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| FIRST QUARTER:
Volume 3, Number 1
February-April 2008
Valuation of Hospitals in a Changing Reimbursement and Regulatory Environment By: Robert James Cimasi; MHA, ASA, AVA, CBA, FCBI, CMP™ By: Anne P. Sharamitaro; Esq. By: Lance D. Haynes; MSF By: Todd A. Zigrang; MBA, MHA, CHE Introduction
A. Healthcare Industry Background:
1. The Impact of Healthcare’s “Third Party Payers” Syndrome
a. The Impact of Changes in Medicare Payments
b. The Role of Commercial Insurance
c. Medical Savings Accounts
d. Health Savings Accounts
2. The Rise of Two-Tier Healthcare
a. The Shift to “Defined Contributions” from “Defined Benefits”
b. The Emergence of “Boutique Medicine”
3. Physician Supply
a. Trends in Physician Supply
Table 1: U.S. Physician/Population Ratios
b. Trends in the Specialization of Professional Practices
B. Medicare Prescription Drug-Improvement Modernization Act of 2003
1. Specialty Hospital Development Moratorium
2. Prescription Drug Coverage
3. The Resource-Based Relative Value Scale
Table 2: Medicare Updates: Changes in Conversion Factors
Table 3: Medicare Physician Reimbursement Changes by Specialty
a. The Impact on Physician Compensation
Figure 1: Average Physician Compensation Inflation Adjusted to 2008 Dollars Based on CPI-U
Figure 2: Primary Care Compensation Inflation Adjusted To 2008 Dollars Based on CPI-U
Figure 3: Medical Specialty Compensation Inflation Adjusted to 2008 Dollars Based on CPI-U
Figure 4: Surgeons’ Compensation Inflation Adjusted to 2008 Dollars Based on the CPI-U
4. New Medicare Reimbursement for Cancer Drugs
Table 4: Changes in Medicare Payments, CPT Codes
C. Core Valuation Concepts:
1. Economic Concept of Value
a. The IRV Pyramid
Figure 5: The “Value” Pyramid
2. Basic Practice Valuation Tenets
Figure 6: Reliance on Historical Data
3. Buy or Build? — Value as “Incremental Value”
Figure 7: Value as “Incremental Benefit”
4. Standard of Value
a. Fair Market Value
b. Fair Value (Judicial or Legislative Value)
c. Acquisition or Investment Value
d. Selection of a Standard of Value
5. Premise of Value
a. Value in Exchange
b. Value in Use
6. Defining the Entity and the Interest
7. Classification of Assets
Table 5: Assets Found in Various Healthcare Organizations
8. Types of Goodwill Found in Medical Practices
a. Professional Goodwill
b. Practice Goodwill
9. Effect of Continuing Increases in Demand for Healthcare Services on Valuation
10. Effect of Legislation and Healthcare Industry Competition on Valuation
11. Summary — Relevance
Checklists:
Checklist 1: Reimbursement Issues in Healthcare Valuation
Checklist 2: Regulatory Issues in Healthcare Valuation
Checklist 3: Typical Pre-Engagement Steps in the Healthcare Business Valuation Process
Checklist 4: Typical Steps During the Healthcare Business Valuation Process
HBS-Styled Case Model: Valuation of General Hospital, Inc.
Schedules:
• Historical Income Statements
• Historical Balance Sheets
• Valuation of Accounts Receivable
• Summary of Property, Plant & Equipment
• Underlying Assumptions of Projections
• Projected Income Statements
• Projection of Average Daily Census
• Projection of Long-Term Debt
• Projected Balance Sheets
• Calculation of Net Cash Flow
• Benchmarking/Ratio Analysis
• Calculation of Weighted Average Cost of Capital (“WACC”)
• Discounted Net Cash Flow Analysis (Debt-Free Technique)
• Direct Market Comparable Transaction Method (Transactions of Hospitals with 100 or Less Beds)
• Guideline Publicly Traded Company Method, Latest 12 Months Technique
• Adjusted Book Value Method
• Adjustment to “Amounts Due from Third Parties”
Appendices: Specific Data — Documents & Materials Considered General Data — Healthcare Industry Information and Data Sources International Glossary of Business Valuation Terms Contingent and Limiting Conditions Description of Guideline Publicly Traded Companies
Financial Implications of USA PATRIOT and Sarbanes-Oxley Acts for Hospitals By: Gregory O. Ginn; PhD, MBA, CPA, CMP™ [Hon]
By: Hope R. Hetico; RN, MHA, CMP™
Introduction:
In the wake of the September 11, 2001, terrorist attacks against the United States, the U.S. Congress passed Public Law 107-56 whose short title is “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001.”
At first blush, the USA PATRIOT Act, and various legislative derivatives, seems to have very little to do with hospitals, healthcare organizations or the medical industrial complex; however, upon closer inspection, several sections are relevant to the hospital industry.
A. The US PATRIOT ACT
Prevention and Detection of Money Laundering
Preparedness for Biological and Chemical Attacks
Protection of Critical Infrastructures
Financial Implications of USA PATRIOT Act for Hospital
Table 1: Financial Implications of USA PATRIOT Act
Health Insurance Implications of the USA PATRIOT Act
US PATRIOT Act Impact since Inception
Frequently Asked PATRIOT Act Questions
Also, in the wake of well-publicized scandals involving Enron Corporation and its auditor, Arthur Andersen, the U.S. Congress passed Public Law 107-204, whose short title is “The Sarbanes-Oxley Act of 2002.” Like the USA PATRIOT Act, the Sarbanes-Oxley Act contains sections that may affect many hospitals and healthcare organizations.
B. The Sarbanes-Oxley Act
Governance
Internal Controls
Ethics
Disclosure
Financial Implications of the Sarbanes-Oxley Act for Hospitals
Table 2: Financial Implications of the Sarbanes-Oxley Act
Penalties
Sarbanes-Oxley Act Impact since Inception
Frequently Asked Sarbanes-Oxley Act Questions
C. Conclusion
HBS Styled-Case Models:
Case Model 1: Evan and the USA PATRIOT Act
Case Model 2: Clare and the Sarbanes-Oxley Act
Case Model 3: CEO Clare Miller and IRS Form 990
Checklists:
Checklist 1: USA PATRIOT Act
Checklist 2: Sarbanes-Oxley Act To order your subscription including
strategic quarterly updates, contact:
Institue of Medical Business Advisors, Inc
Suite #5901 Wilbanks Drive
Norcross, GA 30092-1141 USA
1-770-448-0769 VM Order: MarcinkoAdvisors@msn.com
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