Normalization Adjustments in Medical Practice Valuation

The valuation of closely-held medical practices generally involve normalization adjustments to financial statements.  One major area of normalization I encounter relates to payor reimbursements, incentive and risk pool payments.  The prevalence of non-recurring items related to the ACA and health plan expansion may or may not require adjustment depending on the nature of these payments.  This is where the valuation analyst needs to become a reimbursement expert in order to make the appropriate adjustment to historic financials and future projections.

Incentive Payments

As a result of health care legislation there has been a large push to increase beneficiary enrollment. Thus health plans have been offering incentive payments to encourage providers to expand their primary care base. These come in the form of incentive payments which are partially or fully subsidized and can be deeply embedded in financial statements.  As a valuation analyst looking at summary income statements it may be difficult or impossible to determine the source, nature, and recurrence of these items.  Thus obtaining detailed statements of revenue by source by month and reviewing these with management during management interviews is critical to developing a better forecast.  I have discovered that many of these payments are in fact non-recurring and need to be addressed accordingly.

Medicaid Parity Payments

A contributor of non-recurring payment I have seen in primary care practices with large Medicaid populations relates to parity.  Parity payments were devised to encourage primary care physicians to take more Medicaid beneficiaries.  For certain Evaluation and Management codes, Medicaid reimbursements were paid on par with those paid for Medicare.  This result in large double digit increases in reimbursements for a number of procedure codes.  These will not be continued in 2016 and beyond and should be adjusted accordingly.  This is a critical adjustment to make in medical groups that may have a large Medicaid population.

HCC Payments

Another item which I encounter are Hierarchical Chronic Condition payments related to Medicare managed care beneficiaries.  HCCs are commonly encountered chronic conditions found the Medicare population.  Providers may receive payment adjustments if they remit encounter data and display a population with a disproportionate share of these conditions.  These are evaluated periodically and the payments will vary based on the acuity of the population.  This is source of reimbursement which may not require normalization as they reflect likely ongoing payment, though the amount may be uncertain.  In these cases I will keep the payment but use a weighted average to account for the affect going forward.  It is critical for the analyst to understand the specific nature of such payments in order to properly weight and forecast such items.  All “extraordinary” payments may not require adjustment if they may be reasonably continued in the forecast period.

All “one-time payments” are not created equal and it is important for the valuation analyst to understand them.  The few examples listed above require the analyst to understand the source, nature, and sustainability of such payments in order to develop the appropriate forecast.  This extends to all forms of reimbursement which may be found in the healthcare environment.

0

No Comments Yet.

Leave a Reply

Your email address will not be published. Required fields are marked *