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Issue #19-1 | December 5, 2013
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Healthcare valuation in flux

Healthcare Value Wire attended the recent ASA Advanced Business Valuation Conference in San Antonio. One of the sessions focused on the healthcare industry from the point of view of business valuation analysts.

Massive changes: "The whole concept of valuation in healthcare may change," says Jason Ruchaber, CFA, ASA Partner (HealthCare Appraisers Inc.). The industry is undergoing massive changes as a result of health reform. The most fundamental shift, according to Ruchaber, is on the revenue side because of an overhaul in the reimbursement methodologies, that is, the payments to healthcare providers (physicians, hospital) from private insurers or government plans (Medicare) for patient care. The payments, traditionally fee-for-service-based, will transition to payments based on the quality of care and outcomes. Providers may be compensated based on a patient’s entire "episode of care," which means they could receive incentives or pay penalties if, say, a patient is readmitted to the hospital because of subpar care. Changes in reimbursement will vary based on location and service type. "We don’t know yet what these payment systems will look like," he says.

On the expense side, the costs of regulatory compliance will likely be higher. For example, hospitals are required to meet new requirements for electronic health record (EHR) systems that may cost $50 million for a midsize hospital. Offsetting some of this could be increases in patient volume, triggered by health reform’s insurance coverage mandate that is estimated to result in 30 million additional insured individuals.

Because of all of the uncertainty surrounding the effects of health reform, this should result in higher risk/discount rates in the models used by valuation experts. Also, the “value” of a healthcare provider may need to be reexamined so that the quality of care is recognized in a quantitative way.

Health reform is under attack, and it will continue to evolve. "I see significant changes to the law over the next five years," says Ruchaber. "But it’s likely here to stay."

Goodwill value impairment in healthcare

The healthcare industry figures prominently in the latest findings on goodwill impairment.

Overall, U.S. companies recorded $51 billion of goodwill impairment in 2012, a 76% increase from the $29 billion reported in 2011, reveals the 2013 Goodwill Impairment Study from Duff & Phelps and the Financial Executives Research Foundation. This marks the highest impairment level since those reported as a result of the financial crisis in 2008. Just three industries—information technology, industrials, and healthcare—booked two-thirds (67%) of the goodwill impairment recorded in 2012.

Goodwill intensity (goodwill as a percentage of total assets) across all industries has held fairly stable over the years at approximately 6%, but the healthcare industry has shown a recent upward trend, at 24% in 2012. Contributing factors in general for high goodwill intensity in healthcare include ongoing transaction activity as well as high growth expectations from future technologies.

Speaking of impairment, the final AICPA Goodwill Impairment Guide has just been released in e-book format (print version coming before the end of this year). Not familiar with this guide? You’re not alone: 39% of public company respondents and 65% of private company respondents were not aware of the development of this guide, according to the goodwill impairment study.

More hospitals look to retail clinics

The use of retail clinics by hospitals is in a growth mode as more hospitals look to them to improve their bottom lines in the face of increasing demand from the public.

The proportion of retail clinics owned by hospital systems doubled (from 9% to 18%) between 2007 and 2010, reveals a new study by the Center for Studying Health System Change (HSC). Also, the study found that, during this same period, the proportion of U.S. families using a retail clinic nearly tripled from an estimated 1.7 million families to 4.1 million.

Retail clinics are proving to be a good strategy to meet the high volumes of urgent care needs that have been on the rise. At urgent care retail clinics, patients can be treated at a much lower cost than in the emergency facilities. Plus, urgent care centers can refer patients to the regular hospital if necessary.

Pricing transparency can cut costs

When you shop in, say, a supermarket and prices are plainly marked, you tend to spend less. This phenomenon also applies to physicians ordering lab tests, according to a new study.

Get thrifty: In a controlled environment, researchers found that physicians who had access to the pricing information through the EHR ordered significantly fewer high- and low-cost-range lab tests than the physicians who ordered without pricing data. In addition, physicians were generally very receptive to the intervention, with a majority (81%) reporting that the exercise increased their knowledge regarding costs of care.

The study tested the effects of pricing transparency by comparing the frequency of lab orders between two groups of physicians. One group received real-time information through an EHR on laboratory costs for 27 individual tests. The other group of doctors did not have access to the pricing information. Changes in the monthly lab order rate between the two groups were compared for 12 months before and six months after the intervention started.

The study, published in the Journal of General Internal Medicine, was conducted among 215 primary care physicians working in Atrius Health, an alliance of six nonprofit medical groups, and a home health and hospice agency in Massachusetts.

Shift focus to reduce readmissions, says new study

Hospitals are hit hard by Medicare readmission penalties, up to 2% of reimbursements, so lowering readmissions can avoid this penalty. A new study suggests that hospitals can lower readmissions by focusing on the patient as a whole rather than on what caused him or her to be admitted in the first place.

Yale School of Medicine researchers studied more than 4,000 hospitals in the U.S. caring for older patients hospitalized with serious heart problems or pneumonia from 2007 to 2009, examining more than 600,000 readmissions within 30 days. They found that top-performing hospitals with the lowest 30-day readmission rates had fewer readmissions for all diagnoses and periods after discharge than lower-performing hospitals with higher readmissions.

The study, published in the British Medical Journal, concludes: “Lower readmission rates might be best achieved through the use of general strategies and capacities that lower readmission risk globally rather than interventions that target specific diagnoses or time periods after admission.”

What to do: The study emphasizes that recently discharged patients are a highly vulnerable population, so it’s crucial to help make the immediate post-discharge period safer. That means doing an effective follow-up with patients after they’re discharged and determining the causes of readmissions.

AMA backs team-based payment models

The American Medical Association has come out in support of emerging models of payments that are shifting away from being based on volume. The AMA endorses team-based payment models but says that physicians should lead the teams, according to a statement by Dr. Ardis Hoven, AMA president. Physician-led team-based care “represents the future of healthcare delivery in America,” and she pointed to successful examples at high-profile health systems, such as the Mayo Clinic, Geisinger Health System, Intermountain Healthcare, and Kaiser Permanente.

Fee-for-service payments will continue to be an option, but these will fall by the wayside in favor of payment models based on value, such as episode-based bundled payments, global bundled payment systems, pay-for-performance programs, care management models, shared savings arrangements, combinations of incentives coupled with base salaries, and others.

One physician-led medical home associated with Blue Cross Blue Shield of Michigan recently released preliminary data showing a $155 million savings in 2012 and a total of $310 million saved since 2008.

Nonprofit hospital’s winning strategy

The nonprofit Children's Hospital of Philadelphia (CHOP) is thriving despite these turbulent times, according to an article in Fortune. The hospitalgenerates about $2 billion in revenue, and, after all expenses, a $55 million research budget, and $74 million in uncompensated care, it has an average surplus of about $150 million. To accomplish this, the hospital’s business strategy is threefold:
  • Regional network. CHOP has branches in the suburbs where Medicaid covers a lower percentage of patients, so it has diversified its base of payers.

  • Specialty procedures. CHOP focuses on "luminary procedures," which are specialties that attract patients from outside its market (even overseas). For example, it does 1,000 fetal interventions for children with congenital conditions, such as spina bifida.

  • Innovation sales. The hospital markets innovations it develops internally. For example, in 2008, CHOP sold the royalty stream for a vaccine it developed for rotavirus for $180 million. It also spun off a separate company to develop more research and innovative treatments.

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