EDGEMONT CAPITAL BLOG
Pump Up Your Pain Management Service
Interventional pain management is important for patients relatively convenient and remarkably profitable for orthopedic and anesthesia providers to offer at the ASCs and office-based facilities where they work, or even in standalone clinics. The service line can also be quite attractive to corporate partners, if you keep the following valuation and legal considerations in mind.
Why pain management is a win-win
Most ORs that host orthopedics can easily slot chronic pain management cases into their schedules (osmag.net/aK7MKq). The treatment of a growing patient need that many primary care physicians are reluctant to handle is particularly attractive to outside investors, as is the long-term nature of the care relationship and, in turn, the recurring revenue of follow-up visits and ancillary services.
For ASCs and office-based facilities, investment, partnership and/or consolidation can help them stay competitive in the surgical marketplace through greater leverage in negotiating insurers’ payment rates, the financial support for investments in technology, the ability to attract and retain surgeons and the flexibility to meet patients’ needs and improve care quality.
In recent years we’ve seen the creation of eight separate interventional pain management platforms intended to combine individual pain management practices and spin off de novo offices. For facility owners and operators, a focus on the following areas can drive investor and acquirer valuations.
- Strong physician relationships. Generally speaking, a pain management group seeing 100 total patients from ten referral sources will receive a higher valuation than one getting 50 patients each from two sources. The reason being, if one of those two referring physicians retires, moves or simply becomes dissatisfied with his patients’ care, the group’s business could be irreparably damaged. Investors want diverse patient streams, and view a diversity of referral sources as a proxy for the market perception of the group, the strength of its marketing efforts and a testament to its reputation.
- Procedure mix. Investors seek pain management groups that treat the whole patient, and are able to craft the treatment solution to the specific patient. Groups that deliver a healthy mix of procedures, both routine (injections) and complex (nerve stimulation), and such ancillary services as physical rehab and prescriptions, are seen as more competitive in the market. However, a conservative use of narcotics as well as exceptional clinical protocols and compliance procedures are must-haves for any investor.
- Investment in the business. A track record of investments in systems — both human and IT — shows a group’s commitment to efficiently delivering high-quality care. Owners that have been willing to take a short-term cash-flow hit in order to invest in compliance systems and employees, clinical and practice management software, and financial reporting packages, demonstrate a long-term vision that excites investors.
- Market presence. Groups that operate out of multiple locations and have strong brand recognition within their markets are considered better candidates for investment or acquisition, especially if they don’t depend entirely on the reputation of any single practitioner. They’re better able to address the needs of a larger referring physician population, and their patients, and achieve better utilization of fixed costs, increasing profitability.
Keeping pain management legal
A pain management group’s compliance with certain legal concerns will determine the ease with which a transaction can be completed at the highest valuation.
- Coding and billing. A heightened level of government scrutiny over pain management businesses means that any adverse coding and billing issues may cast disastrous shadows over a deal’s progress. While a healthy practice should have a regular compliance audit protocol in place, it’s advisable to perform an audit six to 12 months before entering into a transaction with an investor to identify and remedy any potential issues. Even if the investor engages its own auditor, the pain management group’s audit will better prepared it to respond to any identified issues.
- Licensing, regulation and ownership. Many states require that pain management practices, their owners and their investors be licensed or registered with the state. Closing the transaction without the proper licensure in place can harm both the practice and the investor. An investor’s legal team will plan for these requirements, but the practice’s physician-owners should not rely solely on the investor’s counsel. Due diligence is also required with regards to the state’s drug storage, advertising and prescribing regulations.
Some states prohibit the corporate practice of medicine and the splitting of professional fees between physicians and non-licensed individuals or entities. Non-licensed investors in these states typically must invest in a management company that holds the practice’s non-clinical assets and oversees administrative operations in exchange for a management fee. All clinical matters are left to the practice, which continues to be owned by licensed physicians. This complex structure requires assistance from legal advisors in order to protect the physician from liability.
- Self-referral. If the practice accepts government insurance programs, it’s important to make sure that the practice is in compliance with the federal Stark Law and Anti-Kickback Statutes. Most practices provide such ancillary services as lab work, imaging and infusion, all “designated health services” under the Stark Law. Since the physicians who’ll refer patients for these services will likely have financial relationships to the practice, verify that the employment exception or the group practice exception to the Stark Law applies. Otherwise, these referrals may violate the law and would not be reimbursable. Since many states have their own versions of the federal self-referral laws, conducting legal diligence to confirm compliance prior to a transaction will make the process go much more smoothly.
Ms. Jester (firstname.lastname@example.org) is a partner in the healthcare law department at Waller Lansden Dortch & Davis in Austin, Texas. Mr. Mitchell (email@example.com) is a managing director and partner at Edgemont Capital, a healthcare investment banking firm in New York City.