AHLA's Speaking of Health Law

Fraud and Abuse: Impact of COVID-19 on Health Care Fair Market Value

March 30, 2020 AHLA Podcasts
AHLA's Speaking of Health Law
Fraud and Abuse: Impact of COVID-19 on Health Care Fair Market Value
Show Notes Transcript

In this episode of our monthly series on fraud and abuse issues, Matthew Wetzel, Associate General Counsel, Compliance Officer, GRAIL, and Stephen Bucci, Director, Berkeley Research Group (BRG) discuss with Jason Ruchaber, Founder and Managing Partner, Root Valuation, the impact that the coronavirus pandemic is having on fair market value. The podcast covers timely and important topics such as what sectors, if any, have seen a positive valuation impact from the crisis, how compensation arrangements can address this type of disruption, and how to deal with at-risk pay for clinicians. From AHLA's Fraud and Abuse Practice Group. Sponsored by BRG.

To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.

Speaker 1:

The following message and support for A H L A is provided by Berkeley Research Group, a global consulting firm that helps organizations advance in the areas of disputes and investigations, corporate finance and strategy and operations. B R G helps clients stay ahead of what's next. For more information, visit think brg.com.

Speaker 2:

Welcome to the fourth edition of the A H L A Fraud and Abuse Practice Group podcast. My name is Steve Bucci, and along with my co-host Matt Wetzel, we hope to provide you with a monthly update on hot topics and key stories about the most pressing healthcare fraud and abuse issues in the United States. Each month, we will discuss trends, enforcement, critical updates in the law and other important topics. And we hope to provide you with core insights on critical issues and how the government enforces the fraud and abuse laws, potential litigation that could impact how healthcare companies operate and regulatory development that may have an impact on your business or your client's businesses. We also hope to share some practical considerations with you for companies seeking to comply with the law. Today's topic is focused on the impacts COVID 19 is having and will likely have on healthcare fair market value issues. Before we start our fourth podcast today, I'd like to start with some introductions. I'm Steve Bucci, a director in Berkeley research groups health analytics team. I and other members of my practice focus on litigation and other disputes, investigations and compliance issues affecting healthcare entities. On behalf of B R G, I'd like to thank the A H L A for the opportunity to sponsor and support this podcast initiative. Matt Wetzel serves as vice chair for educational programming for the American Health Lawyers Association's Fraud and Abuse Practice group. Matt is Associate General Counsel and Compliance Officer at Silicon Valley based diagnostic testing company Grail. Matt is a seasoned legal and compliance advisor, advocate and strategist, as well as an enthusiastic relationship builder and dot connector. Our guest today is Jason Ru Cober. Jason is the founder and managing partner of Root Valuation, a provider of healthcare focused valuation and financial advisory services to clients nationally. Jason is a frequent speaker, author, and instructor on healthcare valuation topics, and is an active member of several professional and trade organizations. Jason holds the chartered Financial Analyst or CFA designation. He's also an accredited senior appraiser in business valuation. Throughout his professional career, Jason has conducted well over a thousand valuation engagements ranging from basic to highly complex introductions being completed. Matt, I'll turn it over to you now to lead our discussion today about fair market value in the brave new Covid 19 world. Well, thanks very much, Steve. Really appreciate that introduction and, uh, really happy to be with everybody on our continuing podcast on fraud abuse issues with A H L A. Jason, welcome. We're happy to have you here. Uh, and, uh, this is a really critical, important issue that we're addressing is we're all facing the new normal of, uh, of Covid 19 and, uh, how we handle, uh, this sort of pandemic. Uh, the healthcare industry obviously is at the forefront of that, not only in terms of, uh, diagnosing and, uh, combating the disease itself, but trying to maintain the healthcare on other fronts, uh, for the American populace as well. So, um, Jason, you know, one of the big issues, uh, that I can imagine you're probably seeing in your business, uh, has to do with business valuation right now, uh, in the covid-19 sort of immediate, uh, uh, after effects, uh, and, and continuing effects with the economy at a virtual standstill and government mandates on business closures and stay at home orders. What are, what, what is, what is the impact? What's the effect of these actions on business valuation and, and what have you seen in your business?

Speaker 3:

Sure. Um, well, obviously things are, are very dynamic and, and changing rapidly right now. Um, so we're, we're in a little bit of a let's wait and see what happens. Um, certainly the progress made on the, the relief package and the Senate today, I think is, is a positive step in the right direction. Um, but as you noted, um, businesses at a standstill and it, you know, obviously that affects all sectors of the economy. Um, you know, and, and certainly healthcare is no, uh, exception to that. Um, the most immediate effect that, that I saw in my own practice, it pertains to business valuation, um, is that, you know, in process deals and valuation assignments related to transactional, um, valuation. Um, we hit the pause button, um, just to stop and wait. And if you think about that, obviously there's, there's other priorities that are shifting and deployment of capital into other resources. They're absolutely necessary during the crisis. Um, but also the economic impact of this response really is unknown right now. Um, you know, you have, for example, um, elective surgery, surgery centers, surgical hospitals, um, really they're, they're closed right now. They're not doing any cases. Um, the same is true for, you know, other sorts of in-person, uh, elective visits. All of that is, is at a standstill. And so there is an immediate, um, uh, kinda wait and see element of, uh, of what is going to come to pass, but immediately deals are, are on hold. Um, I do think that, um, you know, there, there will likely be, um, uh, uh, you know, continued appetite for deals once we, once we get through this, um, perhaps a little bit of the wind has been taken out of the, the acquisition sales, if you will. Um, but at least for, for the near term, um, that, that's what I'm seeing in, in terms of maybe a little longer term, uh, outlook. You know, I think what we're gonna have come to pass is, I mean, you, you use the word the new normal. Um, I'm, I'm hoping it's more of a, a current normal and, and maybe not a permanent lasting impact, at least from an economic standpoint. Um, but certainly I think investors, um, uh, are, are gonna have to reprice risk. Um, I think a lot of the risks that, um, have been in our economy, a lot of risk faced by small businesses and healthcare and, and, and other otherwhere, um, really haven't been adequately priced because we never foresaw that such dramatic volatility could exist. Um, and so that's gonna have an impact on multiples for sure going forward. Um, multiples are also impacted by growth expectations. And so if we do have a, uh, mid to long term, um, deceleration of our economy or certain business sectors, that'll also have a, a downward impact on, on multiples. And then even with the relief packages that are, that are being deployed, um, I, I think it's likely that for those businesses that do survive, and, and, and Mindy simply may not, I I think we'll have significant debt levels, um, higher than, than we have seen historically, um, that are gonna have a, a suppressive effect on equity values, may not, you know, change overall values of, of entities. Um, but all things being equal, if you have, you know, an entity that gets through this and, and we kinda get through the immediate risk repricing, um, with those higher debt levels, that just shifts some of the value from the enterprise away from equity holders and, and into, uh, the hands of the data holders.

Speaker 2:

Well, I, we really appreciate that insight, uh, uh, Jason, really, uh, quite formative. Uh, and, you know, as we're thinking about, um, the current normal or the new normal, uh, I also hope that it's more of a current, normal than, than, uh, a long term, uh, uh, shift to how we, uh, uh, consider these types of events, uh, in our society. But, uh, are there any sectors, uh, within healthcare that might have, uh, valuations that are positively impacted coming out of or, or throughout, uh, the covid 19 crisis?

Speaker 3:

Um, yeah, I, I think that is certainly going to be, um, the case, um, both in healthcare and, and in other industries. Um, but if you just think about kind of the, the, the obvious, um, you know, beneficiaries of, of this, uh, crisis, um, my mind immediately turns to, to telehealth, um mm-hmm.<affirmative> providers and telehealth platforms. And we're seeing a, a almost a, a, you know, a forced push into those platforms right now. Um, and an easing on, on multiple regulatory compliance issues from, from hipaa, um, to licensure, um, et cetera, as well as, um, uh, changes in the reimbursement, uh, environment for, for telehealth and remote health access. I do think that for a very good period of time will, will be the new normal. And I think that whereas a lot of the population was kind of resistant to adopt those models from a consumer standpoint, I, I think the sphere in the back of their mind that there, you know, could be an underlying, um, you know, health issue of visiting a a a healthcare facility may translate into a, you know, a lot more telehealth even beyond what we're we're experiencing. So, certainly that, um, is gonna be, um, a sector that I think will benefit from this. And again, not just the providers, but also the, the, the it and, and technology, uh, providers that, that help facilitate the, the, the use of telemedicine and telehealth. Sure. You know, every sectors that, uh, uh, that may be positively impacted, um, I, I think diagnostic testing and labs, um, certainly are gonna see an uptick in volume and, and maybe for the, the foreseeable future, uh, the immediate issue is, is overwhelming. Um, but I think as we become more cautious as a society, um, we may see more tests being done, uh, or, uh, you know, a larger battery of tests when, when we have, um, patients present with what we may have historically thought of as I just go home and wait sort of symptom. Um, and, and then, you know, thinking about, um, kind of other sectors that, um, are still kind of obvious, but, uh, a little bit, um, less certain, I think drug and device companies, um, will benefit, um, particularly those that are able to, to bring a solution, um, to the marketplace, uh, for covid 19. Um, but you know, we were seeing some collaboration and encouragement of collaboration across, uh, companies from, from the federal government that perhaps didn't exist before. And, and, um, I think that will, uh, in the near term be, uh, uh, positive. And then, you know, the, the one area that I'm, um, I'm kind of on the fence in terms of my expectations at least, is, you know, how hospitals, uh, will fare from this. Um, you know, we've seen a lot of, uh, press that hospitals are gonna be negatively impacted by the COVID 19 response. And I, I think certainly, you know, the shift away from, from high reimbursing elective surgeries and, and, and, um, you know, surgical cases, um, is going to be, um, a, a downward pressure on, on revenue and profitability for a lot of health systems. But I'm also seeing reports, in fact, just this morning, uh, modern healthcare posted, uh, um, uh, an article, um, and I think they referenced a fair health, um, that indicated the COVID 19 response was likely to generate 558 billion in, in network equivalent, um, collections, um, from, from inpatient and, and other, uh, covid 19 response. Uh, we also see in the, in the stimulus package that was released, there was 130 billion in, in stimulus for, for hospitals. Um, so obviously increased occupancy, um, is, is going to potentially have a favorable impact, but that's gonna be offset by the enormous, uh, increase in cost that they're incurring right now to, to staff and, and, you know, make emergency measures available to, to patients. Um, and also the, the shift away from what has historically been the more, uh, profitable elective, uh, procedure side of the ledger.

Speaker 2:

Do you think, uh, Jason, do you think we'll see that elective surgery side come back later this year? In other words, for those folks whose, uh, surgeries have been either canceled or delayed, do you think we'll see an increase in the number of elective surgeries in the second half of 2020? Or are we, or are we thinking about that spilling into 21?

Speaker 3:

You know, it's hard to say. I I think a lot of it's gonna come down to fear and anxiety, uh, among the consumer base mm-hmm.<affirmative>, um, because the demand for those services, um, you know, you'd have to, you know, put it on kind of a continuum ride. I mean, if you have a knee that needs to be replaced, you're gonna get that done as soon as you can after this is all, um, set and done. And, you know, if it's a cosmetic procedure that may be delayed, um, uh, a little bit longer just to let everything settle down. But I think the demand for those surgeries is didn't go away. It, it just got delayed. I think the bigger question is gonna be, you know, how, how devastating from an economic standpoint is the, is the, the delay for surgery centers and surgical hospitals, um, because the, you know, the, the, just the ongoing costs that exist in those facilities and the complete absence of, of revenue, that's a huge working capital drain. Um, sure, I'm cautiously optimistic that it will return in the second half of 2020. And I, I think, you know, what happens over the next couple of weeks in terms of flattening the curve and, and, you know, rolling out some positive messages on, on this from both a health and an economic standpoint, will, will really dictate how that plays out in the, in the latter half of the year.

Speaker 2:

Absolutely. Absolutely. Let's turn for a little bit now, uh, Jason, to compensation valuation. One of the questions that folks have is whether, um, you know, compensation arrangements that depend on a, a fair market of value, um, uh, evaluation, uh, whether they adequately address this type of disruption. Uh, and, and I think we're learning that most really don't adequately address this type of worldwide, uh, pandemic like, uh, disruption like we're seeing with Covid-19. What are some of the immediate challenges, uh, that will be faced from a fair market value standpoint, and how do you think physician compensation models should be modified or need to be modified, uh, moving forward?

Speaker 3:

Sure. So, you know, this is, this is one where, again, things are changing quickly, and I think that the regulatory guidance around, you know, compensation arrangements, um, is, is going to have to adapt as, as well as the economic models we use to, to determine fair market value. Um, but certainly, um, and just like with the business valuation, um, commentary I gave, I think compensation models, there are some obvious immediate impacts that we need to get through some kind of mid-term, less obvious and then long-term solutions that we'll have to rethink, um, um, and, and possibly redesign how we approach some of this. Um, so, so diving into the immediate needs, um, currently we have a, a strong demand for staffing, obviously. Um, we have hazardous environments, uh, with, with providers and, um, other staff in, in hospitals and health systems, uh, working, um, extended hours and difficult shifts. Um, I think the immediate impact of that is, you know, how do you make sure that those on the front lines are, are being adequately compensated and, and do we need to implement any sort of, um, change in the pay model to, to reflect that? And, and I think, you know, as you think through the models that exist currently, I think providers on our different models are gonna be impacted in, in, in different ways. So for example, if you're on a salary model, um, you know, it's a, a fixed salary plus incentive, and you go from working a, a normal workload to a super, uh, charged, uh, work burden, I think that needs to be modified. Uh, and it may not be set in advance for a term of the year, um, but it certainly is going to be the case where you've gotta convert that to something else that adequately reflects the efforts that are being made by these providers on, on fixed compensation models. On the other side of that equation, I think you have, uh, a large contingent of physicians that are on, um, you know, productivity based models, um, whether that be percent of collection or, or work review based models that are not on the front lines, um, of this response and are being dramatically impacted in terms of their ability to provide services. So there, um, again, it's gonna be a situation where how do you maintain the, the continuity of your, your workforce on these models? And is there, um, uh, a justification and, and also a compliance, um, uh, protocol that, that permits providers on those models, um, to, to be compensated. And, and I think the alternatives there are kind of the, the opposite. Maybe switching them over to a, a fixed salary based model for some period of time or potentially, uh, provide stipends or, or other sorts of, um, uh, supportive pay during this kind of weird time that we're in right now. Um,

Speaker 2:

Absolutely. And I can, I can, I can tell you, Jason, sorry to interrupt, but I can tell you just even my, in my own experience, uh, working with fair market value, uh, uh, evaluations and methodologies, this certainly, uh, isn't the type of, uh, you know, unexpected consequence or, or, or, uh, experience that we take into account generally in a fair market value methodology. So it's, this is new, this is novel territory.

Speaker 3:

Yeah, it is. And you know, I think that's, in times like this, it, it really highlights the importance of, um, working towards, um, rational solutions to, to challenges like this because we don't have a playbook, right? Um, and I know that fair market value and commercial reasonableness are, are often thought of as kind of two sides of the same coin, well, or two sides of the same coin of importance, I guess. Um, there are certainly different, um, uh, analyses and, um, OIG guidance on that is a very clear in the, in the recent proposed rules that they are definitely different. But I, I think developing a commercially reasonable rationale for the change is really important right now to, you know, and anything that advances the health of the patient population and provides continuity of service, I think is a, a reasonable justification. The secondary piece to that of determining the appropriate economics, I think we have to, to make informed judgments based on experience and, and using, you know, informed judgment on what's appropriate. And, and that may not be able to be paired with, you know, a third party opinion. It may be the case that, um, we simply need to, to take action to maintain continuity of workforce and staff and come back and, and retest it later. And again, that presents some regulatory challenges, but I think we all need to think, uh, creatively, uh, during this time to make sure that, that the clinicians, particularly those on, on the front lines are, are being adequately supported and those that are sitting on the sideline unwillingly, that they are also not put into a place where, um, you know, they're not able to, to maintain the practices or maintain adequate level of service for, for those needs.

Speaker 2:

Absolutely, absolutely. Two areas, uh, when we, when we decided we were gonna talk about fair market value, a couple of questions I had, um, and, uh, that, that, that might, uh, be unique to this particular situation. So first on hazard pay, um, any particular thoughts on, uh, how to account for hazard pay in connection with a covid-19 like crisis or, or, or the current crisis? And then also I I, I'm interested in your thoughts on smaller or local hospitals and health systems and how they can remain competitive, uh, from a fair market value perspective in this current scenario. So maybe we'll start with hazard pay and then go to, uh, local and regional hospitals.

Speaker 3:

Yeah, so hazard pay, I mean, we're hearing a lot about this, and I think there is at least, uh, a, a logical, a compelling logical argument that hazard pay may be appropriate. Um, at the same time, you know, particularly as it pertains to infectious disease, you know, specialists and, and you know, critical care, intensivists, er doctors, those are, those are clinicians that are working in inherently, um, dangerous or hazardous positions in any event. And so there may be some degree of, um, that already baked into some of the, the compensation models, um, but certainly a, a response like what we're seeing right now to, to covid 19, it, it's unprecedented. So there's not, again, there's not a playbook, there's not any sort of historical reference point that we can, we can lean on in, in the healthcare sector, um, that says this is, this is how we ought to, to deal with this. You know, for me, my, my recommendation would be, would be to look at it on a case by case basis. I, I certainly think that, you know, the, the extreme conditions that many clinicians are being forced to, to, to work in right now, whether that's, you know, inadequate, um, equipment, you know, having to reuse equipment because of supply shortages, um, extended hours where, you know, their, their own immune system and, and energy levels are being depleted and, and perhaps making them more susceptible to, to infection. Um, you know, there, there are a lot of compelling arguments that would suggest hazard pay may be appropriate when you are truly on, on the front lines. I think the question then becomes how do we, how do we quantify that? Um, and again, we don't have a, you know, there's no salary survey data that we can point to and say, oh, there we go, there's the premium. Um, and so we're gonna have to look to proxies that are in the market, um, you know, whether that's, um, you know, conflict zone pay for, for military personnel or non-military personnel. Um, you can see in, in certain, in instances, you know, response to, um, highly dangerous areas, um, you know, where, where you have aid workers perhaps, you know, in an Ebola outbreak or something like that. Um, it's difficult to translate that data directly to providers. Um, but I think that looking at the underlying mechanics of those sorts of scenarios and, and, and looking at the way that the pay has been modified, um, I think that's one approach that is at least logical. It's gonna take some finessing. Um, and I, I think there's not a single right, and, and perhaps not a single wrong answer either in how that's addressed, um, but I do think it is, it's a difficult challenge for, uh, appraisers to deal with right now, and I think there's gonna be a lot more qualitative elements to that analysis than, than, um, you know, perhaps a, a typical fair market value analysis would entail.

Speaker 2:

Certainly, certainly. No, that's really informative and uh, and helpful thoughts as well. I think the sort of, um, you know, some of the higher level points I'm hearing today, and, and, and, and, and, and please correct me if I'm wrong, are, you know, there's increased flexibility, uh, uh, in, in connection with fair market value method methodologies in a scenario like this, um, that, uh, accounting for hazard pay, um, might fall into that flexibility as well. Um, if, if you're a small or local regional hospital or health system, uh, and you're assessing this situation from a fair market value perspective, uh, what are some of the considerations that you would keep in mind? How do these, um, smaller health systems remain competitive in the marketplace? What are your thoughts on, on that question?

Speaker 3:

Yeah, you know, it's, again, that's one of those scenarios that it, it, it's, it's kind of hard to contemplate the various scenarios that may come to pass in, in this particular, uh, situation. We haven't seen, um, the same level of, uh, at least as it pertains to, to the covid 19 crisis. We have not seen rural areas be impacted as much as, you know, highly populated, um, metropolitan areas like, you know, those in California and New York, Seattle. Um, and so, you know, in terms of remaining competitive, um, I think you have to, uh, again, do the same sort of qualitative analysis that is required, um, in, in, in the discussion we just had on, on hazard pay. And, and that is, take a look at the, the particular needs of that system. What are they trying to, to accomplish? What are the specific needs and how have they changed as a result of this crisis? And, and in some cases that may be availability in some cases that, you know, may be, you know, we need to, you know, again, used like a telemedicine based model that perhaps we're not using historically, and how do we, how do we fund that? How do we main make sure that these providers that are in our environment who are experiencing little or no pay right now, how do we support them? So I, I think it's gonna be on a case by case basis, depending upon the needs of a particular hospital, the medical specialty, and the, and, and the community. Um, but again, I, I think that using any rational valuation methodology paired with adequate qualitative support and analysis of the situation, um, is how, is how I would approach that situation or those situations.

Speaker 2:

Well, thanks, thanks for that, Jason. I mean, I think the, the message is pretty clear, you know, uh, uh, a rational approach and a flexible approach, uh, uh, are appropriate in response to this particular situation. We just have a couple of moments left here in our podcast, Jason, and I'm wondering if there's any other impacts that you anticipate, uh, from a fair market value perspective as a result of covid-19?

Speaker 3:

Yeah, so there's two things that I think are gonna be particularly challenging from a fair market value standpoint. Um, the first is, um, you know, how we deal with, with quality pay, um, or at risk pay during this time, you know, the government's already indicating a willingness to, to adjust the reporting period, uh, benchmark and or delay reporting on some of the quality measures for, from, you know, from a, from a reimbursement standpoint for, for MIPS and otherwise. But for, for clinicians that are participating in a model where a significant portion of their, their comp is based on, you know, a payment of quality metrics, paper performance, um, I, I think it's gonna be heavily impacted because of this. And I think the right way to, to deal with this is to try to isolate the anomalous period of time and eliminate that from, from the equation. I think we're gonna have to do some, uh, analysis much like we do, uh, in business valuation where, you know, we go through a process of normalizing performance and we try to isolate and eliminate non-recurring or atypical events. I think we're gonna have to do that here with compensation on pay for performance models where we isolate this, this period of time and, and, uh, neutralize it. I think that's the only thing that's, uh, rational and, and economically fair for, for clinicians. Um, the, the other thing that is more of a long-term issue, uh, and that is, you know, valuation is as a, as a function, it's always a forward-looking process, but we often look to the past to find proxies and data that we use as a, as a benchmark to measure that. And that's particularly true with, with compensation valuation. And we look at historical based compensation survey data, and we use that as a means to value future, um, compensation models. This is gonna create two problems for that. First is we're gonna have a 2020 reporting period that is gonna have a whole bunch of noise, if you will, in the data across all specialties. And so as MGMA and s e and AMGA do their reporting, I think they're, they're gonna have to do some scrubbing of the data sets, um, whether that is something similar to what I just said on quality, where they isolate the period of time for reporting, or they add some questions into their, their surveys, um, to try to identify and, and, and quantify the impacts of, of the covid 19 response on, on providers by specialty. But certainly for appraisers, as we look back and start to use those surveys, I think it's gonna be critically important that we, um, use care and diligence to eliminate both, uh, the positive, if there are positive effects on, on specialties and the negative impacts, uh, of this response to appropriately measure comp. And then one final thought on that is as we're modeling comp, again, it, it's is such a, a crazy scenario that's, that's coming to pass right now. I think a lot of the analysis that we, we do, we, we tend to believe that physicians are gonna operate within fairly narrow bands of whether it's productivity or reimbursement or, um, you know, whatever the, the benchmark is. We recognize there's a, a possibility for volatility. Um, but within fairly narrow bands, I think now the onus on, uh, appraisers is to think about what happens if volatility will be on what is normally expected and, and what's the, the reality that something like this could happen again, whether it's a different, uh, disease or, you know, other disruption or economy. Um, you know, certainly something like war time or economic disruption could have similar sort of sorts of impacts. So I think we need to be careful not to turn a blind eye to the real risk and volatility that underlies those, those comp models and do some sensitivity testing within wider bands of variability than, than perhaps we have done historically.

Speaker 2:

Well Jason, thanks so much for this and for all of the, uh, enlightening thoughts and, and information today. As you mentioned several times, this is an unprecedented situation and this is one of those topics where you might not necessarily join fair market value and covid 19 response, uh, as topics that are interconnected. But you can see just from this conversation today that, uh, there's a significant downstream impact on nearly everything that we do in healthcare and this unfolding crisis. So Jason, thanks again so much for your time. Is there a place where our, our listeners can get ahold of you and, and reach out to you?

Speaker 3:

Yeah, absolutely. Um, uh, all of my contact information is, uh, available on my website, um, that's root valuation.com, um, um, located here in Denver, Colorado, mountain Time. So, um, feel free to, uh, gimme a call or shoot me an email and, uh, happy to talk through any of these issues.

Speaker 2:

Great. Well thank you Jason. Really appreciate it. And Steve, thanks so much for co-hosting today.