More Medicare providers creating value out of thin air

Doctors and hospitals have ratcheted up their bottom lines by billions of dollars using “questionable” practices. Officials know this is going on, but they admit that any abuses will probably never get detected. What’s more, providers are taking steps that will add more camouflage to this issue, according to a new investigation from the Center for Public Integrity (CPI).

Value source: Healthcare providers have moved steadily toward using better-paying codes for treating elderly patients on Medicare. They say this is justified because treating seniors has grown more complex. But some of this is likely due to “upcoding”—that is, charging for more extensive and costly services than were delivered. Regardless of whether it’s a mistake or abuse, the practice is growing.

How much are we talking about? More than $11 billion of doubtful Medicare fees have been charged, says CPI. Of course, when you layer in the projection of this extra revenue stream, it adds many more billions to the current business value of the providers.

Medicare officials admit that they can’t get a handle on upcoding abuse. “We cannot quantify what portion of the error rate is attributable to fraud,” Medicare auditors wrote in a June 2000 report. Medical groups, including the powerful AMA (which controls the codes), have blocked all efforts to revamp the coding system. The Obama administration seems to have no aggressive strategy to target coding abuses.

More camouflage: Detecting upcoding errors and abuse will be tougher because of the growing use of computerized medical records that make it easier for doctors to document the level of treatment. In fact, these systems are marketed for their ability to substantiate higher billing codes. More than half of the doctors billing Medicare are now using these systems, with more expected to follow.

Will anyone ever ferret out this phantom value? The best chance is if someone from inside—a whistleblower—comes forward to alert officials to coding abuses. Also, business valuation experts are aware of this issue, so they may delve into this when doing an appraisal. In the meantime, all of this is under the radar.

Of course, upcoding abuse can trigger civil and criminal exposure. And speaking of whistleblowers, upcoding is one of many allegations in the Halifax whistleblower case in Florida, which will be the subject of a session at the AICPA’s National Healthcare Conference in Las Vegas on November 16.

Valuation issues when doctor/owners get divorced

One of the doctor/owners of your organization is going through a divorce. As the financial manager or administrator, what can you expect? Yes, he or she may cry on your shoulder, but that’s not what we’re talking about. The doctor’s ownership interest is a marital asset and must be valued. That means you will be thrust into this unfortunate situation—like it or not.

A recent BVR webinar, Medical Practice Valuation in Divorce, discussed how a healthcare practice differs from other types of professional practices with respect to the valuation process. One of the key differences is in the nature of revenues—not expenses—a healthcare organization generates, according to Kathie Wilson, CPA/ABV, CVA, an expert on valuing medical practices.

Reports to produce: As a result, you will be asked to produce certain reports that will allow the appraiser to analyze the revenue and profit to figure out how much is attributable to the doctor in question. Of course, the traditional financial statements and tax returns will be requested, but you will be asked to produce some specialized reports. Wilson described three key special reports:

• Accounts receivable. Not so special a report in and of itself, but it must be broken down by insurer and also must include a self-pay category. Also, you’ll be asked to run it as of the valuation date.

• Charges, payments, and adjustments. Also broken down by insurer, this report helps the appraiser value the accounts receivable. For example, the charge values must be adjusted to calculate what will actually be collected. This is not bad debt, but rather what will be collected based on the fee schedules of the insurers.

• Charges and units of service, by CPT code. This allows the appraiser to analyze revenue by type of service. It’s akin to analyzing product line profitability.

In addition to producing reports, a valuation professional, attorney, or accountant will interview you as part of the process. He or she will ask you questions about the reports you provided and also about historical trends and your future outlook on matters that have an impact on value, such as the reimbursement environment.

What to do: The last thing you want to do is get in the middle of warring spouses. “Hopefully, everybody can be nice,” says Robert Levis, CPA/ABV, ASA, CFE, of Levis Consulting (Colorado Springs, Colo.). So for your part, Levis advises that you be as cooperative as possible with both sides and their representatives. Fulfill the data requests and answer any questions you are asked. Yes, it may be a burden, but be thankful that you’re not going through what they are.

This webinar is available as a training pack and contains a great deal more information,  including some of the reports you will be asked to provide in the event of a valuation. Click here for more information.

Spotlight on healthcare valuation at AICPA industry conference

The AICPA Healthcare Industry Conference is right around the corner. Head to Las Vegas November 15 and 16 to get up-to-the-minute information on the latest developments in healthcare finance issues. The conference features a valuation track with sessions including:

• Hot Topics in Valuation—including conversion of healthcare entities from C corporation status to S corporations to limit exposure to the new Medicare tax, valuing noncompetes and personal goodwill in the sale of physician practices, and reasonable compensation for tax purposes;
• How Health Information Technology Is Changing Physician Practices;
• Physician Compensation: Making It to the Promised Land of Black Ink;
• Mergers and Acquisitions: Buy-Ins, Buyouts, and Noncompetes;
• Pretransition Valuation Planning Should Consider Post-Transaction Financial Reporting; and
• Healthcare “Hardball”: A panel of legal and appraisal experts answer your toughest valuation and healthcare questions.

Preferred pricing for the conference is available until October 15; to read the complete agenda and register, click here.

Can the healthcare industry standardize to tap into hidden value?

In the basic toolkit for building value, you need strategies that enhance efficiency, increase productivity, and rein in costs. These strategies should make use of time-tested best practices in delivering goods and services to the customer. But this generally involves a standardization of procedures. The fast-food industry is famous for its high degree of standardization designed for cost control, consistent quality, and satisfying customers.

Can the healthcare industry follow the lead of an eatery? Can an industry known for customization of patient care and a deep-seated culture adopt some degree of assembly-line style to increase efficiency and still produce a quality product?

Menu, please: The answer is “Yes,” says a recent article in The New Yorker magazine. It says healthcare providers can learn some lessons from the restaurant chain business. The Cheesecake Factory is highlighted as an example of producing great food while maintaining goals for efficiency, profitability, delivery, and quality control. A high level of standardization is the key to all this.

Parallels drawn to the healthcare industry reveal how these concepts can increase and stabilize quality, increase patient satisfaction, reduce waste, improve profits, and lower costs. Size can certainly be one of the main factors. Huge box stores, big restaurant chains, and, yes, enormous healthcare delivery systems have a leg up on their smaller competitors. However, size is not the only factor. Economies, efficiencies, and improved patient care can be achieved by changing the paradigm of healthcare delivery from customization to standardization.

Idea in action: The article points to Brigham and Women’s Hospital (Boston) and its 10-year effort to standardize joint-replacement surgery. Is there a good reason—beyond physician preference—that makes sense (both economically and from a patient care perspective) to have six brands of knee replacements on the shelf? True, the surgeons will have their personal preference, but should that be the cost driver? So one of the hospital’s surgeons took the lead and—with lots of analysis and convincing—developed a best-practice procedure that standardizes the process, driving down cost and increasing patient satisfaction. This same analysis can be used for a host of other issues and processes in a healthcare organization.

Of course, the culture of a hospital and its doctors is ingrained and seemingly immovable. But this type of change—if handled correctly—can be implemented. The big healthcare organizations are doing it. They see it as a way to tap into the hidden value of their operations. It’s just a matter of time before it gets onto the regular menu everywhere.