On Thursday, Des Moines, IA-based UnityPoint Health and Albuquerque, NM-based Presbyterian Healthcare Services revealed they have signed a letter of intent to explore a merger. The UnityPoint and Presbyterian brands would continue to operate in their local regions, but the combined system would manage $11B in annual revenue, over 40 hospitals, and nearly 3K physicians and advanced practice clinicians.
The Gist: A UnityPoint and Presbyterian link up would seem to follow the playbook of the recently closed Advocate Aurora and Atrium merger. Mergers between large, noncontiguous health systems are currently popular as a means to achieve the benefits of scale without tripping the alarms of federal antitrust regulators.
UnityPoint has been seeking a merger partner for years; most recently its plan to combine with Sanford Health fell through in 2019. It may have found a like-minded partner in Presbyterian, as both systemshave made significant investments in risk, including establishing mature ACOs, developing their own Medicare Advantage plans, and expanding their hospital at home programs.
We’re expecting to see a number of these cross-state system mergers announced over the course of 2023, as large regional players seek combinations that allow them to scale into super-regional, or even national, delivery platforms.
Earlier this month, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) quietly released joint revisions to three healthcare antitrust policy statements which it now considers “overly permissive”. While two of the policies date back to the 1990s and relate to information sharing, the most significant, published in 2011, stated that certain ACOs were “highly unlikely to raise significant competitive concerns”. Instead, the FTC and DOJ say their policy will be to review these arrangements on a case-by-case basis.
The Gist: While unlikely to alter the ACO landscape significantly, this new guidance signals a departure from Obama-era policies that gave outsized priority to ACO development in cost-reduction efforts. Until now, ACOs were passed over for scrutiny, while regulators focused on more traditional hospital mergers in an attempt to prevent outsized market leverage.
Moving forward, the Biden administration must strike a delicate balance between policies that encourage greater coordination amongst independent healthcare entities working together to improve patient care and lower costs, and the market leverage that such coordination can generate.
We expect 2023 to be a pivotal year for the industry, as the accelerated acceptance of virtual care and demographic trends, such as an aging population, increasing chronic illnesses and healthcare worker shortages, sustain demand for medtech-enabled solutions.
The combination of rapid developments in novel healthcare technology and heightened demand for integrated tech-enabled care has continued to fuel innovation in the medtech industry. At the same time, medtech innovators – whether in digital health, wearables and AI-driven offerings in healthcare, or diagnostics, telemedicine and health IT solutions – continue to face a patchwork of laws, rules and norms across the world. Life sciences and healthcare innovators and regulators are also looking to medtech to increase access to care and health equity. Here are ten global medtech themes we are tracking in the coming year:
Focus on digital tuck-in acquisitions in medtech M&A
Despite continued uncertainty in the overall financial market, medtech M&A activity continued at a steady pace in 2022. This year witnessed a rise in tuck-in acquisitions of smaller companies that can be easily integrated into buyers’ existing infrastructure and product offerings, as opposed to significantly sized takeovers of businesses that aren’t squarely aligned with buyers’ existing businesses lines. Medtech acquirers have been particularly focused on developing their digital capabilities to innovate and reach customers in new ways. As digitization continues to transform the industry, we expect acquirers to continue to prioritize the value of digital and data assets as they evaluate potential targets.
Continued interest by private equity and other financial sponsors
Private equity firms, healthcare-focused funds and other financial sponsors have continued to display a strong appetite for investing in Medtech companies, with top targets in subsectors such as diagnostics and healthcare IT solutions. Later-stage medtech companies in particular are gaining a larger share of venture capital funding, as later-stage investments allow financial sponsors to focus on businesses with higher yields, as well as less time to market and capital reimbursement. Demographic trends, including an aging population and the increasing prevalence of chronic diseases, coupled with healthcare technology advancements have created robust demand for medtech-enabled solutions. Additionally, medtech offerings have broad applications that can extend beyond stakeholders in a specific therapy area, product category or care setting, offering the ability to satisfy unmet needs with large patient bases.
Strategic medtech collaborations as the new norm
Strategic medtech collaborations and partnerships have become the new norm in our increasingly connected digital healthcare ecosystem. In response to heightened consumer demand for tech-enabled care, pharmaceutical and medtech companies are collaborating to use digital technologies to engage with consumers, unlocking a vast range of treatments such as personalized medicine. Additionally, as the market rapidly evolves towards data-driven healthcare, we expect medtech companies to continue to work collaboratively to address existing barriers to data sharing and promote interoperability of healthcare data.
Continued scrutiny by antitrust and competition authorities
As expected, global antitrust and competition authorities continued to focus on the tech, life sciences and medtech sectors in 2022. The US, UK and EU authorities have stepped up efforts to investigate and challenge conduct by large pharma and technology companies pursuing mergers and acquisitions. We expect these authorities to assess similar concerns in the digital health context in an effort to account for the value of combined datasets and the interoperability of various offerings that could be derived from digital health mergers and acquisitions. Furthermore, geopolitical tensions have resulted in new and expanded foreign investment regimes to improve the resilience of domestic healthcare systems. Notably this year, the UK government implemented the National Security and Investment Act that allows it to restrict transactions that may threaten national security, including in the AI and data infrastructure sectors. Sensitive data continues to be a recurring theme for foreign investment review for Committee on Foreign Investment in the US and that of the EU as well.
Growing importance of data privacy and security
Increasing regulatory attention to sensitive health data and the escalating rise of ransomware attacks has made data privacy and security more important than ever for medtech innovators. The Federal Trade Commission has issued several statements about its willingness to “fully” enforce the law against the illegal use and sharing of highly sensitive data. Additionally, several state privacy laws coming into effect in 2023 create new categories of sensitive personal data, including health data, and impose novel obligations on innovators to obtain data-related consents. As ransomware continues to pose security-related threats, the US Department of Health and Human Services renewed calls for all covered entities and business associates to prioritize cybersecurity. New standards, such as cybersecurity label rating programs for connected devices, aim to address security risks. In the EU, medtech providers will need to consider how the launch of the European Health Data Space and newly proposed data regulation, such as the Data Act and AI Act, could impact their data use and sharing practices.
More active engagement with FDA/EMA/MHRA
We expect companies active in the medtech sector, particularly those that make use of AI and other advanced technologies, to continue their conversations with the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency (“EMA”), the Medicines and Healthcare Products Regulatory Agency (“MHRA”) and other regulators as such companies grow their medtech business lines and establish their associated regulatory compliance infrastructure. Given the unique regulatory issues arising from the implementation of digital health technologies, we expect the FDA, EMA and MHRA to provide additional guidance on AI/ML-based software-as-a-medical device and the remote management of clinical trials. 2022 saw stakeholders in the life sciences and medtech industries collaborate with regulatory authorities to push forward the acceptance of digital endpoints that rely on sensor-generated data collected outside of a clinical setting. As the industry shifts to decentralized clinical trials, we expect both innovators and regulators to work together to evaluate the associated clinical, privacy and safety risks in the development and use of such digital endpoints.
Increasing medtech localization in the Asia Pacific region
2022 saw multinational companies (“MNCs”), including American pharma/device makers make an active effort to expand their medtech business lines in the Asia Pacific region. At the same time, government authorities in the region have been increasingly focused on incentivizing local innovation, approving government grants and prohibiting the importation of non-approved medical equipment. In light of MNCs’ market share of the medical device market in the Asia Pacific region, especially in China, we expect the emergence of the domestic medtech industry to prompt discussions among MNCs, local innovators and government authorities over the long-term development of the global market for medical technology.
Long-term adoption of telehealth and remote patient monitoring technologies
The Covid-19 pandemic saw the rise of telehealth and remote patient monitoring technologies as key modes of healthcare delivery. The telehealth industry remains focused on enabling remote consultations and long-term patient management for patients with chronic conditions. Looking forward, we expect to see increased innovation in non-invasive technologies that can provide early diagnostics and ongoing disease management in a low-friction manner. At the same time, we anticipate telehealth companies to face increasing scrutiny from regulatory authorities around the world for fraud and abuse by patients and providers. Consumer and patient data privacy and security in connection with telehealth and remote patient monitoring continue to remain top of mind for regulators as well.
Women’s health and privacy concerns for medtech
We expect to see increased consumer health tech adoption for reproductive care, especially in light of the U.S. Supreme Court’s decision to overturn Roe v. Wade. Following the Dobbs decision, a number of states introduced or passed legislation that prohibits or restricts access to reproductive health services beyond abortion. In response, women’s health-focused companies are expanding their virtual fertility and pregnancy, telemedicine and other services to patients. At the same time, such companies need to assess the legal risks stemming from the collection and storage of their customers’ personal health information, which could then be used as evidence to prosecute customers for obtaining illegal reproductive health services. We expect companies active in this space to take steps to navigate the patchwork of data privacy and security laws across jurisdictions while establishing clear digital health governance mechanisms to safeguard their customers’ data privacy and security.
Addressing inequities in the implementation of digital healthcare technologies
Medtech innovators and regulators have been increasingly focused on addressing inequities in the healthcare system and the data used to train AI and ML-based digital healthcare technologies. In 2022, a number of medtech companies collaborated to provide technologies that result in improved patient outcomes across all populations, as well as boost participation of diverse populations in clinical trials. In parallel, we are seeing increased interest from regulators to reduce bias in digital health technologies and the accompanying datasets, as evidenced by the EU’s proposed AI Act and the UK’s health data strategy. In the US, which currently lacks comprehensive government regulation of AI in healthcare, there have been increasing calls for institutional commitments in the area of algorithmovigilance. Because of the inaccurate conclusions that may result from biased technologies and data, MedTech companies must prioritize health equity in the implementation of digital healthcare technologies so that everyone can benefit from the latest scientific advances.
In conclusion, the medtech industry has remained resilient amidst the challenging macroeconomic environment. We expect 2023 to be a pivotal year for the industry, as the accelerated acceptance of virtual care and demographic trends, such as an aging population, increasing chronic illnesses and healthcare worker shortages, sustain demand for medtech-enabled solutions. At the same time, the rapidly changing legal and regulatory landscape will continue to be a key issue for medtech innovators moving forward. Adopting a global, forward-thinking regulatory compliance strategy can help MedTech companies stay competitive and ultimately, achieve better outcomes for patients.
An enlightening piece published this week in Stat News lays out exactly how UnitedHealth Group (UHG) is using its vast network of physicians to generate new streams of profit, a playbook being followed by most other major payers. Already familiar to close observers of the post-Affordable Care Act healthcare landscape, the article highlights how UHG can use “intercompany eliminations”—payments from its UnitedHealthcare payer arm to its Optum provider and pharmacy arms—to achieve profits above the 15 to 20 percent cap placed on health insurance companies.
So far in 2022, 38 percent of UHG’s insurance revenue has flowed into its provider groups, up from 23 percent in 2017. And UHG expects next year’s intercompany eliminations to grow by 20 percent to a total of $130B, which would make up over half of its total projected revenue.
The Gist:
The profit motive behind payer-provider vertical integration is as clear as it is concerning for the state of competition in healthcare.
UHG now employs or affiliates with 70K physicians—10K more than last year—seven percent of the US physician workforce, and the largest of any entity.
Given the weak antitrust framework for regulating vertical integration, the federal government has proven unable to stop the acquisition of providers by payers. Eventually, profit growth for these vertically integrated payers will have to come from tightening provider networks, and not just acquiring more assets. That could prompt regulatory action or consumer backlash, if the government or enrollees determine that access to care is being unfairly restricted.
Until then, the march of consolidation is likely to continue.
47-hospital Sanford Health, based in Sioux Falls, SD, and 11-hospital Fairview Health Services, based in Minneapolis, MN, have signed a letter of intent to form a combined $14B health system that would retain Sanford’s name. Sanford has been seeking a health system partner for several years; most recently it was in talks with Intermountain Health, before they ended the process following a COVID-masking controversy with Sanford’s then-CEO. An announced merger with Iowa-based UnityPoint Health was also called off in 2019. Sanford had earlier attempted to combine with Fairview, in 2013, but abandoned plans after receiving pushback from Minnesota’s Attorney General, who was concerned that services could be cut, and that the system’s long-term partnership with University of Minnesota could be at risk.
The Gist: Perhaps Sanford has finally found its dance partner, one that gives it access to the booming Minneapolis metropolitan area, which the largely rural health system lacks. Like many recent mergers, the deal brings together two systems across non-overlapping markets, making it likely to pass antitrust scrutiny.
Fairview has posted losses for the last two consecutive years, making it an easier pickup for Sanford, which can now introduce its 220K member health plan to a new market. We expect more health system mergers like this in 2023, as margin pressures are motivating many to seek the promise of shelter in scale.
UHG closed its $13B acquisition of data analytics company Change in early October, just weeks after the Justice Department failed in its bid to block the sale on antitrust grounds. In court proceedings, UHG denied it intended to use Change data to give its insurance arm, UnitedHealthcare, a competitive advantage against the rival insurers who use Change as an electronic data interchange clearinghouse.
But a new ProPublica report highlights how communications between UHG and consulting firm McKinsey & Co. point to this potential data advantage as one of the clear upsides from acquiring Change. The McKinsey report was explicitly dismissed by the US District Court judge who, in his ruling in UHG’s favor, was persuaded by testimony from senior executives and evidence of UHG’s history of maintaining internal data firewalls.
The Gist: UHG has a longstanding business interest in maintaining the trust of rival insurers that use its data analytics unit, OptumInsight. Voluntary and internally imposed firewalls between the UHG’s insurance arm and its other businesses are key to maintaining this trust. Although Justice Department lawyers could not provide convincing evidence that UHG has or intends to breach its firewalls, there is still reason to monitor any such activity closely.
The failure of the McKinsey report to sway the court against the deal illustrates how difficult it is for the Justice Department to challenge vertical mergers, even when there is compelling evidence that such deals may impact competition.
Private equity groups have invested about $1 trillion into nearly 8,000 healthcare transactions in the past decade, and some experts are pushing for more scrutiny of its increasing influence on the industry amid concern it may be causing higher medical bills and diminished quality of care, a Nov. 14 Kaiser Health News report said.
Because such investment groups typically invest less than $101 million, such transactions do not attract automatic antitrust reviews at the federal level, the report continued. That represents more than 90 percent of private equity investments in the industry.
Nevertheless, companies owned or managed by private equity groups have agreed to pay fines of more than $500 million since 2014 in over 30 lawsuits under the False Claims Act, which deals with false billing submissions, KHN’s investigation found.
The problem may be most acute in certain specialist fields and in certain metropolitan areas. While private equity, for example, plays a role in just 14 percent of gastroenterology practices nationwide, it controls about 75 percent of that market in at least five metropolitan areas across five states, including Texas and North Carolina, according to research from UC Berkeley’s Nicholas C. Petris Center.
And private equity pockets may be getting deeper. In 2021 alone, over $206 billion was invested by such groups in healthcare, and there is plenty of “dry powder” around for more, KHN reported. The Healthcare Private Equity Association, for example, which boasts about 100 investment companies as members, says the firms have $3 trillion in assets awaiting allocation.
Private equity, like everything else, may have some poor performers but it doesn’t help to generalize as groups “vary tremendously” in how they operate their healthcare investments, Robert Homchick, a Seattle attorney, told KHN.
“Private equity has some bad actors, but so does the rest of the [healthcare] industry,” he said. “I think it’s wrong to paint them all with the same brush.”
Concerns remain, however, that, at least in some cases, private equity involvement is simply a vehicle for maximizing returns, often at the expense of patients. In addition to the $500 million fines, there is also evidence of some private equity groups pushing through additional testing and mandated patient numbers to boost returns, often in medically questionable scenarios, the report said, citing the example of National Spine and Pain Centers previously owned by private equity group Sentinel Partners.
In that case, National Spine paid $3.3 million in a whistleblower case related to allegations of unnecessary treatment and testing, KHN said.
The scope of such private equity dominance in some markets worries many industry observers, and much more needs to be done to help reel in such potential abuses, they say.
“We’re still at the stage of understanding the scope of the problem,” said Laura Alexander, former vice president of policy at the nonprofit American Antitrust Institute, which collaborated on the Petris Center research. “One thing is clear: Much more transparency and scrutiny of these deals is needed.”
On Monday, a federal judge denied the Department of Justice (DOJ)’s attempt to block UHG’s $13B purchase of Change Healthcare, a technology firm specializing in claims processing and data analytics.
The DOJ sought to block the purchase on antitrust grounds, arguing that UHG would have access to technologies that its rivals use to compete, but the judge, writing in a sealed ruling, found the DOJ’s case inadequate. It is unclear at this point whether the DOJ will appeal.
Change will now join UHG’s OptumInsight division, though in response to anticompetitive concerns, the ruling ordered UHG to sell part of Change’s claims payment and editing business, as it had already planned to do.
The Gist: Antitrust regulators have had much greater success at challenging horizontal healthcare mergers but have struggled to find solid footing to fight vertical deals.
The UHG-Change case was closely watched in part because of the precedent it would have set in terms of holding “platform” aggregators in check. As UHG and other healthcare titans continue to acquire assets up and down the value chain (physician practices, ambulatory surgery centers, clinics, telehealth capabilities, risk products), it’s increasingly clear that the government will face an uphill climb to question the competitive effects of these vertical M&A activities.
A spokesperson for RWJBarnabas Health said the case is “yet another in a series of baseless complaints filed by … an organization whose leadership apparently prefers to assign blame to others rather than accept responsibility for the unsatisfactory results of their own poor business decisions and actions over the years.”
A lawsuit filed last week accuses RWJBarnabas Health of “a years-long systemic effort” to hamper competition and monopolize acute care hospital services in northern New Jersey.
The case brought by CarePoint Health to a U.S. District Court accuses the state’s largest integrated healthcare delivery system of “aiming to destroy the three hospitals operated by CarePoint as independent competitors” with the support of healthcare real estate investors and Horizon Blue Cross Blue Shield, the state’s largest health insurer.
CarePoint Health includes the 349-bed Christ Hospital, 224-bed Bayonne Medical and 348-bed Hoboken University Medical Center (HUMC).
The group said RWJBarnabas intended to force the first two hospitals to shut down but acquire the third due to its more profitable payer mix.
“RWJBarnabas Health’s] goal explicitly disregarded the needs of the poor, underinsured and charity care patients which CarePoint serves in its role as the safety net hospital system in Jersey City and surrounding areas,” CarePoint wrote in the lawsuit.
The slew of alleged tactics listed in the lawsuit largely surround RWJBarnabas Health’s “serial acquisitions” of hospitals, providers and real estate that “has gone unchecked by the state and [New Jersey Department of Health],” CarePoint wrote.
This included an alleged bad faith proposal to acquire Christ Hospital and HUMC, the true intent of which CarePoint said was to “gain market knowledge and gather competitive intelligence, and use this newly-acquired information to freeze programmatic growth and any significant hiring or construction at Christ Hospital.” The process had a negative impact on CarePoint’s employee retention and staffing, according to the suit.
The plaintiff also alleged that RWJBarnabas used its political connections to influence whether state departments granted CarePoint Certificates of Need for multiple revenue-generating projects as well as COVID-19 relief funding.
Further, CarePoint accused RWJBarnabas of strategically adjusting its service offerings in competitive markets to drive uninsured or underinsured patients to CarePoint facilities while using its relationships with Horizon and ambulance operators to drive emergency room traffic and well-insured patients, respectively, to competing locations.
These collective actions constitute violations of the Sherman Antitrust Act as well as the New Jersey Antitrust Act, CarePoint wrote.
“The idea that [RWJBarnabas Health] would use its influence to jeopardize the health of that community and the care providers of a competing hospital not only directly contradicts its own vision, but clearly demonstrates that [RWJBarnabas Health] is far more interested in anti-competitive and predatory business activities than serving the New Jersey community,” CarePoint wrote.
RWJBarnabas Health discounted the allegations in an email statement.
“This is yet another in a series of baseless complaints filed by CarePoint, an organization whose leadership apparently prefers to assign blame to others rather than accept responsibility for the unsatisfactory results of their own poor business decisions and actions over the years,” a spokesperson for the system told Fierce Healthcare. “RWJBarnabas Health has a longstanding commitment to serve the residents of Hudson County, and is proud of the significant investments we have made in technology, facilities and clinical teams as we advance our mission.”
RWJBarnabas Health treats over 3 million patients per year and employs 37,000 people. The academic healthcare system runs 12 acute care hospitals and four specialty hospitals alongside other locations and services. It disclosed more than $6.6 billion in total operating revenues across 2021.
The system’s merger and acquisition activity placed it in the federal spotlight this past year after the Federal Trade Commission moved to block its planned integration of New Brunswick-based Saint Peter’s Healthcare System. The deal was called off in June.
With a closely divided Congress, President Biden has leaned heavily on regulatory actions to advance his healthcare priorities. With the midterm elections fast approaching, the graphic above assesses the impact of those actions, and outlines which legislative components Democrats may still try to pass before November.
From the start, the administration has signaled the importance of promoting competition in healthcare markets, and has devoted more scrutiny to hospital mergers—while leaving most attempts at vertical integration unchallenged. Through Medicaid waivers, it has worked to expand insurance coverage, rolling back Trump-era work requirements, expanding postpartum coverage, and encouraging states to experiment with public option plans on the Affordable Care Act (ACA) exchanges.
The Centers for Medicare and Medicaid Services (CMS) has continued the steady march toward value programs, revising the Direct Contracting model to factor in health equity. Despite these incremental moves, Medicare Advantage (MA) remains the focus of long-term efforts to control Medicare spending, and MA programs have seen payments boosts year-over-year.
Meanwhile, the fate of President Biden’s signature healthcare campaign promises remains in the hands of an intransigent Congress. Senate Democrats are currently trying to negotiate a deal on a bill allowing Medicare drug negotiations and extending ACA subsidies, an important provision to protect millions from receiving premium hike notices just weeks before Election Day.
HENRY KOTULA 