THE GRAND ILLUSION MARKET DATA POST-CARACCI

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Archibald Tucker
7 years ago
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1 THE GRAND ILLUSION MARKET DATA POST-CARACCI And Other Common Failures in Healthcare Industry Valuation 1

2 Look for an article by Ken Patton and me in the current CPA Expert Caveat Given that the experts who testified in these cases may be present, I have chosen not to use their names. They may well have very different views than mine having been inside the case, and not having the benefit of hindsight - like me. Court Opinions do not cover everything they had to say. My views on Caracci, Delaware Open & market data are indeed passionate, and have been since the day the original decisions were announced. No disrespect of any colleague is intended.* *And, need I add that I recognize that I am not funny, but hope springs eternal. 2

Court Opinions do not cover everything they had to say.

3 Welcome to The Grand Illusion,* come on in and see what s happening. You paid the price, here s what you need to know. Caracci Failures Single market companies & multi-market comps Cost approach and the Accounting Equation Reasonable Knowledge of Relevant Facts Definition of Fair Market Value Compounded by Current requirements of Stark regs. for market data *Belief that out of area, multi-market comps can be used to value a single market entity. Parody based on Styx The Grand Illusion by Dennis Deyoung 3

Relevant Facts Definition of Fair Market Value Compounded by Current requirements of Stark regs.

4 With a cost-based system you can never make a profit Caracci BACKGROUND Conversion of Mississippi s largest home health agency, Sta-Home, from tax exempt to for-profit in 1995 Expectation of a Prospective Payment System (PPS) replacing Medicare cost-based system A PPS pays for services on the basis of a fee set in advance. National expenditures for home nursing care grew from $3.8 billion in 1990 to $20.5 billion in a circumstance that guarantees congressional action and always has! 4

Medicare cost-based system A PPS pays for services on the basis of a fee set in advance.

5 Caracci BACKGROUND 95% of Sta-Home revenues were Medicare There were Mississippi agency transactions and Hospitals were active buyers, using a cost shift strategy This was focus of ongoing government investigations and later would be considered improper Audit by IRS: Excess benefit transaction assessments: $250 million! 5

strategy This was focus of ongoing government investigations and later would be

6 But don t be fooled by the seminars, the or the magazines. Using TGI s* Market Database to Value Anything and Everything! 8 CPEs, only $295! Sign up for TGI s Webinar on the Guideline Public Company Method 2 CPEs, $150! Market Data Review: Family Law Judge in Bugtussle Accepts TGI Database to Value Used Car Dealer! *TGI: The Grand Illusion 6

7 They show you data graphs of what the Price should be 7

8 MEDICARE SPENDING ON HOME HEALTH POST-Caracci 0.0% -5.0% 1996, -4.5% 1997, -4.5% -10.0% -15.0% -20.0% 1999, -13.9% -25.0% 1998, -24.8% Given the post-event facts, could a reasonable Appellate Ct have concluded otherwise? This was foreseeable at the time of the conversion in my view. 8

8% Given the post-event facts, could a reasonable Appellate Ct have

9 Taxpayer expert Hahn makes these points eloquently in a Journal of Health Law article, Spring 2007 COST APPROACH This! Is the Whole Ball of Wax! Remember that the left side or asset side of the equation has to equal MVIC! Appellate Court was impressed that Taxpayer Expert used an asset-based approach in addition to MVIC For healthcare valuation, regulatory risk is in goodwill thus asset allocation is valuable if not critical!* *And this was suggested by IRS way back in 1995! See my BLOG! 9

Appellate Court was impressed that Taxpayer Expert used an asset-based approach in addition to MVIC For healthcare

10 Caracci KEY POINTS Level of payment for services varies radically from state to state and even market to market. Urban markets are dominated by a few health insurers who hold significant influence over the fees paid to providers. Very few insurers have national market coverage and those that do have significant market share in only a few states. [1] [1] See, e.g., Government Accounting Office Private Health Insurance: Number and Market Share of Carriers in the Small Group Health Insurance Market. 10

Very few insurers have national market coverage and those that do have significant market share in only a few states.

11 Caracci KEY POINTS Appraiser would need to look at the payor mix for both the Guideline and the subject and see if they were similar. In a poor state like Mississippi, the insurance market is unlikely to have been attractive since most of the available patients would have had Medicare or Medicaid, the worst possible payor. Out of market Guideline transactions and public companies are basically worthless most of the time and inconsistent with Stark regs. 11

In a poor state like Mississippi, the insurance market is unlikely to have been attractive since most of the

12 So if you ve figured out that its complete confusion, because the answers aren t the same. A large volume of data with limited data points does not mean you can draw a meaningful conclusion from it; this characterizes most of the data out there. 12

A large volume of data with limited data points does not mean

13 MARKET DATA When appropriate, use of market data requires an in-depth revenue analysis of both the subject and purported comps and assessing the future prospects for each source of revenue by payor! If the database lacks that information, you cannot rely on it for comparison! At best, you can use it as a reality check for a disciplined application of the income approach. 13

14 Just remember that it s The Grand Illusion and most market data s really lame.* It s really lame! *For valuing Healthcare entities! 14

15 My article on this case appears in the Summer 2007 edition of Business Valuation Review The Failures Delaware Open MRI Industry Risk Premiums Long-term Growth Rates Reasonable Knowledge of Relevant Facts 15

Delaware Open MRI Industry Risk Premiums Long-term

16 Delaware Open BACKGROUND Delaware Chancery Court decision Chancellor Strine developed own valuation model Used SIC 8071 (negative) risk premium Used 4% terminal growth rate Fannon/Treharne/Mercer style tax rate for S Corp Merger resulting in lawsuit occurred January

premium Used 4% terminal growth rate Fannon/Treharne/Mercer style

17 INDUSTRY RISK PREMIUM This is the Income Approach equivalent of The Grand Illusion: multi-market public companies in the SIC Code are of limited or no use in determining the Beta-proxy for a small, single-market valuation subject. As can be seen on the slide for two imaging companies included in the Risk Premium, they have POSITIVE Betas in this time period, not negative!! 17

Beta-proxy for a small, single-market valuation subject.

18 BCBS of Delaware: 50% share of HMO/PPO Market 18

19 A Beta of 1.0 moves with the market; a negative Beta moves Less, a positive More; volatility means risk and a higher discount rate COMPONENTS 19

20 AIQ, Alliance Corp with MRDG, Miracor Diagnostics IS THIS A NEGATIVE BETA? Beta is +++! 20

21 LH, Lab Corp with DGX, Quest Diagnostics IS THIS A NEGATIVE BETA? I think these look like Betas of ? 21

22 IS THIS A NEGATIVE BETA? 22

23 LONG-TERM GROWTH RATES Every year I say the same thing: A small entity dependent on Part B reimbursement cannot sustain a growth rate in excess of 3% (if that) into perpetuity! Further, an entity engaged in a business with rapid utilization increases has a limited expectation of any perpetual growth AND THIS IS FORESEEABLE! 23

24 MEDICARE PAYMENT How It Works - or Doesn t! Two Key Items Conversion Factor multiplied by RVUs equals Fee RVUs - 3 Components Physician Work Practice Expense Malpractice Insurance Conversion Factor

25 FYI, you cannot value an imaging business without a full understanding of the Deficit Reduction Act! ANALYSIS Following Graphs are per unit of service payments only. They do not illustrate the effect of the implemented recommendation that the payment for multiple imaging services performed on contiguous body parts be reduced. 25

26 Anyone see a 4% terminal growth rate here????? MRI FEE HISTORY Medicare Payment for Chest MRI $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 5.88% 2.49% 4.51% -1.26% % 10.00% 0.00% % % % % % 26

27 MRI FEE HISTORY Medicare Payment for Brain MRI $660 $640 $620 $600 $580 $560 $540 $520 $ % 4.40% 2.57% -1.43% % 10.00% 5.00% 0.00% -5.00% % % 27

28 Someday soon we ll stop to ponder what on earths this spell were under. A Grand Illusion! What do you see? 28

29 We made the grade and still we wonder who the heck (!) we are. It is said that inexperienced appraisers unfamiliar with the guideline methods fail to use them properly or at all. Might it not be more true that appraisers lacking confidence in their own ability to interpret the income return expectations of small business default to the simplicity of extracting multiples from databases which they can then apply to simplistic measures such as revenues to determine MVIC? 29

30 You Decide! 30

31 Medicare: 10 Years After BBA 97 No Goin Home! 31

32 Physicians BLOG:

33 MedPAC 2007 More later! 33

34 MedPAC

35 Final rule published 11/01/07 Changes of more than -9% generally indicate that the RVUs for that specialty have been reduced; less than -9% indicates an increase in RVUs. Note anesthesia came back a winner! 35

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40 IMAGING Prepared in 9/07 BLOG:

41 DRA*: Deficit Reduction Act Set physician office and IDTF technical reimbursement at the LOWER of MPFS or OPPD fee schedule Dramatic cutbacks in MR and CT in particular One more nail in the coffin for low volume imaging operations Is there now a Consolidation Trend??? 41

42 MedPAC Per beneficiary volume for imaging grew the most of all Part B, at about 9 percent. 42

43 POSSIBLE LEGISLATION? Ever wonder why high volume imaging is so profitable? Medicare assumes amount of time that imaging equipment is in use at a medical practice is 50% of office hours SCHIP would ve increased to 75%! Multiple Conversion Factors? 43

44 BEWARE STARK 3.1?? Anti-Markup Provision expansion? In-office Ancillary Services Exception Restrict reassignment by independent specialists? Revise same building rule? End of Per Click where physician-referrer leases space and/or equipment? This is a BIG valuation issue No more 64 slice CTs owned by cardios, leased to hospital? 44

45 BEWARE STARK 3.1?? Limiting Percentage-Based Comp to Physician Services End leases using percentage of collections? Under Arrangements 6 feet Under? 45

Establishing Fair Market Value under the Anti-kickback and Stark Laws

Establishing Fair Market Value under the Anti-kickback and Stark Laws Katherine A. Lauer, Partner Latham & Watkins LLP San Diego, CA Framingham, MA www.cpa.net Overview Legal Issues Regulatory Guidance