Webinar Discusses Hospital-Physician Affiliation Trends and Best Practices

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On Dec. 6, VMG Health's Jim Rolfe, managing director of transaction services, and Jen Johnson, CFA, partner, discussed four different hospital-physician affiliation trends in a webinar presentation for Becker's Hospital Review.

Mr. Rolfe began the presentation by discussing hospital market trends. From the 1990s-2000s, there was a migration from the inpatient hospital setting to outpatient services. This exodus was due to a variety of reasons, including reimbursement changes, advances in medicine and technology that enabled less time-consuming procedures and physicians wanting more control over patient care.

That trend, however, is now moving in reverse due to the ambiguity of healthcare reform. More physicians are seeking the security of a partner. "The trend is going back to the hospital base," said Mr. Rolfe. "The need for affiliation is great." Mr. Rolfe said decreased reimbursement is the underlying theme — and common cause — for most hospital-physician affiliations.

Hospitals' futures are likely to be highly integrated. An integrated delivery network is one of the most logical ways hospitals can affiliate with physicians. Under an IDN, the hospital can merge or acquire hospitals, acquire ancillaries, acquire practices and align or employ physicians. Mr. Rolfe said a significant portion of the hospital CEOs he's worked with have indicated the quickest way to increase their organizations' earning potential is through acquisitions and consolidation.

Hospital acquisitions
The future of hospital transactions is likely to fall into two categories: healthy or troubled. More than $74 billion was spent on hospital transactions from 2000-2009. Most healthy hospitals trade on EBITDA multiples of 6-8x or revenue multiples of .8-1.2x. Troubled hospitals generally trade on revenue multiples of .3-.6x.

Ancillary service acquisitions
Mr. Rolfe discussed four types of ancillary acquisitions: imaging, surgery centers, radiation therapy and medical oncology, and in-office ancillaries. Hospitals typically pursue these entities because valuations of ancillary services at risk are relatively low, hospitals can apply their higher hospital outpatient department rates and the services can help hospitals position themselves for accountable care contracting in the future.

There are three common acquisition models for ancillary services. The first is the 100 percent purchase of the center, which can lead to HOPD rates that are 30-40 percent higher and can increase in inpatient volume. However, it can also leave physicians with no skin in the game and present greater financial risk. The second is a joint venture, which is normally 51 percent ownership by a hospital and 49 percent by a physician. Third, there are joint-venture arrangements where a hospital brings in a third-party operator.

EBITDA multiples for ancillary services can be anywhere from 3x-7x. Differences can be attributed to things such as whether or not the facility is in a CON state or how many owners it has. Mr. Rolfe recommended hospitals not use "rule of thumb" judgment with these types of valuations.

Physician practice acquisitions
There is a huge demand for employed physicians right now, a push that's been growing for the past few years. In 2005, 72 percent of physicians were independent, according to a survey cited in the presentation. In 2008, it was nearly even, with 51 percent of physicians independent and 49 percent employed by a hospital.

There are two valuation issues for physician practices: fair market value of the practice and fair market value compensation. "A practice typically has little intangible value," says Mr. Rolfe. "To have a higher FMV, the practice must have earnings exceeding physician compensation." He also explained that comparing the valuation of a practice down the street will not suffice. "There's no defense when you say hospitals across the street are paying physicians this," he says. "It has to be FMV."

Professional service agreements
Ms. Johnson highlighted a number of physician service agreements, which may be the result of joint ventures, acquisitions, employment or new contractor arrangements. Hospitals can pursue a combination of any one of these, including: administrative services, call coverage, co-management, management, ACO models, professional/technical splits, development, billing and collection or leasing arrangements. In her work experience, hospitals have pursued one or several of these arrangements at any one time.  

Some general best practices for these arrangements include:
• Clear understanding of agreement terms, which must define what services will be provided and how parties will be compensated. The valuation should match this agreement.
• Cognizance that survey data is commonly misused. Physicians may point to a survey and request median compensation for RVUs. These earnings can be inflated and hospitals should be careful and mindful of how survey data is used.
• Finally, fair market value means compensation cannot consider the value or volume of physicians' referrals.    

View or download the Webinar by clicking here (wmv). We suggest you download the video to your computer before viewing to ensure better quality. If you have problems viewing the video, which is in Windows Media Video format, you can use a program like VLC media player, free for download by clicking here.

Download a copy of the presentation by clicking here (pdf).

Learn more about VMG Health.



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