Category: Compensation Valuation

by Mark Spurlin, CPA

commercial reasonableness

Many people assume the concepts of Fair Market Value and Commercial Reasonableness are basically the same and/or if an arrangement is FMV it is also commercially reasonable. There was also the common belief that if an arrangement was not profitable, it was not commercially reasonable. While this may be true in some cases, this is not the general rule. There is in fact a clear distinction between Commercial Reasonableness and FMV.

Commercial reasonableness refers to whether a transaction makes sense from a business perspective, and whether it aligns with the goals of the parties involved. On the other hand, Fair Market Value is the price that would be agreed upon in a transaction between a willing buyer and a willing seller, both of whom are knowledgeable about the market and under no compulsion to act.

However, the misconceptions that Commercial Reasonableness and FMV are one in the same are understandable given that while the concept of Commercial Reasonableness has been around for decades, it wasn’t clearly defined in the regulations until 2021 when 42 CFR § 411.351 was published, providing the following definition:

“That the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”

Basically, does the arrangement in question make business sense, even if not everyone involved makes a financial profit?

One of the most common examples of how an arrangement can be FMV, but not commercially reasonable, is in regards to Medical Directorships. It may be FMV to pay a Cardiologist $250 an hour to perform medical director duties, but if a nurse can provide the services for $50 an hour, it doesn’t really make sense to pay the physician.

Nuances like the difference between Commercial Reasonableness and FMV can have a huge impact and navigating this space can be quite the challenge for physician practices. At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about physician compensation, speak with Mark Spurlin at 720.458.3766 or contact us at info@rootvaluation.com.

 

by Mark Spurlin, CPA

There are three generally recognized approaches to compensation valuation, which can be applied to any asset or service. These approaches include::

  • Income Approach – A general way of determining a value indication using one or more methods that convert anticipated future economic benefits into a single present amount.
  • Market Approach – A general way of determining a value indication using one or more methods that compare the subject arrangement to similar arrangements (for which the specific services and compensation amounts have been disclosed)
  • Cost Approach – A general way of determining a value indication based on the principle of substitution, that is, the cost it would take to replace the service with a suitable alternative of equal utility.

As applied in the determination of FMV compensation, we generally observe the following:

Income Approach

This is not typically used for valuing physician compensation as consideration of the income generated by the services could violate the regulatory prohibition of consideration of the volume and/or value of referrals.

Market Approach

This is a commonly used method for compensation that uses the benchmark survey data for comparable arrangements. For example:

  • Clinical Compensation – Often utilizes multiple reported survey metrics such as Total Cash Compensation, wRVUs, professional collections, compensation per wRVU, etc. to estimate the compensation paid based on a similar provider, in a similar market, providing similar services.
  • On-Call Compensation – Often utilizes reported hourly or shift-based call coverage rates based on specialty, type of coverage (i.e. restricted, unrestricted, beeper only, acuity, etc.), collections/revenue from other sources (i.e. collections for services rendered while on call)
  • Medical Director – Often utilizes reported hourly call coverage rates based on specialty.

It should be noted that while benchmark survey data is useful for valuation, the reported data has limitations and is prone to misuse. Moreover, it is almost impossible to determine a direct comparison between the reported (aggregated) data and a subject arrangement, and there are numerous variables that could impact the applicability of survey data such as, sample size, standard deviation, correlation of production to compensation, comparability of duties, burden, etc.

Cost Approach

This method is commonly used in compensation analysis, particularly for Professional Services Arrangements (“PSA”), Medical Directorship, Call Coverage, etc.

For example:

  • PSA – Often considers the actual cost for alternatives such as recruiting and hiring physicians to provide the service, or obtaining locums, etc.
  •  Medical Directorships – Often utilizes annual compensation rates to derive hourly rates based on the hours actually worked (i.e. a full time employee is generally considered to be 2,080 hours, but that often includes PTO hours, so the true hourly rate for hours worked is actually higher).
  • Call Coverage – Also often utilizes actual hourly cost but is then adjusted to reflect the actual burden of the call coverage and any other sources of compensation. For example, you wouldn’t pay a physician the same rate to just answer a beeper as you would a physician that has to present multiple times per shift. Typically, the burden factor adjustment for unrestricted call coverage ranges from 5% to 30%.

The Cost Approach is generally utilized and considered in conjunction with the Market Approach and often serves as an upper limit for compensation.

Each of these approaches contain numerous variations, that tailor the approach to the specific nuances of the valuation assignment. No one valuation approach is appropriate in all circumstances and appraisers will typically rely on multiple valuation methodologies in arriving at their conclusion of value.

At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about physician compensation, speak with Mark Spurlin at 720.458.3766 or contact us at info@rootvaluation.com.

 

by Mark Spurlin, CPA

healthcare valuation

The answer is likely yes (and they often do).

The reason for this dichotomy in pay is multifaced, but it can be largely attributed to economies of scale. In private practice, fixed overhead costs are often shared by a smaller number of physicians, the administrative (non-billable) time burden is higher for the physicians, and a private practice generally has limited leverage with commercial insurance payors to negotiate favorable payor contracts (particularly under traditional fee-for-service models). These economic forces place constraints on the overall profitability of a private practice relative to their hospital-owned counter parts.

It should also be noted that whereas these economic constraints impose practical limitations on what a private practice doctor can earn (i.e., in private practice physician earnings are limited to available profits), a hospital may be able to subsidize employed physicians if the prevailing market rate of compensation exceeds the profit generated by the physician group. This is not without limitations, however, and it is of utmost importance that any compensation paid is compliant with the applicable healthcare regulations. Compensation must be consistent with fair market value, not calculated in a manner to takes into account to the value or volume of referrals, and the arrangement must commercially reasonable.

In an open and unrestricted market, the forces of supply and demand will ultimately determine the compensation that is paid for any good or service, including physician services. In today’s healthcare environment there are many other factors that should be considered when setting physician compensation, and prevailing market compensation often exceeds what can be earned in private practice.

At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about physician compensation, contact us at (720) 458-3777.

 

By Mark Spurlin, CPA

 

New Healthcare delivery models, services and platforms are rapidly deploying across the nation and consumers/patients have access to an ever-growing pool of options when it comes to how and where they receive care.  Bringing a new product or service to market can be a time consuming, risky, complicated and costly endeavor whether you’re a start-up looking to bring something totally new, an established health system or even a small physician practice. Devising a pricing strategy for these services that is commercially reasonable and fair market value should start with the following questions:

  • What set’s you, your product or service apart from the competition? (price, quality, distribution, IP/technology, access, etc.)
  • What is value to the customer, real and perceived? (actual benefit > actual costs and perceived benefit > perceived cost i.e. quality, convenience, trust, reputation, etc.)
  • Is that something others will even be willing to pay a for? (unmet or under met demand, can you create demand)
  • Is it something they’d be willing to pay a premium for? (insurance or Medicare sets price or consumer pays out of pocket)

It is just as important to understand what the product or service costs to produce/provide which can be difficult, especially when it’s a new venture.  To do this you must have a detailed understanding of the direct and indirect costs, other overhead etc. This will give you the inputs and assumptions necessary to build out a proforma analysis. It is then essential to pressure test these assumptions and refine them as necessary.

While this process can be performed internally, having a third-party fair market valuation can provide added value by not only assisting with regulatory compliance, but also by offering a different perspective and/or offering analysis around alternative models.

At Root Valuation we take the time to also understand the company, the product or services, and the goals of the various stakeholders involved.  We take the time to help ensure small miscalculations or misjudgments don’t lead to costly mistakes, and work to identify any value that may have been overlooked.

By Mark Spurlin, CPA

At the recent ABA Health Law Section conference in Washington D.C., multiple panelists discussed the rapid adoption of telehealth during the COVID-19 pandemic, and challenges that lie ahead for the industry. The positives and negatives of telehealth services vs. in-person care can be hard to weigh. Services requiring more hands-on evaluation and testing will continue the need to be performed in a healthcare facility. However, follow-ups and medication management could shift to tele-visits and technology that can remotely monitor patients and/or allow the patient to provide simple information like vitals which will ultimately reduce the overall number of in-person encounters. Services that rely less on physical patient interaction, like mental health services especially, have broad support and consensus on the benefits of expanded access to telehealth. There is also no doubt telehealth is especially beneficial for patients in rural areas; additionally, telehealth can decrease the time it takes to receive care and prevent unnecessary utilization of more costly emergent care such as urgent treatment clinics and emergency departments.

During the pandemic, a number of changes were made to the regulatory and reimbursement framework for telehealth. These changes included temporary waivers to certain regulatory restrictions to access, as well as reimbursement parity between telemedicine and in-person visits. The 2022 Medicare Physician Fee Schedule (“MPFS”) extends parity in reimbursement with in-person visits through the end of 2023, but the long-term future is much less certain for reimbursement. Multiple variables, including the economics of telemedicine, the quality of care, new technology and market participants, utilization rates and patient/provider habits in a post-pandemic world are hard to predict individually, much less in the aggregate. We believe it is reasonable to assume tele-health services will eventually be paid at a lower rate than in-office services and many practices will see an overall decline of in-person visits, but increased efficiency and lower costs will offset a majority of the decline, potentially allowing for even better margins.

Regarding the regulatory framework and temporary waivers, these too are likely to evolve. It is apparent that the Department of Justice and the OIG are still concerned about the potential for fraud and abuse within telehealth services, and have dedicated significant recourses to identify, investigate, and eliminate waste, fraud, and abuse in our federal health care programs.[1] Ironically, new technology and datamining capabilities have created tremendous efficiencies, increasing the detection, investigation and prosecution of bad actors. We believe these technological efficiencies will ultimately deter fraud and abuse, give regulators and lawmakers more confidence to prevent much of the rollback after the PHE, and even promote even greater expansion and experimentation of telehealth services in the future.

Through our valuation and advisory services practice, Root has been on the forefront of the telehealth expansion and has had the privilege to work with numerous companies that are introducing new and innovative technology and care delivery models. While the pandemic opened the floodgates and lead to a huge rush to market for many new products and services, it is as important as ever to be mindful of compliance. Root understands time is of the essence when new products and/or services are brought to market. Our expertise and philosophy of providing a more consultative and collaborative approach to valuation services, when going to market, are achieved by working in tandem with clients and counsel to help develop commercialization strategies and agreements to maximize value, while remaining compliant and within fair market value.

[1] https://www.cms.gov/About-CMS/Components/CPI/CPI-Spotlight

Telehealth has long been known to have the potential to be a major disruptor to the healthcare industry. Now, during one of the largest disruptions of our lifetime, it has shown its true potential by providing a temporary lifeline for patients and providers alike. In an effort to provide access to healthcare and maintaining continuity of care, the government has issued broad waivers temporarily reducing many of the hurdles that have limited the adoption and expansion of telehealth such as geographic restrictions, coverage and payment rates, state licensure, certain platform and HIPAA requirements, etc.
 
The temporary lifting of restrictions and the protections provided in the Stark Law and Anti-Kickback statutes, coupled with the continuum of care void created by the pandemic has led to a mad dash to provide telehealth services. In turn, this has created an urgent need to enter into various arrangements necessary to support telehealth services. Due to the emerging and evolving nature of the various telehealth services many physicians, hospitals, even large health systems find themselves navigating uncharted territories. And despite the temporary waiver, the long-term viability of these agreements requires regulatory compliance including fair market value compensation. With so much uncertainty, many clients are turning to valuation firms like Root Valuation to help with some of the truly unique challenges of marketing and pricing these services and products.
 
Some of the more daunting and unknown long-term challenges include:
  • Will any of the temporary provisions expanding coverage and access to telehealth services remain in place or become permanent after waivers are lifted?
  • What are the implications if they are not?
  • Will there be a lasting impact on patient demand and preferences?
  • How will care delivery models and practice patterns need to adapt?
  • How does/will the ability to practice across state lines impact FMV?
The safest course of action in light of this uncertainty is to assume Stark and Anti-Kickback regulations and enforcement will be reapplied as currently written. As such, we believe it is important that clients work with a valuator to develop sound logic and document their support for the pricing of temporary arrangements. Clients should also implement specific provisions to revisit these compensation structures and amounts once the waivers expire and the go-forward market and compliance considerations are known with greater certainty.
While it may be impossible to plan for all of the eventualities that may manifest once the pandemic is over, we believe this is a watershed moment for telehealth that will see sustained high demand for these services long after the pandemic subsides. In the near to mid-term telehealth will remain highly fragmented and inconsistent due to the multiple variables and parties involved, however, new technologies and increased capital investment will likely change not only telehealth, but the healthcare industry as a whole.
 
At Root Valuation we are committed to helping clients navigate the market and regulatory uncertainties through a consultative approach to valuation services. If your organization needs help navigating telehealth financial arrangements or help planning how the changes related to telehealth could impact your organization, please give us a call at 720.390.6673 or email us at info@rootvaluation.com.

By Mark Spurlin

Hospitals, health systems and providers of all types are facing unprecedented challenges as they respond to the COVID-19 pandemic, and almost all aspects of healthcare have been affected. In response, we have seen HHS, CMS and other regulators take broad measures to bypass regulatory uncertainties by issuing waivers and providing guidance that allows flexibility for healthcare providers to respond to the crisis based on the unique facts and circumstances they currently face.
Although the priority has been ensuring the resources are available and in place to provide care, and rightfully so, setting the appropriate compensation for physicians and non-physician providers poses its own uncertainties and challenges. Providers on the frontlines are facing a surge in demand, while others are much more idle as elective procedures are canceled or postponed and many patients in general are avoiding seeking healthcare services for non-urgent issues.
 
To facilitate real-time decisions and ensure continuity of care, on March 30, 2020 CMS issued blanket waivers of sanctions under the physician self-referral law, also known as Stark Law. The blanket waivers apply to certain financial relationships and referrals related solely to “COVID-19 Purposes” and are intended to provide additional flexibility for physicians and providers to provide sufficient healthcare items and services in instances that may not normally comply with Stark Law.
 
The waivers address and apply to a wide array of compliance issues that would normally constitute violations under current law. These range from hospitals providing excess benefits to the medical staff such as meals, comfort items, and/or on-site child care, to the temporary ability of physician-owned hospitals to convert observation beds to inpatient beds or otherwise increase their inpatient bed count to accommodate patient surge during the COVID-19 outbreak. Perhaps the most widely applicable wavier applies to the remuneration from an entity to a physician (or an immediate family member of a physician) that is above or below the fair market value (“FMV”) for services personally performed by the physician (or the immediate family member of the physician) to the entity.
 
Furthermore, the guidance can be applied retroactively to March 1 and covers compensation arrangements that commenced prior to the required documentation of the arrangement in writing and the signatures of the parties, but that satisfies all other requirements of the applicable exception. It should be noted that while these waivers provide flexibility for hospitals and healthcare providers to operate under during the pandemic, each financial relationship should be evaluated independently and comply with other federal, state, and local regulations.
 
These regulations and temporary waivers create a new altered framework to answer which financial arrangements CAN be compensated during the Covid-19 pandemic. However, the next question is how, and how much, SHOULD you compensate providers during this temporary crisis and what are the potential long-term implications. The answer to these questions requires careful consideration of the specific facts and circumstances and the application informed judgment. Importantly, steps should also be taken to revisit these arrangements after the crisis has passed to ensure that temporary emergency compensation measures are in fact temporary and do not create compliance risks downstream.
 
Root Valuation is committed to helping the clinicians and healthcare organizations on the front lines in our fight against the coronavirus pandemic. If you or your organization needs valuation support for COVID-19 related compensation arrangements we will donate up to 2 hours of our time for consultation and discount our fees by 50% for any associated FMV opinion required.