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

Government budget crises have been widely reported and have virtually dominated local and national news coverage in recent months. Funds shortages for Medicaid and other healthcare programs in many states have reached critical stages, all while Medicaid enrollment has risen. Many states have contemplated a variety of mechanisms for limiting spending on state healthcare programs while simultaneously examining revenue-enhancement opportunities for the program through participation and other provider-level fees. Part I of this blog series will discuss the state-level challenges generally. Subsequent parts of this blog series will examine states and industries most hard hit, as well as which sectors may continue to flourish despite state program cuts.

Bloggers Lea Winerman and Vanessa Dennis of PBS’s The Rundown have published a truly fascinating pictorial description of the funding crises, with a state-by-state examination of the situation. According to data presented by Winerman and Dennis, states are looking at a combined $125 billion shortfall in fiscal year 2012 -- which begins in July 2011 for most states – and that states estimate that the Medicaid program will cost them $195 billion in 2012.    That's up 48% from what they spent in 2010 budgets.

In one ongoing state effort, Maine’s Gov. Paul LePage is leading the charge to narrow eligibility requirements for Medicaid, an approach other state leaders are considering in lieu of, or in tangent with, cutting reimbursement. Many industry analysts believe that certain changes proposed in Maine, such as making families of three earning more than $24,645 annually ineligible for the program, are likely to be approved by the federal government, whereas changes such as cutting eligibility for adults without children are not permitted by PPACA (aka the Affordable Care Act).

Unless specific state-level industry protections are implemented, such changes to eligibility and cuts to state Medicaid programs logically impact certain industries most dependant on Medicaid dollars the most, such as the skilled nursing (SNF) industry. For example, Eljay LLC recently released an analysis of Nevada Medicaid payment cuts to SNFs proposed by Gov. Brian Sandoval that provides a bleak outlook for the industry. Eljay LLC used cost report information from 32 of Nevada’s skilled nursing facilities to assess the impact of the loss of $20 per Medicaid patient per day residing in a skilled nursing home. The analysis estimates that the $20 rate reduction would equate to an average loss of almost $500,000 for each facility used in the analysis. More specifically, three facilities would have annual revenue reductions exceeding $1 million and the average shortfall between Medicaid allowable costs and the rates paid would be almost $40 per patient day. The report concludes that the cuts would result in significant facility closures and loss of jobs.

Despite the sobering picture painted by these state-level program analyses, investments in many healthcare and life sciences sectors continue to perform well. It is simply more critical than ever for investors and providers to closely examine their current and potential revenue sources to understand challenges and opportunities coming down the road.

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We have discussed in several prior posts the conversion to the Medicare bundled payment system for dialysis facilities which began January 1, 2011. Dialysis facilities had the option of either opting in fully to the new system starting this year or instead utilizing the four-year phase-in approach. CMS had estimated the number of facilities that would opt in fully at only 43%, when in reality more than 80% elected to opt in.

One significant update in the bundling methodology was announced by CMS earlier this month. Due to the higher-than-expected number of facilities opting in, CMS announced in an interim final rule on April 1^st that it would eliminate the so-called "transition adjustment" imposed on dialysis facilities as part of the new payment methodology, which had required a 3.1% payment reduction during these transition years to achieve budget neutrality.  Not surprisingly, members of the dialysis community are commending CMS for the move. 

Separately, while in many ways it seems as if the dialysis industry has embraced bundling (as evidenced by the unexpectedly high percentage of facilities opting in fully), critics of certain aspects of the payment methodology remain. For example, BioTrends recently published a report detailing concerns of nephrologists with the impact on clinical care resulting from the conversion to bundling. According to the report, and as had been generally expected, bundling has had the greatest impact on the management of renal anemia. The BioTrend reports estimates that approximately one-half of nephrologists perceive the new payment system as negative and feel significant pressure to target lower hemoglobin levels and to limit the measurement of non-essential labs. The hemoglobin level at which nephrologists initiate and hold erythropoietin stimulating agents (ESAs) in dialysis patients has declined compared to both the prior year and prior quarter and nephrologists expect this to ultimately result in fewer hemodialysis patients being treated with ESAs in the next six months, and lower dosages when treated. Additionally, the report indicates changes in the treatment of chronic kidney care (CKD) patients who aren’t yet dialyzing, as well as other changes in their renal practices. 

It is important that dialysis providers and investors considering the dialysis industry understand these shifts in various aspects of bundled reimbursement in order to most effectively structure a program from clinical and administrative standpoints that provides both high quality care and economic viability.  

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            A few weeks ago, McGuireWoods hosted our 8^th Annual Healthcare & Life Sciences Private Equity & Finance Conference along with co-sponsor McGladrey.  The Hon. Bill Frist gave the keynote address.  It was a real treat to have the former Senate Majority Leader at our conference.  With his position as a partner at the private equity firm of Cressey and Co, his role in shaping government policy on healthcare in the Senate and his ongoing practice as a leading heart and lung transplant surgeon, Dr. Frist sits at the vital intersection of government, private industry and the healthcare infrastructure.

            In Dr. Frist’s keynote address, he walked through his assessment of the significant problems we face as a country in rising healthcare costs.  He built his analysis articulating the following sequence:

            (i)      The greatness of America will ultimately be constrained if we are unable to control our growing national debt;    

            (ii)     The primary driver of our national debt is federal entitlements;

            (iii)    The primary driver of the growth in federal entitlement spending is Medicare and Medicaid spending (not social security); and

            (iv)    The primary driver in Medicare and Medicaid spending is runaway healthcare costs.

In short, to Dr. Frist, the continued greatness of America depends in large measure on our ability to bend the cost curve on healthcare services.

            While not everyone would have drawn exactly the same breakdown, the endpoint is not controversial – if we do not control healthcare costs, Medicare and Medicaid will bankrupt the country.  From that stark position, many people have drawn many different conclusions about what we should do to get out of our predicament.  Some advocate changing the healthcare system in general to look more like other countries (seems politically unlikely at this time).  Others seem to call for more modest tinkering reforms (seems unlikely to move the needle enough to change the outcome). As the former Republican Senate Majority Leader, Dr. Frist’s prescription leans much more on private industry innovation.  And that prescription has some definite guidance for the healthcare investor.

            Dr. Frist believes that the innovations that drive toward a better “value‑based” healthcare solution (defined as: clinical results per dollar spent) will be the fertile intersection of economics and policy choices going forward.  He went on to describe what he anticipates as federal and state government policy shifts that will drive policy toward a heightened focus on value-based healthcare. 

            Regardless of your thoughts on the political aspects of Dr. Frist’s perspective, it is difficult to argue with his conclusion that companies offering products and services that improve the clinical outcomes of each dollar spent will be rewarded as we move down the road toward reigning in healthcare costs.  That could mean companies with products or services based on improving community wellness.  It could mean companies delivering structures that change physician incentives toward maintaining the health of a population instead of providing services to sick individuals.  It could mean an information technology solution to specific clinical problems.  It could mean a thousand different things.   The main takeaway from Dr. Frist’s presentation was that the smart healthcare investor should not be looking just for cost savings mechanisms or ways to leverage structural pockets of profitability in the system but rather should be looking for opportunities that promise greater “value-based” healthcare products and services.   Good advice from perhaps the leading voice on healthcare investing. 

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Healthcare and life sciences companies do business in a heated regulatory enforcement environment. Buyers of healthcare and life sciences companies are placing increasing scrutiny on target companies' compliance with healthcare laws and regulations. As such, it is  becoming more and more common for due diligence of potential portfolio companies to uncover actual and potential violations of laws and regulations. 

When a regulatory issue is uncovered, the parties involved in the transaction may have a number of options to jointly consider addressing the issue.  This may include self-disclosing to various regulatory authorities.  Buyers should also be aware of creative structures that can be used to get the deal done while still protecting themselves.  McGuireWoods will present a complimentary webinar on Wednesday, April 20, 2011 from 1-2 p.m. eastern time that will address the following topics:

• Current healthcare and life sciences regulatory enforcement environment.
• Key diligence areas for potential healthcare and life sciences investments.
• Overview of mandatory and voluntary self-disclosure and reporting protocols.
• Case studies examining common due diligence compliance and regulatory issues discovered during due diligence.
• Examination of legal obligations to self-disclose violations of laws to regulatory agencies.
• Addressing compliance issues through representations and warranties and indemnification in acquisition documents.

To sign up for the webinar, click here.  If you have questions, please email Krist or Amber. 

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Yesterday, CMS released the much anticipated proposed regulations regarding the Shared Savings Program contemplated in Section 3022 of the healthcare reform law, PPACA.  The 429-page set of regulations is expected to provide greater clarity re CMS's implementation of HHS's authority to contract with Accountable Care Organizations (ACOs) under shared savings or other payment arrangements.  The proposed rule provides for a 60 day public comment period.  

 In conjunction with the CMS release, yesterday three other federal agencies issued related guidance.  First, the FTC and DOJ jointly issued a Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program.  The joint proposed statement seeks public comment until May 31st regarding the two agencies' guidance, including the new proposed antitrust "safety zone" that would be created.

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