Cartoon – In Layman’s Terms
Monthly Archives: October 2017
Cartoon – Crack in the Projector Lens
The hospital divestiture trend is heating up, and not going away anytime soon
Not long ago, health systems gobbled up hospitals with the overriding goal of growth, expanded footprints and market share. Some major health systems are now regretting those buys as they have become saddled with community hospitals that are losing money and struggling with large debt and capital needs.
Two major health systems facing this issue are Community Health Systems (CHS) and Tenet Healthcare, who are both looking to shed facilities.
“The strategy that CHS, Tenet and many others had was to really build around scale without really thinking about the regional economics of how these hospitals work together,” Gregory Hagood, senior managing director at SOLIC Capital Advisors, which works with hospitals on mergers and acquisitions, told Healthcare Dive.
Health systems like CHS and Tenet grew their systems with large purchases, but they’ve learned from their experiences and are now looking at divestiture options as a way to shed unprofitable hospitals and billions of debt. No longer are major systems and investors interested in buying struggling hospitals, which CHS did when it purchased the struggling Florida system Health Management Associates for $7.5 billion in 2014.
CHS and Tenet look to cut facilities, debt
CHS, a for-profit system with 137 hospitals in 21 states, is looking to divest at least 30 hospitals this year. They have already announced more than 20 hospital sales this year. CHS’ divestitures come after the health system lost $1.7 billion last year and accumulated about $15 billion in debt. Given their financial situation, Moody’s Investors Service recently downgraded CHS’ corporate family rating, probability of default rating and senior unsecured notes.
Meanwhile, Tenet Healthcare, the third largest investor-owned U.S. health system, is looking into strategic business options that may include a sale. The Wall Street Journal estimated Tenet has a market value of $1.6 billion, which is a far cry from what it owes. Fitch Ratings reported that Tenet had about $15.4 billion of debt at the end of June.
Tenet recently announced it’s selling eight U.S. hospitals and all of its nine U.K. facilities, which CEO Trevor Fetter said will yield between $900 million and $1 billion.
In addition to the sales, the company is dealing with executive and board shake-ups. Fetter recently announced his impending departure and two board members left the board because of “irreconcilable differences regarding significant matters impacting Tenet and its stakeholders.”
CHS and Tenet might be the most high-profile systems looking to shed debt and facilities, but they’re far from the only ones. A recent report by Kaufman Hall found that hospital and health systems mergers and acquisitions increased 15% in Q2. Big players are especially active. There were six transactions of health systems with nearly $1 billion or more in revenues announced in the first half of 2017. There were only four such deals in all of 2016.
Though hospital M&A activity remains high, healthcare financial experts say the days of health systems swallowing small, unprofitable hospitals as part of larger deals to solely build a system’s footprint are gone. Those days have been replaced by more strategic decisions as to what is right for the organizations, Richard Gundling, senior vice president of healthcare financial practices at the Healthcare Financial Management Association, told Healthcare Dive.
Health systems are now taking a strategic view of hospitals to see if they fit into their culture. They are also ignoring small, community hospitals with debt or buying them for much less than they may be worth.
The systems that are selling unprofitable hospitals are also faced with a market in which investors aren’t interested in paying top dollar for struggling hospitals with heavy debt. Instead, Hagood said, investors are more interested in post-acute care services like rehab and long-term care and ambulatory care initiatives. They don’t typically see hospitals as a wise investment.
“Smaller systems that have huge debt loads or pent-up capital demands have received a lukewarm reception at best,” Patrick Allen, managing director with Kaufman Hall’s mergers and acquisitions practice, told Healthcare Dive.
Why are health systems divesting?
Health systems, especially ones that have built up debt, are having trouble making up lost revenues. Hospitals could once cover a struggling type of care through a different, more profitable service. That’s no longer the case as payers and the CMS have squeezed hospital margins.
Sagging reimbursements and payer policies that move patients from hospitals to outpatient care and freestanding facilities are hurting hospital finances. There’s also a CMS proposal to allow hip and knee replacement surgeries for Medicare patients on an outpatient basis. Those kinds of surgeries are often the most profitable for hospitals, which means they may soon lose another revenue driver.
Beyond those direct payer impacts, health systems are looking to protect themselves against a changing industry in which market share isn’t as important as flexibility and efficiency. “As all of these changes are occurring, the systems are strategically moving and gathering their assets to be able to deal with expected changes,” Gundling said.
Gundling said another issue facing large systems that may lead to divestiture is cultural mismatch. A large system may have swooped in and bought a 100- or 150-bed community hospital as part of a larger purchase. The hospital’s community may have bristled at the idea of a large out-of-state corporate entity buying a mainstay of their community. Plus, physicians may dislike a new system’s clinical protocols.
“There might be times when you say it might not be the right fit for us after all … That can lead to a divestiture decision,” Gundling said.
How are health systems handling divestitures?
Health systems are taking different avenues to deal with possible divestitures. Some systems want to completely rid themselves of certain hospitals. Others look to repurpose small hospitals for outpatient, skilled nursing facilities, labs or imaging while maintaining a large regional hospital. Still others forge partnerships, so they don’t completely sell the properties.
Allen said many health systems see their small community hospitals aren’t bringing in enough revenue and can’t be competitive in every service line and business. So, instead, they are dropping unprofitable services and sticking with what works for them.
Gundling compared health systems’ decisions about divestiture to an individual creating the right investment balance. For health systems, divestitures are not about selling properties, but strategically managing risk. “They aren’t just selling off to sell off. All have different strategies,” said Gundling.
Allen said divestitures are a balancing act for systems. They can shed debt and assets, but that comes with revenue loss. “The balance is always what is the right sale price for the exchange of cash flow when it becomes less than profitable. Balancing those two are always tough,” said Allen.
When deciding on whether to divest, merge or partner with other facilities, Allen said systems need to figure out the community’s needs, the area’s business climate, what the facility wants to be and potential partnership opportunities. Allen, whose company works mostly with nonprofit systems, said many are repurposing underutilized facilities into other uses like rehab, skilled nursing facilities, labs and imaging.
“Once you have a handle on what the market needs and what the market provides, then you can make strategies to get you there,” he said.
Another issue facing health systems is infrastructure. Many smaller hospitals don’t meet today’s care delivery system. “A lot of hospitals don’t lend themselves very efficiently to quality care based on their 30- and 40-year old design,” said Hagood. “That factor can accelerate their repurposing.”
The results and future of the divestiture trend
Allen said divestitures have resulted in systems being able to reallocate capital and move forward with less debt. However, Hagood said one major reason health systems have for divestitures — shedding debt — hasn’t completely worked. Part of the problem is that the new investors aren’t paying top dollar for a struggling community hospital with debt.
“The biggest challenge so far is that they have struggled to get value for those assets to effectively repay that debt,” he said.
Gundling said health systems that have shed debt have followed the divestitures by focusing on cost efficiencies, supply chain management and revenue cycle management.
The hospital divestiture trend has led to sales, mergers and partnerships, with repurposed or downsized facilities, but it hasn’t closed many facilities. That may be coming soon, though.
Hagood said pending mergers, including the Mountain States Health Alliance and Wellmont Health System deal in Tennessee and Virginia, will likely lead to facility closures. There aren’t enough healthcare dollars to support the number of facilities in some of the Appalachian communities involved, he said.
Most of the large divestiture action has been centered around for-profit systems, but Hagood said to watch for more nonprofit action, including Catholic Health Initiatives (CHI), which recently reported a $585.2 million operating loss for fiscal year 2017 after losing $371.4 million in 2016.
Earlier this year, Moody’s Investor Service downgraded CHI’s rating on long-term debt and variable rate demand bonds because of poor operating performance since 2012 and a relatively low level of liquid assets. Moody’s warned that further downgrades could occur unless CHI improves its operating performance.
CHI divested its KentuckyOne facilities earlier this year, a move expected to bring in $534.9 million. Given the company’s finances and healthcare environment, Hagood said there could be more divestitures.
“Nonprofits are going to move slower, but I think you’re going to see them (divest) as economics continue to shift,” he said.
Experts agree the divestiture trend is just heating up as health systems deal with the greater emphasis on outpatient care and freestanding centers. Hagood predicted 24-7 inpatient facilities with full emergency rooms and surgical facilities will continue to dwindle in the coming years as systems repurpose facilities.
“There are 5,000-plus hospitals today. I think you’re going to see that consolidate down,” he said.
HHS loses abortion lawsuit
The D.C. Circuit Court of Appeals yesterday rebuffed the Trump administration’s effort to stop an undocumented teenager from getting an abortion, likely bringing an end to one of the stranger legal sagas of the Trump administration so far.
The D.C. Circuit ordered the Health and Human Services Department to let the woman visit an abortion provider immediately, saying the department had violated her constitutional right to obtain an abortion by refusing to let her leave the detention facility where she’s being held.
Go deeper: Read the court’s 6-3 decision.
What’s next: HHS can leave it here, or appeal to the Supreme Court.
Be smart: File this case as potential fodder for future Supreme Court confirmation hearings. Because the ruling came from the full D.C. Circuit, it involves several judges who could be future Supreme Court nominees. The majority included Judges Sri Srinivasan and Patricia Millett, both of whom are seen as potential SCOTUS contenders under a Democratic president.
Insurance and device taxes back on the chopping block
It’s time once again for the insurance and medical device industries to ramp up their lobbying against the ACA’s taxes on their products. Congress has frozen both taxes, but both are set to kick in again next year.
- A trio of Senate Democrats — Heidi Heitkamp, Jeanne Shaheen and Joe Donnelly — introduced a bill last week to delay the insurance tax for another two years. House Republicans are also hoping to find some bipartisan support for a similar measure, though they also still need to finalize the policy details.
- Opposition to the device tax is also bipartisan, and heating up. More than 175 House members, including 43 Republicans, signed on to a letter yesterday urging Speaker Paul Ryan to bring up a bill fully repealing the device tax.
Reality check: Both industries, but especially insurers, are more likely to win another delay than see their taxes repealed.
And though there will be public pushes here and there for stand-alone bills, or for inclusion in tax reform, getting onto Congress’ massive end-of-year package is their best bet. Measures to delay the insurance or device taxes could be added to Alexander-Murray, if it comes up, as a way to win more Republican votes without losing Democrats.
Republicans go toe-to-toe, again, with competing ACA bills
Now the Senate has two competing plans to fund the ACA’s cost-sharing subsidies — which could mean it won’t be able to pass either one. Senate Finance chair Orrin Hatch and House Ways and Means chair Kevin Brady outlined a new proposal yesterday as an alternative to the bipartisan ACA bill led by Sens. Lamar Alexander and Patty Murray.
The details: It’s hard to call these competing ACA stabilization bills. Although they’d both fund cost-sharing reduction (CSR) subsidies for two years, Hatch-Brady would also waive the law’s individual mandate for five years — effectively replacing one source of rising premiums with another.
- Conservatives are not happy with Alexander-Murray. They’ve argued that if they’re going to keep the law’s cost-sharing payments flowing, they should be able to extract severe regulatory reforms in exchange.
- Hatch-Brady is definitely more conservative than Alexander-Murray. The big unknown is whether its presence will stop more Republicans from accepting Alexander-Murray as “The Bill” — especially in the House, where its standing is weaker than in the Senate.
- What they’re saying: “Sad attempt at relevancy by health care staff on Finance who are upset that their boss is entirely focused on tax reform, as he should be,” a senior GOP aide told my colleague Caitlin Owens.
The odds: 100% of the available evidence, from the entire Trump administration to date, suggests very strongly that Republicans are not capable of passing a health care bill on their own. They couldn’t do it with 50 votes in the Senate, and either one of these bills would need 60.
- Alexander-Murray has 60 votes in the Senate.
- Hatch-Brady would have an extremely hard time getting there. Waiving the individual mandate will be too much to ask from most, if not all, Democrats.
- Leadership will likely face a choice between passing Alexander-Murray, with only minor modifications; or not passing anything at all.
- All of this still probably comes down to December, when lawmakers have to deal with a host of thorny must-pass bills.
Part owner of proposed Chesapeake eye-surgery center faces allegations in kickback scheme, feds say
A North Carolina-based physician and part owner of a proposed medical center in southern Chesapeake is facing allegations of involvement in a kickback scheme.
The U.S. Attorney’s Office in Minnesota is pursuing a civil action against Jitendra Swarup, an ophthalmologist at Albemarle Eye Center in Elizabeth City, N.C., a spokeswoman said Friday. She said the government’s complaint would be filed by a court-mandated mid-November deadline.
Swarup was among more than a dozen physicians and four companies listed as defendants in a 2015 complaint lodged by a “whistleblower” and former executive of Sightpath Medical. The lawsuit alleges physicians were bribed through travel, entertainment and “sham consultancy agreements” to use Sightpath products and services.
The company and its former CEO, James Tiffany, settled with the government and the whistleblower recently for $12 million, according to the U.S. Attorney’s Office in Minnesota and court documents. The 2015 complaint, which was originally filed in 2013, claimed, among other things, that Sightpath paid Swarup consulting fees to induce referrals.
“We intend to vigorously defend Dr. Swarup, and we believe he will be completely exonerated,” Swarup’s lawyer, Marc Raspanti, said Friday. Raspanti said no criminal charges have been filed, and there is no criminal investigation. The spokeswoman in Minnesota wouldn’t comment on the existence of a criminal investigation, but to date, there has not been a criminal charge issued, she said.
Raspanti, a Philadelphia-based attorney, said he is “cautiously optimistic” the government can be persuaded to “spend their time elsewhere.”
Swarup and Chesapeake ophthalmologist Paul Griffey want to build an outpatient surgery center on about 1.5 vacant acres off Carmichael Way in Edinburgh. Twelve surgeons are committed to what’s being called the Center for Visual Surgical Excellence, Griffey told council members last week. Services would include cataract, retinal and other surgeries, city planning documents say.
According to a certificate of public need issued for the center last month by the Virginia Department of Health, the capital costs of the project are $3.7 million, with financing costs of $1.4 million. It’s scheduled for completion by October 2018. A condition of the state’s certificate is that the center must provide “an appropriate level” of charity services, according to department documents.
City staff and the Planning Commission have recommended approval of a conditional-use permit. City Attorney Jan Proctor said Friday the City Council is aware of the civil lawsuit, but it is not a factor in the land-use issue.
“Dr. Swarup vigorously denies the allegations, and they provide no basis to deny the (permit) whether or not true,” Grady Palmer, the attorney for the project, wrote in an email to council members Sept. 1. The council will consider the proposal tonight.
Swarup, a Suffolk resident, told council members last week that he’s been practicing for 20 years in northeastern North Carolina, where Albemarle Eye Center has five offices, including two on the Outer Banks. He is licensed in Virginia and North Carolina, according to state medical board websites, and is affiliated with hospitals in both states.
Settlement documents say Sightpath Medical supplies medical facilities with products that ophthalmologists use for surgeries in ambulatory surgical centers and hospitals.
Federal payers, including Medicare, reimburse the facilities and the physicians, documents said. Sightpath offered and paid illegal remuneration to physicians to promote the use of its products and services, which resulted in the submission of false claims, the settlement documents said.
The 2015 complaint contends that Swarup began receiving $8,000 a month around 2002 as a consultant for Sightpath, but that he “does not perform commercially reasonable services for these payments.”
Instead, the payments were made to gain Swarup’s business in North Carolina and induce referrals, the documents say. Swarup sought these payments, which continued until at least 2008, as a “quid pro quo for arranging for hospital administrations to utilize Sightpath’s services and equipment,” court documents say.
Swarup was also a guest of a company executive on at least one “luxury” fishing trip to Budd’s Gunisao Lake Lodge in Manitoba, Canada, in 2006, according to the 2015 complaint.
Raspanti said Swarup was a consultant for Sightpath from 2002 or 2003 to late 2014, but Sightpath is still contracted with hospitals in which Swarup operates. He said most of those facilities had contracts with the medical service provider before Swarup came to North Carolina to practice.
Swarup made roughly $80,000 a year in consulting fees with Sightpath, Raspanti said, which included discussions on ways to improve products and services and the training of technicians who assisted Swarup with his procedures.
“The contract, as far as we’re concerned, was legal and honored for many years by both sides,” Raspanti said. It was neither unusual nor inappropriate, he said, and contracts like it exist in other medical disciplines.
There were “half a dozen trips” over the course of Swarup’s contract with Sightpath, Raspanti said. Swarup paid for some and contributed to others, and most were requested by Sightpath executives and were part of Swarup’s contractual obligation. Executives also visited Swarup at his North Carolina home, Raspanti said.
“Just because you see an allegation doesn’t mean it’s true,” Raspanti said, noting there have been “no allegations of inappropriate surgeries, no allegations of lack of medical necessity, no allegations of bad medical outcomes.” He said Swarup has not been excluded from Medicaid or Medicare or any private insurance company.
Raspanti, a health care lawyer for many years, said his client – the only local doctor named in the 2015 complaint – has been targeted because he is an active and prolific surgeon. Raspanti said he has told Swarup to do whatever he needs to do to run his practice, including his pursuit of a new venture.
“I have told him to move full speed ahead on it,” Raspanti said.
Bipartisan ACA bill gets a challenge from the right
The details: Hatch and Brady’s proposal, which hasn’t yet been translated into legislative text, is largely in line with what the White House has said it wants. Their proposal would:
- Fund the ACA’s cost-sharing subsidies for two years
- Attach new abortion-related conditions on those funds
- Waive the individual mandate for five years
- Retroactively waive the employer mandate for two years
- Expand health savings accounts
The alternative: The bill sponsored by Sens. Lamar Alexander and Patty Murray, by contrast, would fund the cost-sharing subsidies for two years; allow more people to buy cheaper, less comprehensive coverage; and make it easier for states to seek waivers from some of the ACA’s regulatory requirements.
The bottom line: Few, if any, Democrats could support Hatch-Brady — and that gives it much longer odds than Alexander-Murray, which already has the 60 votes it would need to pass the Senate. The question is whether GOP leaders will try to find a middle ground — and whether the presence of an alternative will stop Alexander-Murray from gaining more GOP support, especially in the House.
Cartoon – Redefining Success as a Slowing of Failure
Cartoon – Mandatory Training for Business Ethics
HENRY KOTULA 