicians. These buy and employ transactions generally make good business sense for both the hospital and physician(s) but also include certain risks – especially for the hospital. Accordingly, an appropriately structured “buyer’s side” due diligence engagement can be an effective way to minimize those risks.

Buyer’s side due diligence is generally focused on the assets being acquired and liabilities assumed - including those not directly reflected on the balance sheet. Additionally, some level of due diligence regarding practice operations is also helpful for purposes of identifying future operating risks and/or opportunities for improvement. Such due diligence can vary substantially depending on the circumstances. For example, large physician practices with multiple offices and substantial ancillary revenue will generally require more in-depth due diligence than small practices with no ancillary revenue. Accordingly, each due diligence engagement will vary depending upon the particular facts and circumstances of the practice.

Although most physician practice acquisitions are structured as asset purchases with representations and warranties from the seller, appropriate buyer’s side due diligence will assist with identifying and minimizing the hospital’s risk associated with the transaction. Such risks are not only from a financial “benefit of the bargain” standpoint but also from a regulatory compliance perspective as well; since paying more than fair market value for the practice could result in penalties or sanctions under the Stark law and/or Anti-Kickback Statute.

For more information regarding buyer’s side due diligence in connection with hospital acquisitions of physician practices, see my article “Financial Due Diligence Issues in Connection with Hospital Acquisitions of Physician Practices.” 

Also, you may view the Buyer’s Side Due Diligence Checklist - Hospital Acquisitions of Physician Practices below, or you may download the PDF of the checklist here.

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For many years, hospitals have sought assistance from physicians in helping manage clinical departments. This assistance has come primarily in the form of medical directorships. In the traditional medical directorship, the physician attends departmental meetings and provides clinical input when asked. Generally, the physician tracks the hours spent and is compensated at an administrative rate of pay.

Hospitals are seeing more of a movement toward quality-based reimbursement and bonuses or penalties based upon performance against quality metrics. For this reason, hospitals have recognized the need for greater assistance and more clinical input from the physicians on their medical staffs.

In response to the increased need for physician input, hospitals are rethinking medical directorships and are transitioning them to clinical leadership positions. In some cases, the clinical leadership positions resemble the old medical directorship positions. However, clinical leaders are more involved in day-to-day management of the service line, typically requiring more hours from the physician. These arrangements usually have some portion of the compensation at risk or a bonus available, based on achievement of quality-based metrics.

Because these arrangements are fairly new, it remains to be seen if they will result in the quality improvement goals sought by the hospital. However, hospitals that wish to be on the leading edge should consider implementing the clinical leaders model in place of their current medical directors. This will best position them for likely changes coming down the road from governmental and commercial payors.

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On March 30^th, President Obama signed into law the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”). This Act is the final piece of legislation relating to healthcare reform and modifies some items contained in the Patient Protection and Affordable Care Act (the "Healthcare Act”) signed into law last week. It also includes some additional items previously unmentioned, as detailed below.

Unearned Income Medicare Contribution – Beginning in 2013, the Reconciliation Act levies a 3.8% surtax on the lesser of net investment income or income in excess of a defined threshold amount. The thresholds are $250,000 for a joint or surviving spouse return, $125,000 for married individuals filing separately, and $200,000 for all others. For estates and trusts, the 3.8% surtax is on the lesser of undistributed net investment income or income in excess of the highest estate or trust tax bracket.

Individual Health Insurance Requirement – Penalties for the lack of coverage continue to be phased in starting in 2014, but the penalty itself decreased slightly from the ones noted in the Healthcare Act. By 2016, penalties will reach the greater of $695 per uninsured adult or 2.5% of household income, with a cap of $2,085 per family. 

Penalties on Large Employers – After 2013, penalties will be assessed on largeemployers (those with at least 50 full-time employees) that do not offer affordable health coverage and have any employees who qualify for tax credits because they purchased insurance on an exchange. The Reconciliation Act modifies the penalty amount to be $2,000 for every full-time employee over a 30-employee threshold, regardless of how many employees actually receive a tax credit.

Dependent Coverage – Effective upon the President’s signature, the general exclusion for reimbursements for medical care expenses under an employer-provided plan extends to any child of the employee age 26 and under as of the end of the tax year.

Excise Tax on High-Cost Employer-Sponsored Plans – For tax years after 2017, a 40% nondeductible excise tax will be levied on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage.

Health-Related Accounts & Reimbursements – The Reconciliation Act postpones the changes related to flexible saving account limits. The amount of salary reduction that can be deducted under a flexible saving account is decreased to $2,500 beginning in tax years after 2012.

Photo used under creative commons license by Speaker Pelosi.

Related Posts:

• Healthcare Reform Legislation: Overview of Facts
• Upcoming Changes for Individuals due to Healthcare Reform
• Upcoming Changes for Businesses due to Healthcare Reform

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