Put aside your Sony flat-screen TVs and Blu-Ray players and make way for ---flow cytometry. Why is Sony Corporation, a proven global manufacturer in the field of audio, video game, communications, key device and information technology, venturing in the turbulent, albeit often lucrative waters of medical applications? Because they can.

Less than a year ago, Sony Corporation of America announced the acquisition of iCyt Mission Technology, Inc., a leading producer of high-performance cell sorters used for stem cell and disease research. iCyt, headquartered in Champaign, Illinois, designs, manufactures and sells flow cytometers as well as associated reagents and services. Sony brings to the laboratory table a cosmic level of technological and engineering experience. Indisputably one of the international leaders in technology, Sony has long been exploring healthcare applications for its heretofore consumer-based optic technologies, such as microchips used for Blu-Ray disc players, as well as its advanced data processing systems.

The acquisition of iCyt by Sony hurls the global giant headlong into the burgeoning field of biological instrumentation. Keiji Kimura, Sony Executive Vice President, opined that “…marrying Sony’s expertise in manufacturing consumer products with iCyt’s technological assets will accelerate development of the business.”

At the recent Congress of the International Society for Advancement of Cytometry, Sony and iCyt announced two new, state-of-the-art cell-sorters; SYNERGY, an advanced bench-top cell sorter/analyzer, and ECLIPSE, a multi-color automated bench-top analyzer. These machines, which range in price from $250,000 to $1.4 million, have been optimized for use with iCyt’s latest comprehensive line of flow cytometry reagents.

Current developments in regenerative medicine have brought to the forefront the necessity of cell analysis -- flow cytometry – as an indispensable instrument for research. Sony’s application of its core technologies should enhance and epitomize its venture into the world of life science instrumentation and related technology. Sony and iCyt have, jointly, been accelerating the development of next-gen cell analysis systems, distributing these revolutionary devices to private and public research institutions, pharmaceutical and biotechnology companies and large medical centers around the world.

Sony Corporation, which recorded consolidated annual sales of approximately $87 billion for fiscal year ended March 2011, is uniquely positioned to expand its data processing expertise into the realm of health care.

iCyt, will be able to utilize Sony’s international resources and reputation to deliver innovative solutions to the cell analysis market. Other major players in the field of flow cytometry include BD Biosciences (part of Becton, Dickinson & Co.), Beckman Coulter and Danish company Dako A/S.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Since the beginning of 2011, medical diagnostic and monitoring device companies have been performing in an established and even an exceptional manner. To date, these specialized medical device businesses have shown double-digit EPS growth and organic revenue growth in the middle-to-high-single digits.

Sales from medical tool companies have risen 14%, diagnostics companies 15%; up 5% as compared to the Standard & Poor. The prior year saw the diagnostics/tools sector up nearly 30%.  Perhaps the most desirable companies are those that have been in existence for a number of years in such emerging markets as China and India, where they are able to capitalize on the resources of the region.

A most interesting classification is the role of genomic testing in clinical diagnostics. DNA sequencing, a combination of chemistry and engineering is, arguably, the most dynamic segment of the medical device market, as well as the fastest growing.

Of the approximately 300 leading healthcare companies that are actively investing in all types of medical products and services, about 10% are in the areas of diagnostic and monitoring devices, with diagnostics seeing four times more companies than monitoring.

Besides monitoring and diagnostic device companies, other tools, services and software being developed by healthcare companies include therapeutic and surgical devices, pharmaceuticals, drug delivery systems, medical records, hospital/patient/clinic services, biotechnology, elderly/disabled care, laboratory services and medical supply companies.

Companies with rapid growth in the fields of diagnostic and monitoring devices include: Securus Medical Group, which has raised $750,000 of a planned $1.5 million Series A venture funding; Intuity Medical, which has raised Series D funding of $76 million and NanoDetection Technology, which has raised Series A funding of $2.3 million from its lead investor.

Monitoring and diagnostic device companies look to be poised to lead healthcare manufacturing and technology companies into the new year.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

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

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

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

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

 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

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

What is your lender concerned about?

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

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

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

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

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

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

FDA is clearing up confusion about what types of changes to existing medical devices require new 510(k) submissions by updating its 1997 guidance document, "Deciding When to Submit a 510(k) for a Change to an Existing Device." The 2011 Version has been published with the intent of clarifying the requirements in an effort to improve predictability, consistency, and transparency of the premarket review program. When conducting diligence on medical device manufacturers, investors should be aware of historical and planned changes to existing devices.  These changes may need to follow the new requirements.  Click here to read more.  Contact Melissa Gilmore, McGuireWoods' FDA counsel at mgilmore@mcguirewoods.com.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Join us on November 2 in Deerfield, Illinois for an interactive conference designed for all stakeholders from medical device, durable medical equipment and diagnostic manufacturers and distributors.  Speakers will be joining us from Baxter, Sg2, Medtronic, Stryker and more. 

Topics Covered Will Include:

• Structuring successful MedTech partnerships
• Physician payment sunshine laws
• Underlying changes in healthcare reimbursement and their effects on medical device companies
• Preparing for venture funding and use of incubators to fuel start-up growth
• New developments in regulation of mobile health devices
• Many more topics for growth stage and established device, DME and diagnostics companies!

Please watch the blog for more agenda information and registration details.  Please contact lsams@mcguirewoods.com with any questions. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

This week, the 6th Circuit Court of Appeals upheld the constitutionality of the individual mandate portion of the healthcare reform law, the ACA (also known as PPACA).  In this first decision from a Federal Court of Appeals on the matter, a Republican appointee joined a Democratic appointee Wednesday for a 2 to 1 decision upholding the law.  The decision affirms the ruling of a federal circuit judge in Michigan.  

We have discussed in prior posts that the 6th Circuit case is one of several similar challenges pending in Federal Courts of Appeal around the country.   In mid-June, the 11^th Circuit Court of Appeals heard arguments in the government’s appeal of Circuit Court Judge Vinson’s earlier ruling that the individual mandate is unconstitutional and that, given the lack of a severability clause, the entire law is therefore unconstitutional.  And 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.  The nation continues to await these additional Circuit rulings, with the expectation that some or all of these cases will be consolidated by the US Supreme Court for expeditious hearing this fall.

Available here are prior posts discussing these PPACA challenges, legislative efforts to repeal portions of the law and the Physician Hospitals of America (PHA) and Texas Spine and Joint Hospital (TSJH) court challenge to Section 6001 regarding limitations on physician-owned hospitals.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Healthcare providers are often the first to feel the effects of Medicaid funding shortfalls.  Economic turmoil, federal law and political pressures leave states few options but to slash the rates they pay to providers or take other actions regarding program eligibility discussed in Part I of our Medicaid Budget Crisis series.  A recent Kaiser Family Foundation study found that 39 states cut or froze provider rates in 2010 and 37 states have either planned or implemented rate restrictions in 2011.   Yet, because Medicaid covers approximately 68 million beneficiaries nationwide, many providers continue to rely to varying degrees on Medicaid reimbursement.  As John Iglehart's piece in the New England Journal of Medicine describes, in 2010 the program spent approximately $406 billion on acute and long term care, representing one sixth of the United State’s overall healthcare spending.  Assuming that the requirements of the healthcare reform law, The Affordable Care Act (aka PPACA) continue to take effect as scheduled, these numbers are expected to continue to grow, some estimate by over 16 million people. The challenge, particularly for healthcare investors, is determining which providers can benefit from Medicaid programs despite state budget cuts.  In a continuation of our series on the Medicaid budget crunch and its affect on healthcare investing, this post will consider some of the healthcare providers that are well positioned to flourish (or at least emerge relatively unscatched) as states and the federal government assess strategies for Medicaid budgets. 

The first type of business that are more likely than others to emerge as winners, or perhaps more accurately at least not be cast as losers, from the Medicaid budget crunch are those that do not rely heavily on state legislatures for their reimbursements.    A few provider types that fall in this category are as follows.

• Dialysis Providers: The best example of this is dialysis providers who receive the majority of their payments from the federal government’s Medicare program. 

• Preventive Care/Disruptive Healthcare Initiatives:   We have discussed in the past certain healthcare thought-leaders' perspectives on the value of disruptive healthcare initiatives, a philosophical shift in the macro system of orienting care and incentivizing clinical outcomes.  As providers focusing on preventive healthcare and those geared toward different stages in the healthcare continuum flourish, those that are typically self pay or commericial-reimbursed rather than  government-reimbursed could be "winners" in the Medicaid budget crunch.

• Primary Care Providers: As a result of PPACA, primary care providers are another group that should enjoy some insulation from state budget issues.  Assuming that PPACA is not repealed or rendered unconstitutional, the legislation calls for a temporary, federally funded two-year increase for payments to primary care physicians starting in 2013.  The increase would pay primary care physicians 100% of the rate that Medicare pays primary care physicians, rather than the historically lower Medicaid rates that each state sets.   At least in the short term, this enhancement should insulate primary care physicians from the volatility in state budgets and, at least for providers in some states, give primary care physicians a significantly enhanced reimbursement rate for each patient that they treat.   
  • Unfortunately, the extent to which this enhanced reimbursement will benefit primary care physicians depends on the state in which a physician practices. While state Medicaid programs have historically reimbursed primary care physicians at lower rates than Medicare, the degree of difference varies dramatically between states.  In 2008, states like New York and California reimbursed primary care physicians at less than half the rate of Medicare.  Therefore primary care physicians in these states stand to gain significantly from the PPACA’s rate enhancement.  On the other hand, states like Alaska, Wyoming and Idaho had Medicaid reimbursement rates that exceeded the Medicare reimbursement rate. Thus, at best primary care physicians in these states will likely see their rates remain the same or possibly even decline as state Medicaid directors reduce their reimbursement rates to bring them into line with Medicare.
  • Finally, primary care physicians must consider whether or not a two year rate enhancement is enough to entice them to open their clinics to Medicaid patients.  In 2008 only 42% of primary care physicians nationally were accepting new Medicaid patients. This compared with 61% of primary care physician accepting Medicare patients and 83% accepting privately insured patients.  For further detail on historical rates and primary care government program activity, see these publications by Stephen Zuckerman and Dennis Smith.

Other potential winners in the Medicaid budget crunch are those businesses who can provide better care with fewer resources and the vendors who will provide the tools to help healthcare providers reach these cost and quality improvement goals.

• Managed Care Organizations:  A number of states are trying to overcome their Medicaid budget issues by pushing more of their Medicaid beneficiaries into privately run managed care plans.  In 2010 13 states and in 2011 20 states expanded their Medicaid managed care programs.  These plans at least purport to save states money and encourage more efficient care because they allow states to pay an insurance company a set fee for each Medicaid patient that a health insurer covers.  A recent USA Today article highlights the business opportunities that the recent state expansion of managed care, combined with the PPACA’s expansion of Medicaid, offers large healthcare payers like Aetna and UnitedHealthcare.  While many industry participants disfavor MCOs because of the manner in which they control costs, at least one state, Florida, is giving hospitals and doctors groups the chance to set up their own managed care networks and compete directly with traditional MCOs.  In theory at least, under this plan, providers will be able to take advantage of some of the business opportunities that MCOs see in the expansion of Medicaid managed care. 

·        Health IT:  Health information technology is another area that has received significant government investment over the past two years.  The American Recovery and Reinvestment Act of 2009 (ARRA) included approximately $27 billion worth of incentives for Medicaid and Medicare providers who “meaningfully” use electronic health records.  The incentives are substantial. Clinicians with at least 30% of their patients (20% for pediatricians) on Medicaid can qualify for up to $63,750 in grants. 

Ultimately, who wins and who loses as a result of a particular state's Medicaid budget crunch largely depends on the state in which a provider practices.  Not every state is experiencing the same level of budget problems and not every state is exacting deep rate cuts to Medicaid providers.  For example, states like Oregon and South Carolina, with large Medicaid budget shortfalls, are resorting to large provider rate cuts, while states like Virginia may be able to avert any rate cut for the upcoming fiscal year other than for outpatient hospital care.  Healthcare providers and investors would be wise to consider the particular circumstances of their states and the providers’ reliance on Medicaid reimbursement when assessing the likely impact of the Medicaid budget crunch on their businesses.

*** The authors would like to thank Tim Hoppe, McGuireWoods LLP summer associate, for his significant contribution to this post. ***

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As the Fourth Circuit Court of Appeals considers the constitutionality of the individual mandate of the Affordable Care Act (aka PPACA, or healthcare reform) and various GOP healthcare bills are deliberated, the healthcare plan spearheaded by Wisconsin Rep. Paul Ryan has  emerged as one platform for 2012 presidential hopefuls to stake out their positions on the U.S. healthcare system.

Ryan’s plan, part of the GOP budget proposal for 2012, would establish insurance exchanges for Americans age 55 and older and subsidize their purchase of a private insurance policy based on their income through vouchers. Republicans backing the plan say it would help cut the federal budget deficit by $5 trillion over the next 10 years.

Among other concerns, critics point out that the value of those vouchers would rise only as fast as overall consumer inflation, which has beeen outpaced by the rise in health costs for years, a result that would leave beneficiaries on the hook for rising health costs. Mindful of the political risks, most Republican presidential hopefuls treaded gingerly after Ryan and supporting House Republicans unveiled the plan.

A US News report describes the various positions on the Ryan plan publicly expressed by Republican hopefuls in the month since it was announced, ranging from former Minnesota Gov. Tim Pawlenty’s general approval of the ideals without approval of the Paul plan itself, to Indiana Gov. Mitch Daniels’s more clear support, to various others lingering on the fringes. 

Now that he is officially a candidate for the Republican presidential nomination, Newt Gingrich is beginning to more firmly define his positions on various on healthcare reform issues. Although, not surprisingly, he has been generally critical of Obama healthcare initiatives, on May 15^th Gingrich appeared on Meet the Press discussing his distaste for the Ryan bill as akin to Democrat efforts at imposing such a “radical change,” instead preferring “a system where people voluntarily migrate to better outcomes, better solutions, better options”. And while Gingrich has been generally critical of the Obama healthcare initiatives, he has endorsed the individual mandate to buy insurance that is one of the most well-known and controversial aspects of The Affordable Care Act. Not surprisingly, Gingrich’s comments have drawn criticism from many on the left, including a likely competitor for the GOP nomination, former Pennsylvania Sen. Rick Santorum who has defended the Ryan plan as not radical but a necessary and appropriate curb on the healthcare program effects on the federal budget deficit.  

We fully expect various presidential hopefuls to continue to define their healthcare positions in the coming months and will continue to discuss these developments.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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

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

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I recently had the pleasure of interviewing Trey Crabb, Founder and President of Health Strategy Partners, LLC, located in Nashville. Trey is a veteran strategic and financial advisor to the healthcare industry. In 2010, Trey founded Health Strategy Partners after spending many years at prominent advisory and investment banking firms in New York, Charlotte and Nashville. Our discussion focused in large part on Trey’s creation of Health Strategy Partners and his company’s focus and expertise as well as Trey’s thoughts on A Courting Process: Selecting an Investment Bank That is Right for You, an article I co-authored with my McGuireWoods partners Scott Becker and Krist Werling. The following is a synopsis of our interview.

Trey, I understand that your decision to found Health Strategy Partners was in part due to your beliefs that there was a real need for financial advisory services to for-profit and not-for-profit middle market healthcare companies. Could you explain your goals with the creation of Health Strategy Partners and the focus of your company?

Indeed, a dual focus on both not-for-profit and for profit healthcare organizations puts Health Strategy Partners in a unique position. When we work on transactions between these two groups of companies, our goal with the for profits is to be sure that they understand that ‘fit’ and patience are just as important, if not more so, than are valuation and access to capital. On the not-for-profit side, which includes government-owned healthcare facilities, helping boards understand the intricacies of structuring transactions to benefit communities and keeping income tax sheltered are two areas where we spend much of our efforts. As you question points out, we serve middle market companies in both of these segments in areas such as mergers, acquisitions, joint ventures and affiliations as well as equity and debt capital raises. We also work with much larger companies when their needs are middle market in size, and offer outsourced corporate development department services on the buy-side. We focus on healthcare services of all types from services provided in facilities (e.g. hospitals and others) and not (e.g. home health), and in more technology oriented businesses where service is important (e.g. transcription, laboratories).

Trey, I know that you have read our article A Courting Process regarding some key considerations for healthcare sellers in the investment bank selection process. Would you please share some initial thoughts regarding the recommendations for consideration discussed in article?

I read your article series with interest, as the process by which companies choose an investment banker is near and dear to my heart. As someone who has worked 20 years for two bulge bracket investment banking firms, a boutique firm, a consulting firm and now own my own investment banking firm, I have some perspective from the ‘other side of the table’. I’ll share my thoughts from the perspective of both large (and/or more sophisticated) and small (and/or less sophisticated) companies. Large companies tend to have their own staff dedicated to exploring strategic alliances, mergers, acquisitions, joint ventures, affiliations and the like. Depending on their geographic coverage, personnel may be located not only in the home office but in local markets many miles from headquarters as well. When it comes to buy side strategic transactions, these are usually handled in-house as a result. Smaller sell side activity is also usually handled in-house. When it comes to larger transactions or when the entire business is to be sold, management teams usually interview a small handful of firms who have multi-line capabilities and an industry emphasis. Since the late 1990s and early 2000s banks which have shown a willingness to lend are many times given a preference in such a process for a variety of reasons. In other cases, a firm (or individual) is chosen by the company without an interview process at all due to a previous relationship, or related, the interview process is pursued only to check pricing of the preferred banker (not my favorite process to participate in, unless I’m the preferred banker!). On a separate note, financing transactions related to bank debt are handled by in-house finance staff. Bankers are typically engaged only to access public debt or equity markets.

Would you please describe for us any changes you noted in the past several years regarding the investment banking business for healthcare companies?

The investment banking landscape has undergone significant change over the past 10 years. After 9/11 mass layoffs on Wall Street were commonplace, and many experienced bankers were forced to relocate to other firms with lesser known nameplates. Big firms since that time have been very quick to continue a pattern of reductions in force when industry sectors have become less busy. The relative importance of the boutique investment banks has really increased since that time as a number of those bankers either laid off from previous employers or those who have chosen to pursue that environment are chipping away at large firm’s market shares on strategic transactions. This has become more pronounced since the market downturn which began in 2008 and in many respects continues through today. As a result, companies large and small would be wise to find the banker with the best fit/relationship/demeanor/availability/reputation regardless of their level of overhead, as long as investment banking is a core part of their focus. Management teams generally will know within 30 minutes if a prospective investment banker has the connections and relationships necessary to get the deal closed.

Trey, what are your thoughts as to how healthcare companies typically identify potential investment banks and some nuances of the selection process?

Some larger organizations and most smaller companies may not have a dedicated staff of professionals focused on strategic transactions. Management teams may use an investment banker for buy and sell-side activity, and like larger companies, may interview a handful of firms or use another where a previous relationship exists. Sourcing of firms to interview and engage is many times haphazard – internet searches, board member and management relationships and referrals from other peers are typical methods used by smaller companies to find a banker. On the other side of the coin, there are a multitude of service companies with current and potential healthcare organization business – accounting, consulting and law firms; turnaround and management firms, software firms and other groups focused on providing financial advisory services (those who write RFPs and help with access to yet other firms providing bond underwriting and interest rate derivative services). In many instances, each of these firms will have an early view on potential strategic opportunities from time to time, and as a result be asked by companies if they also are in the “M&A” business. After hearing that question enough times, many of these firms have moved existing personnel into this area or hired new ones for that purpose. In these cases, the strategic advisory business typically becomes a bolt-on, non-core service designed to protect their original business. On the other hand, there are a number of firms focused squarely on what I’m describing here, the Middle Market, and they come in both generalist and specialist flavors. I have found that there are quite a few very good investment bankers who have worked in a collection of industries. When it comes to healthcare, my belief is that a deep industry knowledge saves time and generates a real return for the client. As for me, when non-healthcare opportunities come my way I happily refer them out to other quality firms in the hopes that they will treat me likewise. Companies of all sizes like the attention and idea generation provided from high quality, well known investment banking firms. Many of these companies will hire the most well known firm to represent them in a strategic transaction. I have heard too many instances however of deals being handed off to personnel different from the ones who do the marketing; to people with whom the company is uncomfortable, and without a personal connection to the original contacts of the firm. Companies must get the absolute commitment from the lead banker on the project and know that when they call, he/she will answer the call. This is the biggest selling point of boutique firms. They can get down to doing deals and just provide great service to clients. The biggest selling point of bulge bracket firms is access to professionals in every possible discipline: debt, equity, M&A, etc., some with a retail distribution network. Generally, these firms won’t do a transaction below a certain fee floor, unless they choose to do so to protect the existing relationship.

Thank you, Trey, for your valuable insight in this interview. Trey Crabb and Health Strategy Partners may be reached at 615.463.6262 or tcrabb@healthstrategypartners.com. The company website is www.healthstrategypartners.com.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In our January 4th blog post we discussed the results of two studies indicating venture capitalists were regaining confidence in various industries and are expected to invest more in 2011 but with some hesitation surrounding medical device companies.   Data released on Friday by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) in their quarterly MoneyTree Report does not contradict those findings, indicating that venture capitalists invested $21.8 billion in 3,277 deals in 2010, an increase of 19% in dollars and 12%  in deals over 2009.  According to the NVCA press release, this rise in venture capital investments is the first time since 2007 that the annual investment level has increased over the prior year's level.  

However, investments in the medical device industry fell 9% in 2010 (with the largest single quarter drop of 31% in Q4 versus Q4 2009).  The medical device industry ended the year as the fourth largest investment sector with $2.3 billion into 324 deals.  According to the report, that's slightly more deals than in 2009, when medical devices ranked third among all industries. 

Prior posts have discussed diligence issues for medical device companies as well as the uncertainty inherent in the revamped FDA section 510(k) approvals process, which may be impacting current investor confidence.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The new Republican-controlled House of Representatives has scheduled a bold and symbolic vote to repeal the healthcare reform law (PPACA) next Wednesday, January 12th.  The proposed repeal legislation is expected to be a brief document that simply revokes the law in full.

Because the Senate is still controlled by Democrats, the repeal legislation is expected to go no further than the House, but despite the uphill battle, Republicans are working hard to win over enough Senate Democrats to pass repeal legislation in the Senate as well.  On Monday, key Senate Democrats sent a letter to incoming House Speaker John Boehner vehemently opposing the repeal and warning that a full-scale repeal would take away a 50 percent discount on brand-name drugs for seniors who fall into a coverage gap known as the doughnut hole.  Adding additional concerns to the mix,  the non-partisan Congressional Budget Office reported today that repeal would result in adding $230 billion to the federal debt by 2021.

Although a full-scale repeal of the law seems unlikely now, Republicans are expected to 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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

McGuireWoods has announced its Second Annual Medical Device, Durable Medical Equipment & Diagnostics Conference to be held on November 3rd in Deerfield, Illinois just outside of Chicago.  Medical device manufacturer and distributor managers, compliance officers, investors in medical device manufacturers and distributors, regulatory personnel, general counsel and legal counsel are invited to join us for an interactive conference addressing key legal and business issues facing medical device, durable medical equipment and diagnostics manufacturers.

Click here to view the full conference agenda and registration information. 

Presentations and panels include the following topics:

• Keynote: A Health Plan’s Preparation for Healthcare Reform
• Roundtable: Deals & Financing Issues for the Medical Device Industry
• Key Issues in Outsourcing Medical Device Manufacturing, Marketing & Distribution
• Medical Device & DME Distribution: Consolidation & New Reimbursement Challenges
• Maximizing Value in Medical Device Product Launches
• Preparing for Deals: Due Diligence, Compliance Planning and Other Issues
• Antitrust 101: Understanding Current Antitrust Issues Facing the Medical Device Industry
• Physician Payment Sunshine Act & Other Transparency & Compliance Issues for Medical Device Manufacturers
• False Claims Act Changes & Compliance Effectiveness: Preventing Through Risk Based Planning, Auditing & Monitoring
• Mitigating Litigation, Product Liability & Product Approval Risks Facing Medical Device Manufacturers

Contact Krist Werling at kwerling@mcguirewoods.com for registration information or to inquire about discounted attendee rates. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Krist Werling was interviewed by Becker's Orthopedic and Spine Review on current trends and issues for orthopedic and spinal device manufacturers.  The interview addresses a wide variety of issues for ortho and spine manufacturers including the impact of healthcare reform on spine and orthopedics, changes at FDA and the impact of new physician transparency requirements.  Read the interview here.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

This blog post is the second in a series examining the potential impact of health reform on medical device companies.  The first post can be accessed here. 

1.                  Payment Reductions. The Healthcare Reform Act did not include direct payment reductions that apply to specific types of medical devices, however there are provider payment reductions that will indirectly affect medical device manufacturers. For example, total payment reductions to hospitals during 2011 are expected to be in the range of.35% less than 2010 payments, according to the American Hospital Association.The Congressional Budget Office estimates that this will amount to $112.9 billion in hospital payment reductions over the next ten years. These reimbursement reductions will directly affect hospital budgets for certain types of capital spending and for spending related to devices that are not reimbursed as part of a Diagnostic Related Group. Device manufacturers should understand their customers’ budgets so they can anticipate whether their hospital and other provider customers may decrease their budget allocations for device purchases.

2.                  Stricter Fraud and Abuse Scrutiny. The Healthcare Reform Act amends certain federal fraud and abuse laws. Specifically, the Act amended the False Claims Act (“FCA”), the Anti-Kickback Statute (“AKS”) and the Federal Sentencing Guidelines. The FCA subjects a person to monetary penalties and/or imprisonment for knowingly and willfully falsifying, concealing or covering up a material fact, making materially false representations, or using a document known to contain any materially false statement. More significant to medical device manufacturers is the elimination of the FCA’s “Public Disclosure Bar.” The Public Disclosure Bar prevented a qui tam plaintiff from using publically available information as the basis for a claim against an entity suspected of violating the FCA. The removal of this bar will increase the potential financial reward for certain qui tam plaintiffs. Therefore, the number of claims brought against medical device manufactures will likely increase significantly. 

3.                  Shared Cost-Savings Reimbursement Programs. The Healthcare Reform Act sets forth certain reimbursement programs focused on rewarding providers for reducing the cost of care, including the formation of so called accountable care organizations, or “ACOs,” and extends an existing gainsharing demonstration program. An ACO is essentially an organization of physicians and other healthcare providers that is assigned a population of Medicare beneficiaries and is paid a share of savings achieved through coordinated care efforts, provided certain quality standards are achieved. Additionally, the Act authorized extension of the gainsharing demonstration program. While ACOs and gainsharing programs are not expected to have an immediate impact on medical device manufacturers, if these types of organizations gain traction, the utilization of certain devices and procedures may decrease. Device manufacturers that are preparing future sales projections should be aware of the development of these organizations and the potential impact thereof. 

4.                  Medical Device Innovation Funding.  The Healthcare Reform Act included funding for grant monies to spur medical device innovation. The grant program, called the Cures Acceleration Network, enables the Director of the National Institutes of Health to award grants in order to promote innovation in technology supporting advanced research, development and production of so called “high need cures,” including through the development of medical products. To receive grant money, an entity must submit an application containing detailed information about the project for which the entity is seeking the grant, contribute non-federal funds to the project in the amount of $1 for every $3 awarded under the grant, and must also issue a final report at the end of the project describing the project outcomes. The award maximum is $15 million per project for the first fiscal year that the project is funded, with the possibility of receiving additional monies of up to $15 million in the subsequent fiscal year. Currently, Congress has authorized $500 million for the program for fiscal year 2010. In addition to the grant program, the Healthcare Reform Act authorized the Qualifying Therapeutic Discovery Project, which grants a tax credit for any taxable year in an amount equal to 50% of the investment in any qualifying project. 

5.                  Pay for Quality. The Healthcare Reform Act includes numerous new initiatives pursuant to which provider reimbursement will be increased or decreased depending on the quality of care that providers are able to demonstrate. For example, Section 3008 of the Act provides that hospitals in the top quartile with respect to national rates of hospital acquired conditions will have their Medicare payments for all discharges reduced by 1%. Similarly, Section 3007 of the Act directs the Secretary to develop and implement a system where physicians are paid additional amounts for providing quality health outcomes for Medicare beneficiaries at a lower cost. These changes to payment systems will occur over an extended time period, but demonstrate that the CMS is moving toward a system focused less on payment for individual services, and more on paying for efficient, high quality, low cost care. Even more so than in the past, to successfully market devices, manufacturers will be required to demonstrate that hospitals and healthcare providers can improve efficiency, quality and value through the use of their medical devices. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As investors consider potential investments, it is important to take into account the future impact of the recently passed health reform legislation. This blog post is part I of an itemization of 10 areas of the health reform bill that will likely have an impact on companies that manufacture medical devices and supplies. Some of these effects may be positive and some may be negative – but any investor in a device company should be aware of these areas of the health reform legislation. 

1.                  Expanded Coverage. The primary purpose of the Healthcare Reform Act was to expand coverage to a broader range of patients in the United States. In part, the Act accomplishes this expansion through a significant broadening of the eligibility criteria for enrollment in Medicaid.  Specifically, the Medicaid expansion enables most individuals with incomes of less than 133% of the Federal Poverty Level to enroll in the Medicaid program. Additionally, the mandatory insurance requirement and broader availability of health insurance through Health Benefit Exchanges will help to ensure that there are more patients that have access to health care. Increases in access to care may result in a positive near-term impact on some device manufacturers, as a result of the increased demand for medical services. 

2.                  Future Cuts? The Act does not contain significant changes to reimbursement methodologies or major decreases in reimbursement for healthcare providers. Therefore, Congress will likely be back at the table within the next three to ten years to address the cost issues that are attendant with the expansion of availability of healthcare services. It is unclear how Congress will address these cost issues, but one possibility is that it will decrease reimbursement in the future. Device manufacturers that are in high-tech, high-cost niches should begin to plan for potential reimbursement reductions in their sector. Additionally, it will be important for all device manufacturers to be able to differentiate their products as providing true clinical benefits instead of simply building a “better mousetrap.” 

3.                  Medical Device “Tax”. The Act included new “industry fees” or taxes that are applicable to pharmaceutical and medical device manufacturers, insurance companies, and pharmacy benefit managers. The medical device fee is effective 2012, and manufacturers of a medical devices will be required to pay 2.3% of the sales price for such device as an industry fee. The definition of a “taxable medical device” includes any device that is defined in Section 201(h) of the Federal Food, Drug and Cosmetic Act and is intended for human use. A limited number of medical devices, including eyeglasses, contact lenses, hearing aids and any other device that is determined by Centers for Medicare and Medicaid Services (“CMS”) to meet the “retail exception,” are exempted from this fee. Unlike the pharmaceutical fee, the medical device fee applies to all manufactures, regardless of size and revenue levels.

4.                  Comparative Effectiveness. The Act laid the groundwork for future inclusion of comparative effectiveness measures when CMS makes payment decisions by funding a new independent entity called the Patient Centered Outcomes Research Institute (“PCORI”). The PCORI will study the effectiveness of various services, products and therapies and will issue reports regarding their effectiveness. The reports that are generated by PCORI may be relied on by CMS or other third party payors making decisions about payment, coverage and treatment. 

5.         Physician Payment Sunshine Act. The Healthcare Reform Act included the Physician Payment Sunshine Act. This will require covered manufacturers that make a payment or other transfer of value to a physician or teaching hospital to report such payments annually in electronic form. Payments or transfers of value include consulting fees, payments for clinical trial participation, charitable donations, royalties and a variety of payments that may be made to physicians and teaching hospitals. There are some payments that are exempted from the disclosure obligations. These exempted payments include annual aggregate payments to a recipient of less than one-hundred dollars and individual payments of less than ten dollars, payments that are made entirely through market research organizations, and the provision of samples to a physician or teaching hospital for the benefit of patients. 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

We recently had the opportunity to travel with Amsino International to visit several of Amsino’s medical device manufacturing facilities located in and around Shanghai, China. The experience prompted two key observations regarding the global health care system and its impact on medical device manufacturers. Investors in medical device companies would be well served to factor these two key issues into plans and projections.   

1.                  The “China Price” is Not Just Labor Cost Driven. Many commentators have spoken about the importance of the “China Price” in driving lower cost of medical devices, pharmaceuticals and medical supplies. At the same time, there has been concern expressed about whether the “China Price” will remain low if labor costs increase significantly in China. This has particularly been a concern as recent protests at auto manufacturing plants and other activities have shown that the Chinese government and Chinese workers may push for higher compensation, and benefits for Chinese workers. However, in talking to medical device manufacturers in China, it is clear that the “China Price” is not just driven by low-cost labor. Instead, many manufacturing districts in China have organized in such a fashion that they are able to deliver extremely low-cost and high-quality medical products due to the mix of resources that is available in these manufacturing districts. 

The resources include the availability of supplies and suppliers, the availability of low-cost machines and tooling, access to transportation, expertise in manufacturing, quality control, and other necessary inputs. Shanghai in particular has organized itself around manufacturing and delivery of low-cost, high-quality goods with its convenient port access to the Yangtze River and the Pacific Ocean. It is clear that although labor costs may rise in China, the other factors that elevated China into a manufacturing hub will not soon change. Therefore, even if labor costs go up, there will still be significant value that Chinese manufacturers can deliver. 

2.                  The Growing Middle Class and China’s Version of Health Care Reform Will Significantly Expand the Market for Medical Devices, Supplies, and Pharmaceuticals in China. The second observation that one immediately comes to in traveling around Shanghai is the amazing growth of the Chinese middle class. This increasingly fairly compensated group is demanding more from their government class in the form of health care and other essential services. It is this growing middle that has pushed the government in part to announce last year an ambitious health care reform plan that will “fix the ailing medical system” and “insure fair and affordable health services for 1.3 billion citizens”.

Over the past year the Central Committee of the Communist Party of China and the State Council have expanded on what China’s version of health care reform will encompass. Most importantly, it will include the spending of approximately 850 billion Yuan ($124 billion US dollars) over the next three years. One of the cornerstones of this reform is the construction of an astounding number of new hospitals and health care facilities throughout rural China. Each of these new hospitals will require initial equipment purchases, as well as a new source of medical supplies and pharmaceuticals. These health care reform activities will clearly drive increased utilization in China.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On April 6^th, US-based biopharmaceutical company Cephalon, Inc. (NASDAQ: CEPH) acquired all of the outstanding capital stock of Ception Therapeutics, Inc., also a US-based biopharmaceutical company focused on developing novel products to address areas of unmet medical need, for $250 million.  The transaction resulted from the January 2009 purchase by Cephalon of an option to acquire the Ception stock.  Cephalon heralds the merger as a unique opportunity to expand its biologics pipeline, including the anticipated introduction to the market of CINQUIL™ (reslizumab), which is currently in Phase III studies and is intended to treat eosinophilic asthma. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Patient Protection and Affordable Healthcare Act (commonly known as the "healthcare reform" bill) includes significant new transparency and disclosure obligations that apply to physicians, hospitals, and medical device and pharmaceutical manufacturers. 

Some of these transparency and disclosure obligations are based on legislation introduced by Sens. Chuck Grassley (R-Iowa) and Herb Kohl (D-Wis.), which was previously entitled ‘‘the Physician Payments Sunshine Act of 2009.’’ The transparency and disclosure obligations have been included in the Act in an effort to reign in costs of expanded health care availability. The premise behind the obligations is that ‘‘sunshine’’ on physicians' financial relationships with industry will reduce conflicts of interest by deterring industry from spending excessive amounts of money on such relationships and consequently reduce the negative impact such relationships have on prescribing practices.  The transparency initiatives impact physicians, pharmaceutical and medical device manufacturers and PBMs.  For a full description of each new requirement, please read this article by Krist Werling and Holly Carnell published in BNA's Health Care Fraud Report.

These new initiatives will impact healthcare investors in two ways.  First, investors should be aware of added burdens on target investments.  For example, for medical device manufacturers, these disclosures will require added infrastructure to address tracking and reporting requirements.  Second, investors may find opportunities in these burdens.  Software, web services and consulting services have sprung up to assist physicians, pharmaceutical manufacturers and device manufacturers in remaining compliant with new obligations. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Will healthcare reform help or hurt medical device and medical manufacturers? That is the question on many device managers’ and shareholders’ minds. At first blush, many stakeholders assume that healthcare reform will drive down margins and include new regulations that will hurt device manufacturers. However, a contrary argument says that healthcare reform (at the outset) will dramatically increase patient numbers in hospitals and physician offices around the country. 
 
McGuireWoods hosted a Medical Device Symposium in November and two industry leaders shared the following thoughts:
 

• David Koo, Senior Partner, Roundtable Healthcare Partners, a seasoned investor in the disposable device market, sees significant opportunities over the next three to five years for device manufacturers that provide low cost devices and lower the cost of care and address current hospital and physician concerns (ie, hospital-acquired infections).  According to Mr. Koo, much of this growth will come from the expansion of coverage that will be driven by health reform efforts in Washington, D.C.
• Medical device companies must remain vigilant in the coming three to five years according to Rob Clark, Senior Director - State Government Affairs, Medtronic. The health reform activity in D.C. does not currently contain many significant cost-containment efforts. Mr. Clark’s outlook is that these efforts will likely be introduced at federal and state levels as well as by commercial payors in the coming years as costs increase due to broader coverage. Medtronic has played an active part in helping to shape the outcome of some states’ cost containment efforts already.

This debate will continue into the coming months and years as the details are filled-in on healthcare reform efforts. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link