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Strategic Value Group, LLC Business Valuation: Does EMR Matter? OCHIN Learning Forum November 16, 2012 This presentation is intended for educational purposes.

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Presentation on theme: "Strategic Value Group, LLC Business Valuation: Does EMR Matter? OCHIN Learning Forum November 16, 2012 This presentation is intended for educational purposes."— Presentation transcript:

1 Strategic Value Group, LLC Business Valuation: Does EMR Matter? OCHIN Learning Forum November 16, 2012 This presentation is intended for educational purposes only and is not intended to represent specific professional advice or services. Consultation with appropriate professional advisors is recommended for specific situations. © 2012 Strategic Value Group, LLC. All rights reserved.

2 About Us Formed in 2004 to provide valuation and valuation related advisory services. Our mission is to assist our clients from both a strategic and compliance perspective by providing objective, high quality, value-added valuation consulting services. Business Valuation, Intangible Asset Valuation, Compensation Valuation, Service Agreements, Tangible Asset Valuation. Nationwide Client Base Los Angeles 6080 Center Drive Suite 600 Los Angeles, CA 90045 Seattle 601 Union Street Two Union Square, 42nd Floor Seattle, WA 98101 Dallas 13455 Noel Road Suite 1000 Dallas, TX 75240 2

3 Presentation Overview I.Current Market Dynamics II.Overview of General Valuation Concepts III.Specific Valuation Methodologies IV.Engaging an Appraiser V.Questions 3

4 Current Market Dynamics 4

5 Healthcare reform creating change Increased focus on compliance Regulatory changes: ACO’s, Stark III, etc. Positioning for the future Implementation of Fair Value reporting standards 5

6 Current Market Dynamics Acquisition activity is high ▫ Increased transaction activity related to physician-hospital alignment, hospital affiliations and other cooperative structures. More complicated transactions Transactions in ASC’s, Diagnostic Imaging, Radiation Oncology, Cardiology related services still active 6

7 Current Market Dynamics Physician Practices Practices without significant market power have lower negotiating positions with payors while Physician Groups with strong market positions faring better. Practice expenses continuing to climb Growing pressure to invest in EHR systems Difficulty recruiting new physicians Amount of Goodwill, if any, is generally lower More specialist transactions 7

8 Overview of General Valuation Concepts 8

9 Uses of Valuation BUSINESS Acquisitions Joint Ventures Other Arrangements Compensation Arrangements Internal Business Planning COMPLIANCE Stark Anti-Kickback Private Benefit Inurement Others FINANCIAL REPORTING Purchase Price Allocation Specific Assets & Liabilities Share-based Compensation Fair Value TAX REPORTING Purchase Price Allocation Charitable Contributions Section 409A Professional vs. Practice Goodwill Valuation Litigation Support 9

10 Users of Valuation COMPLIANCE Internal Counsel – Hospital External Counsel – Hospital External Counsel – Physician Group Compliance Officer - Hospital BUSINESS CFO – Hospital Business Manager – Hospital Business Manager – Physician Group FINANCIAL REPORTING CFO – Hospital External Auditor – Hospital Controller – Hospital TAX REPORTING External CPA – Physician Group Business Manager – Physician Group Valuation Litigation Support 10

11 How does the valuation “Plug in” ScenarioAdvantagesChallenges 1. One Party hires an appraiser to provide the opinion (Limited Transparency) a)Greater Negotiation Flexibility for the hiring party a)Potential perception of valuator as non-independent. b)Sharing of valuation information may be limited. 2. Both Parties jointly engage an appraiser to provide the opinion (Transparent between Parties) a)Open sharing of information Analysis a)May require more precision b)Generally takes more time and is more difficult to manage for valuator. c)Higher potential cost 3. Both Parties jointly engage an appraiser to provide the opinion and one party hires a valuation consultant a)The party who hires the valuation consultant may have an advocate a)Can lead to difficulties depending upon the “role” and expertise of the valuation consultant b)Higher total cost 4. Both Parties hire their own appraisers a)Both Parties have their own valuation consultant a)Higher total Cost b)Potential for appraiser disagreements based upon different data or methodology 11

12 What is Being Valued / Levels of Value Equity Assets Common Preferred Tangible Intangible Other Options, Warrants, etc. Controlling Interest Marketable Minority Interest Nonmarketable Minority Interest Control Premium Minority Interest Discount Marketability Discount 12

13 Standard(s) of Value Tax Purposes, Seller Advisory, Management Decision-Making Fair Market Value “…the price at which the property would change hands between a willing seller and a willing buyer neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Revenue Ruling 59-60 Regulatory Stark and Anti-Kickback Statute Requirements Fair Market Value “ means the value in arm’s-length transactions, consistent with the general market value. General market value means “the price that an asset would bring as the result of bona fide bargaining between well- informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party on the date of acquisition of the asset or at the time of the service agreement.” § 411.351 42 CFR Financial Reporting Fair Value “Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” ASC 820 (fka SFAS 157) 13

14 Standards of Value Strategic and Financial Investors Investment Value “The value to a particular investor based on individual investment requirements and expectations.” ASA BV Standards Regulatory Stark and Anti-Kickback Statute Requirements Reasonable Compensation “the amount that would ordinarily be paid for like services by like organizations in like circumstances” Reg. 1.162-7(b)(3) 14

15 Premises of Value Orderly Liquidation Forced Liquidation Going Concern 15

16 Valuation Methods and Key Considerations Income Approach ▫ Based on discounted cash flows, or capitalized cash flows Asset Approach ▫ Based on the underlying identified assets Market Approach ▫ Based on sales of other similar companies Reliability of Management Projections Historical Trends Industry Trends Future Outlook Regulatory Outlook Discount Rate Key Tangible Assets: Working Capital Furniture, Fixtures & equipment EMR Systems Potential Key Intangible Assets: Trade Name Covenant not to Compete Payor Contracts Certificate of Need Trained & Assembled Workforce Liabilities: Current Liabilities Accrued PTO for Employees Interest bearing debt Capital leases Comparable Transaction MethodComparable Company Method 16

17 Valuation Methods and Key Considerations (cont.) Structure of the Transaction Asset vs. Equity Determination of what assets and liabilities are included Market Approach for physician practice valuation is generally not as relevant due to lack of comparability Cost approach relevant where there is little or no intangible value Definition of Goodwill (valuation definition vs. healthcare definition) Consistency between analysis and go-forward agreements such as physician compensation and other service agreements 17

18 Business Analysis ATTRIBUTERELEVANT COMPONENTS Reimbursement(A) Reimbursement Status, (B) Fee for service vs. Capitation, (C) Payor Mix, (D) Governmental Reimbursement and (E) Other Reimbursement Volume(A) Specialty, (B) Competition, (C) Capacity of Facility and Equipment and (D) Status of Physicians Expenses(A) Physician Compensation, (B) Other outsourced agreements and (C) Fixed/Variable Risk(A) Coding, (B) Relationships with Physicians, (C) Diversification, (D) Existence of non-competes and (E) Competition Other(A) Tangible & Intangible Assets, (B) Working Capital and (C) Capital Expenditure requirements 18

19 Specific Valuation Methodologies 19

20 Potential Assets* AssetsLiabilities Working capital (Cash, A/R, Supplies, Prepaids, etc.) Current liabilities Tangible Assets (Real Estate, FF&E)Accrued PTO for employees Intangible AssetsDebt related to equipment GoodwillOther Debt *This list is not intended to be exhaustive but rather to present examples of common assets and liabilities. 20

21 Intangible AssetsIncome Approach Market ApproachCost Approach Trade NameRelief from Royalty Method Comparable Agreements WorkforceReplacement Cost EMR System (or Medical Records) Survey of Providers Replacement Cost Lease AgreementAbove/Below Market Method Comparable Agreements Non-Compete Agreements With- and Without- Method Replacement Cost Payor ContractsExcess Earnings Method Intangible Assets 21

22 Intangible Assets (cont.) Intangible AssetsIncome Approach Market ApproachCost Approach Provider ContractsExcess Earnings Method Replacement Cost Accreditations / Certificate of Need With- and Without- Method Comparable Transactions Replacement Cost GoodwillResidual 22

23 EMR Legislation & Regulations The Health Information Technology for Economic and Clinical Health (HITECH) Act provides the Department of Health & Human Services (HHS) with the authority to establish programs to improve health care quality, safety, and efficiency through the promotion of health IT, including electronic health records and private and secure electronic health information exchange. Under HITECH, eligible health care professionals and hospitals can qualify for Medicare and Medicaid incentive payments when they adopt certified EHR technology and use it to achieve specified objectives. Four regulations have been released, two of which define the “meaningful use” objectives that providers must meet to qualify for the bonus payments, and two of which identify the technical capabilities required for certified EHR technology. 23

24 EMR Legislation & Regulations (cont.) Incentive Program for Electronic Health Records: Issued by CMS, these final rules define the minimum requirements that providers must meet through their use of certified EHR technology in order to qualify for the payments for Stages 1 and 2 of meaningful use. Standards and Certification Criteria for Electronic Health Records: Issued by the Office of the National Coordinator for Health Information Technology (ONC), these rules identify the standards and certification criteria for the certification of EHR technology, so eligible professionals and hospitals may be assured that the systems they adopt are capable of performing the required functions. The U.S. Department of Health and Human Services announced the release of the final rules for Stage 2 of meaningful use earlier this year and updated certification criteria and standards. 24

25 EMR Methodology Market Approach ▫ Survey of EMR providers ▫ Compensation structure can make comparisons difficult ▫ Limited information on market quotes Cost/Market Approach ▫ Cost approach with market inputs where available ▫ Hardware, software, maintenance, and continuing tech support costs ▫ Markup on costs for operational profit and to compensate for volume and time budget risk 25

26 EMR Common Considerations What type of EMR system? ▫ Software as a Service ▫ Outright purchase ▫ Customization 26

27 EMR Common Considerations (cont.) Factors that might impact analysis: ▫ Who owns the system, is there a buyout clause? ▫ How many physician licenses included? ▫ Are there any adjustments to price for scale? ▫ Super-adequacy and will the system be used for other departments? ▫ Is tech support needed, what are the standards of performance? ▫ What are the obligations of each party related to liability from use of the system? ▫ Comparability of the system in the marketplace 27

28 Hot Topics Structure of Practice Acquisitions Go forward Compensation Unit of Measure Accounting for transactions may create numbers that are different from Compliance valuation Leasing arrangements, including restrictions/ rights, etc. EMR Intangible value relative to DCF Super-adequacy (Compensation/Services) 28

29 Engaging an Appraiser 29

30 Selecting the Appraiser(s) Assess the need for an independent valuation Assess the Firm  Experience  Resources  Independence Assess the credentials of appraisal team  Professional Credentials of the lead appraiser (CPA/ABV, ASA, CFA, CVA, AVA)  Experience and prior appraisals  Other team members  Area(s) of valuation expertise Assess ability of firm and appraisal team to work with stakeholders Assess the appraiser’s responsiveness Your comfort level 30

31 Best Practices - Engaging an Appraiser Establish Internal protocol for when a valuation is needed and at what point in the process to include the valuator Consider Integrating the valuation process as part of strategy, compliance and the financial reporting system Proper Scoping of Valuation project based upon uses/users of the valuation and the nature of the prospective transaction Clarity on engaging the valuator, how to use the valuation results and the management of the valuation process Identify any confidential information so that it can be managed. Coordination with legal and financial team Recognition of iterative process and timing/data requirements Independence is important 31

32 Other Engagement Considerations Engage under privilege? Transparency Reliance Assessment and management of expectations 32

33 Divergence in Practice Why can there be material differences between valuations?  Different Scope  Different Methodology  Different Data  Different Assumptions  Element of Subjectivity  Level of Expertise  Independence The current environment/cycle is causing additional divergence in practice.  Financial reporting went through this also but Healthcare valuation is lagging behind. 33

34 34

35 Resources BVR Guide to Healthcare Valuations OIG – Office of the Inspector General: CMS – Centers for Medical & Medicaid Services: IRS – Internal Revenue Service: ABA – American Bar Association: AHLA – American Health Lawyers Association: FASB website: SEC website: International Accounting Standards Board: International Valuation Standards Committee: American Institute of Certified Public Accountants: LinkedIn Sites 35

36 CONTACT INFORMATION: Greg Endicott Managing Director 310-556-8888 x 101 Office 206-427-5282 Mobile Danene Spaeth Senior Consultant 310-556-8888 x 106 Office 206-499-0889 Mobile LOCATIONS: Los Angeles: 6080 Center Drive Suite 600 Los Angeles, CA 90045 Seattle: 600 Union Street Two Union Square, 42 nd Floor Seattle, WA 98101 Dallas: 13455 Noel Road Suite 1000 Dallas, TX 75240 Missy Schrib Senior Manager 310-556-8888 x 110 Office 214-451-3403 Direct 36

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