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Issue #30-1 | March 24, 2015
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Dear Colleague,

Business Valuation Resources has been pleased to provide you with valuation and financial news of the healthcare industry. This is the last issue of this newswire, but we still have you covered!

We invite you to stay up to date on the latest resources in healthcare valuation and financial news by visiting our website at bvresources/healthcare often. To keep you up on all business valuation news, we will be transitioning your free subscription to our weekly BVWire ezine if you do not already receive it.


Andy Dzamba, Editor
Business Valuation Resources

Faulty healthcare valuations due to Stark Law confusion

Some business valuation experts in the healthcare industry have begun to avoid traditional methodologies in certain situations, instead using approaches that contradict business valuation theory. This practice is due to a misinterpretation of the Stark Law definition of "fair market value," according to William Hamilton, a senior manager in the Atlanta office of Pershing Yoakley & Associates, PC, a firm specializing in healthcare consulting, valuation, audit, tax, and management advisory services.

In the March 2015 issue of Business Valuation Update, he writes: “We have recently seen several reports where healthcare appraisers have chosen not to consider the income approach in fair market value appraisals of certain hospital-physician transactions because they believe it implicitly considers the ‘volume or value of referrals.’” He goes on to say that, specifically, these transactions involved the sale of a designated health service line (such as an imaging center) by a physician group to a hospital where the seller is the primary or sole source of referrals. “Despite income to support a substantially higher value, the appraiser selected the asset approach because the profit generated by the subject business was a direct result of patient referrals from the selling medical group,” Hamilton says. “These transactions create the appearance of a hospital purchasing a stream of referrals from physicians, which is prohibited under the Stark Law.”

Hamilton also reports that he has seen situations where the appraiser has transformed an existing business into a hypothetical one for valuation purposes by utilizing benchmarks to calculate the value of a "typical" imaging center or clinical laboratory using the income approach rather than relying on the expected future operating performance of the subject.

“Our view as appraisers is that each of these methodologies misinterprets the Stark Law definition of ‘fair market value’ and violates traditional business valuation theory,” he says.

For more details, see the March 2015 issue of Business Valuation Update (subscription required).

Potential financial impact of Supreme Court ruling

The ongoing soap opera over the Affordable Care Act now focuses on the U.S. Supreme Court, which will decide whether individuals who buy health insurance through federally sponsored exchanges are entitled to a subsidy. If they are not, millions of Americans could be left uninsured and less likely to buy healthcare services. The case is King v. Burwell, which challenges the legality of premium subsidies in as many as 37 states.

Hit to earnings: Healthcare industry valuation experts have been following this case because of its potential financial impact on healthcare providers. If the Supreme Court rules against the subsidies, it would mean a “single-digit percentage hit to pre-tax earnings for the publicly traded chains,” according to a report in Modern Healthcare. “HCA would see the most significant effect at 3.5% of its estimated 2016 earnings before taxes and other charges, with Tenet following at 2.9%, according to Darren Lehrich, an analyst at Deutsche Bank,” says the report.

The Supreme Court’s decision is expected in June.

What’s the No. 1 trend affecting healthcare provider revenue?

It’s consumerism, according to a new study from Availity. Patients are taking on more responsibility for their healthcare costs through the growing popularity of high-deductible health plans.

Collect upfront: It’s essential that providers collect from patients at the point of service or before, according to the study. Once they leave the office, patients are much less likely to pay. The vast majority (90%) of physician practices and healthcare facilities agree that collecting patient financial responsibilities before the patient leaves the office is important to the financial health of their businesses. Patient-access tools significantly improve upfront collections, and 71% of hospitals are using those tools, says the study, but there’s still room for many providers to improve on collections.

Multiples and trading performance for healthcare services

The S&P Healthcare Services Index has increased by 0.1% over the three-month period of November 2014 through January 2015, thus outperforming the S&P 500 (1.1% decrease over the same period), according to the February 2015 Healthcare Sector Update from Duff & Phelps. The best performing sectors were healthcare REITs (up 12.7%) and contract research organizations (up 8.5%). The worst performing sectors were emergency services (down 8.6%), acute care hospitals (down 6.8%), and HCIT (down 6.7%).

Latest multiples: The current median LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 1.71x and 11.7x, respectively. The sectors with the highest valuation multiples include: healthcare REITs (13.32x LTM revenue, 20.1x LTM EBITDA); HCIT (3.06x LTM revenue, 19.9x LTM EBITDA); and consumer-directed health and wellness (3.05x LTM revenue, 26.6x LTM EBITDA).

The report also provides data on the pharmaceutical/medical devices/life sciences sectors.

Financial challenges are top concern of hospital CEOs

Financial challenges again ranked No. 1 on the list of hospital CEOs' top concerns in 2014, according to the American College of Healthcare Executives' annual survey of top issues confronting hospitals. Healthcare reform implementation and governmental mandates tied for second, closely followed by patient safety and quality.

Within the financial challenges issue, respondents identified specific concerns facing their hospitals. Following are those concerns in order of mention (respondents could check as many as desired).

Medicaid reimbursement (including adequacy and timeliness of payment)


Bad debt (including uncollectable emergency department and other charges)


Decreasing inpatient volume


Medicare reimbursement (including adequacy and timeliness of payment)


Competition from other providers (of any type—inpatient, outpatient, ambulatory care, diagnostic, retail, etc.)


Government funding cuts (other than reduced reimbursement for Medicaid or Medicare)


Increasing costs for staff, supplies, etc.


Revenue cycle management (converting charges to cash)


Managed care payments


Other commercial insurance reimbursement


Inadequate funding for capital improvements


Emergency department overuse


AAMC urges Congress to help ease physician shortage

Under a best-case scenario, the nation's graying and growing population will contend with a shortage of at least 46,000 physicians within 10 years, reveals a new analysis from the Association of American Medical Colleges.

That shortfall could hit 90,000 by 2025 if the healthcare sector fails to adopt more efficient care and payment models such as patient-centered medical homes and accountable care organizations, AAMC says. The organization is calling on Congress to immediately fund an additional 3,000 medical residency slots each year in addition to the 27,000 to 29,000 residency slots already in place

Use more nonphysicians: The report also urges healthcare providers to aggressively embrace and promote the use of nonphysician clinicians. According to a MGMA report Nonphysician Provider Utilization in the Future of US Healthcare, during the past 15 years, medical practices have increased their use of NPPs. Since 2008, the number of full-time-equivalent (FTE) NPPs per FTE physician increased by 11%, from 0.27 to 0.30 in multispecialty practices. Cardiology, family medicine, and orthopedic surgery practices have reported an increase in the use of NPPs over the past five years.

Is an Uber-like disruption coming to healthcare?

Recent movement from the U.S.'s biggest retailers into the primary care business indicates that the healthcare industry may be in for a big disruption—just like Uber overhauled the traditional taxi industry, according to an opinion article on

Uber came out of nowhere and cashed in on the sharing economy—and in a short time the company hit a valuation of over $40 billion. Now Wall Street is searching for the next industry that can be Uber-fied, article says. Wal-Mart, Target, and Walgreens are just a few of the retailers to jump on the healthcare bandwagon.

War clouds? The article concludes: “There is no doubt that retail is making a big bet on health care. If it succeeds, the payoff will be enormous. But just as Uber is at war with the taxi industry, retailers will soon be at war with the large, publicly-traded health care chains.”

Healthcare providers use HIE to reduce imaging costs

Dozens of healthcare providers in New York state are sharing medical imaging data through a health information exchange (HIE), which helps coordinate care and reduce costs, reveals a new research study published in the American Journal of Managed Care.

Redundancy cut: The research focuses on the Rochester (N.Y.) Regional Health Information Organization (RHIO), a nonprofit HIE launched in 2006. Although the researchers did not attach a dollar figure to the medical-imaging cost savings realized by participating providers, they were able to document impressive reductions of redundant imaging in two of the top diagnostic testing categories: radiography and ultrasound. Among physicians accessing Rochester RHIO data, the odds of a repeat ultrasound were reduced 44% and the odds of a repeat radiograph were cut 21%.

The study is entitled Health Information Exchange and the Frequency of Repeat Medical Imaging.

Healthcare M&A activity set records in 2014

Healthcare merger and acquisition activity exploded in the fourth quarter of 2014, setting new records for deal volume as well as spending. At least 345 transactions were announced, up 1% compared with the previous quarter. Spending hit $138.3 billion, an increase of 119% compared with the $63.1 billion in the third quarter of 2014, according to Health Care M&A News.

Full-year totals for 2014 also broke previous records for the number of deals and the dollars spent. At least 1,299 transactions were announced last year, an increase of 26% over 2013’s total of 1,035 transactions. The previous record for most transactions in a year was set in 1997, at 1,287.

Outlook: M&A activity is likely to keep booming, at least during the first half of 2015. “Americans continue to enroll in healthcare plans through the exchanges, which is good news for providers and payers,” said Lisa E. Phillips, editor of Health Care M&A News at Irving Levin Associates. “We see some uncertainty over when the Federal Reserve will raise interest rates, not if. And the U.S. Supreme Court will release its decision in King v. Burwell by the end of June, which could disrupt enrollments through Again.”

Healthcare data breaches lead all industries

There were 783 reported data breaches across all industries in 2014, and the highest percentage (43%) came from the healthcare sector, according to statistics from the Identity Theft Resource Center. The healthcare data breaches exposed 8.3 million records. One of the largest breaches was a cyberattack on Community Health Systems in Tennessee, which compromised the protected health information of 4.5 million patients, according to the ITRC 2014 Breach List.

What to do: Here are 10 steps that will help keep healthcare data safe, according to data breach response solutions company ID Experts.

  1. Adopt a top-down approach to risk management;
  2. Leverage governance in risk management efforts for health IT security, privacy, and compliance;
  3. Adopt a layered cyberdefense strategy;
  4. Include detection of and response to breaches in strategic health IT planning;
  5. Use enterprise risk management as it relates to your health IT objectives;
  6. Allocate enough resources to each data-based project;
  7. Operationalize your incident response process;
  8. Analyze past incidents to determine what was successful and what was not;
  9. Determine incident root causes; and
  10. Keep staff trained and educated about data security.


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