Small business options are limited.
By Jerome Connolly, PT, CAE
In a final rule1 on health insurance market standards issued May 16, the Centers for Medicare and Medicaid Services (CMS) adopted a wide range of provisions affecting insurance coverage under the Affordable Care Act (ACA), including small business plans, standards for navigators who help consumers find coverage under the ACA, drug coverage determinations, insurer quality rating information, and efforts to stabilize premiums. The rule took effect in July and will be in place when the second round of ACA open enrollment commences November 15.
According to a CMS fact sheet2, the rule standardizes notices health insurers are required to provide to consumers when they make coverage changes when policies are renewed or discontinued. In the area of drug coverage, the rule also requires health plans to make coverage determinations within 24 hours on medications that are not covered for enrollees with conditions that jeopardize their life, health, or ability to regain maximum function, or when enrollees undergo treatment with drugs not covered by the plan.
CMS said the rule aligns the start of annual employer election periods in federally facilitated Small Business Health Options Program (SHOP) Marketplaces for plan years beginning in 2015, with the start of open enrollment in the individual market exchange for the 2015 benefit year. The rule also lists the conditions under which a SHOP would be permitted to not implement “employee choice” in plans, if their state’s insurance commissioner believes it is in the best interest of consumers in that state. Employee choice provides the choice of multiple insurers in a small business marketplace.
Insurance commissioners in 18 states (Alabama, Alaska, Arizona, Delaware, Illinois, Kansas, Louisiana, Maine, Michigan, Montana, New Hampshire, New Jersey, North Carolina, Oklahoma, Pennsylvania, South Carolina, South Dakota, and West Virginia) have made that determination, claiming that the number of people in the small group market opting for coverage through the ACA is so small that allowing employees to choose from a variety of plans will lead to rate spikes because risk will be too uneven.3
The National Federation of Independent Business (NFIB), which opposed the ACA, criticized the delay of the “employee choice” option in the law. “The SHOPs should offer even more arrangements than employee choice and basic employer choice (the only option currently available), including defined contribution health plans,” says NFIB.4
Even the Small Business Majority which supports the law, expressed disappointment in that provision saying, “The finalization of a rule today that would allow states to potentially delay a critical requirement that the small business health insurance marketplaces allow employees to choose among multiple insurance carriers is incredibly disappointing for small business owners and their workers.”
NFIB also urged CMS to publish actual 2015 rates as early as possible prior to open enrollment so small business owners can plan for the upcoming year.
The final rule also specifies a list of state requirements that would conflict with federal standards for navigators and assisters who help people get enrolled under the ACA. It also requires insurers to submit data to calculate quality ratings, which marketplaces must display starting in 2016.
The regulation includes provisions beneficial to insurance plans, such as changes to the risk corridors program intended to mitigate uncertainty associated with enrollee risk profile, and adjustments to the medical loss ratio (MLR) calculation for policy issuers that provided “transitional” continuation of plans that do not comply with the ACA. Under the MLR requirement in the statute, insurers must spend at least 80 percent of premiums on claims or quality improvements, or refund the difference to consumers. The change will generally result in a reduction in rebate payments for those issuers who would have owed rebates in the absence of the adjustment. (Total consumer benefits from the first two years of the MLR provision amounted to more than $3 billion, according to a Commonwealth Fund report released May 12.5)
A spokesperson for America’s Health Insurance Plans (AHIP) applauded the rule, saying these temporary risk mitigation programs will help ensure market stability and affordability for consumers.6 In its comments on the proposed rule earlier in the year, AHIP had asked for more relief than was included in the final rule.
In addition to the final rule, the CMS also posted answers to Frequently Asked Questions7 May 16 regarding a range of other ACA requirements, including “essential health benefits” that insurers must cover, the actuarial value of plans, mental health parity, guaranteed availability, minimum essential coverage, and transitional policy extensions of plans that do not comply with the ACA for employers with 51–100 employees and for individuals.
This FAQ document emphasizes that health plans must provide coverage of the essential health benefit package, and it is a violation of the law if the plan’s benefit design—or the implementation of its benefit design—discriminates based on an individual’s age, expected length of life, present or predicted disability, degree of medical dependency, quality of life, or other health condition.
Moreover, insurers may not impose benefit-specific waiting periods, except in covering pediatric orthodontia, in which case any waiting periods must be reasonable. This clarification refers to a waiting period that is applied uniformly to a specific benefit within the plan design and not reasonable medical management.8
The FAQ also states that insurers may file plans that they only market through the Exchange to qualified individuals or the SHOP Marketplace, provided the marketing does not violate applicable discrimination standards, and otherwise complies with applicable federal and state laws and regulations. However, such plans would be considered to be offered in the individual or group market, respectively, in the state. If, despite the fact that the policy issuer has not advertised the plan other than through the Marketplace, an individual or employer (as applicable) seeks to enroll in the plan directly with the insurer, the health plan may instruct the individual or employer to complete enrollment through the Marketplace. But if the individual or employer wishes to enroll directly with the plan, the insurer must accept every individual or employer in the state that applies for such coverage.
While small businesses with fewer than 50 employees are not mandated to buy health insurance in 2015, the SHOP exchange is designed and available for employers with up to 50 employees to offer group health coverage. However, some features of the federal and state SHOPs were delayed late last year as officials shifted focus to the bungled individual marketplace rollout.9
Small employers with generally up to 50 full-time equivalent employees (FTEs) have access to the SHOP Marketplace, which is open for enrollment year-round. It is estimated that small businesses pay on average 18 percent more than larger businesses for health insurance. SHOP is intended to offer small employers increased purchasing power to obtain a better choice of high-quality coverage at a lower cost by pooling their risk. To purchase coverage in SHOP, eligible employers must have at least one common law employee, offer SHOP coverage to all of their full-time employees (FTEs), and meet minimum participation rates.10
A tax credit is available to help small employers afford the cost of providing health care coverage for their employees but it is specifically targeted for those employers with low- and moderate-income workers. Employers with fewer than 25 FTEs, paying average annual wages below $50,000, and that contribute 50 percent or more toward employees’ self-only premiums may qualify for a small-business tax credit of up to 50 percent to help offset the costs of insurance. In 2014, this tax credit became available to qualified small employers that participate in the SHOP Marketplace. The 50 percent tax credit will continue through 2015, after which the program is scheduled to end. On a per-employee basis, the amount must be under $50,000. In fact, if it is under $25,000, the full credit is awarded—but then it phases out until the average reaches $50,000. If the credit exceeds the tax liability for the year, it can be carried back one year or forward for 20 years.11
Beginning this year, the ACA increased the incentives that can be offered to employees, from 20 percent to 30 percent of the total cost of coverage for participation in “health-contingent” wellness programs that require participation in a physical activity, for example, or meeting certain health standards, such as a desired cholesterol or blood sugar level or body mass. To incentivize smoking cessation, smokers can be charged premiums up to 50 percent higher than those for nonsmokers, and federal grants are available to help small businesses start a wellness program.12
A variety of factors, including those described above, has depressed small business enrollment in the first year, and it is likely to remain suppressed for the near term. The Obama administration has allowed small business employers to renew their existing plans through 2016 even if they do not meet ACA coverage standards, and many will do so because of uncertainty with the exchanges. Moreover, as mentioned earlier, the tax credit for businesses with fewer than 25 employees has a limited reach and has been difficult to navigate.
Employee benefits brokers in the 18 states declining to implement the employee choice option will have just one plan to present to employees of small business clients through the ACA’s small business Exchanges, thus leaving in place a distorted, non-uniform system. This will likely extend the time for determining whether the commercial exchanges are making rates more affordable for small businesses.
Once the delays are ended, the renewals run out, and every state is offering employee choice in an online exchange, it is likely enrollment will steadily improve. But without the employee choice feature, there’s little reason at present for a small business to go through the Exchange instead of the brokers whom they have traditionally used.13
Jerome Connolly, PT, CAE, is a registered federal lobbyist whose firm Connolly Strategies & Initiatives has been retained by PPS. A physical therapist by training, he is a former private practitioner who throughout his career has served in leadership roles of PPS and APTA. Connolly also served as APTA’s Senior Vice President for Health Policy from 1995 – 2001.
1. ACA Exchange and Insurance Market Standards for 2015 and Beyond, Final Rule, Centers for Medicare and Medicaid Services, Department of HHS, http://op.bna.com/hl.nsf/id/bbrk-9k6sfm/$File/finalexchMay2014.pdf. Accessed July 2014.
2. Exchange and Insurance Market Standards for 2015 and Beyond, Center for Consumer Information & Insurance Oversight, www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/marketstandards-5-16-2014.html. Accessed July 1, 2014.
3.4. Kardish C, Small Business Participation in Health Exchanges Likely to Remain Weak, Governing. Posted July 1, 2014. Website www.governing.com/topics/health-human-services/gov-small-business-health-exchanges-enrollment.html. Accessed July 2014.
5. The Federal Medical Loss Ratio Rule: Implications for Consumers in Year 2, The Commonwealth Fund, May 12, 2014.
6. Hansard S, CMS Releases Final 2015 Health Insurance Exchange Rule, BNA’s Health Insurance Report, May 21, 2014.
7. Frequently Asked Questions on Health Insurance Market Reforms and Marketplace Standards, Center for Consumer Information & Insurance Oversight, www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/downloads/Final-Master-FAQs-5-16-14.pdf, posted May 16, 2014. Accessed July 2014.
8. Hansard S, CMS Releases Final 2015 Health Insurance Exchange Rule, BNA’s Health Insurance Report, May 21, 2014.
9. Klein K, Answers to More Small Businesses Questions About Obamacare, Bloomberg Businessweek, June 30, 2014.
10. Key Provisions Under the Affordable Care Act for Employers with Fewer Than 25 Employees, Small Business Administration. Website: www.sba.gov/content/employers-with-fewer-25-employees. Accessed July 18, 2014.
11. Taulli T, Small Business Tax Credits For Obamacare?, Forbes, March 8, 2014.
12. Bluestein A, Your Obamacare To Do List: Launch a Wellness Program, Inc. Magazine. Website: www.inc.com/magazine/201312/adam-bluestein/obamacare-to-do-list-create-a-wellness-plan.html. Accessed July 18, 2014.
13. Bronson C, Obamacare Exchanges to Offer Just One Plan for Many Small Employers, Insurance Business America, June 12, 2014.
By Franklin J. Rooks Jr, PT, MBA, Esq
At some point, practice owners inevitably think about what is next after private practice and start planning for retirement. It also may make sense for the private practice owner to think about pre-retirement plan- ning. While the private practice owner may not be ready to retire, he or she may want to consider options for exiting the ownership of the practice while continuing to work for the practice. In this regard, the owner is not retiring, but instead monetizes the practice by “taking some chips off the table.” It is pre-retirement in the sense that the owner continues to work—albeit under new ownership—and is able to invest sale proceeds to further achieve future retirement financial goals. The private practice must be a saleable asset—but is it? What do you have to sell? Some practice owners have been met with a rude awakening when they realize that they do not have anything to sell. That is, what they have built is not of value to any would-be buyer. As many practitioners have come to see, there is a tremendous distinction in the creation of a job versus the creation of a business.
Many private practitioners have outstanding clinical expertise and provide exceptional care, but that alone does not create a business. Many practitioners have been able to set up shop, design their own hours, control their vacation times, answer to themselves, and practice physical therapy the way they want. They are their own boss. Unless there is a significant earnings number created in the process, the
private practitioner has succeeded in creating a job for him/ herself. Instead of working for a hospital or other entity, the practitioner has chosen to work for him/herself. This is laud- able, but not worthy of any financial consideration as part of any value-added transaction. Acquirers are not purchasing jobs, they are purchasing businesses.
Who’s Buying What
The physical therapy market has been active recently with a number of mergers and acquisitions taking place. Some of the acquisitions are strategic; others are financial. In a strategic acquisition, an entity that is already entrenched in the physical therapy space purchases a physical therapy practice that fits into its overall growth plan, making it a “strategic” fit. The purchaser is considered to be a “strategic buyer.” In some cases, a strategic buyer is a competitor of the target company. Other times, the strategic buyer is not a competitor in the target’s geographic marketplace, but wants to enter the region. The overall goal of a strategic buyer is to make a synergistic acquisition that fits within the acquirer’s growth strategy. Although, a financial buyer is generally one without any investments in the industry in which the target company is situated. A financial buyer looks at the metrics of the company—cash flow, return on equity, management sta- tistics—with the goal of increasing the financial performance of the target company.
These buyers typically determine the target company’s earnings, termed EBITDA. “EBITDA” is the acronym for earnings before interest, taxes, depreciation, and amorti- zation. This is a standardized measure used by buyers to assess the target company’s financial performance. The cal- culation subtracts the company’s revenue from its expenses, but the expense calculation excludes taxes, interest, depreci- ation, and amortization. The measure is intended to insulate the target company’s value from accounting treatments and accounting elections it may have made. EBITDA may be supplemented by certain add-backs, which serve to increase the EBITDA. Many times, add-backs are those expenses that are not required to run the company or those expenses that would not exist but for the current owners operation of the company. Examples may be the add-back of the owner’s automobile expenses to EBITDA, adding back any excess compensation or even the cost of tickets for sporting events that are not exclusively used for the business. These add-backs result in a higher EBITDA. Just as there may be add-backs that favor the seller, there can also be negative adjustments to EBITDA. For example, if the target company is under-insured and obtaining proper insurance results in a material expense, the application of that expense could lower EBITDA. Making positive and negative changes to the practice’s earnings produces an adjusted EBITDA.
Once the adjusted EBITDA is determined, the target company value is determined by using a multiplier. The multiple of EBITDA provides the enterprise value. For example, if the company has EBITDA of $750,000, and the multiplier is 4.5, the enterprise value is $3,375,000. Many factors influence the multiple. The buyer’s risk and the industry’s ability to grow are predominant factors. There are also “deal specific” factors that may come into play. Strate- gic buyers may pay a higher multiple than financial buyers. With respect to physical therapy, buyers may consider the following: How many clinical locations does the target company have? Does the target company have locations in more than one state? Is the EBITDA above or below a million dollars? This is not an exhaustive list. However, at the end of the day, you need to have EBITDA. EBITDA is typically the basis of any valuation.
Is There Enough EBITDA?
Simply put, EBITDA is what is left over after all expenses. For the solo practitioner, if all of the practice’s earnings are paid out in salary, an adjustment is made based on what the market compensation is for a person functioning at owner’s capacity. That is, if the solo practitioner pays him/herself $200,000 and the market price to replace that individual is $150,000, a rough estimate of the EBITDA is around $50,000. An EBITDA multiple of 5.0 would translate into an enterprise value of $250,000. Upon any sale, these proceeds would flow to the seller net of any debt that the practice has. If the prac- tice had $50,000 of debt, the proceeds to the seller would be $200,000. If a broker was used in the sale, there would likely be transaction costs. And, of course, the sale would be subject to federal and state tax. On the other side of the equation, there is a tipping point for which the sale does or does not make economic sense. Buyers in all transactions conduct due diligence on the entity that may be purchased. Getting the deal across the finish line requires accountants who assess the quality of earnings and lawyers who draft transaction documents and finalize the sale. All of this involves expense. The value proposition must be such that the deal makes eco- nomic sense. EBITDA of $50,000 may be too small. However, there is a point—which is buyer-specific—that determines whether or not to entertain the transaction.
Think about your exit strategy. Take a critical look at your business. As you plan for retirement at some point in the future, does your practice represent an asset that you can monetize? Does your perceived value of your practice mesh with realities of the market? What have you created? Your EBITDA is a great indicator of whether you have created a job for yourself or whether you have created a business.
Franklin J. Rooks Jr, PT, MBA, Esq, is a physical therapist and practicing attorney in Philadelphia. He was a founding partner of PRO Physical Therapy in Wilmington, Delaware. He can be contacted at firstname.lastname@example.org.
By C. Jason Richardson, PT, DPT, OCS, COMT
Early in my career, I often viewed our competition as the “enemy” and believed that engaging them in collegial talks would conflict with our respective strategic plans or that the discussions would lead to revealing our “secret sauce.” Many of you may hold a similar view. Seeing the competition as the “enemy” means leaders with similar day-to-day challenges have little to no contact or collaboration with each other. Ultimately, this view will significantly limit your ability to evolve your business.
While certain strategic components of your business should remain under wraps, non competitive communication can lead to operational improvements, best practices, and personal growth.
Recently, I met a large competitor when I traveled through their town. My initial conversation with this executive was over the phone, and I followed up our conversation with a calendar invitation. I told him I wanted to discuss global changes related to regulatory and payment trends, general operational structure, and how they were leveraging technology to enhance patient experiences within their physical therapy practice—as well as put a face with the name.
While this practice executive was a bit guarded early in our meeting, these walls quickly came down once I demonstrated a willingness to discuss my perspective. During the meeting, we established a rapport and by its conclusion, we had generated new ideas on operational tasks that we each could implement to enhance our practices. To date, we both periodically speak with one another and have committed to catching up in person a few times a year.
In conclusion, we need to be open to engage with our competitors and meet with them periodically. Not to exchange business secrets, but to learn from one another and collaborate on issues that mutually align. Taking this initiative will enhance your knowledge, expand your point of view, and inspire new ideas. You may even make a new friend.
C. Jason Richardson, PT, DPT, OCS, COMT, is a PPS member and the vice president of clinical operations for Results Physiotherapy in Franklin, Tennessee. He can be reached at email@example.com.
Share your passion and celebrate your business during National Physical Therapy Month
By Don Levine, PT, DPT, FAFS
As we gear up for October, the Marketing and Public Relations Committee urges you to celebrate your profession by sharing your passion! October is National Physical Therapy Month, and we champion you to make it your own and share your passion with your community. Ask yourself: Why did you open your doors? What makes your motor run? What is your purpose? Share these answers with your clients and community!
“To be successful, the first thing to do is fall in love with your work.”1 While few may love the ever-increasing administrative burdens, we cannot deny that we have one of the most rewarding professions. Learning the skills necessary to help alleviate patients’ pain and improve their function should humble us every day. It is truly a gift to help those in our community live better lives. Now, let’s celebrate and educate!
How you share your expertise is important—but first you must decide what you would like to share. Some companies have already developed their mission statement, and this may be a great tool from which to build your message. If you have a management team, bring this group together and discuss the message you want your community to receive next month. What makes your practice valuable to the members of your community, and what most excites you and your staff about your profession? Narrow the information down to one or two concepts and then hone your message. In a smaller practice, bring key staff together to perform this task—get input from team members. Sharing their passions will heighten their desire to be a part of the process.
Sharing is caring!
Getting the word out can be done in many different ways:
- Website: List information on your website regarding any events your practice may be holding.
- Facebook: Easy and free. Not only can you post events, but you can take advantage of posting pictures that demonstrate your passion and your involvement in your community. Engage your audience so it is not just a one-way street.
- E-newsletter: This is a great way to get your information out to your fan-base!
- Media placements: Placing ads in newspapers and in magazines or on radio and on television can be expensive, so it is up to each practice to decide if the cost is worth the exposure. Do not forget to seek out free press opportunities when you invite groups to cover your event!
- Referral sources: Dropping off information to your referral sources can be more effective than mailing. Think outside the box for this group. Medical doctors easily come to mind, but remember other targets such as massage therapists, personal trainers, nurse case managers, and area coaches, too.
What’s a physical therapist to do?
The ideas should come from your practice to make it your own. Some ideas may be as simple as hosting an event to celebrate your patients or referral sources, and other events may be as elaborate as developing a road race or an obstacle course challenge. Holding a legislative open house provides lots of exposure (featured in Impact September 2013 issue). Hosting your local and state representatives is a sure way to bring in the press, so think about combining this event with something to really set your practice apart.
Physical therapists understand the health care issues that our society faces today. We cannot take this knowledge for granted, but instead should spread our knowledge and understanding to our communities. Every day that our clients place their wellness in our hands is truly a gift.
As Theodore Roosevelt stated, “Far and away the best prize that life offers is the chance to work hard at work worth doing.”2 Celebrate your profession and your passion!
Don Levine, PT, DPT, FAFS, is chair of the marketing and PR committee and co- owner of Olympic Physical Therapy with five locations in Rhode Island. He can be reached at firstname.lastname@example.org.
1. www.oneweekjob.com/blog/2010/11/09/the-50-best-work-and-passion-quotes-of-all-time/ Accessed July 2014.
2. http://idealistcareers.org/12-quotes-that-will-encourage-you-to-follow-your-passion/ Accessed July 2014.