PYA Principal Jim Lloyd was among the faculty who spoke at the 2013 Mid-South Commercial Law Institute during a panel discussion on “Healthcare Facilities in Bankruptcy.” The presentation provided an overview of healthcare facilities and key issues, healthcare regulatory environment, valuation of healthcare facilities, and red flags for healthcare businesses in bankruptcy or distress.

1. Mid-South Commercial Law Institute
December 6, 2013

2. Paul G. Jennings
Bass, Berry & Sims, PLLC
Michael R. Hill
Harwell Howard Hyne Gabbert & Manner
W. James Lloyd
Pershing Yoakley & Associates, P.C.
Page 1

3. 
Paul G. Jennings serves as the chair of Bass, Berry & Sims PLC‟s Bankruptcy and Restructuring Practice. Paul
has over 23 years of experience in bankruptcy, insolvency and distressed asset matters, including representing
large corporate debtors, unsecured creditor committees, case trustees and plan trustees. Over the course of
his practice, Paul has represented a number of purchasers of distressed assets, both in and out of bankruptcy
proceedings, in several different industries. Paul has significant litigation experience in bankruptcy and
insolvency related matters, including preference, fraudulent conveyance and board fiduciary duty matters.

A significant portion of Paul‟s work over the years has been in the healthcare industry, including restructurings
and representing purchasers of healthcare businesses and facilities.

Paul is a member of the American Bankruptcy Institute, the Nashville Bar Association and the Tennessee Bar
Association, where he was past president for the Section of Commercial, Bankruptcy and Banking Law. In
2005, he was named to the National Register's Who's Who in Executives and Professionals. Paul is listed in
Best Lawyers,® has been named one of the best bankruptcy lawyers by Business Tennessee magazine since
2004 and one of Tennessee's leading bankruptcy litigation lawyers by Chambers USA. For the past four
years, he has been listed in the Nashville Business Journal's Best of the Bar, a distinction earned exclusively by
nominations from other attorneys. In 2006, Paul was listed in the Lawdragon 500 New Stars, New Worlds. In
2014, he was named Best Lawyers® 2014 Nashville Bankruptcy and Creditor Debtor Rights/Insolvency and
Reorganization Law Lawyer of the Year.
Page 2

4. 
Mike Hill is leader of h3gm‟s Healthcare Practice Group. He focuses on business law matters primarily
involving healthcare companies from start up to maturity and advises them on corporate, transactional and
operational issues. In his transactional practice, Mike advises his clients on compliance with the broad range
of regulation applicable to the healthcare field. He also regularly represents individual physicians and group
practices on matters such as group formation and compensation formulas, joint ventures, employment
agreements, recruiting agreements, and professional services arrangements.

He was a member of the inaugural class of the Nashville Health Care Council‟s Fellows Program, serves on
the board for the Nashville Health Care Council and has been featured by Chambers USA: America‟s Leading
Lawyers for Business, Nashville Medical news and the Nashville Business Journal as a leader in healthcare
law.
Page 3

5. 
W. James (Jim) Lloyd is a Principal in the valuation and dispute services practice of Pershing Yoakley &
Associates, P.C. Jim has over 25 years of experience providing valuation, economic damages, and other
consulting services to a multitude of organizations across the U.S. Significant healthcare experience includes:
Ambulatory Surgery Centers, Cancer Centers, Dialysis Centers, Hospitals, Imaging
Centers, Pharmacies, Pharmaceutical Manufacturers, Physician Practices, and Retirement/Assisted Living
Facilities, among others.

Jim is a frequent speaker at various national conferences and has authored/co-authored multiple articles on
valuation and dispute-related topics. Mr. Lloyd is the past Chair of the American Institute of CPA‟s Accredited in
Business Valuation Credential Committee, and past member of the American Society of Appraisers‟ Board of
Examiners. Jim has substantial expert testimony experience in federal and various state and local courts and
arbitration proceedings across the U.S.

Professional credentials include: Certified Public Accountant (CPA), Accredited Senior Appraiser
(ASA), Accredited in Business Valuation (ABV), and Certified Fraud Examiner (CFE).
Page 4

6. 
Overview of Healthcare Facilities and Key Issues

Healthcare Regulatory Environment

Valuation of Healthcare Facilities

Red Flags for Healthcare Businesses in Bankruptcy
or Distress
Page 5

7. Healthcare Regulatory
Environment and Key
Definitions
Page 6

8. STARK LAW
Prohibited self-referrals for
Medicare and Medicaid
patients.
ANTI-KICKBACK STATUTE
100
m
Road
Knowingly and willful
offers, payments, or receipts
for referrals.
Menu
IRS-NFP REQUIREMENTS
IRC Section 501(c) 3
requirements
Page 7

9. 
Department of Health and Human Services Definition1
◦ An arrangement which appears to be “a sensible, prudent business agreement, from
the perspective of the particular parties involved, even in the absence of any potential
referrals.”

Stark Definition2
◦ “An arrangement will be considered „commercially reasonable‟ in the absence of
referrals if the arrangement would make commercial sense if entered into by a
reasonable entity of similar type and size and a reasonable physician of similar scope
and specialty, even if there were no potential designated health services (“DHS”)
referrals.”

OIG Threshold 3
◦ Compensation arrangements with physicians should be “reasonable and necessary.”
1 63
Fed. Reg. 1700 (Jan. 9, 1998).
Fed. Reg. 16093 (March 26, 2004).
3“OIG Compliance Program For Individual and Small Group Physician Practices,” Notice, 65 Fed. Reg.
59434 (Oct. 5, 2000); OIG Advisory Opinion No. 07-10, September 20, 2007, pg. 6, 10; “OIG
Supplemental Compliance Program Guidance for Hospitals,” Notice, 70 Fed. Reg. 4858 (Jan.
31, 2005).
2 69
Page 8

10. 
IRS Definition1
◦ Fair market value (“FMV”) is defined as the amount at which property would change
hands between a willing seller and a willing buyer when neither is under compulsion and
both have reasonable knowledge of the relevant facts.

OIG/Stark Definition2
◦ The value in arm‟s-length transactions, consistent with the general market value
◦ The price that an asset would bring as the result of bona fide bargaining between wellinformed buyers and sellers who are not otherwise in a position to generate business for
the other party, or the compensation that would be included in a service agreement as
the result of bona fide bargaining between well-informed parties to the agreement who
are not otherwise in a position to generate business for the other party, on the date of
acquisition of the asset or at the time of the service agreement.
1Estate
Tax Reg. 20.2031.1-1(b); Revenue Ruling 59-60, 1959-1, C.B. 237.
Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations.
2Federal
Page 9

11. 
Determined from the perspective of hypothetical buyers
and sellers without the ability to refer business to one
another.

No consideration for post-transaction buyer synergies.
However, such synergies often exist!

The financial terms of the transaction must make
economic sense based on the assets being
sold/received.

Post-transaction compensation must be taken into
consideration.
Page 10

12. 
Federal statute
◦ Section 1128B of the Social Security Act is an intentbased statute that prohibits the knowing and willful
offering, paying, soliciting or receiving of any remuneration
to induce or to reward referrals of items or services
payable by federal health care programs, including
Medicare and Medicaid. [42 U.S.C. 1320a-7b(b)]
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13. ◦ Section 1128B of the Social Security Act prohibits the
offering, paying, soliciting or receiving of any remuneration to
induce or to reward referrals of items or services payable by
federal health care programs, including Medicare and
Medicaid. [42 U.S.C. 1320a-7b(b)]
◦ Covers referrals for any item or service that might be paid for
by Medicare or any other federal healthcare program
◦ Provides for criminal liability to both sides of an illegal
transaction, even where only one purpose of the remuneration
offered, paid, received, etc., is to obtain money in exchange for
referrals or to induce referrals
Page 12

14. 
Section 6402(f) of the Patient Protection and Affordable
Care Act (“PPACA”) added the following two sub-sections to
the Anti-Kickback statute:
◦ Claims for items and services provided to federal health care
program beneficiaries that violate the Anti-Kickback statute
constitute false or fraudulent claims for purposes of the Civil
False Claims Act [42 U.S.C. 1320(a)-7b(g)]
◦ A person does not need actual knowledge of the Anti-Kickback
statute or specific intent to violate the Anti-Kickback statute [42
U.S.C. 1320(a)-7b(h)]
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15. 
[42 CFR 1001.952]
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
Investment interests
Space rental
Equipment rental
Personal service and management contracts
Sale of a practice
Employees
Practitioner recruitment
Obstetrical malpractice insurance subsidies
Investments in group practices
Ambulatory surgical centers
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16. 
First Published October 30, 1998 (63 Fed. Reg. 58399).

Provides guidance on how to conduct investigation, quantify
damages and report.

235 cases resolved between 2008 and April 2013.

Conduct at issue must constitute a potential violation of
law, not merely on error or overpayment.

Primary benefit for providers is a reduction in the damages
multiplier (1.5x instead of 3x).

OIG may consider a provider‟s ability to pay.
Page 15

17. 
The federal physician self-referral prohibition (“Stark Law”)
prohibits a physician from referring Medicare patients for
designated health services (“DHS”) to an entity with which the
physician, or the physician‟s immediate family member, has a
financial relationship, unless the relationship meets the specific
requirements of a Stark exception. [42 U.S.C. 1395nn]

Prohibits the entity from submitting a claim (or causing a claim to
be submitted) to Medicare

“Financial relationships” include both ownership and
compensation relationships.
◦ Strict liability statute – no intent to violate necessary.
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18. 
[42 CFR 411.355]
◦ Clinical laboratory services
◦ Physical therapy, occupational therapy, and outpatient speechlanguage pathology services
◦ Radiology and certain other imaging services
◦ Radiation therapy services and supplies
◦ Durable medical equipment and supplies
◦ Parenteral and enteral nutrients, equipment, and supplies
◦ Prosthetics, orthotics, and prosthetic devices, and supplies
◦ Home health services
◦ Outpatient prescription drugs
◦ Inpatient and outpatient hospital services
Page 17

19. ◦ General exceptions to both ownership and compensation:
[42 CFR 411.355]
 Physician services
 In-office ancillary services
 Academic medical centers
◦ Exceptions related to ownership or investment interests:
[42 CFR
411.352 and 411.356]
 Physician-owned hospitals
 ACA prohibitions
 Grandfathered hospitals and expansion prohibitions
Page 18

20. ◦ Exceptions related to compensation arrangements:
[42 CFR 411.357]










Rental of office space
Rental of equipment
Bona fide employment
Personal service arrangements
Physician recruitment
Isolated transactions
Fair market value compensation
Indirect compensation arrangements
Obstetrical malpractice insurance subsidies
Retention payments in underserved areas
Page 19

21. 
Under prior Self Disclosure Protocol, provider had to
indicate that fraud was involved.

Established under

Full investigation and report required.

Potential for significantly reduced damages.

Significant backlog of applicants. As of March
2013, CMS had received over 250 disclosures, and
settled only 19.
6409 of ACA.
Page 20

22. ◦ CON laws limit expansion of healthcare facilities and serve as
barrier to market competition.
◦ Some state laws provide exemptions for relocations, capital
expenditures subject to threshold, change of ownership, and
acquisitions
◦ Because of restrictions on establishing certain types of
healthcare facilities or offering of certain types of healthcare
services, CON laws may have significant value [See 50 State
Survey of Certificate of Need and Licensure: Nursing
Homes, Assisted Living, Home Health, and Hospice, American
Health Lawyers Association (2009)]
Page 21

23. 
CON / State Licensure Requirement
◦ Varies by state.
◦ May impact timing of closing. Many state licensing agencies require 30-60 day pre-closing
notification requirements. In some states, CON approval may take several months.
◦ Not limited to main business line (i.e., hospitals have myriad licenses for various
functions, departments and pieces of equipment).
◦ May vary by nature of transaction (stock sale v. asset sale).

Medicaid
◦ Varies by state.
◦ May include successor liability.

Medicare
◦ Consistent application regardless of state.
◦ Only applies to a sale of assets. Sale of equity results in a “Change of Information” filing.
◦ Part A Providers and Part B Suppliers treated differently.
◦ Potential for significant interruption in cash flow.
◦ ”Provider Number” issues.
Page 22

24. ◦ State Anti-Kickback laws:
 Applicability to state Medicaid services
 Limitations of violations, duty to report, specific
behavior
 Availability of safe harbor protection
◦ State Stark Laws:
 Applicable to specific payer or unlimited by payer type
 Applicable to broad “practitioner”
◦ State corporate practice of medicine laws
◦ State non-profit and charity laws
Page 23

25. Valuation of Healthcare
Facilities
Page 24

26. 
There are three general approaches for valuing any
business/asset, which are:
◦ Asset (“cost”) Approach
◦ Income Approach
◦ Market Approach
Page 25

27. 
Based on the anticipated cost to replace, replicate, or
recreate the asset.

Generally used for non-operating type entities and/or
businesses that generate no/nominal cash flow.

Net Asset Value Method.
Page 26

28. 
Assets and liabilities are adjusted to their respective current
values, and then the liabilities are subtracted. Result = the
entity‟s net equity (i.e. “net asset”) value.

Often requires third-party appraisals of the tangible assets.

Commonly used for businesses that lack positive cash flow
(e.g., physician practices with no excess cash flow after
subtracting the physicians‟ fair market value compensation.
Page 27

29. 
Based on the entity‟s earning power (i.e., ability to
generate income/cash flow for the owners).

Generally most applicable for operating entities with
positive earnings and growth prospects.

Primary methods include:
◦ Discounted Cash Flow Method
◦ Capitalized Income Method
Page 28

30. 
Provides an indication of value based on the entity‟s ability to
generate positive net cash flow.
◦ Net cash flow = the excess above all necessary operating
costs, working capital requirements, and capital expenditures.
◦ Amount available for distribution to the owner(s).

Cash flows must be projected for a discrete period of time and
then discounted to present value utilizing a risk adjusted discount
rate.

Terminal period cash flows are capitalized.
Page 29

31. 
Uses a single period measure of net cash flow as a proxy
for future periods.

Value determined by capitalizing the single period cash flow
stream with a capitalization rate.
◦ Capitalization rate = Discount rate – long term growth rate
◦ Assumes future cash flows will grow at the long-term growth
rate

Primarily used for mature/low growth businesses.

Often difficult to use for healthcare entities.
Page 30

32. 
Based on market transaction data involving similar
businesses/assets.

Often difficult to use for small/medium sized healthcare
entities due to substantial differences across markets and
other factors.

Primary methods include:
◦ Guideline Public Company (“GPC”) Method
◦ Merger and Acquisition Transaction (“M&A”) Method
Page 31

33. 
Utilizes valuation multiples developed from publicly traded
guideline companies.

Guideline companies must be “sufficiently similar” to the
subject entity but not necessarily the same.

Common multiples include: price/earnings
(P/E), price/sales, price/beds, price/book value, etc.

Generally difficult to use for most small/medium sized
businesses.
Page 32

34. 
Utilizes valuation multiples developed from similar
entities that have been bought/sold.

Requires reliable transaction data involving similar
businesses.

Valuation multiples must be closely correlated to the
transaction price.

Irving Levin & Associates – good resource for
healthcare transaction data.
Page 33

35. IT
DEPENDS…
If the
business…
…has positive
…does not
cash flow, the
have positive
cash flow, the
Income and
NAV method
market
will probably be
approaches will
necessary.
probably be
appropriate.
Page 34

36. 
As a general rule, all applicable valuation methods
should be utilized and the various indications of value
reconciled (i.e. weighted) for purposes of determining
the entity‟s value.

Weightings should depend upon the facts and
circumstances and reliability of the underlying
data/assumptions.
Page 35

37. Red Flags for Healthcare
Businesses in Bankruptcy or
Distress
Page 36

38. 
Excessive compensation/distributions

Excessive debt/leverage

Insufficient cash/working capital

Operating metrics substantially different than peer
group

Outdated facilities/equipment/technology

Declining physician base
Page 37

39. 
Physician Compensation
◦ Should make sense relative to professional productivity
(e.g. collections, wRVUs)
◦ Multiple benchmark sources readily available (e.g.
MGMA)

Executive Compensation
◦ Should be FMV for tax-exempt entities
◦ Multiple benchmark resources available
Page 38

40. 
Accounts Receivable
◦ Generally omitted from most physician practices and other
small healthcare businesses (cash basis of accounting).
◦ Gross vs. net of contractual adjustments?
◦ Collectability.

Medical Supplies
◦ Generally expensed when purchased.
◦ Inventory or estimate based on purchase activity.
Page 39

41. 
Fixed Assets
◦ Often have very little “book value” and/or resale value.
However, they will generally have “in-use” value as long
as still being utilized.
◦ Often requires third party appraisal for large ticket items.
◦ Key issues:
 Do the assets actually exist?
 Are they still being used?
 Condition of the equipment – upgrades and service
agreements
Page 40

42. 
Accounts Payable/Accrued Expenses
◦ Often excluded from the balance sheet.
◦ Can generally be identified through inquiries, analysis of
operating expenses, and subsequent payments.
◦ Prior year retirement plan contribution liability.

Other (Unrecorded) Obligations
◦ Future lease payments (equipment and/or facilities).
◦ Equipment service agreements.
Page 41

43. 
Debt obligations
◦ Third party loans – terms, security, purpose.
◦ Related party loans – debt vs. equity.
◦ Lease agreements.
 Equipment
 Facilities
 FMV lease rates?
Page 42

44. 
Net revenue by type of service (service mix)
◦ Evaluate on per CPT code, encounters, etc. basis.
◦ Volume and reimbursement trends .
◦ Benchmark to Medicare fee schedule for reasonableness.

Net revenue by physician/provider
◦ Assess risk.
◦ Evaluate FMV compensation.
Page 43

45. 
Payer mix
◦ Net revenue per procedure should make sense relative to
the Practice‟s payer mix.

Bell curve analysis
◦ To help identify “up coding” and similar compliance type
problems.
Page 44

46. 
Operating expenses can generally be easily
benchmarked for reasonableness (e.g. MGMA Cost
Survey, etc.).

Trending and ratio analysis to help identify unusual
transactions and possibly non-recurring expenses.

Not unusual to find some “personal” expenses in most
physician practices and other small/closely-held
healthcare businesses
Page 45

47. 
Trending and ratio analysis to help identify unusual
transactions and possibly non-recurring expenses.

Not unusual to find some “personal” expenses in most
physician practices and other small/closely-held
healthcare businesses
Page 46

48. 
Governance
◦ Active and Engaged Board
◦ Recognizing distress early and moving to address
◦ Consider need for outside expertise, replacement management or
CRO
◦ Directors & Officers Insurance Coverage and Indemnity

Communication
◦
◦
◦
◦
◦
Employees/medical staff
Secured lenders
Suppliers/vendors
Payors
Community/elected officials
Page 47

49. 
Restructuring Options
◦ Chapter 11 Reorganization
◦ Chapter 11 Liquidation
◦ Chapter 7/Closure
Page 48

50. 
Sale Transactions
◦ Government consent to transfer of provider number and
inability to cut off recoupment (i.e. overpayments, etc.)

Financing Healthcare Receivables
◦ Medicare/Medicaid A/R may not be collected directly by a
lender



Disposal of patient records
Provider agreement – recoupment
On-going fraud and abuse investigations may not be
stayed
Page 49

51. 

Exclusion from Medicare or other governmental programs
Expanded Administrative Expense Priority Claims
◦ For actual and necessary costs and expenses of closing – healthcare
business and with regard to disposal of patients‟ records or transfer of
patients

Patient Care Ombudsman
◦ 2-part test for appointment of ombudsman
 (i) Whether debtor is a healthcare business
 (ii) Whether totality of circumstances warrants the appointment of an
ombudsman
◦ Duty is to monitor the quality of patient care and to represent the
interests of patients
Page 50

52. Page 51

53. W. James Lloyd, CPA/ABV, ASA, CFE
Principal | Pershing Yoakley & Associates
jlloyd@pyapc.com | (865) 673-0844
Paul G. Jennings, Esq.
Member | Bass, Berry & Sims, PLLC
pjennings@bassberry.com | (615) 742-6267
Michael R. Hill, Esq.
Shareholder | h3gm
Mike.hill@h3gm.com | (615) 251-1046
Page 52