Health Care Valuations: The New, the Old and the Ugly

https://www.wipfli.com/insights/blogs/health-care-perspectives-blog/health-care-valuations-the-new-the-old-and-the-ugly?

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The shift in health care from volume-based, fee-for-service to value-based reimbursement (VBR) continues to push forward. In its wake, unintended consequences and new challenges have emerged — not only in aspects of delivery but also when determining fair market value (FMV) and remaining compliant with the federal Anti-Kickback Statute and the Stark Law. Below we touch on those consequences and how they’ve emerged from both new and old regulations.

The New: MACRA

Now in play, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) promises to fundamentally change the way the country evaluates and pays for health care. Its new payment schedules, however, have created ramifications that not only tangle the hospital-physician relationship but also create implications for VBR transactions and valuations.

As part of the transition to value-based medicine, four new MACRA elements in particular represent significant changes:

1. Pay for Performance (P4P) Arrangements: The remuneration system makes part of payment dependent on performance, measured against a defined set of criteria, and creates measurements and performance standards for establishing target criteria.

2. Shared Savings Arrangements: The new approach incentivizes providers to reduce health care spending for a defined patient population by offering a percentage of net savings realized as a result of their efforts.

3. Episodic Payments: An episode payment system offers a single price for all the services needed by a patient for an entire episode of care; for example, all the inpatient and outpatient care needed following a heart attack. The intent is to reduce the incentive to overuse unnecessary services within the episode. It also gives health care providers the flexibility to decide what services should be delivered rather than constraining them by fee codes and amounts.

4. Global Budget: With a fixed prepayment made to a group of providers or to a health care system (as opposed to a health care plan), this arrangement covers most or all of a patient’s care during a specified time period.

Clearly the value equation is shifting. Value is defined no longer solely by how much revenue a physician generates but rather by solving problems for patients and patient experience. Value can also be derived not by revenue per patient, but by how many patient lives a physician directs, and with that comes control over how some payments are allocated for patient related services.

As the value dynamics change, hospitals have sought to establish closer relationships with physicians. Acquisitions of physician practices by hospitals have continued at dramatic rates alongside the move toward direct physician employment and provider service agreements. New players in the market and marketplace forces have also emerged as competition to hospitals. Private equity groups and insurance companies are pursuing the acquisition of physicians and clinics for control of patient lives, and therefore revenue.

While the trend toward hospital-physician alignment is intended to improve health care delivery, it has come under scrutiny for potential fraud and abuse violations due in part to established laws that now appear at odds with the new VBR movement.

The Old: Anti-Kickback Statute and Stark Law

Health care organizations, providers and their counsels are well aware of the laws in place they must abide by, namely the Anti-Kickback Statute (AKS) and the Stark Law, which have been in force for more than three decades.

Such regulatory considerations related to fraud and abuse have long had significant impact on the value attributable to each property interest and on the valuation process itself. There are in fact several distinct meanings of fraud within the context of the health care regulatory framework, and they affect a property’s profitability and sustainability, creating significant risk and uncertainty for business entities.

What constitutes fraud, however, is now under the microscope and creating potential liability under the False Claims Act. The new direction of collaborative relationships on behalf of the patient and patient outcomes can make some arrangements suspect. How do physicians refer patients in the new MACRA environment without it being considered a conflict of interest or fraudulent? How will payments made to physicians not exceed the range of FMV and be deemed commercially reasonable? How can alignment strategies be constructed to provide a full continuum of care under VBR reforms?

While there have been no changes to the longstanding regulations, discord between the old laws and the new VBR direction is necessitating a different approach to compliance. The American Hospital, in a letter to the U.S. Senate Finance Committee in a hearing on the Stark law, said, “As interpreted today, the two ‘hallmarks’ of acceptability under the Stark law — fair market value and commercial reasonableness — are not suited to the collaborative models that reward value and outcomes.”

The Ugly: The Push and Pull of the New and the Old

The friction between the enforcement of fraud and abuse laws by the Department of Justice and the Office of the Inspector General, and the VBR models being implemented by Health and Human Services is warranting a review of MACRA and the threshold and definition of commercial reasonableness. With no one clear definition of commercial reasonableness, its analysis is ripe for distortion.

Many regulators’ arguments are centered around Practice Loss Postulate (PLP) — that the acquisition of a physician practice that then operates at a “book financial loss” is dispositive evidence of the hospital’s payment of consideration based on the volume and/or value of referrals.

The problem? In maintaining the economic delineation between physicians and hospitals, the PLP focuses exclusively on immediate and direct financial (cash) returns on, and returns of, investments by health care organizations related to vertical integration transactions. The PLP ignores other economic benefits associated with vertical integration, such as social benefits, qualitative gains, efficiency gains and avoiding costs.

As a consequence, such a vertical integration move could be viewed by regulators as evidence of legally impermissible referrals under the Stark law. However, it would prevent vertically integrated health systems from withstanding fraud and abuse scrutiny. And it would create barriers to satisfying the threshold of commercial reasonableness.

More “New” Is in the Future Forecast

Active industry input and congressional committee discussion is underway in hopes of generating workable strategies to reduce the law’s burden. And although the actual outcomes are uncertain, changes are clearly ahead.

CHS sees massive Q3 net loss amid weak volume, aftershocks of HMA settlement

https://www.healthcaredive.com/news/chs-sees-massive-q3-net-loss-amid-weak-volume-aftershocks-of-hma-settlemen/540868/

Credit: Rebecca Pifer / Healthcare Dive, Yahoo Finance data

 

Dive Brief:

  • Community Health Systems reported third quarter net operating revenues of $3.5 billion, a 5.9% decrease compared with $3.7 billion from the same period last year but slightly higher than analyst expectations.
  • In its earnings release after market close Monday, the Franklin, Tennessee-based hospital operator also disclosed a massive shareholder loss in the quarter of $325 million, or $2.88 per diluted share. CHS had a net loss of $110 million, or $0.98 per diluted share, in Q3 2017.
  • Lower volume was partially to blame, as the quarter saw a 12.4% decrease in total admissions and a 12.2% decrease in total adjusted admissions compared with the same period in 2017. The report also pointed the finger at the financial aftershocks of its troubled purchase of Health Management Associates (HMA), along with loss from early extinguishment of debt, restructuring and taxes.

Dive Insight:

CHS, one of the largest publicly traded hospital companies in the U.S., reported its highest operating cash flow since the second quarter of 2015, according to Jefferies. The third quarter figure of $346 million is also significantly higher than the $114 million from the same quarter last year.

Similarly, volume and revenue didn’t tank as heavily on a same-store basis as they did overall. Same-facility admissions decreased just 2.3% (adjusted admissions by 0.8%) compared with a year ago. Net operating revenues actually increased by 3.2% during the quarter compared with last year, beating analyst expectations.

But declining admissions show how hospital operators continue to struggle under the fierce headwinds 2018 has blown their way so far. CHS is clearly not immune, as the 117-hospital system faces ongoing operational challenges, bringing in financial advisers earlier this year to restructure its copious long-term debt.

The 20-state hospital operator continues to deal with the fiscal fallout from its roughly $7.6 billion acquisition of Florida hospital chain HMA in 2014. The Department of Justice accused the 70-facility HMA of violating the Stark Law and the anti-kickback statute for financial gain between 2008 and 2012, activities CHS reportedly was aware of prior to the merger.

Just last month, CHS announced a $262 million settlement agreement ending the DOJ investigation into HMA’s misconduct. However, that liability was adjusted during the third quarter and, taking into account interest, now totals $266 million. The fee will reportedly be paid by the end of this year.

The settlement also slapped an additional $23 million tax bill on the 19,000-bed system under recent changes to the U.S. tax code.

But that’s not the only regulatory brouhaha CHS has dealt with this quarter.

Since August, CHS has been under civil investigation over EHR adoption and compliance. Annual financial filings show that the company received more than $865 million in EHR incentive payments between 2011 and 2017 through the Health Information Technology for Economic and Clinical Health Act, payments that investigators believe may have been overly inflated.

To deal with the burden, CHS has continued its portfolio-pruning strategy into the third quarter (although a recent Morgan Stanley report notes the system has a very high concentration of weak facilities, and those at risk of closing, relative to its peers). 

During 2018 so far, CHS has sold nine hospitals and entered into definitive agreements to divest five more. The earnings report also divulged CHS is pursuing additional sale opportunities involving hospitals with a combined total of at least $2 billion in annual net operating revenues during 2017, taken in tandem with the hospitals already sold.

The ongoing transactions are currently in various stages of negotiation, the report notes, but CHS “continues to receive interest from potential acquirers.”

CHS is cast in a better light when balance sheet adjustment and non-cash expenses are discarded, as well. Adjusted EBITDA was $372 million compared with $331 million for the same period in 2017, representing a 12.4% increase and suggesting the company can still generate cash flow for its owners in a more friendly atmosphere than the one Q3 provided.

But, though Q2 results were a bright spot in an otherwise gloomy year for the massive hospital operator, its shares have lost about 30% of their value since the beginning of the year (compared to the S&P 500’s decline of roughly 0.5%).

Jefferies believes that CHS should improve its balance sheet and drive positive same-store volume growth, along with speeding up divestitures to raise cash to pay down debt, in order to improve its stock performance.

 

 

CMS Reevaluates Stark Law in Response to Value-Based Care Initiatives

http://www.managedhealthcareexecutive.com/health-law-and-policy/cms-reevaluates-stark-law-response-value-based-care-initiatives?rememberme=1&elq_mid=2696&elq_cid=876742&GUID=A13E56ED-9529-4BD1-98E9-318F5373C18F

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On June 20, 2018, CMS and HHS issued a “request for information” (RFI) seeking input on strategies to reduce the burden of the federal physician self-referral law or “Stark Law,” including the law’s impact on the transition to value-based care.

In the RFI, CMS solicits information on the ways in which the Stark Law creates challenges for coordinated, value-based care, and the transition to alternative payment and delivery models; it also seeks ideas and input on how the Stark Law may be changed to facilitate these models.

What’s driving the RFI

The RFI is launched as part of the agency’s “Regulatory Sprint to Coordinated Care” led by HHS Deputy Secretary Eric Hargan, which is directed at addressing regulatory barriers to coordinated care.  As such, the Regulatory Sprint and the RFI represent the administration’s efforts to reduce regulatory burden, while also demonstrating a commitment to the transition to more value-based, coordinated care and risk-based payment.  In public statements, HHS and CMS officials have suggested that the Regulatory Sprint may support similar flexibility in other laws, including the Anti-Kickback Statute.

Although the agency does not commit to any specific regulatory changes in this document, it is notable that HHS issued a similar RFI in 2010 just before it issued sweeping waivers of the Stark Law and Anti-Kickback Statute for the Medicare Shared Savings Program.  While many of the questions focus on “Alternative Payment Models” under the Quality Payment Program, the RFI is not limited to these programs.  Instead, the RFI invites the public to propose new exceptions and revised interpretations of the statute to advance the goals of coordinated care.

What CMS wants to know

In the RFI, CMS poses twenty specific questions related to the Stark Law, Alternative Payment Arrangements, and delivery system innovation strategies. The topics and questions range from:

  • Requests for details on Alternative Payment Models and innovations considered or engaged in by healthcare delivery system participants, including details on the financial and operational details of the arrangements, such as financial risk;
  • Solicitation of ideas and input on additional and/or new exceptions to the Stark Law that would facilitate existing and innovative arrangements;
  • Thoughts on changes to existing provisions of the final rule implementing the Stark Law, such as definitions of “commercial reasonableness” and “fair market value,” and thoughts on other potential definitions and terms such as “Alternative Payment Model,” clinical and financial integration and others;
  • Comments on key concepts in the existing law including compensation formulas that do and do not take into account the volume or value of referrals or other business within the meaning of the Stark Law and other novel financial arrangements; an
  • Requests for information on the Stark Law’s compliance cost, the potential role of increased transparency to promote compliance and how CMS should assess the Stark Law’s effectiveness in achieving its underling policy goals related to improper financial incentives.

The RFI may represent an important opportunity for the healthcare industry to educate CMS on current experiences and challenges, and to shape the content of future rules implementing changes to the Stark Law, particularly in a time of industry integration across the continuum of care.  The RFI also offers tangible evidence of the administration’s commitment to continue a migration to value-based care, and potentially reflects an enhanced commitment and desire to migrate away from fee-for-service payment to arrangements involving financial risk.

 

 

Kaiser Health News report questions safety of ASCs: 5 things to know

https://www.beckershospitalreview.com/quality/kaiser-health-news-report-questions-safety-of-ascs-5-things-to-know.html

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Ambulatory surgery centers are often considered low-cost alternatives to expensive in-hospital care, but a new report from Kaiser Health News and USA Today raises questions about the safety of ASCs and the regulations that govern their practices.

Here are five things to know about the report.

1. The report claims the proliferation of increasingly complex surgeries at ASCs has shone a light on facilities’ poor preparation for emergency scenarios. ASCs are required to have patient transfer agreements to local hospitals in the event of an emergency, complying with state and federal regulations. The report cited examples of patients who were transferred from ASCs in rural areas where hospitals were up to 30 miles away and were unable to access the emergency care needed.

2. ASCs are a surgical site option for elective procedures for patients who are good candidates for the outpatient setting, typically otherwise healthy patients without comorbidities. Not every patient is a good candidate for outpatient surgery; those with pre-existing conditions are better suited for the hospital.

Preexisting conditions can complicate even the most routine surgeries, and the report claims over 260 patients have died since 2013 after procedures at ASCs. Though federal regulations require ASCs keep resuscitation equipment on hand in case of emergencies, a number of the patient deaths detailed in the article took place in facilities that skirted these regulations. However, the Ambulatory Surgery Center Association issued a statement March 2 in response to the article, reporting more than 200 million successful procedures have been performed in ASCs across the country over the same five year period.

3. The report cites examples of patients who felt hurried out of ASCs and dying on the way home.

“The stories these reporters tell are indeed tragic and will no doubt be deeply concerning to readers. Unfortunately, the article fails to provide a comparison to other sites of care and make clear that medical errors occur across all sites of care, including hospitals, and typically at much higher rates than in ASCs,” said Rebecca Craig, RN, MBA, the CEO of Fort Collins, Colo.-based Harmony Surgery Center and Peak Surgical Management.

4. In the third quarter of 2017, the most recent data available, the rate of all cause emergency department visits within one day of ASC discharge was 0.69 percent, according to statistics from ASC Quality.

5. Physicians are allowed to have ownership in ASCs, collecting a percentage of the facility fee for each case. The article’s authors suggest this ownership may influence their decision to direct cases to the center , but the laws governing ASC referrals vary by state, with some states barring surgeon referrals to any ASC in which they or a family member maintain a financial interest.

10 thoughts from discussion on 2018 Anti-Kickback and Stark Law issues

https://www.beckershospitalreview.com/legal-regulatory-issues/10-thoughts-from-discussion-on-2018-anti-kickback-and-stark-law-issues.html

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We had a chance to moderate and participate in a webinar with leading colleagues John Harig, Tim Fry, David Pivnick and Brett Barnett regarding key Anti-Kickback Statute and Stark Law issues facing health systems, surgery centers, dialysis providers and other healthcare providers and investors. Below are 10 key thoughts discussed during the webinar as to fraud and abuse issues in play in 2018.

1. The reading and implementation of the “Yates Memo” issued by the U.S. Department of Justice will influence how the government aims to prosecute individuals in addition to companies.

2. The reading of the U.S. Supreme Court’s Escobar decision will influence whether defendants in false claims cases will receive some relief from technical billing violations that are not fundamental or material to the government’s paying of a claim.

3. Regulators and potential buyers are focused on “creative marketing arrangements” by physician practices, often related to laboratory and/or pharmacy arrangements.

4. Government enforcement agencies and potential buyers are focused on physician compensation arrangements, particularly their compliance with the Stark Law.

5. Potential buyers face a challenge in determining how deeply to examine targets’ past practices through billing and coding audits, as well as how to handle the results of billing and coding audits in negotiation of transactions.

6. Private equity buyers face challenges in their evaluation of risk posed by regulatory issues and how to address regulatory risks in a seller’s market.

7. Sellers present the historical legal analysis of fraud and abuse issues during the due diligence process, particularly when the legal analysis is positive, but assumptions underlying the legal analysis do not align with the sellers’ actual operations.

8. The turnover in the U.S. Department of Justice may impact the timing of fraud and abuse prosecutions and settlements.

9. Recoveries by the government resulting from fraud and abuse prosecutions have increased in magnitude. Furthermore, there are more recoveries coming from cases in which the government has not joined in the case with the relator.

10. The wide array of laboratory arrangements and businesses hold implications for fraud and abuse laws.

 

Los Angeles hospital closes, lays off all 638 employees

https://www.beckershospitalreview.com/finance/los-angeles-hospital-closes-lays-off-all-638-employees.html

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Pacific Alliance Medical Center in Los Angeles, which provided care for more than 150 years, closed Nov. 30.

The hospital, which was originally slated to close Dec. 11, cited the costs of retrofitting its facilities to meet California’s seismic standards as the reason for the closure. The hospital said it lacked a financially responsible way to make the required updates.

“PAMC does not own the land on which our hospital sits, and the owner is unwilling to sell the land to us,” the hospital said in a statement to Becker’s Hospital Review in October. “The hospital building does not meet current California seismic standards, and it is not economically viable for us to invest nearly $100 million to build a hospital on land that we would not own.”

A California Worker Adjustment and Retraining Notification Act notice dated Oct. 9 indicated all 638 of the hospital’s employees would be laid off when the hospital shut down. The hospital confirmed that number in its closure announcement.

In addition to the challenges related to the seismic requirements, Pacific Alliance Medical Center faced a few other major hurdles in the months leading up to its closure. In June, the hospital and its parent company agreed to pay $42 million to resolve allegations they violated the False Claims Act, Anti-Kickback Statute and Stark Law. The companies allegedly had improper financial relationships with certain physicians and billed Medicare and California’s Medicaid program for services provided to patients referred to Pacific Alliance Medical Center. In August, the hospital announced it was recovering from a ransomware attack that compromised the protected health information of 266,123 patients.

7 ways Stark and Anti-Kickback laws hurt hospital care coordination

http://www.fiercehealthcare.com/healthcare/7-ways-stark-and-anti-kickback-laws-hurt-care-coordination

congress

http://www.aha.org/content/16/barrierstocare-full.pdf

http://www.finance.senate.gov/imo/media/doc/Stark%20White%20Paper,%20SFC%20Majority%20Staff.pdf?utm_medium=nl&utm_source=internal

Anti-kickback and anti-fraud regulations, such as the Stark Law, have the unintended consequence of major barriers to care coordination, according to a new report from the American Hospital Association (AHA).

The passage last year of the Medicare Access and CHIP Reauthorization Act (MACRA) removed one regulatory barrier to care but called on legislative groups to make recommendations for removing other similar obstacles. The AHA report identifies seven barriers created by the Anti-Kickback Statute and Stark Law. These barriers, according to the report, obstruct:

  • The sharing of electronic health records
  • Incentives for efficiency and effective treatment
  • Collaboration to ensure coordinated care at discharge
  • Assistance for patients to keep themselves healthy after returning home
  • Assistance with discharge planning
  • Alignment of incentives in services of better outcomes
  • Rewards for team-based care that incorporates non-physician clinicians

The report also calls for numerous legislative solutions to these obstacles. For example, Congress should develop “safe harbors” under the Anti-Kickback law, both to protect shared savings and incentive programs and to develop the assistance patients need to recover. Current rules on safe harbors and exceptions, the report states, “are not in sync with the collaborative models that reward value and outcomes.” Legislators should also refocus the Stark Law to align it with its original purpose of regulating compensation agreements, report authors write.

The report comes around the same time as a report from the Senate Finance Committee on ways to improve the Stark Law. The suggestions range from establishing new exceptions and waivers for risk revenue to loosening current restrictions on waivers. Others consulted for the report, however, argued that expanding exceptions would only further complicate the regulatory framework and repealing the law entirely would be a better option.