Pitchbook has reported on a decade of private equity investments in a four-part series focusing on investments, fundraising, exits and fund returns.   The highlights are illuminating of the period from 2001 through 2010, with the unsurprising peak in 2007 and drop thereafter.   

Highlights from the investments portion of the report include the following:

• The decade saw 17,361 private equity deals totaling $1.73 trillion of invested capital.
• Lower middle-market companies accounted for 81% of the decade’s deal flow .
• The median private equity investment multiple peaked at 11.5x in 2008.
• The average time between investments dropped from six months in 2002 to 2½ months in 2007.
• Add-on deals accounted for 46% of PE buyouts by the end of the decade.
• Texas saw more PE deals and invested capital than any other state.
• Business Products and Services was the top industry for PE activity.

Pitchbook is an independent research firm  providing data, news and analysis to the private equity industry, with a variety of online and other products.

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We have descrived in prior posts the opportunities available through Accountable Care Organizations.   ACOs are intended to provide physicians and medical centers financial incentives to continue offering high-quality medical services to their Medicare patients while keeping costs at an acceptable level through a variety of mechanisms that reward providers for keeping their patient population healthy.  It remains to be seen how successful the model will be, and there is much speculation about the most effective long-term structures for ACOs (including the participants to be included in an ACO model).

It is critical that providers considering an ACO understand and adhere to the final Medicare Shared Savings Program regulations released by Centers for Medicare and Medicaid Services (CMS).  In the final rule published this November, CMS reconsidered many of its core positions set forth in the proposed regulations issued earlier in March 2011, with the goal of reducing burdens and costs for participating in the Medicare Shared Savings Program.

Several of our McGuireWoods colleagues have jointly authored a series discussing the opportunities and parameters for ACOs.  Most recently, the series discussed the final ACO rule changes as they relate to the governance of an ACO.  A link to the series is available here. 

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Urgent Cares of America, a North Carolina-based owner/operator of urgent care facilities, founded in 2001, was acquired by The Comvest Croup in November 2010. The transaction was brokered by Plutus Capital Partners LLC. Three months following that transaction, Urgent Cares of America Holdings, LLC, announced the acquisition of Tri-City Express Care, PLLC, expanding the company’s holdings into the Arizona market.

Urgent Cares of America, now FastMed Urgent Care, launched its new corporate identity in May. CEO John Randazzo, stated “Launching our new brand identity and plans to consistently upgrade our clinics is another important and very tangible step…to build a family of urgent care clinics that is driven by quality, convenient and personal care…”

The Comvest Group is a private investment firm that focuses on providing both equity and debt capabilities to lower middle-market businesses. The firm is comprised of “seasoned, senior-level operating executives at all levels who partner with managers and owners of companies to grow businesses and create long-term values.” Comvest has invested over $2 billion of capital in more than 160 public and private companies since 1988. They recently announced the closing of their fourth private equity fund, Comvest Investment Partners IV (Comvest IV) with capital commitments of over $580 million, surpassing their goal of $550 million.

Plutus is a boutique advisory firm with offices in New York City and Nashville, providing global banking investment services. The company supports clients with investment banking services on capital raises as well as advisory services on mergers and acquisitions, divestitures and licensings. Their main areas of expertise include healthcare, technology, business process outsourcing and financial services.

Urgent care chains have been attractive targets for private equity funds. According to Urgent Care News, “Private equity firms that make purchases of this size usually plan to invest $100 million to more than a billion dollars over the course of five years. Thus, in the next few years, one might expect the emergence of several large chains with hundreds (maybe thousands) of clinics in the USA.”

Other recent transactions in the field of urgent care include: MedExpress, which was owned by private investment firm Excellere Partners, was purchased by global growth equity firms General Atlantic, LLC and Sequoia Capital (September 2010) and Concentra, which was purchased by Humana (November 2010)for $790 million.

One challenge for investments in the urgent care sector is the availability of large platform companies for investment. Many funds seek a platform with at least ten to fifteen locations with positive cash flow. As the urgent care space continues to mature, it is likely that additional funds will snap up new platform investments.

 

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The Supreme Court announced earlier this week that it would rule on challenges to the Patient Protection and Affordable Care Act (PPACA), President Obama’s healthcare reform law. After four Federal Courts of Appeal had reached conflicting conclusions on the constitutionality of all or parts of the law, many experts had expected the Court to hear the case this fall.  Others had believed the Court would hold off on hearing the case until after the 2012 election, due to concerns fboth of influencing the election and of “ripeness” of the case.

At the heart of the legal battle is the "individual mandate", which requires all Americans to buy health insurance by 2014 or pay a penalty.  The Court could uphold all of PPACA,  strike down just the individual insurance mandate or other provisions,  invalidate the entire law or even put off a ruling on the mandate until it is fully ripe (ie after the individual mandate has taken effect in 2014).

A group of 26 states had joined to argue that Congress exceeded its powers and that all of the law should be struck down. The states also challenged the expansion of Medicaid on the grounds Congress unconstitutionally forced the expansion on the states by threatening to withhold funds. The Obama administration has argued that Congress could adopt the insurance purchase requirement under its powers in the Constitution to regulate interstate commerce.

Oral arguments should take place in March, and the ruling is expected by June 2012.  We will continue to track progress of the case and discuss its impact on various healthcare sectors.

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PPD/Pharmaceutical Product Development, an international contract research firm that has just been named to the 2011 InformationWeek 500, is being taken private by affiliates of the Carlyle Group and Hellman & Friedman in a cash deal valued at $3.9 billion. The two PE firms have reportedly paid $33.25/share for PPD, a 29.6% premium over its September 30^th closing price. Subject to shareholder approval and regulatory regulations, the merger is expected to become final by the end of the year.   Companies like PPD provide contract research services for all phases of clinical trials in the pharmaceutical, biotechnology and medical device industries, specializing in all aspects of data and biostatistics management.

The Burrill Report states that “the deal is a turn-around for private equity buyouts, which have been slowed down in the third quarter [2011] due to market volatility and a tough financing environment”.

PPD, according to a company press release, was recognized for its “…PatientView®, an innovative online portal linking clinical trial participants with biopharmaceutical companies, physicians and health care resources to enhance patient connectivity and improve patient retention in clinical trials”.

PPD, with offices in 44 countries and a roster of over 11,000 professionals, has clients and partners in pharmaceutical, biotechnology and medical device companies, as well as academic and government agencies. The company has recently announced its expanded clinical microbiology laboratory, further strengthening its testing services in infectious diseases, one of the leading arenas for clinical researchers and developers.

With the FDA Amendments Act of 2007, and its requirement for mandatory mega trials of new drug protocols and Risk Evaluation & Mitigation Strategies (REMS), the importance of national and international CROs are seeing increased valuation.

Many industry analysts believe that the contract research industry looks to be a positive investment possibility as international economic conditions appear to be recovering, particularly in emerging markets.  Morningstar analyst Lauren Migliore reports, “The emergence of the strategic partnership model, which has seen the world’s largest drugmakers pair up with leading CROs…has helped fuel this return to growth in the industry.”

The PPD deal is the biggest PE buyout of a contract research company in the last three years. Others include Nautic Partners’ acquisition of Omnicare Clinical Research, Thomas Lee Partners’ buyout of InVentive Health, Avista Capital Partners and Ontario Teachers’ Pension Plan’s acquisition of INC Research and the Warburg Pincus buyout of ReSearch Pharmaceutical Services.

Other opportunities surrounding the growing research industry may also emerge, including high-tech business information systems for the medical research field.

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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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 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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It is a rare healthcare company that has no regulatory risk exposure in at least a few material areas.  As sellers of healthcare companies prepare them for sale, they will need to navigate first the letter of intent (LOI) stage with potential buyers and ultimately the more detailed definitive agreements.

The key differences between negotiating deal points at the LOI stage versus the same negotiation at the definitive agreement stage are leverage and information.   At the LOI stage, the buyer is often still trying to get the deal (especially in an auction environment) and is operating with limited visibility into the potential magnitude of issues.  The seller often knows more about potential issues but believes the realistic exposure (vs. worst-case scenario exposure) is relatively small.  Once the LOI is signed, the leverage in the hands of the buyer often increases as the closing of the transaction becomes more certain  usually a key desire of the seller  and arguments that the buyer should absorb more risk usually devolve into re-pricing negotiations which the seller wants to avoid.

What should a seller do or not do at the LOI stage?

1.   Do not try to minimize sell-side due diligence.  While commissioning some level of sell-side legal due diligence will increase the initial expense of a transaction, it can avoid costlier pitfalls later in terms of late pricing renegotiations, risk to ultimate closing and delay.  It is difficult for the seller’s legal team to shield or shade these issues in the dark.  David Stienes, a Principal at LLR Partners, noted that “Dealing with prospective sellers who have performed preliminary work around the key regulatory issues and are willing to have open discussions in advance of an LOI is very comforting to us as buyers and allows greater certainty around our offers.   From the sellers’ perspective, it can also be a valuable tool in assessing the knowledge and ultimate viability of us as prospective buyers.   If interested parties are unwilling and/or unable to discuss these issues upfront, it could be a sign that they do not have a full grasp of the matters and will be educating themselves throughout the process.   This will greatly impact both certainty and speed to close.”

2.  Do not hide the ball.  While slowly parsing information at the early stage is the best pathway to getting an LOI signed, it is the worst way to limit the cost of such issues in terms of pricing, escrows and indemnity exposure.  

3.  Negotiate indemnity cap/survival terms for known issues.  This is often difficult prior to substantial due diligence; however, sellers can often pressure buyers to accept narrower limits at the LOI stage than later in the transaction process.

4.  Force heavier pre-LOI diligence on known issues.  It is unlikely that a buyer will do full legal diligence on issues at the LOI stage, but a request that buyers more fully review known issues can lead to more advantageous LOI treatment or at least swing some of the post-LOI leverage to the seller.

None of these strategies can fully insulate a seller from the impact of known regulatory issues on the sale process; but they can minimize the pain, expense and delay that these issues often cause.

 

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Accountable Care Organizations (ACOs) have become a catchphrase within today’s healthcare industry. As we have discussed in prior posts, ACOs are intended to be a vehicle for providing physicians and medical centers financial incentives to continue offering high-quality medical services to their Medicare patients while keeping costs at an acceptable level. Currently, Medicare habitually reimburses physicians and hospitals more when patients are on the receiving end of more tests and additional procedures, increasing costs. By emphasizing preventative care and monitoring patients with chronic illnesses, the ACO approach is designed such that doctors and their institutions would receive higher reimbursements for keeping their patient population healthy.

Under the new law, which goes into effect January 2012, an individual ACO would manage the health care needs of at least 5,000 Medicare beneficiaries for a minimum of three years. ACOs will, ideally, systematize such components of patient care as hospitals, primary care and specialty physicians, as well as both in-home and institutional long-term health care, ensuring optimal patient care and physician financial benefits. Medical centers, health care practices and insurers across the country are looking to form ACOs that will include privately-insured patients as well as Medicare recipients.

Multispecialty groups have begun establishing ACOs throughout the country, with several initial efforts appearing in California. Large medical centers are buying up practice groups for a variety of reasons, a consolidation trend that now also has the additional benefit to some systems of formation of ACOs that would employ a majority of their providers. With more access to the necessary start-up capital, these institutions will, conceivably, have at least a monetary advantage over many smaller private practice groups. Some of the largest health care insurance providers in the country, such as Cigna, Humana and United Health Care, have also announced plans to form ACOs; these companies already collect a plethora of information on patients, vital for coordinating and reporting healthcare.

Start-up and first year cash costs will typically come from an ACO’s providers, with a CMS estimate of $1.76 million. As with any venture, particularly innovative ones, careful contractual delineation of the parties’ relative rights and responsibilities is paramount for success. For example, if funding obtained via financing, loan documents should be clear as to the extent to which ACO participants are obligated to guarantee such debt (e.g. dollar and time limits on the guarantees relative to the entire ACO investment, etc.). At the conclusion of each year, an ACO will either receive payment from CMS or, conversely, remit funds to the agency. These profits/losses will then be allocated to the participants.   Investors may opt to place finances in escrow or offer bank letters of credit to ensure the availability of funds potentially owing back to CMS should the ACO fail to hit performance targets. Normally, an ACO would issue profits and losses based on a formula that incentivizes providers to meet the organization’s objectives, details of which would be included in negotiations, another aspect of ACO contracts critical in determining investors’ rights as well as risks.
 

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Some healthcare sub-sectors are hot and some are not - read more here at Becker's Hospital Review about "Private Equity Investing in Healthcare: 13 Hot and 4 Cold Areas".  Hot areas for potential investments include:

1. Hospitals and Health Systems
2. Hospital-Based Specialty Groups
3. Ambulatory Surgery Center Chains
4. Health Care IT and mHealth
5. Chronic Disease Management
6. Cancer and Oncology Services and Products
7. Hospice
8. Dental Practice Management
9. Wound Care
10. Rehab and Addictive Treatment Centers
11. Physical Therapy
12. Revenue Cycle Management
13. Certain Overseas Investments

Areas that are not as hot for potential investment right now:

1. Home Healthcare
2. Nursing Homes
3. Imaging
4. Some Life Sciences Areas

Read more here about each of these "hot" and "cold" sub-sectors. 

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We recently had the opportunity in Chicago to participate in a roundtable discussion with four prominent hospital CEOs as well as the CEO of Medline and SCA. The hospital CEOs highlighted the following key issues for the acute care hospital industry:

• Each of the CEOs expressed that they spend significant amounts of their time communicating with patients, physicians and other stakeholders about the realities of healthcare reform and the changes that it will bring to the healthcare system. The hospital CEOs are planning ways to communicate to uninsured and underinsured patients the need to access new insurance options through health insurance exchanges and other avenues.
• Executive leadership is clearly a high priority and key concern for all hospital CEOs. Many are planning internal leadership transitions as well as seeking to bring in new leaders from other industries.
• In the coming years, hospitals’ primary mission will change from their traditional role of providers of acute care to a new role of ensuring community health. This change will be forced by bundling of hospital payments with pre- and post-discharge care, private and Medicare “accountable care organizations” and new models for care of patients with chronic disease. 

Investors in the healthcare industry are examining ways to fund companies that will partner with hospitals in tackling the challenges associate with healthcare reform. A key investment focus spurred by health reform is health care IT – here deal volume has been increasing as hospitals continue to invest heavily in HCIT solutions in order to position their business to survive in the post-health reform world.   Earlier this year, for example, Doximity secured a $10.8 million Series A investment from Emergence Capital Partners and InterWest Partners - Doximity is a provider of a free communication platform that links medical professionals to other professionals via mobile devices or computers, JMI Equity acquired a minority interest in PointClickCare, a long-term care EMR company, and Riverside Partners completed a majority investment in Eliassen Group, an IT staffing and clinical data management consulting firm.

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Buyers of healthcare companies are heavily scrutinizing potential healthcare and life science investments for compliance with increasingly onerous regulatory requirements, reimbursement risk and contractual risk.  The Deal recently published our article on how private equity funds and healthcare business owners can prepare healthcare companies in advance for this scrutiny.  Check out the article "Prepping Healthcare Portfolio Companies for Market".

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             There is considerable uncertainty surrounding the future of the Medicaid program.  At the end of June the federal government’s enhanced Medicaid reimbursement rate to the states ended. The loss of these federal funds has left states clamoring for additional ways to reduce their Medicaid budgets. At the same time, most Americans are keenly aware that the federal government is trying to get a grip on its budget deficit. According to a recent Wall Street Journal report,  this confluence of budget pressures has forced the Obama administration and congressional Republicans to consider cuts to the Medicaid program that may have not been on the table in previous budget negotiations. In a continuation of our series on the implications of the Medicaid budget crunch, this post will consider some of the providers that may suffer the most from the uncertainty surrounding state Medicaid budgets and the implications of the budget uncertainty for patients and the wider healthcare industry. 

Not surprisingly, healthcare providers who accept Medicaid patients are some of the biggest losers when states have to cut their Medicaid budgets. As noted in Part II of our series, since the start of the recession every state has either frozen or reduced provider rates for at least some Medicaid providers.  Part I of our series highlighted some of the proposed rate cuts in Nevada and other states are proposing similar cuts. For example Indiana recently extended a 5 percent rate cut for a number of services including inpatient and outpatient hospital services, home health services, non-hospital radiology providers, and skilled nursing facilities through June of 2013.  California wants to implement even steeper cuts, reducing reimbursement rates for a number of providers including certain hospitals, physicians, and long-term care facilities by 10 percent. 

As a recent article highlighting the impact of MediCal (the California Medicaid program) on the ambulance industry demonstrates, these cuts ripple across the entire healthcare system. In California, the average cost of an ambulance trip ranges between $586 and $673. California’s Medicaid program pays a quarter of this price, a rate that recent budget cuts will reduce by another 10%. This means that ambulance services have to shift costs, almost doubling the average rates that private payers pay for ambulance services to $1200.

However, there are signs that, in the future, states will not be able to rely so heavily on provider rate cuts to balance their budgets. In California, providers and patients sued the state to stop a series of MediCal cuts the legislature enacted in 2008 and 2009.  A federal district court judge and the Ninth Circuit Court of Appeals found for the plaintiffs and enjoined the rate cuts. The courts held that the cut violated federal law requiring MediCal reimbursements to attract enough physicians to meet the needs of patients. The Supreme Court recently agreed to hear the case. Oral arguments are set for this coming fall and a final decision is expected in the spring of 2012. 

The Obama administration is also taking steps to make it harder for states to cut the rates that they pay to Medicaid providers. In May, the administration proposed a new regulation that would create additional administrative hurdles through which states would have to jump to cut Medicaid provider rates. Among other things, the regulations would require states to show that patients have sufficient access to care before states can cut provider rates. This rule, and, potentially, the California court action, could at least blunt the effect of the Medicaid budget crunch on some providers.  States would probably still be able to reduce provider rates to control their Medicaid budgets, but they would also have to consider other option that might make the impact on provider rates less severe.

Unfortunately, some of the “other options” available to the states to balance their Medicaid budgets would still disproportionately affect healthcare providers. In a recent letter to state Medicaid directors, U.S. Secretary of Health and Human Services, Kathleen Sebelius, emphasized the flexibility states have in cutting so called “optional” Medicaid benefits detailed in the chart below. Federal law requires state Medicaid programs to cover such benefits as hospital and physician services, but grants states considerable discretion to cover other benefits such as prescription drugs, dental services, and speech therapy.  Secretary Sebelius suggested that states could achieve substantial savings by reducing these optional benefits, which constitute approximately 40% of total state Medicaid spending, totaling about $100 billion in 2008.

Mandatory v. Optional Medicaid Services

A recent report by the National Association of State Budget Officers indicates that legislatures across the country have taken Secretary Sebelius’s suggestions to heart.  The report notes that fourteen states reduced Medicaid benefits in fiscal 2011 and many are proposing benefit reduction for fiscal 2012.   Nevada eliminated all adult vision, hearing and other benefits.  South Carwww.kff.org/medicaid/8137.cfmolina went even further, eliminating, among other things, podiatry, vision, and hospice services for adults; insulin pumps for Type II diabetics; certain wheelchair accessories and standard circumcision for newborns. 

Investors considering investing in healthcare businesses that provide a significant amount of “optional benefits” to Medicaid patients must carefully look at specific state Medicaid programs. Should the federal government or courts restrict states’ abilities to reduce provider rates, it is possible that more states will look to reduce or eliminate any optional services that they provide to Medicaid enrollees. Thus, those providers providing services like vision and foot care to Medicaid beneficiaries may find it increasingly difficult to do so. Of course, states vary in the amount of optional benefits that they have extended to Medicaid beneficiaries and in the severity of their Medicaid budget deficits.  Accordingly, investors would be wise to consider each state’s particular fiscal environment as well.

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Last week a three-judge panel of the 11th Circuit heard arguments in the 26-state lawsuit challenging the healthcare reform law, The Patient Protection and Affordable Care Act (aka PPACA or The Affordable Care Act or even the ACA to add yet another moniker). The United States had appealed the decision by Judge Vinson of the U.S. District Court for the Northern Division of Florida, which we have discussed in prior posts.  Judge Vinson had ruled that the individual insurance mandate portion of PPACA is unconstitutional and that because the provisions requiring the individual mandate could not be severed from the rest of the law, the entire law was void.  The issues of interest in the appeal are not only the constitutionality of the individual mandate requirement and PPACA at large, but also whether the District Court correctly held that the federal government can force states to expand their Medicaid programs as a precondition for continuing to receive matching federal funds for their Medicaid programs.  McGuireWoods attorneys Shayna Bowen and Amita Sanghvi have published a more detailed description of the June 8^th oral arguments accessible here.

The 11^th Circuit case is one of several cases pending before Federal courts regarding the constitutionality of all or part of PPACA.  The 4^th Circuit heard arguments in mid-May in cases brought by the Commonwealth of Virginia and Liberty University challenging the individual mandate and PPACA generally.  With a surprising three-judge panel comprised of all Democratic appointees, many experts expect the 4^th Circuit to uphold the constitutionally of PPACA in its entirety and the U.S. Supreme Court to then consolidate the 11^th and 4^th Circuit cases for unusually expeditious hearing this fall.

It is also important to note that in the 5^th Circuit, on May 27^th Physician Hospitals of America (PHA) and Texas Spine & Joint Hospital (TSJH) filed an appeal of the ruling by Judge Schneider in the Eastern District of Texas upholding the constitutionality of Section 6001 of PPACA.  We have discussed in several prior posts the key elements of the PHA and TSJH arguments in the 5^th Circuit case, in which a team of McGuireWoods attorneys lead by Scott Oostdyk and Victor Moldovan are representing PHA and TSJH.   If the Supreme Court voids all of PPACA upon hearing one or both of the more global PPACA cases now  pending in the 11^th and 4^th Circuits, the PHA-TSJH case will become moot.

At the same time that the Federal government is defending legal challenges to PPACA through the courts, a variety of legislative challenges are pending as well, including repeal legislation introduced by U.S. Congressmen Sam Johnson (TX-3) and Doc Hastings (WA-4).

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Selling a healthcare company is a daunting task that requires significant foresight, planning and expertise in addition to the tremendous amount of time required to consummate a deal. For a first time seller, the process is especially intimidating as the owner begins the process that will ideally lead to a sale of the business at a price that accurately reflects the value of the business. With that in mind, I had the pleasure of interviewing Bill Siren of AlixPartners, LLP to discuss issues the owner of a healthcare business should consider when he or she has decided to sell their company.

MW: What is the first step that an owner should take to prepare the company for sale once they have made a decision to do so?

Siren: Once the owner decides that the time is right to sell the company, the owner should prepare the company so it can be shown to prospective buyers in the best possible light. These preparations include: (i) obtaining an initial valuation, (ii) conducting an independent, in-depth audit of the business and (iii) identifying areas where improvements can be made that will positively impact the company’s bottom line and operating metrics that prospective buyers use to evaluate a possible acquisition.

MW: What resources are available to assist the owners of a company to perform the initial valuation, conduct the initial audit and identify areas to improve performance?

Siren: Preparing to sell a company can be a very nuanced and delicate exercise. That is why it is important to hire a team of experts with industry specific knowledge to help guide the process and not just finance professionals. The ideal team should blend operational experience in the healthcare field with expertise related to financial modeling and the evaluation process undertaken by prospective buyers. Accredited valuation professionals with operational experience in the healthcare field will have the appropriate industry-specific knowledge as well as the expertise to perform an accurate valuation and audit and identify areas for improvement. These skills are critical in being able to increase the company’s attractiveness to prospective buyers.

MW: How does the initial valuation shape the process of selling the company?

Siren: The initial valuation serves as the starting point in negotiations with prospective buyers. A low valuation could be a sign that the company has room to improve its earnings performance; a metric typically measured by EBITDA.

MW: What are preliminary steps owners can take to improve earnings performance as measured by EBITDA?

Siren: If a company’s initial valuation is below the owner’s expectations and is a result of poor EBITDA, there are several steps an owner can take to improve earnings performance and, in turn, improve the company’s EBITDA. The first is to control expenses. The most common expense drivers that can be improved include supply agreements and pharmaceutical contracts, staffing, benefit levels for employees, overtime usage, etc. The next step is to review the revenue cycle. The improvements gleaned from creating efficiencies to get from patient registration to payment collection more quickly and reduce revenue leakage will fall directly to the company’s bottom line. Third, the company may need to improve its payor mix (if this is controllable). Depending upon the type of business, it is always advantageous to have a high percentage of commercially insured patients. Next, examine and evaluate the physical premises. The owner should make all necessary improvements. Prospective buyers will look for potential money pits and lower their offer accordingly if any exist. A buyer may also find additional value in an operationally efficient company supported by a physically sound infrastructure. Finally, rigorous due diligence should be conducted to ensure the thoroughness and accuracy of the company’s financial records. The company’s financial information should be completely transparent to any potential buyer. While not an exhaustive list, these are steps that can be taken to improve a company’s earnings performance and its attractiveness as a target to prospective buyers.

MW: How will any improvements made to the business improve the owner’s chances of selling or the purchase price for which he or she is able to sell the company?

Siren: The steps to improve performance, most notably EBITDA, not only make the company more attractive to buyers, but may also increase the price for which the owner is able to sell the company. The purchase price is often a multiple of EBITDA. Thus, a boost in EBITDA is augmented by the EBITDA multiplier and exponentially increases the purchase price. The business efficiencies that lead to stronger earnings need to be demonstrated and sustained for several months before the EBITDA number becomes reliable and can reasonably be expected to prompt a higher offer from a prospective buyer. With EBITDA as the dynamic variable, the purchase price can increase even if the multiple remains constant. However, the EBITDA multiple is not always constant. Improving the company’s operational efficiency may lead to a higher multiple where the buyer is willing to pay for an operationally sound company that it can easily fold into its operations without the added task of improving the company’s operations or upgrading its facilities.

---- To be continued.

For more information, please contact Bill Siren at AlixPartners, LLP at (615) 312-8292 or Geoffrey C. Cockrell at McGuireWoods LLP at (312) 849-8272.

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Healthcare reform has had a major impact on the margins of U.S. insurance companies.  Naturally, they have started to look to other lines of business to improve their overall margins.  Even before the healthcare reform bill was signed last March, Humana announced the acquisition of Concentra, a national primary care, urgent care and occupational health provider.  United Healthcare has always operated at the forefront of this trend with its moves into health IT and data management through its Ingenix subsidiary.   

Health insurers now may look to other lines of business both in the provider space and back-office administration of healthcare providers.  We may see insurers with more interest in Concentra-like models of urgent care and primary care medicine.  The WSJ examined this trend in a recent article: http://online.wsj.com/article/SB10001424052748703643104576291022457851278.html  Will this be a new exit strategy for private equity owners of service businesses? 

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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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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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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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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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On Monday, a  federal judge sitting in Florida, Judge Robert Vinson,  declared unconstitutional the portion of the healthcare reform law (aka PPACA, or the Affordable Care Act)  requiring most Americans to buy health insurance by 2014 or face penalties.  Judge Vinson also declared unconstitutional the section of the act that withholds Medicare funds from states that refuse to participate.  This ruling is similar in part to the decision out of Virginia in mid December we'd previously discussed.   However, the Florida ruling is different in one key way - - - Judge Vinson ruled that, because the law contains no savings clause permitting certain provisions to be voided while retaining the remainder of the law, the unconstitutionality of those provisions voids the entire law.

Florida is one of 26 states that has challenged the law to date, while other states have indicated  that they are considering challenging as well.   In contrast to the decisions out of Florida and the Eastern District of Virginia,  federal judges in the Eastern District of Michigan and the Western District of Virginia and have ruled to uphold the "individual mandate" to carry health insurance.

On a related note, the Physician Hospitals of America (PHA) and Texas Spine & Joint Hospital (TSJH) lawsuit challenging Section 6001 regarding physician-owned hospitals may be impacted by the ruling in Florida.   PHA and TSJH have been awaiting an opinion in their case in the Eastern District of Texas from Judge Michael H. Schneider, and they have already filed a motion asking Judge Schneider to adopt the decision and invalidate the ban on physician-owned hospitals.

As the Senate debates whether to vote on the healthcare reform repeal and modification bills introduced over the past several days and other federal courts tackle similar healthcare reform challenges, developments on the healthcare reform front are occurring seemingly daily.  

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Many private investors are considering how the current disruption in the physician practice market will play out.  Following healthcare reform, many physician groups are considering changes to their business model - whether integrating more with hospitals or forming larger groups.  There may be opportunities for investors to play in this disruption.  Join McGuireWoods for a complementary webinar on this topic:

Physician Practice Acquisitions:
Deal Considerations & Post-Transaction Integration

Tuesday, January 25, 2011
Noon - 1 p.m. (ET) | 11 a.m. - Noon (CT) | 9 a.m. - 10 a.m. (PT)

Please register at http://www.mcguirewoods.com/events/physician.asp

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The durable medical equipment and supply distribution industry has seen renewed interest from both financial and strategic investors.  Several regulatory and business forces are driving increased consolidation in the sector.  Although the industry has attractive dynamics, a deep due diligence review is recommended for any investor to avoid post-closing cash flow interruption and hidden liabilities. 

McGuireWoods attorneys recently authored this article which was published in the BNA Medical Devices Law and Industry Report.  The article reviews the following 10 key issues that should be the focus of any due diligence review an investment in a durable medical equipment and supply distributor:

1. Compliance with Medicare DMEPOS Supplier Standards.
2. Billing and Coding Documentation
3. Exposure to False Claims Act Litigation
4. Positioning within the Competitive Bidding Process
5. Relationships with Commercial Payers
6. Referral Source Relationship Compliance
7. Compliance with Privacy and Security Laws
8. State Licenses and Permits and Ability to Undergo Change of Control Transactions
9. State Medicaid Program Limitations
10. Potential for Increased FDA Regulation

Of course, every investment is unique and the variations in types of DMEPOS distributors varies widely.   Distributors may focus on certain segments (ie, powered wheelchairs) that present higher exposures on certain issues.  We hope that you find the article helpful as a starting point to your efforts in reviewing potential investments in this sector.

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As we'd previously reported, the U.S. House had scheduled to vote today on legislation repealing in full the healthcare reform law known as The Affordable Care Act (aka PPACA).   In response to the shootings of Arizona Congresswoman Gabrielle Giffords and others this past Saturday in Tucson, the historic vote has been postponed until a yet undisclosed date.

In the meantime, yesterday Missouri’s House of Representatives passed House Resolution 39 calling on Governor Jay Nixon and Attorney General Chris Koster (both Democrats) to cause the state to join a lawsuit challenging the constitutionality of certain aspects of The Affordable Care Act.   The Missouri resolution passed 115 to 46, with voting largely along party lines.   A companion resolution, SR 27, is currently pending in the Missouri Senate, and it seems unlikely that the Governor and AG will take action until both chambers have weighed in.  Currenly twenty states are parties to the lawsuit, and states such as Maine and Ohio are among a handful of states that  report strongly considering joinly the lawsuit as well. 

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According to at least two recently published surveys, the answer is yes.

National Venture Capital Association/Dow Jones Venture Source Survey

In a recent survey by the National Venture Capital Association and Dow Jones VentureSource, a majority of U.S. venture capitalists stated they are optimistic for 2011 and plan to expand investments generally. The survey involved 330 venture capital respondents polled from late November through early December.   Fifty-one percent of VCs and fifty-eight percent of company CEOs polled said they expect more venture capital investment in 2011. A n additional quarter of each group expects investment to at least remain level with 2010, while 24 percent of VCs and 14 percent of CEOs predicted a decline.

”The market was so troubled in 2009, the sentiment was that things had to get better in 2010,” says NVCA President Mark Heesen.  “It turns out our predictions were correct, and in the past year we have moved beyond the financial crisis and returned to doing what we do best — building great companies. The improving exit market and a renewed excitement in the IT sector have engendered a confidence among VCs and the CEOs of the companies in which we invest that promises to propel the startup community forward in 2011.”

The top three areas of growth identified by the NVCA/Dow Jones VentureSource survey were consumer Internet and digital media, cloud computing, and healthcare information technology.  Survey respondents expect investments in health IT to rise by 77%.  By contrast, comfort with investments in medical devices and pharmaceuticals appeared split, with even percentages of VCs expecting financing to rise, fall and stay the same. This discomfort is likely in part due to the uncertainty now surrounding the timeline for devices to reach market.

Pepperdine University Center for Applied Research Survey

The optimistic outlook from the NVCA/Dow Jones VentureSource survey is similar to that provided by blogger Dave Lavinsky.  Citing results from a Pepperdine University's Center for Applied Research survey from mid-December polling 213 venture capitalists, Lavinsky reported the following:

* Venture capitalists expect to offer their investors an average return of 15% over the next 12 months, compared with only 5% for the past 12 months, likely due to an expected increase in acquisitions of VCs' portfolio companies.

* Over 40% of VCs are currently raising more money or expect to raise more money to fund entrepreneurs within the next 1-2 years.

* 43% of venture capitalists expect general business confidence to improve in the next 12 months.

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Earlier this week,  Judge Henry Hudson of the United States District Court for the Eastern District of Virginia became the first judge to strike down as unconstitutional the Minimum Essential Coverage Provision of the healthcare reform law, which requires uninsured individuals to carry certain levels of health insurance. ‬‪ In Commonwealth of Virginia v. Sebelius, the court ruled that the insurance mandate provision of Section 1501 was unconstitutional because people not buying health insurance were not taking any action that Congress could regulate as interstate economic activity.‬ 

Although there is no savings provision in PPACA  providing that invalidation of one part of a law does not eradicate the entire law, in this case Judge Hudson ruled that Section 1501 is unconstitutional but did not invalidate the entire healthcare reform law.  The government is nearly certain to appeal the decision, and industry followers believe the Commonwealth of Virginia will then ask the Fourth Circuit Court of Appeals to reconsider the judge's decision that only one part of the healthcare reform law is unconstitutional.  In the meantime, Judge Hudson's invalidation of Section 1501 without striking down PPACA in its entirety may provide additional grounds on which challengers to other portions of PPACA may rely, including in the Physician Hospitals of America and Texas Spine & Joint Hospital challenge of Section 6001 regarding physician-owned hospitals we've previously discussed.

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On November 2, 2010, CMS issued a final rule and commentary clarifying the “36 Month Rule” applicable to home health agencies (“HHAs”) that participate in the Medicare Program. The final rule contains several significant changes that narrow the scope of the rule’s application and increase the flexibility for investors in HHAs. The final rule impacts a change in majority ownership of an HHA by sale (including an asset, stock, merger or other consolidation) which occurs 36 months after: (1) the effective date of an HHA’s initial enrollment in Medicare, or (2) within 36 months after the HHA’s most recent change in majority ownership. In such situations the HHA’s Medicare Provider Agreement and Medicare billing privileges do not convey to the new owner and the new owner must instead enroll in the Medicare program as a new HHA and obtain a state survey or accreditation.

There are several key exceptions and clarifications in the final rule as follows:

1.                  If the HHA that is changing ownership has submitted 2 consecutive years of full cost reports (and not low utilization or no utilization reports), the 36 Month Rule does not apply.

2.                  If the owner of an existing HHA is simply changing existing business structure (i.e., a corporation is converting to an LLC) then the 36 Month Rule does not apply.

3.                  The final rule clarifies that if any owner (regardless of such owner’s level percentage ownership in the HHA) dies, then the 36 Month Rule does not apply.

4.                  The commentary to the final rule indicates that changes of ownership at a parent company level or other indirect ownership changes do not trigger the 36 Month Rule’s application.

Investors in home health agencies should consider the implications of the 36 Month Rule in acquisitions of HHAs and also in investing and starting up new HHAs. In large part the future application of the 36 Month Rule can be avoided by simply utilizing a parent holding company for any HHA investments. The text of the final rule can be accessed here.

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With the mid-term elections now behind us and the Republicans faring as successfully as generally predicted, all segments of the healthcare industry are looking closely at what the new Congressional power balance will mean for them. With several seats still in question as states finalize vote counts, the House membership will include at least 241 Republicans (largest since 1946) and at least 184 Democrats, while the Democrats will retain the majority with a slimmer margin.   This shift is the largest seat gain by either party since 1948.   Since then, the biggest change had been the 1994 Clinton-term Republican gain.   

High on the Republican agenda will be tackling the Obama-backed sweeping healthcare reform law passed this spring. Although a full scale repeal of the Patient Protection and Accountable Care Act (PPACA) is highly unlikely, Republicans will likely be looking at every available opportunity to slow down or roll back the healthcare legislation.  Many in the new Congress will be sure to stage strong opposition to new rulemakings and appropriations that are necessary to implement the key components of PPACA in an effort to minimize or delay the practical impact of the law. 

The healthcare sectors most immediately effected by PPACA are already reaching out to their seated and newly elected legislators to gain their ear on key issues. It has been well publicized, and we’ve discussed in prior blog posts, that the physician-owned hospital industry was a particular target in PPACA through Section 6001, which contained massive changes to the Stark law exception under which physician-owned hospitals have historically operated and been permitted to bill Medicare/Medicaid for referrals by their physician owners. Physician Hospitals of America (PHA) and its member hospitals will be working hard to educate newly elected legislators on the issues surrounding Section 6001 in an effort to obtain legislative relief through an amendment of Section 6001 or through the rulemaking process. These efforts of PHA are in addition to the ongoing litigation it has waged in conjunction with Texas Spine & Joint Hospital challenging the constitutionality of Section 6001. Even with the new shift in Congressional power, the industry will very likely continue to face powerful opposition, including from the American Hospital Association (AHA), which has the 5^th largest PAC in the country. The AHA and Federation of American Hospitals (FAH) together have spent $6,344,522 since 2007 on their advocacy efforts, a large component of which is tighter restrictions on physician ownership in hospitals.

Other sectors have also already started making moves to ensure their voice is heard. As the new Congressmen and Senators take office and Congressional leadership and committee leadership take shape, we will very likely see the divergent party healthcare agendas again at the forefront of Congressional activity and should soon see which sectors are most heavily impacted.

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U. S. dialysis providers are completing their final analyses this week as the November 1st deadline to fully opt in to the new Medicare bundling reimbursement methodology approaches.  Pursuant to the new bundling rule released on July 23, 2010, providers who do not contact their Medicare fiscal intermediaries by that date to affirmatively elect to fully opt in to the bundling methodology as of January 1, 2011 will be automatically subject to the four year phase-in methodology beginning January 1, 2011.

In prior posts, I have described in more detail the conversion to the new bundling methodology, pursuant to which CMS will make a single bundled payment to the dialysis facility for each dialysis treatment that will cover all renal dialysis services and home dialysis commencing on January 1, 2011.  It replaces the current system which pays facilities a composite rate for a defined set of items and services, while paying separately for drugs, laboratory tests, or other services that are not included in the composite rate.   

Dialysis providers are utilizing a number of tools to determine whether to fully opt in or instead wait out the phase-in approach.  These tools examine individual providers' geography, patient mix (in terms of dialysis modality and other factors), program size, typical drug dosage statistics and other key aspects of the providers' programs that will help providers determine the impact that bundling will have on their reimbursement.  Providers that anticipate a positive impact from bundling will likely elect to fully opt in now.  One such tool was developed by Jeff Lehman of Dialysis Consulting Group, Inc.  and includes a six step process focusing on six separate identifying characteristics of the individual provider. 

Regardless of a provider's decision as to fully opting in or phasing in to bundling, there will surely be a renewed industry-wide focus on keeping costs low and quality high.

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 With ACOs as such a hot topic right now, and the variety of forms these organizations can take, healthcare investors can examine not only opportunities in ACOs themselves but in healthcare related businesses that will service or be affiliated with ACOs. A fundamental tenant of the ACO model is investment in infrastructure aimed at both cost-efficient delivery of care and enhancing quality of care. Thus there will very likely be businesses that emerge or expand to focus on such infrastructure and consolidation of certain resources. Such businesses may include the following, most of which exist already today but will have the opportunity to expand their services to meet the needs of ACOs:

1)      Billing and coding services, including software manufacturers for internal billing, coding and collection functions, as well as outside third party billing companies, modified to efficiently retrieve all necessary data for the different components from the ACO for consolidated billing;

2)      Payor contracting and payor relations professionals, particularly as commercial payors integrate ACO models into their plans;

3)      Analytics companies to provide analysis of the various patient intake, record-keeping, data sharing, billing/collection and quality initiative aspects of the ACO;

4)      Purchasing organizations and equipment lessors with programs designed for ACOs rather than the individual physician practice, hospitals and other individual components;

5)      Health information technology companies.  Forward-thinking health IT hardware and software manufacturers in particular can examine the needs of ACOs seeking to roll in different provider types and a myriad of physical sites and their need to efficiently share information in a HIPAA-compliant manner.

One way that CMS seeks to better understand the efficiency opportunities with ACOs is by engaging the 10 healthcare organizations that participated in its five-year Physician Group Practice (PGP) Demonstration. The PGP Demonstration, which began in 2005 and ended in March of 2010, enabled physician groups to share up to 80% of the savings they generated above a minimum threshold by improving quality and reducing costs. CMS hopes engaging these PGP Demonstration participants will help resolve some of the outstanding issues related to quality and cost measurement. CMS has indicated that these PGP Demonstration participants may provide valuable insight into the infrastructure changes that they themselves found effective, and those exemplary changes could provide a template for future ACOs.   Healthcare investors can also follow CMS’s analysis with these PGP Demonstration participants to better understand what has worked for other organizations as a way of anticipating what related businesses may be most in demand. 

In addition to tracking these CMS inquiries, Sarah Klein’s article for The Commonwealth Fund examines the admissions, medical records, health IT, patient survey and other infrastructure changes made by four of the ten participants and their feedback as to the value of those changes. Executives from St. John’s Health System based in Springfield, Missouri, Everett Clinic based in Everett, Washington, Billings Clinic in Billings, Montana and Carilion Clinic in Roanoke, Virginia all discuss their systems’ PGP Demonstration experience.

Even if the ultimate success of various ACO models is murky, one thing is clear. There will likely be significant focus on how businesses that service the healthcare industry can fill the needs of ACOs, and interested investors will need to examine the viability of these businesses in light of the ultimate potential and staying power of the ACOs they serve.

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With the authorization of Accountable Care Organizations (ACOs) in the healthcare reform law (PPACA), there has been a tremendous amount of industry attention on understanding ACOs and the opportunities and challenges they present. With ACOs as such a hot topic and the variety of forms these organizations can take, healthcare investors can examine not only opportunities in ACOs themselves but in healthcare related businesses that will service or be affiliated with ACOs.   Understanding the role and possibilities of ACOs is highly valuable in order to assess these opportunities.

PPACA directs the Secretary of Health & Human Services to establish a Shared Savings Program under both Parts A and B of Medicare to improve quality and efficiency of the healthcare delivery system no later than January 1, 2012.    ACOs may be created by ACO professionals in group practice arrangements, by networks of individual practices of ACO professionals, by partnerships or joint venture arrangements between hospitals and ACO professionals, by hospitals employing ACO professionals, by such other groups of providers of services and supplies as the Secretary determines is appropriate.

An approved ACO will be assigned Medicare beneficiaries, will participate in the Shared Savings Program and will be eligible to receive additional payments from Medicare when certain performance guidelines are met and cost-savings targets are achieved. The amount of the additional payment will be a percentage of the difference between the estimated per capita Medicare expenditures for patients assigned to the ACO and the cost-savings per capita Medicare expenditures threshold.

While ACOs are often heralded as the solution to the current ailing model of healthcare delivery for Medicare, including the need for enhanced quality, improved outcomes, better coordination of care, and greater cost-savings, there are many misconceptions about the Shared Savings Program and a seemingly unending list of questions about what form ACOs will take under the final regulations. CMS is tasked with fleshing out the details of how the organizations will work and be reimbursed. Right now, CMS has issued very little guidance on its vision of ACOs and the Shared Savings Program, but CMS has issued a brief Preliminary Questions & Answers piece on its website. A recent article by our McGuireWoods colleague Tom Stallings and Brent Rawlings addresses some of the common misconceptions about ACOs and the Shared Savings Program.  Additionally, our colleagues Scott Becker and Helen Suh discuss nine observations in their recent article about ACOs, including movements by commercial payors toward this model.

In future posts we will focus on the businesses that we envision will emerge or evolve to service these ACOs and those potential investment opportunities.  

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The Centers for Medicare & Medicaid Services (CMS) conducts and sponsors a number of demonstration projects to test and measure the effect of potential program changes. These demonstration projects study the likely impact of new methods of service delivery, coverage of new types of service, and new payment approaches on beneficiaries, providers, health plans and others involved in the delivery and reimbursement of medical services. CMS considers the demonstration projects to be critical tools in validating research and helping to monitor the effectiveness of Medicare, Medicaid, and the Children's Health Insurance Program (CHIP). Findings from demonstration projects have played a role in some of the program changes with the most major historical impact.

Currently CMS is coordinating more than 50 demonstration projects in various stages of the process, from announcement and solicitation of participants to publication of findings and analyses.  One such ongoing demonstration project that actually preceded the March 23, 2010 healthcare reform legislation (Patient Protection and Affordable Care Act or PPACA), is the Acute Care Episode (ACE) demonstration, which commenced in 2009. The ongoing ACE project studies a bundled payment on select orthopedic and cardiovascular procedures to ideally test the alignment of incentives for both hospitals and physicians. The demonstration will also test the effect of open price and quality information sharing on beneficiary choice for select inpatient care.

PPACA itself is highly focused on innovation and anticipates the implementation of dozens of new demonstration and pilot projects, including many aimed at coordinated care efforts.

But what do the results of these demonstrations and pilots mean for providers and investors?  How important are the results? The answers depend in part on the nature of the demonstration and the climate otherwise surrounding the industry at hand.  Harvard Professor David Cutler, a key advisor to the Obama administration on healthcare reform, trumpeted the import of the programs in order to save “enormous amounts of money while simultaneously improving the quality of care” in the June edition of Health Affairs. 

On the other hand, some massive Medicare changes, such as the complete overhaul of the reimbursement methodology for end stage renal disease (ESRD) dialysis providers into bundled payments finalized this summer did not even involve a demonstration project, although certainly other extensive analyses were used.  A demonstration project to study that major ESRD program change had been included in The Medicare Modernization Act of 2003 (MMA) but was later repealed. 

Casting additional doubt on the value of such projects, blogger Roger Collier of healthcarereformupdate.com believes the demonstration and pilot programs have been disappointing in their effectiveness, producing mixed results that are at times unreliable. Collier blames their ineffectiveness on the natural unwillingness by providers to participate in a pilot or demonstration if participation is likely to negatively impact income and on the fact that participating providers are likely to be those most able to achieve savings, which tends to skew results in a particular direction.

At the very least, because demonstration projects involve analysis of reimbursement methodologies and levels, as well as the scope of covered services and requirements for delivery of those services, the results of these projects (combined with financial impact analysis from the Congressional Budget Office and other key investigative government agencies and industry lobbying bodies) can serve as one of many influences CMS and Congressional thinking.  Demonstration and pilot programs can be early indicators of government philosophy toward a particular provider and reimbursement, which healthcare investors can track in order to stay far ahead of trends.

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Our McGuireWoods colleagues, Scott Becker and Bart Walker, recently published an article entitled "Strategies for Hospital Leadership and Identifying Strengths, Allocating Hospital Resources and Focusing on Profitable Niche Leadership" which contains key concepts on strategic planning for hospitals.  In light of healthcare reform legislation, trends in reimbursement, growing interest in accountable care organizations and other issues facing the U.S. healthcare industry, now is an ideal time for hospital leaders to reevaluate their strengths and use those strengths to meet their challenges.  

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The following is a list of eleven of the more experienced and active private equity investors in the health care and life science space. These investors are from large private equity funds that specialize primarily in growth-stage, buyout and platform funding transactions. 

1.                  Robert Womsley, Jim Connelley and Ned Villers – Water Street Healthcare Partners. Mr. Womsley, Mr. Connelley and Mr. Villers each work with the Chicago-based firm of Water Street Healthcare Partners. Water Street has over $1 billion in capital under management. Water Street exclusively invests in the health care and life sciences space with portfolio investments across both medical device, medical device distribution and health care providers. Several of their portfolio companies include Medical Specialties Distributors, Sarnova and Access MediQuip. More information is available about Water Street at www.wshp.com. 

2.                  Craig Frances, M.D. Craig Frances leads the health care team at Summit Partners. Summit Partners is one of the nation’s largest private equity funds with headquarters in both Palo Alto and Boston. Dr. Frances serves as a director of HealthCare Partners, National Veterinary Associates and Physicians Formula Holdings. Dr. Frances can be reached at cfrances@summitpartners.com and more information about Summit Partners is available at www.summitpartners.com. 

3.                  Scott Perricelli and David Stienes – LLR Partners. LLR Partners is a large Philadelphia-based private equity fund that invests in a variety of different sectors including healthcare services. Mr. Perricelli and Mr. Stienes led a recent transaction by LLR Partners to fund a platform company called Vivera Health which will seek to build out fertility surgical and laboratory facilities throughout the country. Scott is available at sperricelli@llrpartners.com and David is at dstienes@llrpartners.com and more information about LLR Partners is available at www.llrpartners.com. 

4.                  David Koo and R. Craig Collister – RoundTable Healthcare Partners. RoundTable Healthcare Partners is based in Lake Forest, Illinois and was founded by senior executives from Baxter International and American Hospital Supply. Mr. Collister and Mr. Koo represent the next generation of leadership at RoundTable and focus on investing in various sectors of the healthcare space including medical devices. RoundTable has deep experience in investing in disposable and generic sectors of both medical device and pharmaceutical industries. More information about Mr. Koo and Mr. Collister and RoundTable Healthcare Partners can be found at www.roundtablehp.com. 

5.                  Jeremy Silverman – Frontenac Company. Jeremy Silverman is a managing director at Frontenac Company. Frontenac is a Chicago-based private equity fund that invests in a variety of sectors and focuses portions of its funds on the healthcare space. During the 1990s, Frontenac was a leader in the practice management consolidation. Current Frontenac portfolio investments include Crescent Healthcare and E+ Cancer Care. More information about Jeremy Silverman and Frontenac can be found at www.frontenac.com. 

6.                  Reeve Waud and David Neighbours – Waud Capital. Reeve Waud is the founder of Waud Capital and David Neighbours is a Partner at Waud Capital which is a manager of over $1 billion of funds also based in Lake Forest, Illinois. Waud Capital has invested in Acadia Healthcare and Hospitalists Management Group, LLC and has had significant success in the healthcare space. To further their management expertise, Waud Capital Partners has brought on board Gary Mecklenburg, the former CEO of Northwestern Memorial Hospital in Chicago, Illinois as an Executive Partner. More information about Waud Capital can be found at www.waudcapital.com. 

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In two prior posts regarding, we addressed various questions for a seller to consider when selecting an investment bank to help the seller achieve its transaction goals.   Those questions, as well as those below,  are just a handful of questions that we suggest companies consider . Ultimately, if you determine that working with an investment bank makes sense for your transaction, a bank can help you move a transaction along in an efficient, low stress and financially rewarding way if you are able to find the right bank for you.

 Is the magnitude and type of transaction exciting to the investment bank such that it will keep the bankers’ attention and keep energy focused on pushing the deal through to completion?    In other words, does the deal fall within the bank’s sweet spot? Deals that are at the larger end of a bank’s typical transaction size may mean that the bank has fewer contacts with the types of investors/buyers that should be targeted. Deals that are in the smaller end of a bank’s typical transaction size may not keep the bankers’ attention to drive the deal efficiently toward closing. 

Will the investment bank be willing to follow your management’s lead on the key deal terms (including which targets are contacted, how the various stages of the process will run, etc.)? With the seller management team, does the bank have strong relationships with one or a few leaders that you perceive would be favored over other seller leadership? Alternatively, do you as the seller prefer an investment bank that will lead you through the process and is the investment banker able to do this for you?

Are the bankers willing and able to provide significant research and insight into potential buyers?  For many sellers, choosing a buyer turns on not only the purchase price but on the buyer’s reputation and own strategic goals as well. This is particularly true when all or some of the seller management team will be staying with the buyer going forward.   Most investment banks have research teams who can provide the desired information, but if in-depth information relating to the buyers is important to you, this is one aspect of the bankers’ services that should be discussed.

 Does the proposed timing and track of the deal process proposed the investment bank make sense to you and work with your needs and goals?

Finally, what do the bankers’ clients have to say about them?  The bankers should offer the ability to contact references from current and former clients. Discussing your questions with these references, particularly former sellers, may prove to be very enlightening as to the road ahead. 

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As a follow-up to our prior post on the topic, below are a few key additional questions that sellers can consider when evaluating investment banks in order to find the bank that will ultimately meet the sellers' needs.  These questions are excerpted from a recent article authored by Krist Werling, Scott Becker and me.

One additional question sellers should ask ia How many investor/buyer targets does the investment bank intend to contact with the request for proposal? More specifically, how many potential investors/buyers does the investment bank intend to contact at each stage of the process? Investment banks can very greatly in their philosophy of which and how many targets to contact. Some believe in disseminating the RFP to as many possible targets as are available in the industry whereas others chose to limit distribution to a few select potential investors/buyers that they believe would have the most interest and that would be the best match for you. You should ask how many targets does the bank intend to initially contact and sign confidentiality agreements, how many will receive RFPs, how many will be invited to management meeting and with how many will the bank negotiate offers/letters of intent? Investment banks can very greatly in their philosophy of which and how many targets to contact. Depending on your own sales philosophy, this is another way that you can distinguish among investment banks.

Within the spectrum of investors/buyers that the investment bank intends to contact, how many strategic buyers vs. financial buyers such as private equity funds will be targeted? Strategic buyers are existing players in the industry that may seek to purchase or invest in your business in order to expand an existing business in a strategic fashion, and this may be a more or less attractive option for you as a seller depending on your relationships with your competitors in the industry, your willingness to divulge confidential information to competitors, etc. Financial buyers often will be willing to ultimately pay a higher price for the business where strategic buyers are often more stream-lined in their acquisition methodology and thus more likely to close the deal quickly and efficiently.  To this end, challenges can arise with investment banks when they have too high a comfort level in one part of the market vs another. For example, in one healthcare transaction for a small specialty hospital chain with outstanding earnings, a client hired an investment bank for the principal purpose of seeking financial buyers.   There, the bankers spent the great majority of their efforts with strategic buyers seeking, in the client’s view, the easier close but not necessarily the maximum price.  Ultimately, the client perceived that it already knew each of the strategic buyers and that pricing from the strategic buyers would not permit a deal.

Do the investment bankers understand why your company is ready to sell at this time? Have they worked out the background story of the sale – essentially explaining why, if the business is such a great thing, you now want to part with it?   Buyers will want to know why you are selling and your story about why you want to sell thus becomes an important part of the process.

Do the bankers believe you need to take significant measures to get the business more fully in shape to sell at a maximum price and are you willing to takes these steps?

What is the investment bank’s philosophy with respect to the completion of due diligence and negotiation of the form of purchase agreement/investment documents before signing a letter of intent? In other words, is the investment bank comfortable with signing a letter of intent before diligence is substantially complete and before at least a rough form of purchase agreement is agreed upon? Investment banks have different philosophies on the wisdom of signing of letters of intent early vs. further long in the process and it is important you be comfortable with the bank’s intended approach although the determination of which negotiation approach will likely be as dependent on the negotiation power of the seller (i.e. on the strength of the seller’s business and interest it generates) as it does on the investment bank’s own philosophy.

What are the fees to be charged by the bank? Most banks will charge a retainer fee (which will be treated as a deposit on payment of the full fee) as well as a sliding scale fee based on achieving targeted outcomes. 

Who at the investment bank will be contacting the potential investors/buyers? In other words, will be bankers that you meet with during the initial selection process and works with most closely at the senior leadership level actually be contacting the targets and doing much of the ground work? Likewise, will those particular bankers be present at management presentations and at other key discussions with potential buyers after initial contact is made?

What does the investment bank believe is the range of value for your business? Specially, what assumptions of earnings are used to generate the value range, what multiple of earnings do they anticipate an investor/buyer paying? Within the total purchase price, what does the bank anticipate will be the buyer’s split of cash and debt financing? Although it is important for you to know that the investment bank values your business and will strive hard to achieve the most lucrative deal possible, it is also important to insure that you are working with an investment bank that sets aggressive but reasonably achievable targets.

In addition to the questions raised in Part I of this discussion, these are just a handful of questions that we suggest companies consider when assessing the value of various investment banks.  In Part III we will discuss a few remaining issues for sellers' consideration when making this important decision.

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On July 23^rd, at the same time that it released the final rule relating to the new bundled payment methodology for renal dialysis providers, CMS issued a proposed rule that would create a new Quality Incentive Program (QIP) for dialysis services, tying a facility’s payment to how well it meets the QIP performance standards.   The QIP, which is the first pay-for-performance program in a Medicare fee-for-service payment system, is scheduled to begin on January 1, 2012. 
 
The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) required CMS to develop the QIP to improve the quality of care facilities provide to dialysis patients.  The proposed rule utilizes just three dialysis quality measures, all of which are measured on a facility-wide basis by looking at the total patient population of the facility as compared to national averages: Hemoglobin above 12 grams per deciliter (g/dL), Hemoglobin below 10 g/dL and URR (urea reduction ratio) above 65%.  These common measures of dialysis quality are what most industry experts expected to be included in the rule and are consistent with CMS’s own QIP outline released in September 2009.  However, in light of comments received during the bundled payment rule-making process, CMS proposes to weight Hgb <10 as the most important of the three measures, accounting for 50% of a facility’s score, while the other two measures would each count for 25%. Each of the three measures would factor into the Total Performance Score, a 30 point scale which measures performance against 2008 national averages (or 2007 performance, if it is lower). The proposed rule includes a sliding scale of payment reductions for 2012, where the minimum Total Performance Score (TPS) that facilities would need to achieve in order to avoid a payment reduction would be 26. If a particular facility does not achieve a TPS of at least 26, the reimbursement withhold would be in .5% increments. 

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For many healthcare companies, when it is time to sell or refinance their business, finding an investment bank that fits the needs, philosophies and goals of the seller can be an important component for success during the sale/refinance process.   Earlier this year, Barclays PLC represented biopharmaceuticals company Ception Therapeutics, Inc. as it closed the $250 million sale of 100% of its capital stock to Cephalon, Inc., arguably helping Ception to achieve optimal pricing. Likewise, in 2006, when hospital system HCA went private via a $33 billion management leveraged buyout, the largest in history at the time, Merrill Lynch Healthcare Investment Banking Group acted as financial advisor to HCA through the process, likely increasing HCA shareholders’ return.  

Utilizing an investment bank is not necessary for all companies in all transactions, but an investment bank can help the seller successfully market the business and attract the right potential investors/buyers and ultimately can result in not only a more lucrative deal but a transaction that otherwise meets the seller’s goals. Assessing which investment bank is right for a seller can be a daunting process, but there a few key questions that you as the seller can pose to your leadership when evaluating the various banks in order to find the bank that will ultimately meet your needs.  In a recent article authored by Krist Werling, Scott Becker and me, we addressed a number of questions that a seller should consider during the selection process.

One of the first key questions a seller should ask is this:  How well versed is the investment banker in your particular industry?  Not only are there investment banks that specialize in healthcare (either boutique investment banks that focus on healthcare or healthcare divisions of larger more diverse investment banks) but some investment banks have specialized experience and knowledge about a particular industry within healthcare such as surgery centers, imaging facilities, etc.   For example, Bank of America-Merrill Lynch, William Blair, Goldman Sachs, Morgan Stanley, JP Morgan and others have significant health care banking groups within their larger investment banking segments and have made headlines with some of the most substantial healthcare M&A deals in the past calendar year, including Pfizer’s purchase of Wyeth for $66.2 million, Roche Holding’s acquisition of the remaining 44% of Genentech and Merck’s purchase of Schering Plough. Middle market more general investment banks like Dresner Partners also often have healthcare experience.  Other banks like Cain Brothers, Leerink Swann and Edgemont Capital Partners have the advantage of focusing nearly exclusively on health care services. Working with an investment bank that understands the complexities of your industry enables the bankers to jump right into a transaction without the need for you to educate them about your industry or to explain basic fundamentals about your business.

The seller should also ask Does the bank understand your individual company as an entity with a unique model, management team and philosophy?   Have they taken the time to get to know your corporate culture and special aspects of your product and service delivery and do they appreciate the ways in which your company differs from your industry competitors?

The seller should further consider Is investment banking a main focus of the company?  We generally caution people against hiring parties to do investment banking services where this is not a core part of their efforts.   For example, one client hired a big four accounting/consulting firm a few years ago to help sell its specialty pharmaceutical business. Investment banking was a newer business line for the big four firm. After months without good results, the client hired William Blair, a company that does focus in investment banking and in part in healthcare and had much better results: i.e. the client ultimately completed a transaction which exceeded essentially all of its targets. 

There are a number of additional considerations when selecting the right investment bank discussed in the article.  In future posts, we will address these questions.

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Yesterday, CMS issued a release regarding the much anticipated final rule laying out the new bundled prospective payment system (PPS) for renal dialysis facilities.  The rule itself was published on July 23, 2010.  Under the new  PPS, CMS will make a single bundled payment to the dialysis facility for each dialysis treatment that will cover all renal dialysis services and home dialysis commencing on January 1, 2011.  It replaces the current system which pays facilities a composite rate for a defined set of items and services, while paying separately for drugs, laboratory tests, or other services that are not included in the composite rate.   At the same time, CMS issued a proposed rule that would create a new Quality Incentive Program (QIP) for dialysis services that will link a facility’s payment to how well it meets the QIP performance standards, which will be discussed in a separate blog post.  
 
Currently and through the remainder of this year, Medicare makes a composite rate payment to ESRD facilities for furnishing outpatient maintenance dialysis in the facility or in the beneficiary’s home.  The composite rate payment covers dialysis treatment costs and certain routinely furnished ESRD-related drugs, laboratory tests, and supplies.  The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA)   required  CMS to develop a new, fully bundled prospective payment system for renal dialysis services to replace the existing composite rate payment methodology.

According to the CMS issuance, CMS received nearly 1500 public comments in response to the ESRD PPS proposed rule that appeared in the September 29, 2009 Federal Register.  Among the major concerns raised by the comments were the proposals surrounding payment for home dialysis training; inclusion of additional payment adjustments for patient characteristics in the payment methodology; and inclusion of former Part D prescription drugs related to ESRD treatment in the payment bundle.   In the final rule CMS: 
 
 1) Creates a home or self-care dialysis training payment adjustment specifically directed to patients trained by facilities certified to provide home dialysis training. 


 2)  Finalizes payment adjustments for dialysis treatments furnished to adults for patient age, body surface area, and body mass index, onset of dialysis, and certain co-morbidities, but does not finalize adjustments for the patient’s sex or the patient’s race or ethnicity. 


 3)   Finalizes a payment adjustment for dialysis treatments furnished to pediatric patients, based on patient age and dialysis modality, but not co-morbidities.  


 4)   Finalizes a definition for renal dialysis services that includes ESRD-related oral-only drugs, but postpones payment for such drugs under the ESRD PPS until Jan. 1, 2014.

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On May 26th, CMS released a proposed rule setting out new credentialing and privileging processes for physicians and other healthcare professionals who provide telemedicine services, a move which may lesson burdens on healthcare providers considering telemedicine options. Further, next week CMS is expected to release an additional proposed rule re additional services which may be reimbursed by Medicare if provided via telemedicine. Both rules, if they become law, could increase opportunities for growth in telemedicine companies.

Proposed Rule re Cross-Credentialing

Prior to January 1, 1999, Medicare coverage for services delivered via a telecommunications system was limited to services that did not require a face-to-face encounter under the traditional model of medical care, such as interpretation of an x-ray or electrocardiogram or electroencephalogram tracing, and cardiac pacemaker analysis. Then on October 1, 2001, section 223 of the Medicare, Medicaid and SCHIP Benefits Improvement Protection Act of 2000 significantly expanded Medicare telemedicine services services to include consultations, office visits, office psychiatry services, and certain other services that have been added over the years. However, in addition to state licensure and other issues faced by hospitals and physicians providing these services, one challenge for hospitals has been the process of granting credentials to these physicians. Under existing Medicare Conditions of Participation (CoP), the governing body of a hospital must make all privileging decisions based upon the recommendations of its staff, after the staff has examined and verified the credentials of practitioners applying for privileges. Thus a hospital must conduct individual appraisals of its prospective members and examine the credentials of each candidate to make a privileging recommendation to the governing body. Hospitals may use third-party credentialing verification organizations, but the governing body remains responsible for the privileging decisions.

By contrast, the proposed rule released on May 26th would allow the governing body of a hospital whose patients receive telemedicine services to grant privileges based on recommendations from its medical staff, which, in turn, would rely on information provided by the distant-site hospital. In the proposed rule, CMS would require the local hospital to verify that:

1. The distant-site hospital is a Medicare-participating hospital.

2. The physician is privileged at his own hospital and that the distant-site hospital provides the local hospital a current list of the physician’s privileges.

3. The physician holds a license issued or recognized by the state in which the local hospital is located.

4. The local hospital has evidence that the distant-site hospital conducts an internal review of the physician’s performance of his privileges.

The local hospital must provide relevant information to the distant-site hospital for its use in periodically evaluating the physician, including all adverse events that might have resulted from telemedicine services provided by the physician to the local hospital’s patients, as well as all complaints the local hospital has received about the physician. CMS believes its proposal would "allow for the advancement of telemedicine nationwide while still protecting the health and safety of patients." CMS is currently taking comments on the proposed rule through July 26th.

Anticipated Proposed Rule re Additional Telemedicine Services

According to the American Telemedicine Association, on or about July 13th CMS is expected to release an additional proposed rule re additional services which may be reimbursed by Medicare if provided via telemedicine. At a minimum, these two proposed rules suggest a greater degree of acceptance of telemedicine services than ever before. If the proposed rules becomes law, many hospitals will likely take advantage of such cross-credentialing options and opportunities to bill Medicare for additional telemedicine services, and telemedicine providers may flourish in the process.

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One aspect of investing in a healthcare facilities business of which investors should be aware is the impact of state certificate of need (CON) laws. A  CON is a state regulatory review process that requires an application to the appropriate state board for the grant of a CON prior to developing, or in some states expanding or modifying, a covered healthcare facility. CON laws arose in the 1960’s as many states attempted to curb rising healthcare expenditures through planning and regulation.  In 1974, Congress passed the National Health Planning and Resources Development Act, mandating that all states adopt CON laws.  A decade later, Congress allowed the federal law to expire, and several states quickly repealed or let sunset their CON laws. Now, according to the National Conference of State Legislatures, 36 states plus the District of Columbia have CON laws that govern some healthcare facilities. Some state laws govern primarily hospitals while other state laws govern a broader array of facilities. Supporters of CON programs believe they help ensure access to healthcare, keep quality high and lower costs by evaluating whether a particular service or facility is actually needed in the proposed area.  Opponents believe it stymies healthy competition that is needed to keep quality high.

Investors should become familiar with the CON requirements, if any, in the states in which their target businesses operate, including the facilities governed by the CON laws and the rules on expansion and modification. Investors should consider whether such restrictions work to the businesses’ benefit currently and whether the restrictions will continue to be beneficial in the future. The presence or lack of state CON requirements also will likely factor into valuation of the business. In certain circumstances, a CON can be considered a valuable asset of the business that was hard-fought and costly to obtain, and state CON requirements can in some cases function as a protection for the business against emerging competitors in at least the short term. However, in most states, CONs are tied very specifically to a designated location and designated size (e.g. based on number of beds, procedure rooms etc) and facilities in a CON state can have less flexibility in terms of modifying business lines as facilities in non-CON states. In those CON states closely regulating expansion and modification, obtaining the necessary approvals can be an expensive and lengthy process.

Additionally, investors should understand the workings of the state CON board and the current political and legal issues facing those boards. For example, the gle provides that no person shall construct, modify or establish certain types of healthcare facilities or acquire major medical equipment without first obtaining a CON or exemption from the Health Facilities and Services Review Board (the Board).  In a recent article, McGuireWoods healthcare attorneys Jeff Clark, Jason Greis and Joe Hylak-Reinholtz discussed some key recent changes to the Illinois CON law impacting Illinois healthcare providers and their investors.  The authors discussed that on March 1, 2010, an important provision in the Illinois law relating to the legislature's decision to alter, yet again, the number of members on the Board (increasing its size from five to nine members) became effective. The change represents the third time since 2003 that the state legislature has altered the number of members on the Board. The change is important because the addition of four Board members could create new opportunities or lead to unforeseen challenges for future CON applicants. The viability of potential projects may be shaped by the individuals Governor Quinn appoints to fill the new Board vacancies. Changes such as these in state CON laws and boards can have significant impacts on a business and should be carefully considered by investors as well.

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In prior posts I’ve discussed the significant impact of the Patient Protection and Affordable Care Act (the PPACA, more commonly referred to as the healthcare reform legislation) on the physician-owned hospital industry.  Section 6001 of the PPACA stymies growth of the industry by prohibiting expansion of existing physician-owned hospitals and bans any new physician-owned hospitals that are not Medicare-certified by December 31, 2010 (i.e. hospitals violating those limitations will not be permitted to bill Medicare/Medicaid for referrals made by their physician owners). Although a number of exceptions apply to the expansion prohibition, most industry analysts believe meeting the exceptions will be challenging to virtually impossible for existing physician-owned hospitals.

According to a press release issued today by Physician Hospitals of America (PHA), the trade association for the industry, there are approximately 265 existing physician-owned hospitals, 29 of which are scheduled to open and receive their Medicare certification by December 31, 2010. An additional 45 hospitals are currently under development and are not expected to be open or Medicare-certified by December 31, 2010. According to PHA, there were also 39 hospitals that were previously under development but were abandoned as projects due to passage of Section 6001.

In response to Section 6001, PHA and Texas Spine & Joint Hospital (TSJH) jointly filed suit today in U.S. Federal Court, Eastern District of Texas, challenging the constitutionality of Section 6001 on grounds that the law is a violation of due process and equal protection rights, and that the Section is void due to a contradictory, vague and arbitrary nature. TSJH is a privately owned hospital specializing in orthopedic and spine surgery, procedures, and tests which had sought and won local zoning approval to expand its facility with an additional 20 Medicare beds, which expansion project would now be prohibited by Section 6001.

Industry supporters and opponents will be carefully following progression of the lawsuit as the resolution is anticipated to have a profound impact on the ability of the physician-owned industry to thrive.

Scott Oostdyk and Victor Moldovan of McGuireWoods are representing PHA and TSJH in the lawsuit. 

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Now more than ever, it is critical that anyone contemplating investment in a healthcare sector carefully review the target company’s compliance protocols. We have always strongly recommended that investors analyze the company’s compliance program, as well as efforts at adhering to the program requirements, in order to better gauge the company’s overall goals and philosophy regarding compliance. Understanding a company’s compliance culture can help the buyer 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.

Now, under the Patient Protection and Affordable Care Act (the PPACA, more commonly referred to as the healthcare reform legislation), 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. 

By contrast, the Secretary of HHS is mandated with determining which 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. It is likely 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.

For healthcare providers without compliance plans that wish to make early moves toward a full compliance program, or for buyers who seek additional comfort through early implementation, an article entitled “A Practical Compliance Plan Approach for ASCs” authored by Scott Becker, Melissa Szabad and myself is available here. Although this article speaks specifically to the ambulatory surgical center industry, it has practical implications for most healthcare providers. 

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On Wednesday, March 12^th, McGuireWoods hosted our 8^th Annual Business & Legal Issues in Dialysis & Nephrology Symposium. Leaders from various perspectives in the industry provided presentations and lead discussions on a wide array of topics, including the effects of the Patient Protection and Affordable Care Act (the PPACA, commonly referred to as the Health Care Reform Law), key compliance issues and investment scenarios.

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In recent years there has been growing public awareness of end of life decisions and the importance of documenting advance healthcare decisions. In fact, April 16^th is National Healthcare Decisions Day, a nationwide educational event founded by McGuireWoods partner Nathan Kottkamp.   Advance directives are legal documents, prepared by patients in advance of the need for healthcare services, that directs the healthcare the patient does or does not want if he or she becomes unable to make decisions. Advance directives may include durable powers of attorney, living wills and organ donation directions.  Nathan recently discussed advance directives, including issues arising out of healthcare reform debates, on Countdown with Keith Olbermann. 

From the perspective of many healthcare providers, providing information about advance directives is required by law. The Conditions of Participation in the Medicare and Medicaid programs require hospitals, critical access hospitals, skilled nursing facilities, nursing facilities, home health agencies, providers of home healthcare (and for Medicaid purposes, providers of personal care services), hospices, ambulatory surgery centers, and dialysis facilities to inquire about and provide information to patients regarding advance directives. Further, the Conditions of Participation require all of these healthcare providers, except ASCs and dialysis providers, to provide public education about advance directives. Additionally, healthcare accreditation bodies Joint Commission and AAAHC have accreditation standards requiring facilities to honor advance directives.

In connection with the national focus on advanced healthcare decisions, new companies have emerged to assist patients and healthcare providers with the advance directives process. Embark Health, for example, has developed and is actively distributing Advance Directive Solution (ADS), a comprehensive online and telephonic resource with all the information and legally current forms to create an enforceable advance directive. Embark Health is also in the process of rolling out The Personal Legacy Solution (PLS), an electronic repository for tracking the location of assets, the location of other important items or documents, and for storing important messages to loved ones (all of which will be retrievable in accordance with the individual member’s specifications).  Embark Health markets these products directly to patients as well as to and through large systems such as health plans, hospitals and other providers. Burgeoning companies like Embark Health and others may provide an opportunity for investors interested in healthcare and healthcare IT services.  

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On March 25th McGuireWoods hosted a webinar for private equity investors that provided an overview of key business issues and due diligence process for investments in the dialysis and physician practice spaces.  If you missed the webinar, an archived copy of the webinar is available on our webite.  This entry provides a brief summary of one of the most important aspects of making an investment in any space: due diligence. 

The dialysis market has been a lucrative area for investment by a number of private equity funds.  Here are a few key areas for conducting diligence on these investments:

• Referral streams - understanding where referrals for the facilities come from is essential.  Further, investors must ensure that relationships with referral sources are in compliance with the Anti-Kickback Statute and Stark Act.
• Medical Director Agreements - ensuring that facilities are properly staffed with CMS-mandated medical directors and that medical director relationships meet appropriate regulatory requirements and include enforceable non-competes.
• Payor Contracting - conducting an analysis of reimbursement rates and ability to retain payor contractrs from commercial payors. 

After being decimated in the late 90s, the physician practice management space is again seeing interest from investors.  When investing in this market, a few key diligence areas include:

• Structural Issues - state corporate practice of medicine laws typically prohibit employment of physicians by corporations that are owned by non-physicians.  As such, physician practice management companies are typically structured as a management relationship with a "professional corporation."
• Management Agreement Structure - state laws prohibiting fee splitting impact the structure of management agreements.  It is important to confirm compliance with fee splitting laws to ensure enforceability of management agreements. 

For a copy of the full presentation, email us at kwerling@mcguirewoods.com or awalsh@mcguirewoods.com. 

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As physicians face the reality of consolidation in certain segments of the healthcare industry, rising costs such as the costs of malpractice coverage, the tangible and intangible costs of administering a private practice and the critical importance of power in the managed care contracting process, many are moving away from traditional private practices with a few colleagues and making momentous changes in the way they practice.  

One way for physician practices to prosper is by strategically restructuring such that they themselves can acquire the scale and resources to accomplish their goals with more autonomy. 

Another option that has gained increasing popularity is for practices to join forces with physician organizations with vast resources, economies of scale, significant management expertise and sophisticated information networks such as large practices, hospitals and physician practice management companies (PPMCs). Of course, as with any transition in practice methodology, there are price tags that come with such a movement.   There are a few different PPMC models, some including ownership of the managed practices under an umbrella organization and others involving purely fee-based management services such as management services organizations (MSOs). The long-term viability of the PPMC model has been seriously questioned in the past decade as former publicly traded PPMC giants like PhyCor* and MedPartners** quickly rose to prominence and nearly as quickly fell from grace.   However some industry experts believe that some of these consolidation approaches, including MSOs and umbrella organization PPMCs, can still be a good solution for physicians in the right format and right circumstances. 

As the larger consolidating organizations flourish, so do investment opportunities. McGuireWoods will be hosting a complementary webinar on Thursday, March 25th focusing on issues relating to investment in the physician practice management space as well as the dialysis industry. This webinar is the first in a series organized by Krist Werling, myself and other colleagues at McGuireWoods that will focus on assessing targets, conducting due diligence and related issues in various healthcare niches.  Registration is available here, and in future posts we will further discuss the opportunities and challenges in these niches.

* In late 2002, PhyCor emerged from Chapter 11 bankruptcy. One of its divisions, privately-held Pivot Health, continues to provide healthcare management services. 

* Following the decline of its PPMC business in the late 90’s, MedPartners began to focus exclusively on prescription benefits management as Caremark Rx and Caremark International, which merged with CVS in 2007 into what is now CVS Caremark (ticker symbol CVS).

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The healthcare sector saw a significant decrease in the number of private equity transactions completed last year. Pitchbook reported that approximately 125 deals were completed where private equity funds invested in healthcare companies in 2009. This is down from 233 in 2008. This reduction takes into account both general economic conditions which saw declines in almost every sector, the overhang of healthcare reform where many investors saw tremendous uncertainty in the healthcare sector due to the potential for healthcare reform and the concern that some funds were over-invested in healthcare. Interestingly enough, much of the over-investing in healthcare resulted less because sponsors increased their percentage of investment in healthcare but more due to significant reductions in the values of the other investments which left their overall percentage of investment in healthcare higher both on the equity or debt side and thus over invested in healthcare. 2010, however, has already seen significant pickup in healthcare investing and new interest in the healthcare sector.

Fellow McGuireWoods attorneys Krist Werling, Scott Becker and I recently published a short article discussing the following four key concepts relating to healthcare investing:

1) Types of buyers from the perspectives of goals and strategies;

2) Types of target companies from a compliance orientation perspective;

3) Healthcare diligence issues; and

4) False claims recoveries issues.

It is critical for any investor in healthcare to have a firm understanding of each of concepts.  The more knowledgeable the investor in these areas, the more capable they will be to evaluate risks of investment. 

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The U.S. dialysis industry includes more than 4,000 outpatient dialysis facilities (in addition to a large number of home dialysis programs) that service more than 350,000 patients suffering from end stage renal disease (ESRD). The industry self-classifies dialysis companies as either large dialysis organizations (LDOs) or small dialysis organizations (SDOs). The LDOs are few in number and include DaVita and Fresenius Medical Care, both publicly traded companies, as well as DSI Renal and Renal Advantage, both of which are backed by private equity funding.  In mid-2008, Congress passed the first major Medicare payment overhaul for dialysis providers in 25 years. Two years later, in anticipation of the January 1, 2011 implementation date, LDOs and SDOs alike are taking a close look at the potential impact on their businesses.   

As part of a more comprehensive ESRD program reform bill, the payment formula for dialysis treatments was reconfigured into a bundled payment for all dialysis services (including pharmaceuticals such as the common anemia management erythropoietin-based drugs). Pricing for those services will be influenced by a market update mechanism starting in 2012. Providers can elect to fully participate in the bundles approach in 2011 or may instead elect to have the approach phased in over four years beginning in 2011. Physicians will also get a 2% increase in the Medicare payment if they submit prescriptions electronically. Those who don’t use the so-called e-prescriptions by 2011 would have their fees cut by 1% the following year, rising to 2% in 2014. 

It is likely that the new bundling system will impact SDOs and LDOs differentially for a variety of reasons. For instance, LDOs enjoy impressive purchasing and contracting power and other economies. Further, some LDOs are vertically integrated such that their key equipment and fungible products suppliers are affiliates, which can result in a significant cost savings to the LDO.  

On the other hand, some industry analysts believe the impact of bundling will be felt differently by providers not necessarily along SDO versus LDO lines but rather based on other factors, such as a provider’s historical drug dosage orders or based on geographic factors. For example, Shari Levanthal of the American Society of Nephrology published an interesting article last year describing the findings of Columbia University/Harlem Hospital researchers who believe that dialysis providers in the east and southeast are particularly likely to feel an adverse financial impact due to historical variances in Medicare reimbursement.

In any event, the January 1^st implementation date for the new methodology is quickly approaching and dialysis providers of all size, modality focus and patient population would be wise to assess now the potential impact on their businesses and strategies for keeping costs low and quality high. 

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In a prior post, I discussed the legislative challenges faced by physician-owned specialty hospitals during the past decade.  One powerful weapon specialty hospitals have in the fight against industry adversaries are research findings showing that specialized surgical care results in better outcomes and fewer serious post-surgical complications such as blood clots, infections and heart problems.

One such study was released online in the British Medical Journal on February 11th.  As reported by Becky Soglin of The University of Iowa Health Care Media Relations, the findings were based on data for nearly 1.3 million Medicare patients who received hip or knee replacement surgeries between 2001 and 2005 at 3,818 hospitals in the United States. The results grouped hospitals into five levels of specialization.  The most specialized hospitals had fewer complications or deaths within the first 90 days after a surgery than less specialized hospitals did.  For one example as cited by Ms. Soglin, the rate of death for patients who had hip and knee replacements was twice as high at the least specialized hospitals compared to patients treated at the most specialized hospital -- 1.4% compared to 0.7% within the first 90 days after surgery. 

Of course both sides of the specialty hospital debate cite statistics relating to the impact of specialty hospitals on the U.S. healthcare system at large.  For specialty hospitals, continued focus on impressive clinical outcomes is critical.  Additionally, specialty hospitals have become popular among patients for their high quality facilities and highly focused care.

Industry adversaries include political powerhouses like the American Hospital Association, which claim that specialty hospitals waste government funded healthcare dollars by permitting physicians to refer to entities in which they own interests and cherry-pick patients with the most lucrative insurance coverage thereby overburdening general acute hospitals with excessive indigent populations.

The future of national healthcare reform efforts is unclear.  Even if specialty hospitals again escape restriction in a consolidated healthcare reform bill,  it is certain that specialty hospitals will not be forgotten by their opponents. 

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The National Health Expenditure Accounts (NHEA) are published by the Centers for Medicare and Medicaid Services (CMS) and are the official estimates of total national healthcare spending.  CMS began releasing the NHEA in 1960. The NHEA measures annual U.S. expenditures for healthcare goods and services, public health activities, program administration, the net cost of private insurance, and research and other investment related to healthcare. The data are presented by type of service, sources of funding and sponsors.

According to CMS, U.S. healthcare spending continued to grow in 2008, increasing 4.4 percent compared to 6.0 percent in 2007. This increase was the lowest in healthcare spending since 1980. Total health expenditures reached $2.3 trillion, which translates to $7,681 per person or 16.2 percent of the nation's Gross Domestic Product (GDP). Data for 2009 has not yet been released.

Through its Office of the Actuary, CMS releases each year projections of healthcare spending for those same categories as are measured in the NHEA.

An overview of NHEA and projection methodologies can be found on the CMS website as well as NHEA historical data. Also available from CMS are the actuarial projections .

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One of the less publicized aspects of recent Congressional healthcare reform efforts is the continued efforts of some legislators to severely limit physician ownership in specialty hospitals, this time through the current U.S. House of Representatives and Senate bills.

There are nearly 200 specialty hospitals in the United States, as well as many in various stages of development. These specialty hospitals most commonly concentrate on surgical procedures, although there is a subset of the specialty hospital market that focuses on cardiovascular services, and there is a growing trend toward specialization in other nonsurgical areas such as special cancer treatment hospitals, children’s specialty hospitals and renal hospitals.

These hospitals are often physician-owned and operate pursuant to a specific exception to the federal Stark Law known as the “whole hospital exception” which permits physician to refer to the hospitals in which they own equity. The U.S. House of Representatives and Senate have both passed bills containing language that seriously alter the so-called "whole hospital exception" to the Stark Law on which these specialty hospitals rely, including by limiting the ability of existing hospitals to expand, limiting the level of physician ownership in such hospitals and prohibiting the development of new physician-owned hospitals which have not yet achieved certain developmental milestones (such as Medicare certification) by a set date.  

The House and Senate are working to consolidate their reform bills but it is yet unknown whether Congress will be able to pass any health care reform bill, particularly given the recent shifts in the power with the election of new Massachusetts Senator-elect Brown. Even if a consolidated bill is adopted, the details of such limitations on physician-owned hospitals are unclear; however, most industry leaders believe any consolidated bill would include some additional restrictions on physician-owned hospitals.

One thing is certain. The political future of physician-owned specialty hospitals is hazy, and if the current healthcare reform efforts do not produce a bill with restrictions on physician-owned hospitals, industry opponents are unlikely to lay down their swords. 

Physician Hospitals of America (PHA) is the industry trade association for physician owned hospitals.

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