Healthcare Reimbursement, Technology & Regulatory Issues 2009

1. Healthcare Reimbursement, Technology & Regulatory Issues 2009 Edward G. Detwiler, ASA Accredited Senior Appraiser American Society of Appraisers

2. Medicare Reimbursement Policies Deficit Reduction Act (DRA) of 2005 • DRA, was signed into law by President Bush in February 2006 and took effect January 1, 2007.

3. DRA 2005 In November 2005, CMS published final regulations, which would implement the same multi-procedure methodology rate reduction proposed for hospital outpatient services. CMS proposed phasing this rate reduction in over two years, 25% in 2006, and another 25% in 2007.

4. Impact on Equipment Values • Many imaging facilities operate near break-even, with some modalities, such as MRI, PET/CT and CT making a profit, while others such as Ultrasound, Mammography and Radiology are marginal or experience losses.

5. Impact on Equipment Values Cuts in reimbursements have caused some to go under as profits become negative.

6. Impact on Equipment Values Remember OBRA 1993? • Anti-Kickback and Self-Referral legislation referred to as “Stark-II” put a large number of imaging and therapy centers at risk or out of business. • From one of my presentations in 1993…

7. The Hillary Factor - 1993 The number of MRI procedures dropped by 30% and the price per procedure dropped by up to 50% overnight!

8. The Hillary Factor - 1993 Prices for new equipment plummeted, sometimes by 50% or more. Values for existing equipment decreased proportionally, as there was a glut of equipment that was sitting and out of use due to violations of Stark-II.

9. Definitions of Value Concepts The most over-used term is “Fair Market Value”

10. Orderly Liquidation Value This value is frequently referred to as the "wholesale value."

11. Residual Value This value should fall somewhere between Fair Market Value In Place and In Use and Orderly Liquidation Value

12. Residual Values • Factors affecting residual values include: • New equipment selling prices • If prices for new replacement equipment decrease, the maximum Fair Market Value will decrease • Likewise, the maximum Orderly Liquidation Value will decrease • Residual Value will follow

13. Residual Values • Used equipment selling prices • If used equipment selling prices decrease, both Fair Market Value and Orderly Liquidation Value will decrease

14. Technology • Forecasting Values based on Technology, known in appraisal terms as “Technological Obsolescence”

15. Technology • Forecasting Residual Values PET/CT vs. PET PET Values decreased unexpectedly with the introduction of PET/CT

16. Technology • Forecasting Residual Values PACS, EMR, HlPPA Automated Chemistry Robotic Surgery DNA - Clean Room Labs

17. Regulatory Environment • Forecasting Values based on changes in Regulatory Environment • Known in appraisal terms as “Economic Obsolescence”

18. Regulatory Environment FASB and IASB • Agree that Operating Lease will disappear • Lessee will see all leases as Capital Leases…no more “Off Balance-Sheet” financing

19. Regulatory Environment • Lessee had Rent Expense, will now have combination of Depreciation and Interest • Economic Structure of Leases will continue as present • FASB 13 will go away

20. Regulatory Environment • Grandfather Clause??? • Possibility that existing Operating Leases will continue until expiration/termination • No Final Ruling

21. The Future