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Transformation toward value-based healthcare is reshaping the delivery of care, patient expectations, and payment structures.
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The Affordable Care Act set in motion myriad changes to the healthcare industry, including a fundamental shift in the perception of health care. The current system is designed to provide what some refer to as “sick care,” with insurance policies, patient behaviors, treatment protocols, and reimbursement all designed to coincide with the onset and subsequent treatment of illness or injury.
The concept of health care is being redefined to focus on the triple aim of enhancing the overall health of populations, improving the patient experience, and reducing the per capita cost of care. Despite significant disagreement and uncertainty as to how to accomplish these objectives, the most likely path will be some variation of value-based medicine.
The Center for Value Based Medicine defines the concept as “the practice of medicine based upon the objective value (improvement in length of life and/or quality of life) conferred by healthcare interventions as determined by utilizing a set of standardized parameters commonly used to evaluate value and cost-effectiveness.” Practically speaking, value-based medicine requires aligning payment mechanisms to incentivize prevention, high-quality care, and treatment protocols with the best outcomes relative to their cost. This approach also entails a migration from our fee-for-service model into one or more value-based models—e.g., shared savings, pay-for-outcomes, pay-for-quality.
The shift away from fee-for-service is a monumental task that likely will take many years to accomplish while meeting with fierce opposition from those who benefit under the current model. But even with the path yet to be defined, the industry is mobilizing resources and investing massive amounts of capital to prepare for the new future of health care. As a business appraiser, I have witnessed how consolidation has evolved from the acquisition of physician practices to the purchase of ambulatory services and entire hospitals, not to mention mega-system mergers such as Tenet’s acquisition of Vanguard and Community Health Systems’ purchase of Health Management Associates. I have been directly involved in many of these deals, but as the industry continues to evolve I can’t help but wonder if we are adequately accounting for these changes in our valuation models.
In the healthcare industry, deals generally must be priced at fair-market value (FMV), as defined in the Stark Law. Numerous resources discuss the nuances of complying with this definition of FMV, so I don’t need to get into detail here. It is important to note, however, that FMV precludes consideration of buyer-specific synergies, and appraisers generally avoid making significant alterations to the existing revenue and cost structure of the business when building their forecasts and valuation models.
Moreover, appraisers typically use historical performance as a basis for these models, extrapolating the past as a means to project the future. In our fee-for-service world, this approach entails modeling some volume metrics—e.g., relative value units, procedures, and scans—then applying reimbursement rates based on either existing levels plus inflation or guidance from the Medicare Patient Advisory Commission, and modeling variable costs in a similar manner.
How can this approach determine the fair-market value of a business when the future likely will look nothing like the past? More important, how does valuing a healthcare business in this way adequately differentiate high-quality and lower-quality practices?
These are not easy questions, and finding answers is made more difficult by issues such as constant legislative posturing, undefined quality metrics, and uncertain future payment mechanisms. Despite these challenges, business appraisers must rethink many of the quantitative and qualitative elements of the appraisal process in accordance with the realities of the industry. Finding consensus on anything related to health care is difficult, of course, but we need constructive dialogue to evolve our processes and stay relevant in this rapidly changing industry.
The following five considerations will be key in future healthcare evaluations.
The past is not indicative of the future. The use of a discounted cash-flow model that extrapolates the past may not result in an accurate valuation. Projected financials developed under a premise of fee-for-service likely do not reflect the economic realities of the healthcare industry. Valuation models should consider the various forms future reimbursement models may take and whether these models will result in a gain or loss of revenue and profits.
Higher quality should equal higher value. High quality does not always translate into high profit or high value—or vice versa—under fee-for-service. Taking more time with patients, preventing subsequent visits or additional tests, avoiding surgical intervention when nonsurgical treatment is available—these behaviors all result in lower revenue and lower profits in the current environment. From a financial viewpoint, the current system also may result in the highest-quality practices receiving the lowest valuations. Higher quality should result in higher value, particularly with the shift to value-based medicine.
But how do we measure quality? Unfortunately the metrics are not defined, and comparative data is limited. Still, appraisers should seek to assimilate new data into their valuation process as it becomes available. In the meantime, appraisers should work with administrators and medical directors to understand the various quality initiatives that are in place and develop risk scoring that can adjust valuation discount rates to reflect indicators of quality. Cash-flow forecasts also should reflect incentive payments and cost-savings initiatives with probability adjustments based on the likelihood of realization.
IT matters. The use of big data finally has made its way into health care. The HITECH Act, passed in 2009, helped facilitate the start of this transition, which I expect to result in significant advances in clinical care and population health. Healthcare companies that have started to incorporate IT into their practices are better-positioned to succeed in this new era. As with high-quality clinical practices, however, the investment and initial inefficiency caused by technology implementation may lead to the incorrect conclusion that the business is worth less.
Implementing IT infrastructure and processes is expensive, and may lead to lengthy periods of suppressed cash flow. However, appraisers need to incorporate adjustments to reflect future returns on this investment and, conversely, recognize that practices that have not started the process face significant capital-investment and competitive disadvantages.
Capital expenditures matter, too. High-quality care, better outcomes, and improved patient experiences cannot happen with antiquated equipment and facilities. The uncertainty and declining reimbursement faced by industry participants have led many businesses to delay or avoid necessary capital expenditures. This problem reinforces the need to conduct onsite inspections as part of business appraisals, and further highlights the role quality should play in the valuation process. Valuations of businesses that have not invested adequately in capital equipment should make note of likely cash-flow reductions and an increase in the discount rate.
Pricing transparency could lead to culture change. The Centers for Medicare & Medicaid Services recently released pricing data for the 100 most common inpatient services, 30 most common outpatient services, and all procedures and services that have been performed by physicians and other providers on at least 11 Medicare beneficiaries. Many hospitals and health systems voluntarily are releasing similar pricing data or making efforts to do so. As patients become more responsible for the cost of their care in the wake of increasing deductibles and coinsurance rates, and as providers release data regarding the prices of their services, we may see the advent of healthcare consumerism.
This dynamic could fundamentally change patient behaviors and preferences, and solidify the importance of quality in health care. Businesses that historically have flourished because of higher prices or more favorable payer contracts may find that patients no longer see the value associated with their facility. Conversely, those with the highest-quality outcomes and highest patient preference may see demand, and prices, start to rise. In this context, appraisers should employ a more comprehensive benchmarking of both prices and outcomes while recognizing that historical payer leverage may fade as the consumer becomes more informed and empowered.
In conclusion, although the term “value” means different things to different people, appraisers should actively seek ways to attribute financial value to the businesses and behaviors that are most likely to bring positive and lasting change to our industry.
Jason Ruchaber, CFA, ASA, is the founder and managing partner of Root Valuation, a healthcare-focused business valuation and financial advisory firm, a member of the Healthcare Special Interest Group subcommittee of the American Society of Appraisers, and a member of HFMA’s Colorado Chapter.
Publication Date: Friday, June 13, 2014
A leader from McKesson discusses how healthcare reform is forcing hospitals and health systems to take a different approach to capacity management and patient flow.
Patient financial engagement is more challenging than ever – and more critical. With patient responsibility as a percentage of revenue on the rise, providers have seen their billing-related costs and accounts receivable levels increase. If increasing collection yield and reducing costs are a priority for your organization, the metrics outlined in this presentation will provide the framework you need to understand what’s working and what’s not, in order to guide your overall patient financial engagement initiatives and optimize results.
Emad Rizk, MD, president and CEO of Accretive Health, discusses the uncertainty facing hospitals and the transitions affecting revenue cycle management.
No two patients are the same. Each has a very personal healthcare experience, and each has distinct financial needs and preferences that have an impact on how, when and if they chose to pay their healthcare bill. It’s no longer effective to apply static billing techniques to solve the complex challenge of collecting balances from patients. The need to tailor financial conversations and payment options to individual needs and preferences is critical. This presentation provides 10 recommendations that will not only help you improve payment performance through a more tailored approach, but take control of rising collection costs.
Jim Bohnsack, vice president, solution & corporate development for Conifer Health Solutions, explains how the company helps healthcare providers leverage data to deliver better outcomes while optimizing reimbursement for all payment arrangements.
This white paper, written by Apex Vice President of Solutions and Services, Carrie Romandine, discusses the importance of patient segmentation and messaging specifically related to the patient revenue cycle. Applying strategic messaging that is tailored to each patient type will not only better educate consumers on payment options specific to their billing needs, but it will maximize the amount collected before sending to collections. Further, targeted messaging should be applied across all points of patient interaction (i.e. point of service, customer service, patient statements) and analyzed regularly for maximized results.
Steve Scibetta, senior director of channel sales for Ontario Systems' healthcare product line, shares insights into effectively managing receivables.
This white paper, written by Apex President Patrick Maurer, discusses methods to increase patient adoption of online payments. Providers are now seeking ways to incrementally collect more payments due from patients as well as speeding up the rate of collections. This white paper shows why patient-centric approaches to online payment portals are important complements to traditional provider-centric approaches.
Elena White, vice president of risk, quality, and network solutions for Optum, discusses how healthcare providers can leverage data and technology as they enable risk in their organization.
Increased electronic engagement between healthcare providers and patients provides significant opportunities for improving revenue cycle metrics and encouraging patients to access EHRs. This article, written by Apex Founder and CEO Brian Kueppers, explores a number of strategies to create synergy between patient billing, online payment portals and electronic health record (EHR) software to realize a high ROI in speed to payment, patient satisfaction and portal adoption for meaningful use.
Somnia President and CEO Marc Koch, MD, MBA, explains how hospitals can drive transformative change in the perioperative experience for outstanding clinical and financial outcomes.
Faced with a rising tide of bad debt, a large Southeastern healthcare system was seeing a sharp decline in net patient revenues. The need to improve collections was dire. By integrating critical tools and processes, the health system was able to increase online payments and improve its financial position. Taking a holistic approach increased overall collection yield by 10% while costs came down because the number of statements sent to patients fell by 10%, which equated to a $1.3M annualized improvement in patient cash over a six-month period. This case study explains how.
PMMC President Roger L. Shaul discusses the effects of healthcare reform on revenue cycle management and how PMMC's products help clients adapt to a changing financial environment.
With the ICD10 deadline quickly approaching and daily responsibilities not slowing down, final preparations for October 1 require strategic prioritization and laser focus.
Greg Burgess, Founder and Chief Product Officer at Burgess Group shares insights and opportunities for payment integrity in the rapidly changing healthcare IT landscape.
Read how Gwinnett Medical Center provides clear connections to financial information, offers multiple payment options for patients, and gives onsite staff the ability to collect payments at multiple points throughout the care process.
Read how Orlando Health was able to perform deeper dives into claims data to help the health system see claim rejections more quickly–even on the front end–and reduce A/R days.
To maintain fiscal fitness and boost patient satisfaction and loyalty, healthcare providers need visibility into when and how much they will be paid–by whom–and the ability to better navigate obstacles to payment. They need payment clarity. This whitepaper illuminates this concept that is winning fans at forward-thinking hospitals.
Financial services staff are always looking for ways to improve the verification, billing and collections processes, and Munson Healthcare is no different. Read about how they streamlined the billing process to produce cleaner bills on the front end and helped financial services staff collect more than $1 million in additional upfront annual revenue in one year.
Effective revenue cycle management can be a challenge for any hospital, but for smaller providers it is even tougher. Read how Wallace Thomson identified unreimbursed procedures, streamlined claims management, and improved its ability to determine charity eligibility.
Before launching an energy-efficiency initiative, it’s important to build a solid business case and understand the funding options and potential incentives that are available. Healthcare leaders should consider taking the steps outlined in the whitepaper to ease the process of gaining approval, piloting, implementing, and supporting sustainability projects. You will find that investing in sustainability and energy efficiency helps hospitals add cash to their bottom line. Discover how hospitals and health systems have various options for funding energy-efficient and renewable-energy initiatives, depending on their current financial structure and strategy.
Health care is a dynamic mergers and acquisitions market with numerous hospitals and health systems contemplating or pursuing formal arrangements with other entities. These relationships often pose a strategic benefit, such as enhancing competencies across the continuum, facilitating economies of scale, or giving the participants a competitive advantage in a crowded market. Underpinning any profitable acquisition is a robust capital planning strategy that ensures an organization reserves sufficient funds and efficiently onboards partners that advance the enterprise mission and values.
The success of healthcare mergers, acquisitions, and other affiliations is predicated in part on available capital, and the need for and sources of funding are considerations present throughout the partnering process, from choosing a partner to evaluating an arrangement’s capital needs to selecting an integration model to finding the right money source to finance the deal. This whitepaper offers several strategies that health system leaders have used to assess and manage capital needs for their growing networks.
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