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RGL
Healthcare Valuation Digest
A discussion of modern valuation in the healthcare market Winter 2009
In today’s challenging economic times and the ever-changing landscape of
healthcare; deals, joint ventures and arrangements are occurring at a rapid
pace. Each transaction is unique and the challenge of determining a fair market
value is never easy. In the field of valuation, there may not be one correct
answer, but there are incorrect answers. The following articles present insights
and perspectives into common scenarios unique to the healthcare industry.
Risks in the Purchase of Physician-Owned Businesses
By Mark Wilkerson and Ranmali Bopitiya
In recent years, many hospitals have
shown interest in purchasing physician
practices and/or ownership interests
in ancillary services facilities (such as
specialty hospitals or surgery centers)
in order to secure patient flow to
the hospital’s facilities. After many
years of dealing with the headaches
associated with the administration
and management of these businesses,
many physician owners have also been
interested in selling such assets and
getting back to what they do best –
practicing medicine.
have a lower value and, accordingly, if
a reduction in the purchase price is in
order to compensate for the additional
risk being undertaken.
Typically, the parties to such
transactions develop and sign a
term sheet or letter of intent that
sets-out the basic terms of the deal,
including the price the hospital intends
to pay for the practice assets or facility
ownership interest. After the price is set
and before the money changes hands,
however, the hospital should insist on
performing due diligence to ensure that
its purchase price is justified and that
there are no hidden traps associated
with the purchase.
The Existence of a Healthcare
Compliance Plan.
If the physicians selling the assets or
interests have not been fully engaged
in assuring the ongoing compliance of
the practice or facility, the hospital will
need to evaluate whether the assets
This article focuses on several risk
areas that often provide justification
for hospitals to pay less in purchase
and sale transactions in order to
compensate for the potential risks being
assumed. So in order to ensure that
your hospital is not paying too much,
attention should be paid to
the following:
The U.S. Department of Health and
Human Services - Office of Inspector
General has issued guidelines for the
development of compliance programs
for individual and small group practices,
so there is little excuse for a practice
not to have an effective program. The
OIG has stated that it does not expect
smaller practices to implement all of the
components of a full-scale compliance
program, but a compliance program
should be more than simply a notebook
on a shelf; there should be evidence
that the program is constantly being
updated. Look for documentation of:
•
•
•
•
•
•
Frequent updates to the Standards
of Conduct;
Regular training and education
of staff;
Processes for investigation and
discipline of violations;
Methods for anonymous reporting
of violations;
Periodic audits and assessments in
all aspects of operations; and
Background checks on all
employees to ensure that none have
been debarred or excluded from
federal programs.
The existence of an effective compliance
program reduces the chance that an
audit will be conducted by the Centers
for Medicare and Medicaid Services
(“CMS”), and if an audit is performed,
the existence of a compliance program
will reduce the practice’s exposure
to penalties. As a practical matter, a
compliance program also increases the
chance that billing errors have been
addressed and it demonstrates that
the owners are aware of applicable
healthcare regulations, such as HIPPA,
Red Flag Rules, and self-referral
restrictions (discussed below).
Although a hospital can limit its
exposure to potential liabilities
associated with non-compliance
Continued>
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Risks in the Purchase of
Physician-Owned Businesses
Continued
through structuring the transaction as
an asset purchase, if the physicians
will continue to be employed by the
hospital post-closing, the physician
stream of income that the hospital
may be counting on could be at risk if
the practice has historically not paid
attention to these important compliance
issues. Accordingly, a reduction in the
value of the practice – and thus the
purchase price - may follow.
Evidence of Corporate
Governance.
In addition to checking with the
applicable state’s Secretary of State
to determine if an entity is in good
standing, it is also necessary that an
organization’s corporate or company
records be kept updated on at least
an annual basis. A major advantage
of doing business in the corporate or
limited liability company form is limited
liability, which prevents the entity’s
obligations from becoming the personal
obligations of its owners and upper
management without their agreement.
However, if formalities are not observed,
limited liability might never be achieved,
or it may be lost.
Thus, when performing due diligence
on an entity in which an interest will be
purchased, the buyer should ensure that
documentation has been maintained to
show that the entity has approved, on at
least an annual basis:
•
•
•
Amendments to the governing
documents of the entity;
Election or appointment of
managers, officers, or directors,
as applicable;
Important transactions, including
major business agreements, loans,
employment contracts, leases,
buy-sell agreements, and tax
oriented matters (e.g., reasons
for accumulating earnings,
charitable contributions, retirement
plans, etc.);
•
•
Loans to members (or guarantees of
their obligations); and
The sale or other disposition of
any substantial portion of the
entity’s assets.
All actions by the entity’s owners
should be evidenced by resolutions
adopted by the governing body. The
resolutions should be contained in
the minutes of actual meetings, or in
unanimous written consents in lieu of
actual meetings. Any action that may be
taken at a meeting usually may be taken
without a meeting if a written consent
to the action is signed by all of the
members of the applicable governing
body. The minutes or consents should
be kept in the entity’s minute book.
Compliance with HIPAA and
FTC Red Flags Rules.
Of course, most all physician practices
are considered covered entities under
the Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”).
While compliance with HIPAA has
always been onerous, the obligations
under HIPAA were recently expanded
in the federal stimulus package. The
Health Information Technology for
Economic and Clinical Health Act
(“HITECH Act”), which was embedded
in the stimulus package, creates many
new HIPAA requirements including
breach notification rules. The new
breach notification rules are already in
effect today.
Therefore, the due diligence of any
HIPAA covered entity should include a
review of the following:
• HIPAA Policies and Procedures
• Business Associate Agreements
• Updates for compliance with the
HITECH Act
• Breach notification procedures
In addition to creating new
requirements, the HITECH Act indicated
that increased enforcement is on the
horizon. While a buyer can limit their
exposure for HIPAA noncompliance
by structuring the deal as an asset
purchase, an entity’s failure to comply
with HIPAA can impact future accounts
receivable. In addition, certain
HIPAA violations may have criminal
repercussions which may require
reporting to Medicare and Medicaid.
In addition to HIPAA compliance, buyers
should review an entity’s compliance
with the new Federal Trade Commission
Red Flags Rules. The Red Flags Rules
require certain “creditors,” which
currently includes most health care
providers, to implement an identity theft
program by June 1, 2010. Congress is
presently considering a bill to exempt
certain small providers from the Red
Flags Rules. In the meantime, buyers
should review whether an entity is
subject to the Red Flag Rules and, if so,
whether the entity has an adequate
identity theft program in place as a part
of the due diligence process.
Self-Referral Rules Compliance.
The self-referral rules loom over any
deal between hospitals and physicians.
The self-referral rules include both the
Stark Law and the Anti-Kickback Statute.
The Stark Law prohibits physicians from
making referrals to a hospital for certain
Medicare or Medicaid reimbursed
services, if the physician and hospital
have a financial relationship (investment
or compensation), unless an exception
applies. The Anti-Kickback statute is a
criminal law, with a similar purpose, to
prohibit the payment, offer, or receipt of
any remuneration in order to induce the
referral of patients for services paid for
by any federal healthcare program.
As a general rule, when the Stark law
applies, a buyer must fit the deal into
a Stark law exception or else the deal
cannot close. A deal which violates
the Stark law will put the buyer at risk
for False Claims Act liability, which
includes treble damages. Buyers
should always consult legal counsel
Continued>
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Risks in the Purchase of
Physician-Owned Businesses
Continued
about structuring a deal to comply with
a Stark law exception. Moreover, legal
counsel should advise buyers regarding
the applicable Anti-Kickback Statute
safe harbors. Although compliance
with an Anti-Kickback safe harbor is not
compulsory, the buyer must assess the
level of risk which they are willing to
accept if they do not fit squarely within a
safe harbor.
In addition to ensuring that the deal
itself complies with the self-referral
rules, the buyer should assess whether
the entity has been complying with said
rules in its other financial relationships.
For example, if an entity is a party to an
equipment or office space lease which
violates the Stark law, the entity may
be obligated to repay all Medicare and
Medicaid reimbursements from the
date the lease was entered. Obviously,
due to the severe repercussions,
noncompliance with the self-referral
rules will have a dramatic impact on the
purchase price.
Evidence of Good
Employment Practices.
A part of any good due diligence
typically includes a review of human
resource department employment
policies and manuals relating to the
practice or facility being purchased,
to the extent an interest is being
purchased in the facility rather than
merely assets. A prudent buyer will also
seek complete employee information,
including employment agreements
and accumulated paid time off.
Finally, buyers typically want to review
information relating to workman’s
compensation, OSHA, and any claims of
non-compliance with applicable state or
federal regulations.
compliance and verification faces
the possibility of significant fines,
disbarment from government contracts,
potential criminal liability and intense
negative publicity.
In addition to the above considerations,
a buyer should review a company’s
immigration compliance and verification
policies, procedures and liabilities. In
the current environment of intensified
enforcement, it is extremely important
for every company to employ best
practices in the area of immigrationstatus compliance and verification.
Mark Wilkerson is a Member and the
Transaction Section Group Leader at
Caplan and Earnest LLC, a Boulder,
Colorado law firm. Ranmali Bopitiya
is an associate at Caplan and Earnest
and practices in the firm’s Healthcare
Group. Mr. Wilkerson and Ms. Bopitiya
both specialize in healthcare industry
transactions and regulatory compliance.
Any company that has not implemented
best practices in terms of compliance
with federal and state laws regarding
immigration-related employment
www.celaw.com
Tel: 303.443.8010
We hope that this article alerted
you to the many and varied ways in
which compliance may impact your
transactions. Due diligence, therefore,
is not only about limiting liability but
also about reaching a true fair market
value. Please feel free to contact us with
any questions.
What Earnings Represent
Fair Market Value? by Chris David, CPA/ABV, ASAABV, ASA
Whether it is an imaging business,
dialysis clinic, surgery center or
physician practice, the fair market
value should be based on the earnings
potential of its existing structure at the
valuation date. This issue arises often,
and clients sometimes expect that the
fair market value of the entity should
be representative of what they plan
or hope to do in the future. Although
a healthcare provider may have plans
to add additional physician investors
or additional revenue-producing cases
in the near-term, these items should
not be factored into the estimated
future earnings of the enterprise. The
fair market value should reflect the
patient volume and earnings generated,
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or expected to be generated, from
its existing owners, staff and other
resources in place as of the valuation
date. For example, a physician practice
should not be valued based on plans
to add two additional doctors and four
additional exam rooms. Similarly, a
dialysis clinic should not be valued
based on the additional patient volume
that a potentially new physician/
investor will generate. It is appropriate
to include routine purchases of capital
equipment, but not major capital
improvements for expansion. Another
way of looking at this concept is that a
hypothetical buyer is not going to pay
for repairs or improvements that are not
already in place.
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Publicly Traded
Healthcare Providers
One year later, after we all thought
the world was coming to an end, how
have some of the top publicly traded
healthcare providers fared in the eyes of
investors? We took a look at the skilled
nursing, assisted/independent living
and hospital sectors. Although the
major indices have staged a substantial
rebound in the past twelve months,
the healthcare provider market has
not followed suit. As a matter of fact,
the picture appears rather mixed. We
analyzed the stock price changes as well
as the change in the price-to-earnings
(“P/E”) ratios of seventeen publicly
traded healthcare providers.
Skilled Nursing
Based on the closing prices as of
October 12, 2009, stock prices declined
for five of the six companies analyzed.
Advocat, Inc. increased in price by
more than 46%. The P/E ratio can
provide another indication of investor’s
confidence in the future prospects of a
company. Only two companies in the
skilled nursing sector are trading at
higher multiples. The companies in this
sector are, on average, 29% off of their
52 week high.
sector declined 25%, while the average
decline in skilled nursing was 33%. Only
two of the six companies report a positive
P/E ratio, and only one, Capital Senior
Living, is trading at a higher P/E multiple
than a year ago. These companies are
down 17% from their 52 week high.
Assisted Living
We observed six companies in the
assisted living space and noted all but
one company, Five Star Quality Care,
declined in price. The companies in this
Hospitals
Four of the five publicly traded hospitals
analyzed increased in price from a year
ago. Lifepoint’s stock price declined
only 4.98%, while the other companies
increased an average of 36%.
However, the trading P/E multiples
show a mixed signal. Two of the five
companies are trading at lower P/E
multiples than on September 30,
2008. The remaining three companies
are trading at higher multiples, most
notably, Tenet Healthcare, which is
now reporting a positive P/E ratio, as
opposed to negative earnings a year
ago. The sample companies in the
hospital sector are trading only 2% off of
their 52 week high.
Smell Test Your Valuation
By Chris David, CPA/ABV, ASABy Chris W. David, CPA/ABV, ASA
As deals and transactions continue,
analysts across the country continue to
issue their opinions of fair market value
of various types of private healthcare
providers. Some valuations seem to
be reasonable and supportable, while
other valuations seem to be disjointed
and out of whack. There is a quick
and easy “smell test” or litmus test a
professional can perform to make sure
the value is in the right ball park. This
test can be referred to as the “inverse
P/E test”. The inverse of a P/E ratio,
E/P, is equal to a capitalization rate
(“cap rate”).
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E/P = Cap Rate
Therefore
1/Cap Rate = P/E
So, if you take the earnings
capitalization rate of the private
enterprise and divide it into 1, you arrive
at the P/E ratio of the private company.
It is important to note that the cap rate
used should be the earnings cap rate,
rather than a cash flow cap rate. This
information can typically be found in
the income approach section of an
appraisal report.
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The implied P/E multiple of the private
enterprise can be compared to similar
publicly traded companies in the same
sector. Fundamentally speaking, the
public companies would normally trade
at a higher P/E ratio because they are
larger, diversified in many markets, have
multiple service lines, better access to
capital and professional management.
If the implied P/E ratio of the private
enterprise is higher than its publicly
traded peers, there should be a good
reason for it, such as exceptional growth
and above average profit margins.
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Forensic Medical Analysis
of Bodily Injury Claims
From a Defense Perspective
Diane Leek, MSN, RN, LNCC, CCM
A legal nurse consultant (LNC) is asked
many times to review medical records
and render an opinion on many issues
including but not limited to causality
of the injury to the loss, if presenting
medical problems/conditions are
related to the loss, what impact preexisting medical conditions have, if
any, on recovery and what are the
implications of the loss to the injured
person as a whole. The LNC may be
asked to provide a cost projection
of future medical as it relates to the
loss. This takes knowledge, research,
review of past (pre-loss) and present
(post-loss) medical records, and
when needed, identifying the correct
medical expert who can rule in or out
the problem that can account for the
subjective complaints claimed.
The LNC places the medical records in
order of treatment received and date
stamped for easy reference by the
client. Identifying what type of report
the LNC is to submit to his/her client is
assessed at the time of referral. While
some clients prefer only a summary
of LNC findings without a detailed
chronology of the medical treatment
received, having a typed and detailed
chronology from beginning to end
(to include pre-loss medical history if
available), puts the LNC in a far better
position of pointing out to the client
any unexplained gaps in the medical
care or lack of it, inconsistencies in the
treatment, deviations from the standard
of care, issues that would strengthen
or weaken the case, and identify what
records remain missing.
Upon receipt of a referral, it is critical
for the LNC to be certain the client
shares the essential post-loss records
including the police report, car repair
invoice, pictures taken at the time
of the loss, accident reports, EMS
report, emergency room and any and
all post-loss medical records including
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medical billing from initial date of
treatment. The LNC can then make a
general comparison of what subjective
complaints were voiced by the claimant
and chain of events that took place at
the time or soon following the loss to
any new complaints or changes to the
claimant’s story that developed weeks,
months, sometimes years later.
mimic same type symptoms allegedly
brought on by bodily injury, the LNC
should not hesitate to advise his/her
client that retrieval of these pre-loss
records needs to be sought.
The claim adjuster’s recorded statement
of the claimant is just as important. The
claimant is often asked about relevant
pre-existing medical problems and his/
her version of the accident, and this
statement may or may not be consistent
to the actual medical documentation.
If challenged by the opposing side it
often takes judicial review to deem them
relevant, but the reasonable argument
and expectation is establishing a
baseline in which to further determine
if the loss caused, made worse, or had
no impact on the presenting subjective
complaints and objective findings. An
example would be the LNC or medical
expert is frequently asked to separate
out alleged bilateral radicular upper
extremity pain complaints following
a motor vehicle accident from that of
peripheral neuropathy in an obese
claimant that has a known history
of heart disease and uncontrollable
diabetes. Prior record is essential to
draw any conclusion of the relationship
of cause and effect from the accident
on preexisting conditions. Another
example is that while the LNC or medical
expert is aware that an asymptomatic
degenerative disc disease condition can
now become symptomatic following
acute injury, the question is by how
much, and to what degree did the loss
now make the claimant impaired as
compared to before the loss or, has the
claimant returned to his/her baseline?
This assessment can only be done by
comparing pre and post loss subjective
complaints and objective clinical
findings.
Privileged information including
medical records covered by a physicianpatient privilege is usually not subject
to discovery except the records that
are reasonably related to the alleged
damages, thus obtaining past medical
records that does not specifically relate
to the body part injured can be difficult.
Yet, these are extremely important to
seek. As prior illnesses or diseases can
There are many resources available
to the LNC to conduct the research
that is needed to better understand
the complaints associated with the
loss and is beyond the scope of this
article. But not to be overlooked are
the medications that the claimant is
taking and laboratory findings. Pre
and post-loss medications are to be
researched to rule out side affects
Police reports often contain valuable
information on mechanism of injury that
includes speed/impact of motor vehicle
collision and if claimant was wearing a
seatbelt. In knowing that the claimant
was restrained by a shoulder/lap belt,
unless the seatbelt malfunctioned or
came apart, the LNC is to question how
a restrained claimant could be allegedly
thrown clear across the inside of the
car following a minor rear end motor
vehicle accident. These are frequent
allegations by the claimant or their legal
representative much later which can and
must be questioned and refuted with
evidence. While LNCs are not experts
as accident reconstructionist, it can be
helpful to view pictures of the accident
and repair bills so as to have a better
understanding of the full impact of the
accident.
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Forensic Medical Analysis
of Bodily Injury Claims
From a Defense Perspective
Continued
that can mimic alleged subjective
complaints, including cognitive
impairment, difficulty sleeping, fatigue,
unresolved musculoskeletal pain and
GI upsets. Abnormal lab values may
be the only clue to the LNC that a preloss medical disease condition was
either undiagnosed or poorly controlled
secondary to mismanagement or
noncompliance. Further research would
be appropriate in this instance.
The detailed bills validate costs
of services, and could be valuable
resources for more information. Many
times, this is the only documentation
that is submitted by the opposing side.
While inadequate for complete review,
it is likely to raise questions that clearly
call for request of additional records.
The LNC can only submit a report of
preliminary findings and defer all final
conclusions pending review of the
complete set of records.
In summary, an insightful analysis by the
LNC seeks the truth of the claim, which
is most often resting in the medical
records. It is medical documentation
that supports a legitimate claim or that
which supports fraud and abuse. While
the majority of claims are legitimate,
there are some claims that can drive up
the carrier premiums to cover unrelated,
wrong, unethical or unending treatment.
The mission and scope of the LNC
reviewing bodily injury claims for the
defense, is to initiate a broader and
deeper inquiry into the validity of the
claim. The work product contributes
to the claim moving toward closure,
minimizing the financial liability of the
client by ensuring that they pay only the
claim that is owed.
Diane Leek, MSN, RN, LNCC, CCM
has been a registered nurse
Manager for RGL Forensics, Inc.
in St. Louis, MO for over 11 years
providing health care consulting and
medical case management services
to casualty insurance companies,
self-insured employer groups, and
legal professionals for personal
injury, workers’ compensation and
medical negligence claims. RGL is an
international firm working exclusively
in forensic accounting and consulting,
focused on four practice areas of
insurance support, fidelity services,
litigation support, and business
valuation.
Prior to joining the firm of RGL, Ms.
Leek worked as a medical management
insurance consultant in both the
group health and property & casualty
insurance industry for more than
a decade and has 20 years clinical
experience in critical care and level one
trauma nursing.
Ms. Leek can be contacted at
dleek@us.rgl.com
RGL’s healthcare valuation group is experienced in fair market value appraisals of
hospitals, ambulatory surgery centers, medical practices, imaging centers, under
arrangements and various other healthcare related ventures. Contact Chris David
directly at 303.721.8898 or cdavid@us.rgl.com.
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RGL Healthcare Valuation
Winter 2009