The Health Care Investor : Healthcare Lawyers & Attorneys for Life Science Companies & Investors

Analysis by Altarum Institute’s Center for Studying Health Spending indicates that health spending in January 2011 grew by 4.4% compared to January 2011, marking the 28^th consecutive month of historically low growth. This healthcare spending increase to $2.64 trillion accounted for 17.7% of GDP.   Noteably, in the prior year, separate National Health Expenditure Accounts (NHEA) data, indicates that the percentage of GDP spent on healthcare in 2009 had jumped to 17.3% from 16.2% in 2008, the largest one-year increase since 1960. At the current rate of growth, healthcare costs are predicted to nearly double to $4.5 trillion in 2019.  At that point, NHEA data indicates healthcare costs will account for 19.3%, or roughly one-fifth, of GDP.

Altarum Institute is a nonprofit health systems research and consulting organization.   The NHEA are the official measurements of US expenditures for healthcare goods and services published by CMS and since 1960 have been the official estimates of total national healthcare spending.  NHEA data are presented by type of service, sources of funding and sponsors. Through its Office of the Actuary, CMS releases each year projections of healthcare spending for those same categories as are measured in the NHEA.  

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The physician joint venture model is popular in a variety of healthcare services including ambulatory surgery centers, cardiac cath labs, dialysis and radiation oncology. Physician joint ventures offer two key benefits to growing companies: (1) a ready source of capital to fuel expansion and (2) the investment by physicians creates a strong bond with the company and engagement with the company going forward. Buyers are attracted to these segments for their cash flow but are sometimes deterred by the idea of having minority or even majority joint venture partners at each operating facility.  There have been several recent announced and closed transactions involving physician joint ventures including the acquistion of National Specialty Hospitals by Irving Place Capital and the acquisition of NovaMed by an affiliate of HIG. 

The following are several considerations that should be made by the buyer (and considered in advance by any seller) for a joint venture structured management company:

1.         Joint Venture Physician Approvals. A close examination of the joint venture operating agreements or governing documents will be required to determine if the transaction will need approval by physician joint venture partners. If approval is needed, the parties will need to examine an approach to obtain such approval.

2.         Physician Joint Venture Tag-Along Rights. Physician joint venture partners may have tag-along rights to participate in an acquisition transaction. The buyer should examine whether the tag-along rights enable the physician joint venture partners to sell all of their shares or just a portion. This also may raise consideration allocation issues among the various operating entities. 

3.         Lending Issues. In the joint venture context a lender may not have the ability to take a security interest in all of the assets of each joint venture entity. Furthermore, there may be a restriction on the management company pledging its equity interest in the joint ventures to a lender. The buyer should review closely these issues to ensure that sufficient collateral will be available to support a cash flow loan. 

4.         Management Agreements. Joint venture structures commonly also include a management agreement with each facility that creates a stream of cash flow for the management company. These agreements should be reviewed to confirm that a transaction will not disrupt that cash flow and that assignability can be achieved in the context of a transaction.

These issues are just several of the important items that should be addressed early by an acquirer of a joint venture structured health services company. These items should also be considered by any seller well in advance of a transaction to facilitate the presentation of a smooth transaction to the buyer.

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While the sell-side deal market for healthcare companies is hot, deals are taking longer to close and the market is seeing more “busted” auctions and transactions. Investors see the potential of strong returns from investment in healthcare service companies, but are sensitive to potential compliance issues, corporate structures and post-closing exposure.

Join McGuireWoods on Wednesday, March 16 for an interactive discussion on key deal structure and preparation steps that private equity funds and companies can take to successfully realize value from healthcare portfolio companies.  Geoff Cockrell, Amber Walsh and Krist Werling will address the following key issues for sellers of healthcare companies:

• Overview of key areas of recent government enforcement including Stark Act, Anti-kickback Statute and HIPAA.
• Steps to mitigate billing and coding risks.
• Demonstrating effective compliance programs to mitigate buyers’ concerns about compliance issues and patient privacy issues.
• Conducting an effective pre-sale contract review to identify and manage risks during the transaction process.
• Pre-market deal structuring considerations for physician practice management and other deals.

Register for this complimentary webinar by clicking here. 

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The Health Insurance Portability and Accountability Act of 1996 (HIPAA) includes two main components that are administered by the Office of Civil Rights (OCR):  the HIPAA Privacy Rule, which protects the privacy of individually identifiable health information (Protected Health Information, or PHI) and the HIPAA Security Rule, which sets national standards for the security of PHI.  This post discusses some significant recent enforcement efforts and what the increased activity means for healthcare providers and investors.

The Changing Landscape in HIPAA Enforcement Efforts

The healthcare industry received a clear message from HHS in late February with the OCR's announcement of two major enforcement actions.  First, the OCR announced on February 22nd that it had imposed a civil money penalty (CMP) of $4.3 million against Cignet Health of Prince George’s County, MD.  Then two days later, OCR announced that General Hospital Corporation and Massachusetts General Physicians Organization, Inc. (Mass General) had agreed to pay $1 million to settle potential violations of the HIPAA Privacy Rule.

This is the first time that the OCR has publicized its enforcement actions involving heavy monetary payments.  Until these CMPs, the publicized enforcement activity for monetary recoveries from covered entities under HIPAA/HITECH has been by attorneys general in Connecticut (in a $250,000 settlement with Health Net, Inc.), Indiana (in a $300,000 suit against Wellpoint) and Vermont (in a settlement with Health Net, Inc., and Health Net of the Northeast, Inc.).

McGuireWoods attorneys Kim Kannensohn, Holly Carnell and Amita Sanghvi have published details of these recent OCR enforcement actions.  Essentially, OCR determined that Cignet had violated the rights of 41 patients by denying them access to their medical records in violation of the general requirement that a covered entity provide a patient with a copy of the patient’s medical records within 30 days of the patient’s request.  In addition, OCR also penalized Cignet for its failure to cooperate with OCR’s investigation on a continuing daily basis from March 17, 2009 to April 7, 2010.  The CMP of $4.3 million is comprised of a CMP of $1.3 million for Cignet’s violations of patient privacy rights and a CMP of $3 million for Cignet’s failure to cooperate.

The Mass General settlement stems from an extensive investigation by OCR relating to a 2009 incident in which a hospital employee misplaced documents containing protected health information, including information of patients with HIV/AIDS.  While commuting to work on the subway, the employee had allegedly removed documents containing PHI from her bag and placed them on the seat beside her and upon exiting the train left the documents on the subway.  The documents containing the name, date of birth, medical record number, health insurer and policy number, diagnosis, and name of provider for 66 patients and the practice’s daily office schedules for three days containing the names and medical record numbers of 192 patients. The documents were not in an envelope, were bound with a rubber band and were never recovered.

What does this Mean for Healthcare & Medical Device Investors?

The message from OCR through these enforcement actions is clear.   HIPAA must be taken seriously and failure to adhere to the requirements can mean heavy penalties and bad press.   This is true not only for "covered entities" but for the multitude of vendors and service providers deemed "business associates" under HIPAA, which entities also have obligations and potential liability under HIPAA/HITECH.  It is now more critical than ever for covered entities and business associates, as well as healthcare investors examining a potential investment opportunity, to review the companies' HIPAA compliance efforts.  Diligence on HIPAA compliance for the vast majority of companies involved in the US healthcare system is a vital element when considering investment.  Reviewing the organization’s plan documents, training programs, security systems and preparedness for a HIPAA audit are among the most important elements to evaluate, and investors would be well served to include such review in their diligence process.

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This past Thursday, March 3^rd, US District Court Judge Roger Vinson stayed implementation of his January 31^st ruling declaring the “individual mandate” of the Patient Protection and Affordable Care Act (PPACA) unconstitutional and the law as a whole therefore void. The stay came in response to the federal government's motion on February 17^th seeking clarification as to whether his ruling relieves the original parties to the case from obligations under PPACA while his ruling is on appeal.  In order for the stay to remain in effect during the appeal process, the federal government must, within seven days, file an appeal seeking an expedited appellate review with the Eleventh Circuit or the Supreme Court.

In his order, Judge Vinson pointed out that he thought his original ruling was as plain and unambiguous as it could be and chastised the government for being slow to respond to the January 31^st ruling and even then only filing a belated motion to clarify.   Despite the admonishment, after applying a four-factor test to determine whether to grant a stay pending appeal, Judge Vinson found the factors weighed in favor of granting the stay.

In his ruling, Judge Vinson urged that the public interest lies in a swift resolution of the issue, writing that “[t]he sooner this issue is finally decided by the Supreme Court, the better off the entire nation will be.”

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