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

We have discussed in prior posts the unique regulatory enforcement climate that providers and investors currently find themselves.   It is critical that anyone contemplating investment in a healthcare business not only understand the regulatory risks and pressures of that industry but carefully review the target company’s compliance protocols for dealing with those challenges in a proactive way.   And the Patient Protection and Affordable Care Act (aka PPACA, ACA or healthcare reform) makes having an appropriately structured compliance plan even more essential than ever.

Under PPACA, certain healthcare providers, as a condition to participation in Medicare, must have in place a compliance plan that meets the requirements to be laid out by the Secretary of HHS. The PPACA lists several detailed requirements for the compliance plans of skilled nursing facilities (SNFs), likely due to the industry’s historical scrutiny and highly publicized investigations from the SNF industry in the past few years. SNFs must implement these compliance plans pursuant to the requirements of Section 6102 of the PPACA within 36 months following passage of the PPACA, and regulations must be issued by the Secretary of HHS for SNFs with additional guidelines no later than two years following passage of the PPACA on March 23, 2010. 

The Secretary of HHS is also mandated with determining which additional provider types must have compliance plans in place and what those plans must entail. HHS has informally indicated that it would likely roll out the compliance plan requirements on an industry-by-industry basis.  Although HHS has been laden down with rule-making obligations resulting from PPACA in the past 18 months,  the agency has indicated that the requirements for most industries will closely follow the key components of the DHHS Office of Inspector General model compliance plan published for healthcare providers in 1997, which has subsequently been updated.   These core elements for a compliance program are as follows:

 i.            Compliance standards and procedures must be adopted and followed.

 ii.           Specific individuals with authority and sufficient resources must be assigned to oversee compliance.

iii.          The organization must exercise due care to ensure that the above authority is not delegated to an individual with a propensity to engage in PPACA criminal, civil and administrative violations.

iv.          The organization must take steps to educate its employees and agents of the compliance program.

v.           The organization must take reasonable steps to achieve compliance with its standards.

vi.          The standards and procedures must be consistently enforced.

vii.         If an offense is detected, the organization must respond appropriately and prevent similar offenses.

viii.        The organization must periodically reassess the compliance programs and make changes necessary to reflect changes within the organization.

When reviewing a company’s compliance plan, it is essential that the provider and investor not only ensure that there is a plan in place but also that the plan is well-tailored for that company’s key risk management needs.  To be truly effective the plan must be specific to that company’s industry and risks, with associated useful training and response tools such that the plan can really be the guide for a full compliance program.   Both providers and investors should ask, how is the plan truly used and made a part of daily operations?  Understanding a company’s compliance culture can help everyone assess the risks it may be taking with investment in the company and what challenges, if any, may be on the horizon for the company.  

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Join us for our annual conference addressing key legal and business issues facing medical device, durable medical equipment and diagnostics manufacturers and distributors.  Readers of thehealthcareinvestor.com can get a 50% discount on the attendance fee by using the discount code: MDC50 when registering. 

The conference is a full-day event that features speakers from the Center for Medicare and Medicaid Services, Medtronic, Strkyer, Hollister, Baird Capital Partners, Smith & Nephew, Hospira, Baxter and many other leading medical device manufacturers and distributors. 

Please join us!  See the full agenda by clicking here.  Questions?  Email Krist Werling at kwerling@mcguirewoods.com.

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It appears that the glory days of investing in skilled nursing facilities (SNF) are over. In a report from Avalere Health, profits for these facilities are predicted to flatline by 2014, only three short years from now. As a result of the 11.1% reduction in Medicare reimbursement rates, estimates show that the skilled-care nursing industry will experience a reduction in overall margins, declining from 4.4% to 0.4%.

More onerous, the report, financed by the Alliance for Quality Nursing Home Care (AQNHC), reveals that payment reduction as well as group therapy changes in FY 2012 will reduce margins from 3.8% to 0.

A new regulation from The Centers for Medicare & Medicaid Services (CMS) will trim payments for this health-care sector by $79 billion over the next decade. These cuts come at a time when SNFs are already reeling from deep reimbursement cuts for Medicaid beneficiaries, with states besieged with huge budgetary deficits.

According to Avalere CEO, Dan Mendelson, “In the long term, there is concurrence among policymakers that SNFs hold the key to better patient management and cost reduction, but in the short term, these pressures on Medicare and Medicaid rates will be exceedingly difficult to manage.”

Alan G. Rosenbloom, president of AQNHC, concurred, “By adding substantial changes in payment methodology for therapy services, CMS also crossed the line from over-correction [of past inadvertent provider overpayments] into real Medicare cuts.”

To the health-care investor, it is of vital importance to be vigilant as to the outcome of this fall’s Congress’ Joint Select Committee on Deficit Reduction, the so-called ‘Super Committee’, which has been given the arduous task of uncovering $1.2 billion in cuts to the federal budget over the next ten years. Additional Medicare cuts would, undoubtedly, be calamitous to nursing home patients, deleterious for caregiver employment and deleterious to SNFs, which provide high quality patient care in a reasonably-priced setting.

 

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In an acquisition of a healthcare company, the buyer has a host of issues to monitor and track during due diligence, negotiation and documentation of the transaction.  The lender will be working through the same issues but will often have a slightly different focus that a buyer should understand.

What is your lender concerned about?

1.  Do you understand the regulatory risks?  It is critical that the lender is comfortable that the buyer understands and is prepared to deal with regulatory issues in the transaction.  Nothing will give your lender pause like regulatory issues that are surfaced by the lender.  

2.  Are there issues in control over collateral?  Healthcare companies often have structures dictated by regulatory necessity.  For example, in many states, the corporate practice of medicine regulations requires that physician practice management businesses be owned by a licensed physician.  The operative company in this type of business often has only a management agreement with a clinic or physician practice group.  From the bank’s perspective, their borrower may not own the hard collateral.  A buyer should be prepared to address these issues before the bank starts asking questions.  

3.  Is state regulatory risk spread over multiple jurisdictions?  Many healthcare companies have state-specific regulatory risk.  Much like when customer concentration raises the risk of something going materially wrong in the business, a business operating in only one or two states has increased concentrated state regulatory risk.  

    4.  Does the business have strong relationships (and contracts) with referring physicians? While the structure may not give a lender collateral in these relationships, the lender often views these relationships as the most relevant business assets.  Good relationships -- and enforceable non-competes where appropriate -- go a long way toward assuring the lender that these relationships will continue.

Buyers need to understand their lender’s concerns and be prepared to address issues before they arise.

 

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 On August 23rd, HHS anounced a new initiative to help improve care for patients while they are in the hospital and after they are discharged. Doctors, hospitals, and other health care providers can now apply to participate in a new program known as the Bundled Payments for Care Improvement initiative (Bundled Payments  Initiative).  

This new effort was authorized by the Affordable Care Act  (aka PPACA, aka the Healthcare Reform Law) and has been launched by the new Center for Medicare and Medicaid Innovation (Innovation Center). As part of the HHS announcement, HHS released a “request for applications” (RFA). The RFA outlines four models, three of which involve a retrospective bundled payment and one which would pay providers prospectively:

“Applicants for these models would also decide whether to define the episode of care as the acute care hospital stay only (Model 1), the acute care hospital stay plus post-acute care associated with the stay (Model 2), or just the post-acute care, beginning with the initiation of post-acute care services after discharge from an acute inpatient stay (Model 3). Under the fourth model, CMS would make a single, prospective bundled payment that would encompass all services furnished during an inpatient stay by the hospital, physicians and other practitioners.”

Letters of intent for model 1 are due Sept. 22, and final applications must be received by Oct. 21. Letters of intent for models 2-4 must be received by Nov. 4 and final applications are due by March 15, 2012.

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 In recent months we have seen a drastic increase in the number and size of federal healthcare fraud investigations and dollar recoveries.  We've seen a renewed commitment to anti-fraud enforcement efforts in the OIG Work Plan.  We've seen CMS begin to using predictive modeling technology just since July 1st to combat Medicare fraud on a national basis, technology similar to that used by credit card companies, which helps identify potentially fraudulent Medicare claims and stop them before they are paid.

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