CASH FLOW ANALYSIS: Real Life ACO Accounting Example

ACCOUNTABLE CARE ORGANIZATION EXAMPLE

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BY DR. DAVID EDWARD MARCINKO MBA CMP®

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What is an ACO?

ACOs are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high-quality care to their Medicare patients. The goal of coordinated care is to ensure that patients get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors.

When an ACO succeeds both in delivering high-quality care and spending health care dollars more wisely, the ACO will share in the savings it achieves for the Medicare program.

Citation: https://www.r2library.com/Resource/Title/0826102549

Case Model

Now, suppose that in a new Accountable Care Organization [ACO] contract, a certain medical practice was awarded a new global payment or capitation styled contract that increased revenues by $100,000 for the next fiscal year. The practice had a gross margin of 35% that was not expected to change because of the new business. However, $10,000 was added to medical overhead expenses for another assistant and all Account’s Receivable (AR) are paid at the end of the year, upon completion of the contract.

Cost of Medical Services Provided (COMSP):

The Costs of Medical Services Provided (COMSP) for the ACO business contract represents the amount of money needed to service the patients provided by the contract.  Since gross margin is 35% of revenues, the COMSP is 65% or $65,000.  Adding the extra overhead results in $75,000 of new spending money (cash flow) needed to treat the patients. Therefore, divide the $75,000 total by the number of days the contract extends (one year) and realize the new contract requires about $ 205.50 per day of free cash flows.

Assumptions

Financial cash flow forecasting from operating activities allows a reasonable projection of future cash needs and enables the doctor to err on the side of fiscal prudence. It is an inexact science, by definition, and entails the following assumptions:

  • All income tax, salaries and Accounts Payable (AP) are paid at once.
  • Durable medical equipment inventory and pre-paid advertising remain constant.
  • Gains/losses on sale of equipment and depreciation expenses remain stable.
  • Gross margins remain constant.
  • The office is efficient so major new marginal costs will not be incurred.

Physician Reactions:

Since many physicians are still not entirely comfortable with global reimbursement, fixed payments, capitation or ACO reimbursement contracts; practices may be loath to turn away short-term business in the ACA era.  Physician-executives must then determine other methods to generate the additional cash, which include the following general suggestions:

1. Extend Account’s Payable

Discuss your cash flow difficulties with vendors and emphasize their short-term nature. A doctor and her practice still has considerable cache’ value, especially in local communities, and many vendors are willing to work them to retain their business

2. Reduce Accounts Receivable

According to most cost surveys, about 30% of multi-specialty group’s accounts receivable (ARs) are unpaid at 120 days. In addition, multi-specialty groups are able to collect on only about 69% of charges. The rest was written off as bad debt expenses or as a result of discounted payments from Medicare and other managed care companies. In a study by Wisconsin based Zimmerman and Associates, the percentages of ARs unpaid at more than 90 days is now at an all time high of more than 40%. Therefore, multi-specialty groups should aim to keep the percentage of ARs unpaid for more than 120 days, down to less than 20% of the total practice. The safest place to be for a single specialty physician is probably in the 30-35% range as anything over that is just not affordable.

The slowest paid specialties (ARs greater than 120 days) are: multi-specialty group practices; family practices; cardiology groups; anesthesiology groups; and gastroenterologists, respectively. So work hard to get your money, faster. Factoring, or selling the ARs to a third party for an immediate discounted amount is not usually recommended.

3. Borrow with Short-Term Bridge Loans

Obtain a line of credit from your local bank, credit union or other private sources, if possible in an economically constrained environment. Beware the time value of money, personal loan guarantees, and onerous usury rates. Also, beware that lenders can reduce or eliminate credit lines to a medical practice, often at the most inopportune time.

4. Cut Expenses

While this is often possible, it has to be done without demoralizing the practice’s staff.

5.  Reduce Supply Inventories

If prudently possible; remember things like minimal shipping fees, loss of revenue if you run short, etc.

6. Taxes

Do not stop paying withholding taxes in favor of cash flow because it is illegal.

Hyper-Growth Model:

Now, let us again suppose that the practice has attracted nine more similar medical contracts. If we multiple the above example tenfold, the serious nature of potential cash flow problem becomes apparent. In other words, the practice has increased revenues to one million dollars, with the same 35% margin, 65% COMSP and $100,000 increase in operating overhead expenses.  Using identical mathematical calculations, we determine that $750,000 / 365days equals $2,055.00 per day of needed new free cash flows!  Hence, indiscriminate growth without careful contract evaluation and cash flow analysis is a prescription for potential financial disaster.

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PODCAST: “Real ACOs Haven’t Been Tried Yet!”

What is an Accountable Care Organization?

DEFINITION: ACOs are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high-quality care to their patients. The goal of coordinated care is to ensure that patients get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors. When an ACO succeeds both in delivering high-quality care and spending health care dollars more wisely, the ACO will share in the savings.

Citation: https://www.r2library.com/Resource/Title/0826102549

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QUESTION: What happens when you’re a healthcare policy wonk and the pilot study for your pet program has failed miserably? 

ANSWER: You declare “Success!” in the editorial pages of the New England Journal of Medicine and demand that the program become nationwide and mandatory. I kid you not.  This is exactly what happens.

Thankfully, Anish Koka is vigilant and explains the blatant obfuscations and manipulations that the central planners engage in to have their way.

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And so, In this video, Anish and colleague Michel Accad, MD, will reveal the machinations, take the culprits to task, and discuss pertinent questions regarding health care organization: 

  • Does “capitation” reduce costs? 
  • Do employed physicians necessarily utilize fewer resources? 
  • What happens when a HMO and a traditional fee-for-service health system operate side-by-side in a community?
BMC and Accountable Care - Boston Medical Center

Enjoy!

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Your thoughts are appreciated.

THANK YOU

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The State of Value Based Care [VBC]

In the USA

By http://www.MCOL.com

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MORE: ACOs VBC Capitation SAMPLE DEM

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[Foreword Dr. Phillips*** [Foreword Dr. Nash]

Ground Breaking Book Explains Why Accountable Care Organizations May Be the Answer the Health Care Industry Has Been Seeking!

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Book Reviews, with Testimonial, by ME-P Founding Publisher Dr. David Edward Marcinko MBA CMP®

PRESS RELEASE!

August 23, 2013CRC Press / Productivity Press is pleased to announce the publication of  Accountable Care Organizations: Value Metrics and Capital Formation authored by nationally recognized healthcare expert, Robert James Cimasi. This dynamic book explores the historical background and evolution of the highly anticipated ACO model which is rapidly expanding since its adoption as part of the Affordable Care Act, commonly referred to as Obama Care. The book describes the basis for the development of value metrics and capital formation analyses that are foundational to assessing capacity for change in healthcare organizations considering the development of an ACO, as well as, the current efficacy of the model.

Book Reviews

“Bob Cimasi has done it again. As a thought leader in contemporary healthcare matters, his new book, Accountable Care Organizations: Value Metrics and Capital Formation, establishes and explains, in plain terms, the operational and financial DNA and genomic construct and understanding for any organization considering the development and operations of an ACO…a must read and resource for any healthcare industry executive.”

-Roger W. Logan, MS, CPA/ABV, ASA, Senior Vice President of Phoenix Children’s Hospital

“Accountable Care Organizations is the first comprehensive text on capital formation and value metrics for this new healthcare business model… I can think of no one more qualified to write it than Bob Cimasi at Health Capital Consultants … it is destined to become a classic work … read, review, refer, and profit by this valuable resource.”

-Dr. David Edward Marcinko MBA CMP® of the Institute of Medical Business Advisors, Inc Atlanta, GA

“As both a healthcare management educator and as a consultant who has worked on health and professional services transactional advisory work for many years, I applaud the ambitious undertaking of Bob Cimasi’s latest book, Accountable Care Organizations: Value Metrics and Capital Formation. Cimasi’s description of the complex history and evolution of the US health system provides a useful framework for students and professionals who may lack a detailed background in the field. This should help them better understand both how we have arrived at the ACO approach, and how it might work. This addressing capital and valuation information is also uncommon in the literature on ACOs. It should provide a valuable contribution to the field, especially given that a some surveys of healthcare leaders have pointed to access to capital and to a lesser but still important degree, agreement on valuation, as concerns as they consider acquisitions, mergers, and other affiliations towards forming/joining ACOs or similar organizations to help deal with the changing reimbursement and competitive environment.”

-R. Brooke Hollis, MBA/HHSA, Executive Director, Sloan Program in Health Administration, Cornell University and Managing Member, Hollis Associates Acquisition Advisors, LLC

The book examines the Four Pillars of Value in the Healthcare Industry: regulatory, reimbursement, competition and technology in addressing the value metrics of ACOs, including requirements for capital formation, financial feasibility, and economic returns. It focuses the discussion of non-monetary value on a review of aspects of population health within the context of such objectives as improved quality outcomes and access to care. It also examines the positive externalities of the ACO model, including results for third parties outside the basic construct of the ACO contracts shared savings payments. The potential role and opportunities for consultants in assisting their provider clients in the consideration, development, implementation, and operation of an ACO are also discussed.

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Accountable Care Organizations

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About the Author:

Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, CMP® is CEO of Health Capital Consultants (HCC), a nationally recognized healthcare financial and economic consulting firm headquartered in St. Louis, Missouri, since 1993. Cimasi has more than 30 years of experience in serving clients in over 45 states, with a professional focus on the financial and economic aspects of healthcare service sector entities including feasibility analysis and forecasting; valuation consulting and capital formation services; healthcare industry transactions including joint ventures, mergers, acquisitions, and divestitures; certificate-of-need and other regulatory and policy planning consulting; and, litigation support and expert testimony.

Mr. Cimasi has served for many years as faculty in both an academic and professional basis for continuing education courses, and he has provided testimony before federal and state legislative committees and has served as an expert witness in numerous court cases. He is a nationally known speaker on healthcare industry topics, the author of several books, including A Guide to Consulting Services for Emerging Healthcare Organizations (John Wiley & Sons, 1999), The U.S. Healthcare Certificate of Need Sourcebook (Beard Books, 2005), The Adviser’s Guide to Healthcare (AICPA, 2010), and Healthcare Valuation: The Financial Appraisal of Enterprises, Assets, and Services (John Wiley & Sons, 2013), as well as numerous chapters, published articles, research papers and case studies, and is often quoted by healthcare industry press.

 

UPDATE:
Top Five Videos Trending in The Last Month On HealthShareTV
  1. Accountable Care Directory 2014
  2. Achieving Quality in Accountable Care Organizations
  3. High-Performing Care Coordination in a Patient/Family-Centered Medical Home
  4. ‘Aetna’s Medicare Advantage Collaborative Initiatives’
  5. Aligning High Performance in Medication Safety to Improve Patient Outcomes and Reduce Readmissions

Source: HealthShareTV

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An Integrated Approach to Healthcare Network Alignment and Scalable Innovation‏

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[Part 5 in a 6 part series]

By Sam Muppalla – Vice President, McKesson Health Solutions Network Performance Management

Previously, on this ME-P, I wrote about the barriers to alignment across product, network, care and reimbursement innovations. And, yes, I teased you with the three-word preview of what was to come this week: Integrated Building Blocks. The idea of building blocks lies at the heart of an approach to achieving alignment and scaling innovation, so let’s dive in.

Unlocking potential administrative, IT and medical savings — while also creating sustainable alignment of the innovation engines — requires various building blocks be in place as a sound foundation for network design and implementation. These building blocks deliver the required functionality in the most efficient manner. When these building blocks are utilized in an integrated fashion, the current barriers are removed and innovation alignment is achieved.

Four Essential Building Blocks

There are four essential network design automation building blocks that comprise the foundation for innovation: networks, contracting, reimbursement and engagement.

Each of these building blocks enables capabilities by delivering necessary functionality within and across the spectrum of network design. Reaching levels of maturity with this capability unlocks additional value and alignment.

Networks

The network building block enables health plans to differentiate and compete. The purpose is to differentiate their value for each customer segment by aligning the product and care model designs with the underlying network designs. It ensures network performance by facilitating the selection of appropriate providers into networks and the alignment of provider reimbursement with network design objectives. It enables networks to be mapped to member-facing and provider-facing products. The provider-facing products can be used for contracting and provider rate differentiation. The member-facing products can be aligned with benefits and serve as steerage targets for benefit designers.

These constructs, in conjunction with each other, enable productization of care model and payment innovation. For example, a health plan could define a “Medical Home Network” that consists of medical homes and supporting providers in a given geography. It could then enable PCMH-specific reimbursement (e.g., PMPM capitation + Fee For Services (FFS) for preventive services + P4P for EBM) by defining a provider-facing product and associating specific reimbursement policies with that provider product. Additionally, it could also define a member-facing product (e.g., PPO Value) which combines the medical home network with the general market PPO network. This in turn will allow the health plan to define a benefit extension which gives a 10 percent premium reduction to members who use Medical Home Network providers for their primary care. In short, a health plan is now able to monetize its care innovation (PCMH), align benefit design to network design for steerage, and align its provider payment with member incentives (around preventive services), while incenting higher quality care (P4P).

The network building block also achieves administrative cost leadership through comprehensive provider data governance and automation of core provider processes.

Contracting

The contracting building block is designed to enable health plans to reduce contract administrative costs while increasing provider payment accuracy. It optimizes the management of the provider contracting lifecycle through the automation of contract authoring, offering negotiating and acceptance while ensuring the standardization of terms and policies. This building block achieves reduced medical expenditure driven by contract standards adherence, reduced claims mis-payments, and increased speed to market for new payment innovations. It also can support rules-based enforcement of network level reimbursement guidelines to ensure consistent network performance.

Reimbursement

The reimbursement building block enables health plans to maximize the effectiveness of their medical expenditures by paying for value versus volume and by incenting team-based performance. It is the single source of truth for all forms of reimbursement including traditional claims pricing, episodes of care, shared savings, capitation and P4P. This building block enables the mixing and matching of reimbursement methodologies to incent optimal provider performance. It supports a modeling engine to analyze the financial impact of reimbursement and contract changes. It incorporates network-aware provider/contract selection for claims pricing intake. This is a rules driven, high performance service that leverages provider relationship information to select the right provider, the right governing contract and the right reimbursement model for each incoming claim. Additionally, it includes provider transparency services that enable health plan provider portals to support online pricing lookups and reimbursement status/detail inquiries for providers. These services can be extended to support provider performance scorecards and benchmarks.

Engagement

The engagement building block is designed to increase collaboration and participation. It enables meaningful engagement among health plans, providers and members in order to improve health outcomes and reduce costs. This building block achieves reduced administrative and service costs, increased member participation and adherence, increased provider satisfaction and adoption of care/payment initiatives, and the enablement of collaborative/integrated care delivery models such as PCMH and ACO.

Utilizing flexible, automated and integrated building block capabilities is the key to sustainable success that not only unlocks the promise of affordable care to customer segments but also delivers on reduced administrative, medical and IT costs. Incorporating information technologies that can facilitate, if not altogether replace, the manual interactions will be an important part of every organization’s evolution.

Assessment

Next week, in our final part 6 of this series, we’ll wrap up this discussion with a look at some of the potential savings health plans could achieve through alignment and an integrated approach to network design. The potential savings are not slight, so stay tuned. As always, if you just don’t want to wait for next week, visit our website and download the entire Unlocking Affordable Care by Aligning Products white paper; it’s available now.

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Health Plans and the Three Levers of Innovation for Affordable Care

Unlocking Affordable Care

Number 2 in a Series of 6

By Sam Muppalla – Vice President, McKesson Health Solutions, Network Performance Management (NPM)

Last week, for the ME-P, I wrote about the increasing Pressure to Deliver Affordable, High-Quality Care.

In the face of those pressures, many health plans have begun to explore innovative approaches to product, care model, and reimbursement designs. What are they doing?

In this second installment of our series about unlocking affordable care, I’d like to take look at how some of the pilots in these areas show promise.

Product Innovation

One path health plans are using to achieve affordable care is through the deployment of value-based insurance designs (VBID). At the heart of this approach is the utilization of member incentives to reduce barriers to high value Rx and services. Conversely, it also incorporates disincentives for low value services or Rx. Typical member incentives include premium reduction, co-pay/coinsurance waiver/reduction, and health reimbursement accounts (HRA). Co-pay increase or cost sharing are typical disincentives. Member steerage to high value providers is another typical goal of VBID. The design of the supporting networks is critical to the success of VBID products. The network design has to ensure that the composition, the quality and the value of the participating providers can fulfill the benefit design and match steerage goals of the member incentives. Furthermore, the network level provider reimbursement guidelines should be complimentary to the member incentives.

For example, member incentive for a preventive exam during a Primary Care Physician (PCP) office visit could be matched by a Pay for Performance (P4P) provider incentive (on top of regular capitation) to perform the examination. Without the incentive, the Per Member Per Month (PMPM) capitation might be a disincentive for the PCP to perform the preventative exam.

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Figure 1: Network steerage is a critical component of product innovation.

Care Model Innovation

Innovative care models provide another approach to the delivery of affordable, high-quality health services. Population management-based care model designs, such as Patient Centered Medical Home (PCMH) and Accountable Care Organization (ACO) designs, are an important advancement towards affordable care. These designs deploy a care team-based approach rather than a traditional siloed services approach to ensure a continuity of care.

The PCMH care model results in continuity of care via a physician who leads the medical team that coordinates all aspects of preventive, acute and chronic needs of patients using the best available evidence and appropriate technology. The emphasis for PCMH is about collaboration to manage a population’s health.

Another example of a care model with a team-based approach is the ACO care model. In this care model, the emphasis is on accountability for providing the required healthcare services for a defined population. Health plans are rolling out ACO pilots across the nation.

For example, the Pension System (of the California Public Employees’ Retirement System) formed a partnership with the Blue Shield of California Health Maintenance Organization, Catholic Healthcare West, and Hill Physicians Medical Group with the goal of improving quality of care while reducing costs. Some of the early findings are showing positive results:

  • 17 percent reduction in patient re-admissions since the pilot began
  • Length of stay reduced by one half day
  • Almost a 14 percent drop in the total days patients spend in a facility
  • 50 percent reduction in the number of patients who stay in a hospital 20 or more days

These results show that it is possible to utilize care models to improve the quality of outcomes while reducing the cost of healthcare.

It is worth noting that health plans are not limited to adopting one care design innovation over another. Greater benefits can accrue to both consumer and provider by combining approaches—leveraging both collaborative and accountable care designs.

Adoption of population management is forcing a change from paying for individual providers’ services to paying for health management of a population across a team of providers. Supporting this requires the reimbursement systems to understand the structure of the care team, role of the various providers within the care team and the relationships between the providers in the care team.

In other words, it will need to understand the provider network structure to calculate the reimbursement. Another complexity is that providers participating in PCMH or ACO care models may also be directly contracted with the health plan. Selecting which payment arrangement to use in these scenarios will require an understanding of providers’ relationships with the plan.

Reimbursement Innovation

Along with innovations in product and care model designs, health plans are also innovating in the area of provider reimbursement. These innovation efforts primarily focus on enabling incentives for quality and performance, while controlling the rate of medical cost growth. These objectives reflect the need to move away from a healthcare system that bases provider reimbursement on volume to one that bases provider reimbursement on the value of the outcome. Within this approach, a variety of different models are evolving (see Figure 2). 

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Figure 2: Mixing and matching payment models.

Evolving in parallel with individual models is an understanding that the ability to mix and match different reimbursement designs will deliver greater value than the utilization of just one design. Health plans are mixing and matching different reimbursement methodologies to optimize provider performance. This implies that a provider is likely to have multiple valid payment arrangements at any given time. Picking the appropriate payment arrangement will require the reimbursement engine to understand the role of the provider in the network and the full context of all of the provider’s relationships.

Assessment

Next week, I’ll be discussing why the alignment between products, care models, provider reimbursement, and network design is so important when it comes to scaling these innovative approaches.

If you can’t wait that long for that discussion, you can read the entire Unlocking Affordable Care by Aligning Products white paper now; it’s available on our website.

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Establishing Your Medical Practice’s Fair Market Value

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Part One of Medical Practice Valuation

By Dr. David Edward Marcinko, MBA, CMP

By Professor Hope Rachel Hetico, RN, MHA, CMP

www.CertifiedMedicalPlanner.org

In recent years, the physician practice market has experienced a noticeable increase in practice merging and acquisitions. Medical practices are being acquired by health systems in anticipation of Accountable Care Organization (ACO) delivery models.

For physicians, the decision to buy, sell, or merge a medical practice is more complicated than ever, and determining a medical practice’s worth is crucial to this process. Over the next two months, we’ll review the why, when, and how of the contemporary medical practice valuation.

Value Isn’t an Absolute Number

A medical practice’s tangible and intangible assets can be grouped into two broad categories:

  • Physical assets: Examples are real estate, medical records, leaseholds, medical equipment and furnishings, and accounts receivable (A/R).
  • Non-physical assets: These include goodwill, restrictive covenants, buy/sell agreements, managed care contracts, and an assembled workforce.

Estimates of value differ markedly, depending on the purpose of the appraisal, the acumen of the appraiser, etc. To help determine the value, some important questions to consider are:

  • What is the value of the practice for purchase or sale?
  • What is the value of a practice for merger?
  • What is the value of practice assets for joint venture with a corporate partner?
  • What is the value to establish buy-in or buy-out arrangements for partners?
  • What is the value of practice assets for purchase or sale, apart from ongoing operations?

To answer these questions, physicians (buyers and sellers) must understand how practices are valuated—beginning with the following informal, and then more formal, definitions:

Informal Terms of Valuation

  • The “asking price” is often arbitrary and difficult to substantiate, and typically is reduced 25-50 percent after negotiations.
  • The “creative price” is derived by way of creative financing. For example, the practice may provide the down payment.
  • The “emotional price” may involve either a motivated buyer or seller, who pays an under- or overinflated price for the practice.
  • The “friendly price” is reserved for associates, partners, or other colleagues.
  • The “realistic price” is one that both buyer and seller believe is fair.

Formal Terms of Valuation

  • Most appraisers use “fair market value” (FMV) as the standard to derive a reasonable value for a practice. FMV means an arm’s length transaction between an unpressured, informed buyer and an unpressured, informed seller.
  • The “business enterprise value” of a practice equals a combination of all assets (tangible and intangible), and the working capital, of a continuing business.
  • The value of “owner’s equity” equals the combined values of all practice assets (tangible and intangible), less all practice liabilities (booked and contingent).
  • The “working capital value” equals the excess of current assets (cash, A/R, supplies, inventory, prepaid expenses, etc.) over current liabilities (accounts payable, accrued liabilities, etc.).

Realizing that there is no absolute sales price is the essence of FMV. When determining valuation, look for a price range with a reasonable floor and ceiling.

Understand The Lingo

If you are a practice buyer or seller, make sure you understand terms and appraisal definitions.

That’s a lesson George Farmer, a primary care physician inFlorida, learned the hard way. He asked his accountant to appraise his business. When he was ready to sell, his attorney (who also happens to be his brother-in-law) drew up the sales contract. Farmer was pleased that the practice sold quickly for its full asking price.

What he didn’t know (but would discover) is that accounting or “book” value—the figure his accountant gave him—is far different than the FMV that he could have received.

Was the CPA wrong? Not really. Was the doctor incorrect? No. But each was operating under a different set of terms and definitions, without knowledge of each other’s perspectives.

How to Begin Valuation

The following steps should occur before the practice appraisal process begins:

  • Retain an appraiser (for each side) who understands the changing health care industry.
  • Aggregate historic practice business information and consolidated financial statements, operating statistics, payer mix, CPT® utilization, acuity rates, etc.
  • Eliminate one-time, non-recurring expenses, adjusted or normalized for excessive or below normal expenses.
  • Understand key assumptions used in financial projections.

To determine value, appraisers should follow the American Society of Appraisers’ Principles of Appraisal Practice and Code of Ethics. The IRS issued guidelines in 1995 further suggesting that appraisers use the general methods of the Uniform Standards of Professional Appraisal Practices (USPAP), which recognize three approaches to medical practice valuation.

1. Income Methods

There are two methods to value a practice by income:

(a) Capitalization Method: The excess earnings or capitalization method estimates value by dividing normalized historical or current income by an appropriate rate of return for the buyer. This method does not require assumptions.

(b) Discounted Method: Discounted Cash Flow (DCF): Analysis requires assumptions to estimate practice value by discounting future net cash flows to their present worth based on market rates of return required by an investor. Understanding the key assumptions produces a meaningful estimate of practice value. These assumptions may include:

  • projections of future practice revenue, productivity, reimbursement trends, and shifts in payer mix
  • projections of practice cost structures and projected physician compensation
  • after-tax practice cash flows
  • reinvestments to replace equipment or other assets
  • residual practice value at the end of the forecast period
  • discount rate based on the practice specific weighted average cost of capital
  • practice efficiencies, operations, and competitive market conditions

The DCF analysis consistently produces higher values than other methods of estimating practice value because there may be supportable reasons to forecast improvements in future practice performance.

2. Marketplace Multiples

Market transaction multiples are ratios developed by correlating actual practice sale prices to key practice performance measurements. Common multiples include comparisons of sale price to revenue, sale price to earnings before interest and taxes (EBIT), sale price to earnings before interest, taxes, and depreciation allowance (EBITDA), gross revenue, net revenue, and the sale price to number of physicians.

Market transaction multiples are typically limited to serving as a benchmark for testing the reasonableness of the other approaches. They are becoming less common and less useful.

3. Cost Approach

The cost approach calls for identification and separate valuation of all the practice assets, including goodwill, depreciated over 15 years.

The cost approach is more labor intensive than using the enterprise analysis to estimate practice value; especially for a new practice, which typically includes the expenses to acquire space, office furnishings, equipment, marketing, advertising, staff development, and losses incurred during the startup period. This estimate of “replacement cost or cost avoidance” value represents an upper limit (or ceiling) of value, and generally is not considered useful in estimating the value of an established medical practice.

Net Income Statement Adjustments

When analyzing a set of financial statements to determine practice value, adjustments (normalizations) generally are needed to produce a clearer picture of likely future income and distributable cash flow. It also allows more of an “apples to apples” line item comparison. This normalization process usually consists of making three main adjustments to a medical practice’s net income (profit and loss) statement.

1. Non-Recurring Items: Estimates of future distributable cash flow should exclude non-recurring items. Proceeds from the settlement of litigation, one-time gains/losses from the selling of assets or equipment, and large write-offs that are not expected to reoccur, each represent potential nonrecurring items. The impact of nonrecurring events should be removed from the practice’s financial statements to produce a clearer picture of likely future income and cash flow.

2. Perquisites: The buyer of a medical practice may plan to spend more or less than the current doctor-owner for physician executive compensation, travel and entertainment expenses, and other perquisites of current management. When determining future distributable cash flow, income adjustments to the current level of expenditures should be made for these items.

3. Non-cash Expenses: Depreciation expense, amortization expense, and bad debt expense are all non-cash items which impact reported profitability. When determining distributable cash flow, you must analyze the link between non-cash expenses and expected cash expenditures.

The annual depreciation expense is a proxy for likely capital expenditures over time. When capital expenditures and depreciation are not similar over time, an adjustment to expected cash flow is necessary.

Some practices reduce income through the use of bad debt expense rather than direct write-offs. Bad debt expense is a non-cash expense that represents an estimate of the dollar volume of write-offs that are likely to occur during a year. If bad debt expense is understated, practice profitability will be overstated.

Balance Sheet Adjustments

Adjustments also can be made to a practice’s balance sheet to remove non-operating assets and liabilities, and to restate asset and liability value at market rates (rather than cost rates).

Assets and liabilities that are unrelated to the core practice being valued should be added to or subtracted from the value, depending on whether they are acquired by the buyer. Examples include the asset value less outstanding debt of a vacant parcel of land, and marketable securities that are not needed to operate the practice. Other non-operating assets, such as the cash surrender value of officer life insurance, generally are liquidated by the seller and are not part of the business transaction.

Assessment

With a basic understanding of practice valuation and the steps involved, buyers and sellers will be better prepared for next steps. So, next time in Part 2, we will discuss the art of the deal, and how to structure the practice sale.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

AdditionalReading:

Cimasi, Robert James: Valuation of Hospital in a Changing Reimbursement and Regulatory Environment. In,Marcinko,DE(Editor): Healthcare Organizations (Financial Management Strategies). Institute of Medical Business Advisors Inc.,Atlanta,Ga., 2011

Marcinko,DE: “Getting it Right,” How Much is a Plastic Surgery Practice Really worth? Plastic Surgery Products, August 2006.

Marcinko,DEand Hetico, HR: The Business of Medical Practice (third edition). Springer Publishing,New York,N.Y., 2011.

Marcinko,DEand Hetico; HR: Risk Management and Insurance Planning for Physicians and Advisors, Jones andBartlettPublishers,Sudbury,Mass., 2007.

Marcinko,DEand Hetico; HR: Financial Planning for Physicians and Advisors, Jones andBartlettPublishers,Sudbury,Mass., 2007.

Marcinko,DEand Hetico, HR: Dictionary of Health Insurance and Managed Care, Springer Publishing,New York,N.Y., 2007.

Marcinko,DEand Hetico, HR: Dictionary of Health Economics and Finance, Springer Publishing,New York,N.Y., 2007.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Conclusion

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Defining the Accountable [Health] Care Organization

ACO Glossary of Terms from CMS, etc

By Staff Reporters

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According to Wikipedia, an Accountable Care Organization, or ACO for short, is a health system model with the ability to provide and manage patients, in the continuum of care across different institutional settings, including at least ambulatory (outpatient) and inpatient hospital care and possibly post acute-care in some cases.

Payment is consolidated rather than ala’ carte’, and generally considered cost effective and “bundled”.

Budgetary Accountability

Furthermore, ACOs have the capability of planning budgets and resources and are of sufficient size to support comprehensive, valid, and reliable performance measurements.

Source: http://en.wikipedia.org/wiki/Accountable_care_organization

CMS Definition

Now, aaccording to the CMS Office of Legislation; Section #1899.

ACO Definition: accountable care organization

Medical Provider Market Power and the American Hospital Association

AHA definition: AHA – ACOs

Assessment

The ACO model is one of the latest designs for managing healthcare costs and especially Medicare costs, and is gaining traction among policymakers desperate to control costs and boost quality in healthcare.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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