With the recent enactment of the Multiple Procedure Payment Reduction and the increased equipment-utilization rate (used to calculate Medicare reimbursement) contained in the American Taxpayer Relief Act, reimbursement pressures on physician-owned imaging centers are intensifying. These centers, many of which are facing declining profits and looming capital expenditure needs, provide potential acquisition targets for hospitals and health systems seeking to grow and strengthen their outpatient imaging service line. With certain acquisitions, it may be important to engage the radiologists to provide management or professional interpretation services to the center post-transaction.
These post-transaction service arrangements are generally executed through a professional service agreement. To mitigate regulatory compliance risk (federal Stark law, anti-kickback law or, for federal tax-exempt organizations, IRS regulations) and to validate the fairness of the compensation terms, an independent valuation firm may be procured to assess if the compensation terms of a PSA are consistent with fair market value. This article describes primary factors that a valuation firm considers in assessing compensation for management and professional interpretation services.
Radiologists typically provide clinical oversight or clinical-natured management services under management service agreements. In this situation, it is appropriate to consider physician executive compensation in lieu of the typical management fees for non-physician management services. To consider physician executive compensation rates, the services must require a physician specialized in radiology. In this instance, the management fee may be calculated as an annual stipend by multiplying the fair market value physician executive hourly rate by estimated annual management (or clinical management/oversight) hours.
It is important to note that the market observed range (3-7 percent of net revenues) for imaging center management services is generally not applicable for management services with clinical responsibilities. This fee range is for "typical management services," such as human resources, financial and accounting oversight, information technology oversight, etc., which are usually performed by non-physician personnel. If the radiologists perform typical management services, then consideration of typical management fees is appropriate. Post-transaction, it is more common for the acquirer to provide all or a portion of the typical management services. If the physician provides a portion of the typical management services, then certain adjustments should be made to the market rate such that the imaging center is not paying for duplicative services.
Ultimately, the valuator should understand the nature of the services (clinical versus non-clinical management) provided by the radiologists and determine the appropriate compensation type, comparables or necessary adjustments based on level of physician responsibility in determining the fair market value of the management fee.
Under this approach, the valuator separates the professional and technical component of the imaging center's net revenues by using published CMS reimbursement data. The professional component calculations are applied to the collections from all imaging codes, regardless of payor, to determine the professional fee payable to the radiologist.1 The actual fee to be included in a PSA is often stated as a percentage of global net revenues, a fixed annual payment, or a fixed fee per scan.
To perform the top-down approach accurately, it is imperative that the valuator carefully consider the following:
Finally, certain adjustments may need to be applied to the professional fee depending on the specific PSA. For example, if an imaging center covers certain costs that benefit the radiologist (i.e., billing/collection service costs, etc.), an adjustment to the professional fee may be required.2
Jonathan Helm, CVA, is a senior manager and Alexandra Higgins is a senior analyst in the Professional Service Agreements Division of VMG Health, a national healthcare transaction and advisory firm in Dallas. This article is not to be construed as legal advice.
Footnotes:
1 The term "professional component calculations" references the percentage of the global fee allocated to the professional services. For example and based on 2012 reimbursement rates for Dallas. CPT 70250 (X-ray exam of skull) had non-facility professional reimbursement of $11.99 and global reimbursement of $38.23. Therefore, the professional component calculation for this code would be 31.3 percent ($11.99 ÷ $38.23).
2 In this example, the imaging center may bear the cost of billing/collection services that the radiologist(s) would otherwise have to bear. Therefore, a reduction in the professional fee equal to the cost of the provided billing/collection services may be warranted.
These post-transaction service arrangements are generally executed through a professional service agreement. To mitigate regulatory compliance risk (federal Stark law, anti-kickback law or, for federal tax-exempt organizations, IRS regulations) and to validate the fairness of the compensation terms, an independent valuation firm may be procured to assess if the compensation terms of a PSA are consistent with fair market value. This article describes primary factors that a valuation firm considers in assessing compensation for management and professional interpretation services.
Management services compensation
Although many hospital acquirers have robust administrative management systems in place, it may be reasonable to engage the previous radiologist owner(s) to provide certain clinical management services to the newly acquired center. In many cases, radiologists are involved in the daily management of the imaging center prior to the transaction and have a deep knowledge of its operations. If the acquirer desires to continue to engage the radiologist(s) through a PSA to perform certain management duties, then a management fee may be reasonable.Radiologists typically provide clinical oversight or clinical-natured management services under management service agreements. In this situation, it is appropriate to consider physician executive compensation in lieu of the typical management fees for non-physician management services. To consider physician executive compensation rates, the services must require a physician specialized in radiology. In this instance, the management fee may be calculated as an annual stipend by multiplying the fair market value physician executive hourly rate by estimated annual management (or clinical management/oversight) hours.
It is important to note that the market observed range (3-7 percent of net revenues) for imaging center management services is generally not applicable for management services with clinical responsibilities. This fee range is for "typical management services," such as human resources, financial and accounting oversight, information technology oversight, etc., which are usually performed by non-physician personnel. If the radiologists perform typical management services, then consideration of typical management fees is appropriate. Post-transaction, it is more common for the acquirer to provide all or a portion of the typical management services. If the physician provides a portion of the typical management services, then certain adjustments should be made to the market rate such that the imaging center is not paying for duplicative services.
Ultimately, the valuator should understand the nature of the services (clinical versus non-clinical management) provided by the radiologists and determine the appropriate compensation type, comparables or necessary adjustments based on level of physician responsibility in determining the fair market value of the management fee.
Professional interpretation compensation (professional fee)
Unlike hospital inpatient imaging departments, freestanding imaging centers generally bill payors on a "global" basis. The job of the valuator is to determine the portion of the global fee that should be paid to the radiologist for the interpretation services rendered. Many valuators will use a top-down approach to determine this interpretation or professional fee.Under this approach, the valuator separates the professional and technical component of the imaging center's net revenues by using published CMS reimbursement data. The professional component calculations are applied to the collections from all imaging codes, regardless of payor, to determine the professional fee payable to the radiologist.1 The actual fee to be included in a PSA is often stated as a percentage of global net revenues, a fixed annual payment, or a fixed fee per scan.
To perform the top-down approach accurately, it is imperative that the valuator carefully consider the following:
- Projected shifts in imaging modality volumes. As a percentage of global revenues, x-ray scans generally have a professional fee of approximately 25 percent while MRI scans have a professional fee of approximately 20 percent. If the estimation of a professional fee is based on historical volumes and no consideration is given to projected changes in the underlying center’s scan mix, the professional fee could be materially impacted.
- Current Medicare reimbursement data. Assuming that CMS technical fees decline for an imaging center, all things equal, professional fees will increase relative to the global revenues. By using non-current reimbursement data, a valuator may inaccurately estimate the appropriate professional fee.
Finally, certain adjustments may need to be applied to the professional fee depending on the specific PSA. For example, if an imaging center covers certain costs that benefit the radiologist (i.e., billing/collection service costs, etc.), an adjustment to the professional fee may be required.2
Conclusion
As hospital executives evaluate the acquisition of physician-owned imaging centers, it is often important to align the interests of the associated radiologists post-transaction. Determining a reasonable and fair market value fee for services rendered is imperative not only for regulatory compliance but also for the sustainability of the radiologist/imaging center relationship.Jonathan Helm, CVA, is a senior manager and Alexandra Higgins is a senior analyst in the Professional Service Agreements Division of VMG Health, a national healthcare transaction and advisory firm in Dallas. This article is not to be construed as legal advice.
Footnotes:
1 The term "professional component calculations" references the percentage of the global fee allocated to the professional services. For example and based on 2012 reimbursement rates for Dallas. CPT 70250 (X-ray exam of skull) had non-facility professional reimbursement of $11.99 and global reimbursement of $38.23. Therefore, the professional component calculation for this code would be 31.3 percent ($11.99 ÷ $38.23).
2 In this example, the imaging center may bear the cost of billing/collection services that the radiologist(s) would otherwise have to bear. Therefore, a reduction in the professional fee equal to the cost of the provided billing/collection services may be warranted.