Medical group deals face growing antitrust scrutiny as price worries rise

https://www.modernhealthcare.com/legal/medical-group-deals-face-growing-antitrust-scrutiny-price-worries-rise?utm_source=modern-healthcare-daily-finance&utm_medium=email&utm_campaign=20190708&utm_content=article1-readmore

Recent actions by antitrust enforcers and courts to block or regulate purchases of physician practices by hospitals and insurers may signal increasing scrutiny for such deals as policymakers intensify their focus on boosting competition to reduce healthcare prices.

Last month, the Federal Trade Commission announced a settlement with UnitedHealth Group and DaVita unwinding United’s acquisition of DaVita Medical Group’s Las Vegas operations.

At the same time, Colorado Attorney General Phil Weiser separately reached a deal imposing conditions on UnitedHealth’s acquisition of DaVita’s physician groups in Colorado Springs.

Also in June, the 8th U.S. Circuit Court of Appeals upheld a District Court ruling blocking Sanford Health’s proposed 2015 acquisition of the multispecialty Mid Dakota Clinic in the Bismarck, N.D., area. That antitrust case originally was filed by the FTC and North Dakota Attorney General Wayne Stenehjem in 2017.

And in May, Washington Attorney General Bob Ferguson settled an antitrust lawsuit with CHI Franciscan setting conditions on the health system’s 2016 affiliation with the Doctors Clinic, a multispecialty group, and its purchase of WestSound Orthopaedics, both in Kitsap County. CHI Franciscan will pay up to $2.5 million, distributed to other healthcare organizations to increase access to care.

The cases represent the most significant antitrust developments involving physician acquisitions since federal and state antitrust enforcers won9th U.S. Circuit Court of Appeals ruling in 2015 upholding a lower-court decision forcing Idaho’s St. Luke’s Health System to unwind its 2012 acquisition of Saltzer Medical Group.

The agreements with UnitedHealth in Nevada and Colorado show a new willingness by federal and state antitrust enforcers to use seldom-cited vertical merger theory. Under that theory, acquisitions of physician groups by insurers or hospitals may foreclose competition by making it more difficult or costly for rivals to obtain physician services.

“I am concerned about the state of consolidation,” Weiser said in an interview. “Healthcare costs in Colorado have risen at an alarming rate. Protecting competition needs to be a central part of our strategy to provide affordable and quality healthcare.”

These recent antitrust actions come as concerns mount over the growing consolidation of hospitals and physician practices and the impact on prices and total health spending. Sixty-five percent of metropolitan statistical areas are highly concentrated for specialist physicians, while 39% are highly concentrated for primary-care doctors, according to Martin Gaynor, a health economist at Carnegie Mellon University.

Hospital acquisitions of physician practices have led to higher prices and health spending, researchers have found. Average outpatient physician prices in 2014 ranged from 35% to 63% higher, depending on physician specialty, in highly concentrated California markets compared with less-concentrated markets, according to a 2018 study by researchers at the University of California at Berkeley. The link between physician market concentration and prices is similar across the country, experts say.

Market consolidation in California

That’s why some elected officials and antitrust attorneys say it’s past time to step up oversight of physician practice acquisitions by hospitals, insurers and private-equity firms. These deals traditionally have received less scrutiny than hospital and insurance mergers, partly because they are smaller transactions that federal and state antitrust enforcement agencies may not have known about beforehand.

The recent cases suggest state attorneys general may play a growing role in policing physician acquisition deals by hospitals and insurers, given that they are in a better position than the feds to find out about brewing local deals. Most of the growth in physician group size has come from piecemeal acquisitions of small group practices, a Health Affairs studyfound last year.

Washington and at least two other states have passed laws requiring healthcare providers to give state officials advance notice before finalizing a merger or acquisition. That gives state AGs another advantage over the FTC, which under federal rules only must receive advance notice of deals exceeding $78.2 million in value. Few physician acquisitions meet that threshold.

Others worry, however, that the absence of clear federal guidelines for challenging vertical mergers between hospitals and physicians has made the FTC and the courts overly cautious, and that it now may be too late because many physician markets are already highly concentrated. In March, the FTC and the Justice Department said they were working on new vertical merger guidelines, which were last updated in 1984.

“The horse may be out of the barn in a number of markets where there have been very large acquisitions of physician practices,” said Tim Greaney, a visiting professor at the University of California Hastings College of Law. “It’s not clear what you can do about that.”

But hospitals, insurers and other physician aggregators argue that making it harder to buy physician groups would hamper their ability to establish cost-saving, high-quality delivery models emphasizing care coordination.

That’s how Sanford Bismarck President Dr. Michael LeBeau responded to last month’s 8th Circuit ruling against his organization’s merger with Mid Dakota Clinic. “Sanford continues to believe that combining with Mid Dakota Clinic would lead to the enhanced provision of and access to healthcare for patients in central and western North Dakota,” he said in a written statement.

Researchers have raised doubts, however, about whether hospital acquisitions of medical practices have truly achieved efficiencies and cost savings, and whether any cost savings have been passed on to payers and patients.

Going forward, hospitals, insurers and other healthcare organizations need to prepare themselves for an era of closer state and federal examination of physician acquisition deals, antitrust experts agree. That also may apply to private-equity firms, which have accelerated their investment in physician groups and have sought to build market power in particular specialties.

The FTC did not respond to requests for an interview.

Healthcare organizations pursuing physician deals must be ready to cite circumstances where competition continues to thrive following a merger. But that may not be easy, conceded Lisa Gingerich, an antitrust attorney at Michael Best & Friedrich.

“The challenge now is there has been so much consolidation that it’s harder and harder to find those circumstances,” she said.

Scaling back integration in Nevada and Colorado

The UnitedHealth Group-DaVita case may present the clearest warning shot to organizations contemplating large physician acquisitions, attracting both federal and state attention.

The FTC argued that the proposed acquisition by United’s OptumCare of DaVita’s HealthCare Partners of Nevada would result in a near-monopoly controlling more than 80% of the market for services delivered by managed-care provider organizations to Medicare Advantage plans.

The merger would be both horizontal—combining OptumCare’s and DaVita’s competing physician groups—and vertical, as it would combine a Medicare Advantage insurer and a physician group. That, the FTC said, would increase costs and decrease competition on quality, services and amenities by forcing rival Medicare Advantage plans to pay more for physician services.

Under the FTC settlement, UnitedHealth agreed to sell DaVita’s Nevada medical group to Intermountain Healthcare, which offers a Medicare Advantage product in Las Vegas through its SelectHealth insurance arm.

Colorado’s terms

Meanwhile, under a separate consent judgment with Attorney General Phil Weiser in Colorado, UnitedHealth will lift its exclusive contract with Centura Health for at least 31/2 years, expanding the provider network available to other Medicare Advantage plans. In addition, DaVita Medical Group’s agreement with Humana, United’s main competitor in Colorado Springs, will be extended through at least 2020.

All four FTC commissioners approved the enforcement action in Nevada. But the two Republican-appointed commissioners and the two Democratic-appointed commissioners disagreed on whether to ask a judge to block United’s acquisition of DaVita’s medical group in Colorado, a purely vertical merger. The 2-2 split meant no federal action was taken.

The Democratic commissioners. Rebecca Kelly Slaughter and Rohit Chopra, said the merger would harm competition and consumers, and welcomed the Colorado attorney general’s remedial conditions. “We hope all state attorneys general actively enforce the antitrust laws to protect their residents from harmful mergers and anticompetitive practices,” they wrote.

But the Republican commissioners, Noah Joshua Phillips and Christine Wilson, opposed action in Colorado on the grounds that the law on vertical mergers is “relatively underdeveloped” and that there was mixed evidence on whether the Colorado merger was pro- or anti-competitive.

Weiser said his office had to intervene to protect the ability of Humana and other Medicare Advantage insurers to compete with United by having access to physicians and hospitals. “State attorneys general will be a critical part of protecting competition, both because we’re close to our citizens and because of a lack of action by the federal government,” he said.

To other observers, the Nevada and Colorado agreements were notable because they invoked seldom-used vertical merger theory, which the FTC has been reluctant to use because it generally saw vertical mergers as helping reduce costs and increase competition.

“This shows that in the proper case, the FTC won’t hesitate to pursue vertical theory to reverse the course of” a physician group acquisition, said Douglas Ross, a veteran antitrust attorney at Davis Wright Tremaine in Seattle.

A muddier outcome in Washington state

Washington Attorney General Bob Ferguson’s settlement of his antitrust case against CHI Franciscan was less definitive than the outcomes in the other recent cases.

He had accused the hospital system of engineering the purchase of WestSound Orthopaedics and the affiliation with the Doctors Clinic to capture a large share of orthopedists and other physicians in Kitsap County, fix prices at a higher level, and shift more services to its Harrison Medical Center in Bremerton. But the settlement left in place CHI Franciscan’s purchase of WestSound and its tight professional services agreement with the Doctors Clinic, while placing relatively modest conditions on joint contracting by the hospital system and the clinic.

Ferguson’s bargaining position was weakened by a federal District Court decision in March granting CHI Franciscan’s motion to summarily dismiss his allegation that the acquisition of WestSound reduced competition and violated antitrust law. That may be the first time since the 1990s that a defendant won summary judgment on a horizontal merger claim in an antitrust case, one expert said.

In addition, the judge required the parties to go to trial on whether the transaction between CHI Franciscan and the Doctors Clinic was a true merger, as the two organizations claimed, or whether they remained two competing provider groups. If Ferguson lost on that issue, his antitrust case would be dead because a merged entity cannot be cited for price-fixing.

The attorney general settled that claim with CHI Franciscan and the clinic by requiring a $2.5 million payment to other healthcare providers and expanding the types of value-based contracts they could participate in. But the two sides differed sharply in their characterization of the settlement.

“This was a matter where we identified anticompetitive effects and ongoing harm to consumers and saw a need to act quickly,” said Jonathan Mark, senior assistant attorney general in Washington. “We believe the remedies in the consent decree are sufficient to address the anticompetitive effects we alleged.”

For its part, CHI Franciscan said there never was any court judgment or admission that it engaged in anticompetitive conduct, noting that the settlement preserved its deals with WestSound and the Doctors Clinic. It was particularly important for hospitals all over the country that Ferguson failed to establish that a professional services agreement with a physician group constituted price-fixing, an attorney for the hospital system said.

“The AG lost this lawsuit and is now twisting the facts to match his baseless allegations,” said Cary Evans, the hospital system’s vice president for government affairs. “Had we not affiliated, the closing of the Doctors Clinic and WestSound would have resulted in less choice, decreased access, and high costs for residents.”

A classic example in North Dakota

The outcome in the North Dakota case was more conventional than the others.

There, the 8th U.S. Circuit Court of Appeals affirmed the District Court’s preliminary injunction blocking Sanford Health’s acquisition of Mid Dakota Clinic as a horizontal merger.

That was fairly predictable because of the huge physician market share Sanford—whose physician group competed with the clinic—would capture if it completed the deal, experts said.

Sanford would control 99.8% of general surgeon services, 98.6% of pediatric services, 85.7% of adult primary-care services, and 84.6% of OB-GYN services in the Bismarck-Mandan market, the 8th Circuit panel found.

The appeals court also upheld the lower court’s finding that a competitor, Catholic Health Initiatives’ St. Alexius Health, would not be able to enter the market quickly after the merger, at least partly because it faced difficulty recruiting physicians in the Bismarck-Mandan area.

“That case really seemed like a no-brainer to me,” said Tim Greaney, a visiting professor at the University of California Hastings College of Law.

A key takeaway was the 8th Circuit’s rejection of Sanford’s “powerful buyer” defense. Sanford had argued that Blue Cross and Blue Shield of North Dakota, the state’s dominant insurer, had enough market power to resist any price increases sought by the newly merged entity.

But analysis of claims data and testimony by a Blues plan representative demonstrated that the merged provider would have the market power to force the insurer to raise prices or leave the market, the 8th Circuit panel wrote.

“If antitrust authorities see someone getting more bargaining power and being able to charge higher prices, that’s something they’ll worry about, even if the (payer) has significant bargaining power as well,” said Debbie Feinstein, a former top Federal Trade Commission official who heads Arnold & Porter’s global antitrust group.

Sanford didn’t say whether it planned to abandon the deal.

 

 

 

Private equity sees ripe opportunity in healthcare this year

https://www.healthcaredive.com/news/private-equity-sees-ripe-opportunity-in-healthcare-this-year/548831/

Private equity investment in healthcare has ballooned over the past decade, and experts say 2019 is poised to be another robust year, with potential ripe targets in orthopaedics and mental health and addiction treatment.

Private equity deals in healthcare in the U.S. more than doubled over the past 10 years, according to financial data firm Pitchbook. In 2008 there were 325 deals (including buyers and sellers) and in 2018 that number swelled to 788, a record number of deals representing more than $100 billion in total value.

One of the largest recent deals was private-equity firm KKR’s nearly $10 billion purchase of Envision Healthcare last year, according to Preqin. Envision provides physician services to hospitals and operates hundreds of surgery centers across the country. Another big deal was the public-to-private takeover of athenahealth by Evergreen Coast Capital and Veritas Capital for $5.7 billion in 2018.

“It looks as though 2018 was a record year for the industry, and overall the trend in deal-making has been one of strong growth — this would suggest that 2019 could be another record year unless we see a change in the underlying conditions,” Preqin spokesman William Clarke told Healthcare Dive.

The Envision deal was among the biggest leveraged buyouts ever at more than $4 billion in debt, according to Pitchbook. The practice is criticized in several respects, including that many are financed by loading a company up with mounds of debt.​

Globally, healthcare accounts for about 13% of all private equity buy-out deals, according Preqin, an industry research firm.

The deals come amid a frenzy of consolidation, both vertical and horizontal, in the healthcare industry as hospitals and insurers try to scale up to insulate themselves from a number of headwinds and disruptors such as Amazon and Apple.

M&A began to accelerate after the Affordable Care Act, as many hospitals aligned themselves with physician groups, looking for greater reach into a market. But private equity firms “provide an attractive alternative to the traditional hospital-physician alignment models,” according to a recent report from the Investment Funds team at the law firm BakerHostetler.

Private equity investors are increasingly seeking deals in areas that are highly fragmented or areas that still operate in silos and are undercapitalized, Ben Isgur, health research institute leader at PwC, told Healthcare Dive. Fragmented areas provide an opportunity for private equity firms to come in and align a number of practices on the same platform, which increases size and scale to improve leverage in negotiations with payers.

Potential highly fragmented targets include orthopaedic practices, which are likely to see a number of private equity investments over the next few years, as well as gastroenterology and urology, according to BakerHostetler.

For example, “Only 30 orthopaedic practices in the country have more than 20 physicians in a single practice,” the report notes. Private equity firms’ attraction to these practices may have increased last year after CMS changed the rules to allow total knee replacements to be performed in outpatient settings. Previously, the agency only allowed total knee replacements to be performed on Medicare beneficiaries in an inpatient-only setting.

Orthopaedics, gastroenterology and urology also are ripe with lucrative ancillary services such as surgery and imaging centers and have high use thanks to an aging population, the report notes. There are more than 5,700 ambulatory surgery centers across the U.S. that perform more than 20 million surgeries every year, according to the Ambulatory Surgery Center Association. Medicare alone spent $4.3 billion on ASC services in 2016, according to the Medicare Payment Advisory Commission.

Investing in healthcare is also enticing for private equity investors as they seek to balance their investments. The healthcare sector is likely more insulated from a recession due to the aging population and demand for services, along with the projected increase in healthcare spending, according to a research report from PwC.

Another area experts are keeping an eye on for potential deals is in mental health, Isgur said.

“There is a huge need for these services and many of the providers are in small practices. The opportunity is to consolidate and capitalize and then build shared services around technology and back-office functions to create more value,” Isgur said.

Private equity investment in healthcare is not new; but like politics, healthcare is still very local, he said.

By 2008, private equity was already active in a number of areas including long-term care facilities, hospice, ambulatory surgery centers, acute care hospitals and clinical labs, according to a previous Health Affairs report.

Buying to sell

Private equity by its nature comes with controversy, with a business model based on buying for the purpose of selling for a one-time windfall profit for wealthy investors and for taking on big debt to finance the deals.

That leaves workers and patients last, critics say, and the sector’s forays into nursing homes brought those fears to the surface.

For years, unions have been critical of private equity firms in general. The American Medical Association, the nation’s prominent doctors group, is probing private equity investments into medical practices and its influence on healthcare. The report will likely be available in June, according to an AMA spokesperson.

The health of nursing home patients was put in jeopardy at facilities run by ManorCare, one of the largest nursing home operators in the country, according to a Washington Post investigation. ManorCare struggled financially when it was helmed by private-equity firm Carlyle Group and ended up filing for bankruptcy last year, nearly a decade after it was acquired by Carlyle Group.

A spate of nursing home acquisitions by private equity firms led to concerns about quality of care issues. Private equity bought up 1,900 nursing homes over the course of a decade, from 1998 to 2008, according to a GAO report from the time.

Isgur noted the controversy, pointing to the proliferation of freestanding emergency rooms in some states.

Some freestanding ERs are backed by private equity firms and may be closer and more convenient for consumers, but that convenience comes at a hefty cost. One insurer, UnitedHealth Group, has warned about that, too.

 

 

 

 

When a hospital wields monopoly power

https://www.axios.com/newsletters/axios-vitals-1b40c794-c913-4681-b2ac-7a6e9746718f.html?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

Illustration of a giant health plus on top of a pile of cash, the ground underneath is cracking.

NorthBay Healthcare, a not-for-profit hospital system in California, recently gave a candid look into how it operates, telling investors it has used its negotiating clout to extract “very lucrative contracts” from health insurance companies.

Why it matters: This is a living example of the economic theories and research that suggest hospitals will charge whatever they want if they have little or no competition, Axios’ Bob Herman reports.

Details: NorthBay owns two hospitals and several clinics in California’s Solano County. Kaiser Permanente owns the only other full-service hospital in the county, and Sutter Health operates some medical offices. (A NorthBay spokesperson argued the system is “more akin to the David among two Goliaths.“)

Three health insurers have terminated their contracts with NorthBay over the past couple years. During a June 19 call with bondholders, executives explained why this has happened.

“We’ve been able to maintain very lucrative contracts without the competition. And what the payers are saying is, they would like us to be like 90% of the rest of the United States in terms of contract structure.”

Jim Strong, interim CFO, NorthBay Healthcare

Between the lines: NorthBay’s revenue has increased by 50% over the past few years, from $400 million in 2013 to $600 million in 2018, due in large part to its natural monopoly and oligopoly over hospital services.

  • This is exactly what we should expect to happen when sellers have the upper hand over buyers, economists say.

NorthBay also serves as a cautionary tale for price transparency, the policy fix du jour.

  • If the health care system is consolidated, consumers don’t have anywhere else to go,” said Sunita Desai, a health economist at NYU. “Even if they see the prices of a given hospital, they’re limited in terms of how much they can ‘shop’ across providers.”

 

 

 

Why is healthcare such an attractive target for private equity?

https://www.managedhealthcareexecutive.com/articles/why-healthcare-such-attractive-target-private-equity

Image result for private equity healthcare

Thanks to TV shows and movies, we tend to think of
private equity bidding wars as involving fast-growing
Silicon Valley companies. But when Oak Street Health,
a Chicago-based network of seven primary care clinics,
began looking for investors last year, more than a dozen
firms flew to Chicago to court the physicians and most of
them ended up bidding for the group of seven primary care clinics, according to a report in Modern Healthcare.

Oak Street is not alone — almost any independent
physician group of scale these days is likely to be an
attractive target for so-called “smart money,” investors
and their advisers.

Increased regulatory requirements and complexity has led
many independent small groups to “throw up their hands
and decide to sell to or join larger entities,” says Andrew
Kadar, a managing director in L.E.K. Consulting’s healthcare
services practice, which advises private equity groups.
While many such physicians sell to a health system and
become salaried employees, investor-backed practice management groups may have certain advantages, Kadar says. “Each private equity firm has its own approach, but in general they tend to give physicians a continued degree of independence and are willing to invest in new tools and technology.”

What is private equity up to? What attracts these
titans of capitalism to one of the most bureaucratic,
heavily regulated industries in the United States? And
what does the acquisition spree mean for physicians?

Here are five things to know about private equity and
healthcare in 2019.

1. The feeding frenzy is just ramping up

The driving force behind investors’ interest in healthcare
is the amount of “dry powder” in the industry — the term
market watchers use for funds sitting idle and ready to
invest, which McKinsey estimates at around $1.8 trillion

Investors are hungry for deals, and healthcare providers
are an attractive target for multiple reasons:

• The healthcare industry is growing faster than the
GDP. Healthcare is a relatively recession-proof industry
(demand remains constant even during downturns).

Many providers are currently not professionally
managed, and many specialties remain fragmented.

Investors see an opportunity to create value by
increasing efficiencies and consolidating market power.

Thus, with many independent providers still competing
on their own, there remains ample opportunity to
roll up practices into a single practice-management
organization owned by investors. “A lot of deals are
making the headlines, but when you look closely you’ll
see that most specialties aren’t highly penetrated yet by
investors,” says Bill Frack, a former managing director at
L.E.K. Consulting who is now leading a new healthcare
delivery venture. “We are still at the beginning.”

2. Investors have various strategies for creating value

Far from the leveraged-buyout days of the 1980s, which
relied primarily on financial engineering to generate
returns, almost all private equity deals today require
investors to find ways to add value to organizations over
the course of their holding period (typically around five
to seven years). By and large, in healthcare they follow
two strategies for doing so.

The most prevalent play is to buy high-volume, high margin specialist groups such as anesthesiologists,
dermatologists, and orthopedic surgeons. The PE
group then looks to maximize fee-for-service revenue
in the group by ensuring that the team is correctly
and exhaustively coding patient encounters (via ICD10) and encouraging physicians to see more patients.

Simultaneously, they work to improve revenue-cycle
management and drive efficiencies of scale into sales
and back-office administration.

Private equity firms may also look to vertically integrate
by acquiring providers of services for which their
specialists were previously referring out. For instance, oncologist groups might buy radiation treatment centers;
orthopedic surgeons might acquire rehab centers;
dermatologists might acquire pathology labs to process
biopsies, and so on.

Investors exit either through a sale to a larger PE group or,
for the largest groups, through an initial public offering.
Consolidating fee-for-service providers “is a very mature
strategy, and there’s not a single specialty you could
name where an investor wouldn’t have an incentive to
[form a roll-up],” says Brandon Hull, who serves on the
advisory council of New Mountain Capital, a private
equity firm that is investing in healthcare, and is a longtime board member at athenahealth.

Hull says investors are starting to take another approach
to creating value — which he argues “is more virtuous
and aligned with social goals.” In this strategy, investors buy up general medicine specialists — such as internal
medicine, pediatrics, or ob-gyns — and then negotiate
value-based contracts from payers.

To succeed under these contracts, investor-backed medical
groups identify the most cost-effective proceduralists
and diagnosticians in their network and instruct general
practitioners to refer only to them; and they work hard
to play a larger role in patients’ health and thus keep
healthcare utilization down. Groups that employ this
approach include Privia and Iora Health. In this strategy,
investors typically exit by selling the organization to a
larger PE group, a payer, or a health system.

Interestingly, groups that pursue the first strategy often
transition to the second – for instance, an efficiently run
orthopedic group might start with a focus on growing
revenue by maximizing fee-for-service opportunities,
but then consider pursuing bundled payments for hip
replacements. Or an investor-backed oncology group
confident in its treatment protocols and ability to keep
operational costs down might accept capitated payments
for treating patients recently diagnosed with cancer.

3. Private equity can be a great deal for physicians

How these deals are structured depends on whether a
specialty group is the first group acquired by investors —

what is known in private-equity lingo as “the platform”—
or whether it’s being added to an existing group, what is
known as a “tuck-in.”

Physicians in the platform practice are often offered
substantial equity and can benefit from the group’s
appreciation — while, of course, being exposed to the risk that
their share-value may decrease if the group fails to deliver on
its intended value proposition. Physicians in subsequent tuckin groups tend to have simpler contracts with a salary base
and added incentives tied to productivity and other measures.
L.E.K.’s Frack says both models can be attractive, but
that a more simple employment model is probably best
suited to most physicians. “I would tell docs that if they
have a strong group of doctors, they don’t have much to
lose. Even if the deal falls flat for investors, the doctors
will likely just be acquired by another investor, and they
won’t be left holding the bag.”

4. Technology underpins it all

A similar private-equity healthcare frenzy in the 1990s failed
spectacularly. One reason for the collapse was that the
technology did not exist for investors to realize back-office
efficiencies and handle the complexity of value-based contracts.

Today, cloud-based EHR and revenue-cycle management
systems harness the power of network effects to help
provider organizations handle complex and unique
payer contracts, improve back-office efficiency through
automation and machine-learning, implement best practices
for care, and quickly onboard the new practices they acquire.

Technology is particularly important for the general
medicine specialist groups looking to win under fee-for-value contracts. “The moment you start to care about
a patient’s entire episode of care, you need a massive
upgrade of your back-end systems, including full
visibility into what’s happening to your patient outside
your office. Now the technology exists to truly achieve
care coordination,” New Mountain Capital’s Hull says.

5. Public perception can be a problem

Even if physicians believe a private equity deal is their
best option, there’s a public relations risk in tying a medical practice to capitalists whose ultimate goal is to earn a return. Most coverage of private equity in mainstream media outlets questions whether investors’ profit motive is bad for patients. Physician associations and medical journals have also raised concerns in a very public way.

Such public skepticism should worry anyone who
remembers the crash of the first private-equity wave in
the 1990s, says New Mountain Capital’s Hull, who ties
that crash to the failure of managed care. “The American
consumer perceived that doctors were getting bonuses
for denying them care; this became the grim punchline
of late-night talk shows, and the whole thing fell apart.”
Frack advises investors and physicians to “monitor
quality data like a hawk, so that the group can counter
anecdotal accounts of bad care.”

Hull adds that savvy investors should take a page from
the many healthcare startups that are laser-focused on building trust with patients, particularly when it comes
to end-of-life decisions and hospice care. “They know
that success in healthcare depends on patients trusting
their doctors to help them make the best medical
decisions,” Hull says.

Positioned to accommodate uncertainty L.E.K.’s Kadar argues out that whatever direction Washington decides to take healthcare, an efficient, professionally managed group practice with advantages
of scale is well-positioned to succeed — and private
equity is one way for physician groups to reach that goal.

“These groups can adapt more quickly than smaller,
independent practices, whether progressives or
conservatives are in power,” he says. As an example,
Kadar imagines a scenario in which Medicare-for-all
comes to pass. “It turns out that most [PE-backed] groups
do very well on Medicare Advantage contracts. If your
group is focused on delivering more efficient, effective care, with strong operations, you’re in a good position no matter what happens.”

 

 

 

 

 

Healthcare consolidation goes beyond usual players

https://www.modernhealthcare.com/mergers-acquisitions/healthcare-consolidation-goes-beyond-usual-players?utm_source=modern-healthcare-daily-finance&utm_medium=email&utm_campaign=20190610&utm_content=article1-readmore

Consolidation in the health system and health insurance industries has been a focus for years. But a new report sheds light on how the “bigger is better” mantra has taken hold in companies that make syringes, X-ray machines or other healthcare products.

The report, prepared by the Open Markets Institute using data from IBISWorld, shows a small handful of companies dominate their respective markets in certain healthcare sectors that tend to get less of a spotlight than their payer and provider counterparts. The largest three pharmacy and drugstore companies represent 67% of market share and the largest two ambulance manufacturers represent 83% of market share. Just two dialysis providers dominate 76% of market share.

Open Markets has released data on monopolization in other sectors of the economy, and Phil Longman, the group’s policy director, said with healthcare approaching 20% of the U.S. gross domestic product, it’s important to direct attention there, too.

“Pretty much anywhere you go in this economy, whether it’s eyeglasses or beer or automobiles or airplanes, if you ask the right questions, you’ll find it’s much more concentrated than it was before,” he said. “That’s true in healthcare, including all of its component parts.”

Pharmacy benefit management draws $453.4 billion in revenue, according to the report, and just four companies hold three-quarters of its market share: CVS, Express Scripts, UnitedHealth and Humana. The four largest healthcare consulting firms represent 76% of their sector, which draws $6 billion in revenue.

Two companies, LabCorp and Quest, have 37% of diagnostic and medical laboratory market share, a $52.6 billion industry, the report said. And three of the largest medical patient financing companies, Synchrony, Citigroup and Wells Fargo, make up 77% of that market, which draws $4.1 billion in revenue.

The report highlighted consolidation across several different healthcare manufacturers, including those that produce hospital beds, surgical apparel, PET imaging, pacemakers and wheelchairs. Three firms own 88% of the $10.6 billion orthopedic products manufacturing sector: Stryker Corp., Zimmer Holdings and Johnson & Johnson.

Healthcare in the U.S. costs more than in other countries because the prices are higher, Longman said. That’s almost always because there is a barrier to entry that thwarts competition. Longman noted that health systems typically purchase the supplies they need, from bed sheets to bandages, from group purchasing organizations.

“That adds up to serious money,” he said.

One of the factors driving consolidation across these subsectors of healthcare is the continued decline in government and commercial health insurance reimbursement for medical products and services, which puts the squeeze on the associated costs like equipment and doctor’s fees, said Beth Everett, managing director of healthcare banking and head of middle-market healthcare with MUFG in New York. Consolidation may help achieve healthcare cost reduction by creating economies of scale, she said. Whether this ultimately happens is “the million-dollar question,” Everett said.

Greater consolidation and integration in the healthcare system is widely recognized as necessary for improving patient care, Longman said. But it should come with some means of regulation to ensure the benefits of the resulting efficiencies go to the consumer. In this case, that hasn’t happened, and monopolistic corporations are holding the benefits of greater scale, efficiencies and coordination of care rather than passing them along.

“We’ve just really mismanaged competition policy in healthcare,” Longman said.

 

Has Community Health Systems Finally Bottomed Out?

https://www.healthleadersmedia.com/strategy/has-community-health-systems-finally-bottomed-out

After selling more than 80 hospitals in three years, leaders of the large for-profit hospital operator are suggesting the worst may be behind them.


KEY TAKEAWAYS

The troubled operator of rural hospitals is focusing now on growth-oriented markets.

The latest round of questions and accusations adds to the tumultuous past five years.

Some analysts say CHS isn’t poised for where the market is headed: outpatient services and value-based care.

Times have been tough for Community Health Systems Chairman and CEO Wayne T. Smith, who is voicing an optimistic message this year as the hospital operator continues to navigate choppy waters.

Smith and fellow CHS senior executives told investors this month that the company expects to complete its massive and long-running divestiture plan by the end of 2019, having already shed 81 hospitals from its portfolio in the three preceding years. The company, based in Franklin, Tennessee, operated 106 hospitals across 18 states as of the end of the first quarter.

While the divestitures give CHS cash to pay down its debt, they are also part of a strategic effort to align CHS operations with the geographic areas where the company sees the greatest growth potential, Smith said.


“This has allowed the company to shift more of our resources to more sustainable markets, ones with better population growth, better economic growth, and lower unemployment, which provides us an opportunity for sustainable growth,” Smith said during the first-quarter earnings call this month.

“As we complete additional divestitures, we expect our same-store metrics to further improve,” he added. “This will lead to not only additional debt reduction but also better cash flow performance and lower leverage ratios.”

Executive Vice President and Chief Financial Officer Thomas J. Aaron echoed that message at the Goldman Sachs Leveraged Finance Conference this month. While CHS was truly a rural hospital company 15 years ago, Aaron said the post-selloff organization is investing strategically in markets where it anticipates growth.

“We’d rather compete in a growing pie than have more market share in a pie that’s shrinking,” Aaron said.

“We feel like we’re well-positioned,” he said.

But the positive forecast is a bit of a tough sell, especially when you consider how bad the past five years have been:

  • Questionable HMA Acquisition: In 2014, CHS completed its $7.6 billion acquisition of Florida-based hospital operator Health Management Associates, Inc. (HMA), in what is widely viewed in hindsight as a bad move. In addition to a $260 million settlement with the U.S. Department of Justice, a subsidiary of HMA pleaded guilty to criminal fraud last year for alleged misconduct that predated the acquisition by CHS—allegations that Smith knew about before the deal was final. “We were aware of the issues they had,” Aaron said this month. “We went ahead and closed on the transaction, confident that we could get the cost synergy, and we felt like they had some great assets.”
  • Major Stock Market Woes: In 2015, the price of CHS shares peaked at nearly $53 apiece, according to New York Stock Exchange data. But by the end of that year, shares had lost more than half of that value. Share prices continued to slide the following year and haven’t made a meaningful recovery since. They have been trading below $5 so far this year.
  • Lackluster Quorum Spin-off: In 2016, CHS spun off 38 hospitals to form Quorum Health Corporation. The spin-off severely underperformed expectations, and investors began asking questions. Quorum formally responded to those investors with a letter that acknowledged several reasons to question the “operational competence” of CHS leaders who backed the spin-off. A related dispute between Quorum and CHS ended in arbitration earlier this year.
  • Ongoing Hospital Divestitures: In 2017, CHS sold 30 hospitals, followed by another 13 hospitals in 2018, Aaron said. So far this year, CHS has announced the sale of at least seven more: one in Tennessee, two in Florida, and four in South Carolina. A spokesperson for CHS did not respond to HealthLeaders‘ request for additional information and comment.
  • Recurring Bankruptcy Questions: Industry analysts have wondered for years whether bankruptcy may be on the horizon for CHS. Those questions were renewed again this month when Ryan Heslop, a portfolio manager for Firefly Value Partners LP, took a short position against the company and said a CHS bankruptcy is likely in the next few years, as Reuters reported. About that same time, Smith invested more than $3 million in CHS stock, according to two Securities and Exchange Commission filings. (Smith, 73, who has been CEO for 22 years, now directly and indirectly controls about 2.8% of the company, as the Nashville Post reported.)
  • Call for CEO’s Ouster: With the release of a report this month titled “Other People’s Money,” the National Nurses United (NNU) group accused Smith of squandering CHS’ assets and called for him to be removed. “The fact that Smith remains at CHS’ helm, given a series of fatal calculations that set the company on a downward spiral, is a real wonder,” the NNU report states. Shareholders, however, voted overwhelmingly in favor of keeping Smith as a director and significantly increasing his incentive plan compensation, according to SEC filings.

Despite the light-at-the-end-of-the-tunnel rhetoric coming from CHS executives, there’s still real concern the company could come undone. That’s because CHS’ problems run deeper than its balance sheets, says Mark Cherry, MFA, a principal analyst at Market Access Insights for Decision Resources Group.

“Given the national trend toward provider consolidation, CHS might not remain intact even if it were financially healthy,” Cherry tells HealthLeaders in an email, adding that CHS seems to be unsuited for the industry’s ongoing shifts toward value-based payments and outpatient care delivery.

“There are only a few markets, like Scranton, Knoxville, and Northwest Arkansas, where CHS has enough presence to act as a stand-alone health system that can influence physician and patient behaviors,” Cherry says.

The structural problem is rooted in a bad strategic bet a decade ago, Cherry says.

“As markets and regions were coalescing around large integrated delivery networks focused on value-based care, CHS continued to invest in suburban facilities and demand high fee-for-service reimbursement,” Cherry says.

“Whereas operating a couple of suburban hospitals within a larger market once gave CHS access to better insured patients and leverage against payers who wanted to offer broad provider networks, the post-ACA landscape does not have as wide a uninsured discrepancy between urban and suburban areas,” he adds, “and payers are shifting to high-performance narrow networks, allowing them to cut CHS facilities out entirely if they are unwilling to compromise.

 

 

 

House Subcommittee Takes Dim View of Healthcare Consolidation

https://www.healthleadersmedia.com/strategy/house-subcommittee-takes-dim-view-healthcare-consolidation

Lawmakers and witnesses alike cited the ill-effects of hospital mergers and acquisitions in a long list of industry behavior they find troubling.


KEY TAKEAWAYS

An economics and health policy professor from Carnegie Mellon suggested lawmakers should give the FTC more power to review nonprofit mergers.

Lawmakers from both sides of the aisle expressed dissatisfaction with the healthcare industry’s consolidation trend and voiced support for legislative action.

A hearing of the House Judiciary Committee’s antitrust subcommittee would not have been a comfortable place Thursday for any healthcare executive touting the benefits of a planned merger or acquisition.

Lawmakers and witnesses took turns criticizing rampant consolidation among hospitals and other healthcare companies. While the public is often told these deals will lead to improved efficiency and higher quality care, those purported benefits frequently fail to materialize, they said.

Since the hearing grouped payer and provider consolidation with anticompetitive concerns about the pharmaceutical industry—an area that both major parties have expressed interest in addressing through congressional action—the discussion could signal how lawmakers will approach any legislation to address the problems they perceive.

Rep. Doug Collins, a Republican from Georgia and the committee’s ranking member, said hospital consolidation has had an especially detrimental impact on rural communities in his state.


“These communities often already have few options for quality care, so as hospital consolidation has increased over the past 10 years, rural communities like my own have been hurt the most,” Collins said.

“At times, these mergers and acquisitions can help rural communities by keeping facilities open, but often they result in full or partial closures and shifting patients from nearby facilities to those hours away,” he added.

Some problems caused by consolidation, such as increased travel times for emergency services, can “literally mean the difference in life and death,” Collins said.

Jerry Nadler, a Democrat from New York and the committee’s chairman, said there’s no question that the recent spate of mergers has contributed to the industry’s problems.

“It is well documented that hospital mergers can lead to higher prices and lower quality of care,” Nadler said.

Martin Gaynor, PhD, an economics and health policy professor at Carnegie Mellon University and a founder of the Health Care Cost Institute, said in his testimony that there have been nearly 1,600 hospital mergers in the past 20 years, leading most regions to be dominated by one large health system apiece.

“This massive consolidation in healthcare has not delivered for Americans. It has not given us better care or enhanced efficiency,” Gaynor said. “On the contrary, extensive research evidence shows us that consolidation between close competitors results in higher prices, and patient quality of care suffers for lack of competition.”

Since hospitals that have fewer competitors can better negotiate favorable payment terms, this consolidated landscape “poses a serious challenge for payment reform,” he added.

“Our healthcare system is based on markets. That system is only going to work as well as the markets that underpin it,” Gaynor said. “Unfortunately, these markets do not function as well as they could or should.”

Gaynor recommended several possible policy changes, including an end to policies that make it harder for new competitors to enter a market and compete and an expanded authority for the Federal Trade Commission to review potentially anticompetitive conduct by nonprofit entities. He also said lawmakers should consider imposing FTC reporting requirements for even small transactions to enhance the tracking capabilities of enforcement agencies.

To support his claims, in his written testimony, Gaynor pointed to research he completed with Farzad Mostashari of Aledade Inc. and Paul B. Ginsburg of The Brookings Institution.