8 interesting trends in healthcare
1. Patient Protection and Affordable Care Act
Will the benefits of the PPACA outweigh the costs for consumers and providers?
As the Patient Protection and Affordable Care Act unfolds, two things seem to be happening: (1) people are becoming less clear about the benefits of the Act, and (2) the costs and taxes associated with the Act are becoming clearer. In terms of benefits, the PPACA has resulted in healthcare coverage for fewer people than originally estimated. With just two weeks left until the end of healthcare exchange open enrollment, the Obama administration announced 5 million had enrolled in coverage through the federal or state exchanges, suggesting it's unlikely 7 million will enroll by March 31, as the Congressional Budget Office originally projected. This shortfall is a let down for hospitals and healthcare providers, who have experienced decreased reimbursements under the Act without as many newly insured patients as originally anticipated.
And, as providers get less, many people are paying more in taxes under the Act. Given this, one might wonder if the public mood toward the entire program will be connected (i.e., will people look at the tax increases on investment income and in several other places and equate it to a question of cost benefit analysis of the PPACA?). Further, the biggest potential benefit from the PPACA (for both individuals and the nation's fiscal health) would likely be lower healthcare costs. Yet, lower healthcare costs means decreased revenues for healthcare providers throughout the country, which could result in layoffs. Will people couple this decrease in spending with increased taxes and be able to understand the accounting? In essence, how do taxes go up and employment and benefits go down? We think this will be interesting to watch play out financially and politically.
2. Hospital mergers
Will the FTC's interest in hospital mergers change if one is struggling and a local partner is the obvious choice?
More hospitals within the same or neighboring markets are exploring mergers than in the past, when acquisitions and mergers involving a larger system partnering with a smaller organization in order to gain a foothold in the market were more common. Traditionally, the Federal Trade Commission has been somewhat cautious in challenging such mergers on anticompetitive grounds. In the past few years, however, it has become much more aggressive, having been successful in several high-profile challenges. Most recently, the FTC sued Albany, Ga.-based Phoebe Putney Health System over its $195 million acquisition of Palmyra Park hospital from the Hospital Authority of Albany Dougherty County. Last February, the Supreme Court sided with the FTC, and in August, the hospitals announced a settlement with the FTC that would avoid a divestiture. Hospital systems entering into intra-market mergers will have to look at the extent of their market power, the extent to which patients have access to alternative hospitals and providers, and whether payers still have significant options in providers in order to assess the likelihood of FTC intervention. What will be interesting to watch play out in the next few years will be whether or not the FTC keeps up its aggressive stance toward these mergers, especially in situations where one hospital is clearly struggling. As the second- or third-tier (or market share) hospitals in many of these towns continue to struggle, the obvious alignment choice for many will be another local hospital.
3. Hospital alignments short of merger
Can these partnerships be designed to be mutually beneficial, or will one hospital benefit over the other?
Many systems are still looking at alignment models short of a complete merger or acquisition. Here, the parties are looking at independent practice association-type models, accountable care-type models and other arrangements amongst providers, whether on the vertical level with practices or side by side with other hospitals. These types of arrangements raise interesting antitrust questions as to whether such arrangements have enough clinical and financial integration to withstand claims of price fixing. There are also questions of whether the parties can truly work well together in an aligned strategy short of an acquisition. For example, does one hospital always look to the other hospital and expect that the second hospital will be less important to it in terms of managed care contracting and every other effort? In essence, is there always a winner or loser, or is there actually a situation in which aligned hospitals can be mutually beneficial to each other? For example, can the partners be helpful to each other in contract alignment and not perceive one hospital as taking dollars or patients from the other?
4. Rise in Qui tam cases
Will the growth in qui tam cases affect providers' ability to fully defend themselves?
The number of qui tam, or whistle-blower, cases being filed against healthcare providers pursuant to the False Claims Act is growing. In 2008 there were 378 qui tam cases filed, and in 2013 that number soared to 752 cases. The PPACA expanded False Claims Act liability, making it possible for a fraud and abuse, anti-kickback, or Stark violation to serve as the basis for a false claims case. It used to be unclear that an anti-kickback claim, for example, could give rise to a false claims case, but now, under PPACA, such actions are actually direct paths to such claims.
Additionally, there is an increased frequency in which the government is joining qui tam relators in their cases. When the government joins, the chances of collection and the amount of collections by the relator go up significantly. Perhaps as a result of this, there has been a significant increase of attorneys who work solely in this area to drive qui tam cases, in essence creating an industry around qui tam cases. Further, the potential exposure in qui tam cases ($11,000 per claim plus feasible damages) makes it difficult to not settle such cases.
5. Dr. Ezekiel Emanuel questions choice in healthcare
Do we really need 5,000 hospitals?
In his new book "Reinventing American Healthcare," Ezekiel Emanuel, MD, PhD, former health policy adviser to the Obama administration, makes the statement that there is not a need for 5,000 hospitals in the United States. While he is harsh with his point, he may be right. Unfortunately, any future state with fewer hospitals will not come without a lot of pain for many communities across the country. As many small communities look at their hospitals really struggling due to not being able to recruit enough physicians, invest in technology or create the infrastructure necessary to maintain a true inpatient facility, he may in fact be right. However, like Army bases used to be, many of these hospitals are the largest employers in their towns and a hub of the community. Thus, the transition and restructuring of healthcare away from these smaller independent hospitals will mean a lot of pain for communities.
6. Out-of-network pressure
How will regulators approach network access issues?
As payers look to bring down costs in general as well as develop lower-costs narrow networks, they are getting more aggressive with out-of-network providers. As a result, we are seeing an increase in litigation by providers over these benefits, or lack thereof. Seattle Children's Hospital, which is an out-of-network provider for every plan on the state's health exchange is suing the state's Office of Insurance Commissioner, arguing its approval of the narrow network plans fails to meet mandated requirements for adequate access to care. Seattle Children's argues the exchange plans have no out-of-network benefits, which means parents who send their children to the hospital for care will be responsible for 100 percent of costs. The hospital has agreed to continue to treat children covered by these plans, but will now be on the hook for recouping charges directly from patients' families. Surgery centers and other providers, who have in the past relied on out-of-network options in order to maintain leverage with payers, can expect challenges in payer contracting to continue, which will put material pressure on these providers.
7. Data privacy and HIPAA
How much of hospitals' resources will continue to need to be expended to protect patients' personal information?
Data privacy and HIPAA have become a huge issue in and of themselves. For the last few years, there has been a tremendous amount of attention paid to privacy breaches and to government investigations of these breaches. When privacy started to become an issue a decade ago, it was typically because drug companies were buying patient information and aggressively selling products to people with certain diseases (often very private in nature). Now, privacy and data security have become much more about identity theft, which never would have been expected a decade or more ago. And, healthcare data breaches are more frequent. In 2013, 199 data breaches were reported to HHS, a 138 percent increase over 2012, according to a report from Redspin. Since 2009, the protected health information of more than 30 million Americans has been compromised in data breaches. Seven million records were exposed in 2013, 4 million of which were exposed in a single incident. It is unclear whether the regulatory scheme matches the real problems. However, it is clear that an incredible amount of spending is here to stay on data security, privacy and HIPAA issues.
8. Private equity investment
Which areas are most attractive to PE investors?
We are seeing marked interest in three core areas:
Pain management. There has been a substantial increase in interest by private investors in pain management clinics. Nearly 100 million Americans suffer from acute and chronic pain, and billions of dollars are spent each year on treatment. After modest private equity activity in this space since 2010, including Chicago Growth Partners' acquisition of Advanced Pain Management and Sentinel Capital Partner's investment in National Spine & Pain Centers, significant investments were made in 2013. Prospira PainCare, for example, formed in 2012 with the backing of three significant private equity firms. It acquired a number of pain centers across the country, including The Pain Management Center based in New Jersey and Neuro Pain Consultants based in Michigan.
Dental practice management. Tremendous investor interest remains in the dental practice management arena. Dentistry, traditionally comprising only small group practices and solo practitioners, is shifting toward more DPM arrangements. In the past decade, more than 25 private equity firms have invested significantly in this sector, in which certain large DPM companies already have annual revenue exceeding $100 million. In 2013, this interest included Monroe Capital providing a $16.6 million credit facility to private equity-owned Smiles Services LLC, a leading DPM in the Pacific Northwest. Such investments are paying off for private equity firms: a Sageworks analysis found DPM investments generated the highest return on equity of the industries it examined. The investor interest in DPM companies may grow in 2014 if certain opportunities materialize. First, many state Medicaid programs have supported dentistry fairly well, especially pediatric dentistry. This support allows dental practices to thrive with substantial Medicaid business, unlike other healthcare providers. Yet, during the past few years, stretched state budgets forced many legislatures to cut spending on dental care, especially for adults. Second, the PPACA strengthened support for dental services, especially for children, by funding Medicaid program expansions and including pediatric dentistry as part of the essential health benefit packages for individual and small employer plans. On the other hand, increased regulatory scrutiny of DPM structures could put new pressures on the sector. For example, a 2013 Senate committee investigation into DPM practices in the Medicaid program recommended some practices be excluded from Medicaid. Similarly, states such as North Carolina have considered legislation at the bequest of their state dental associations to reduce DPM companies’ involvement in Medicaid.
Urgent care. The urgent care industry is a rapidly growing healthcare sector. There was an almost 20 percent growth in existing clinics in the past four years, totaling more than 9,400 urgent care clinics. Furthermore, the existing clinics are looking to expand. In 2013, almost 40 percent of these clinics told the Urgent Care Association of America they would be expanding their facilities or adding new locations, up from 18 percent in 2010. This expansion is not expected to slow; indeed, estimates by IBIS World predict the sector will see more than $18 billion in revenues in 2017 at more than 12,000 clinics, up from $13 billion in revenues in 2012. Millions of private equity dollars from at least a dozen firms have gone to urgent care clinics in the past few years. For example, in 2013, NextCare Holdings Inc., backed by Enhanced Capital Partners, acquired 11 PrimaCare Medical Centers in the Dallas/Fort Worth area to bring its total to 86 clinics nationwide. These investments should continue, in part as a response to fiscal pressure by lawmakers and insurers on hospitals to cut costs and the health insurance mandate's potential increased demand, according to a recent Forbes article. The potential positives for urgent care are twofold. First, patients love the convenience of urgent care clinics. Second, these clinics have the advantage of saving significant payer dollars. For instance, a 2010 Rand study found that almost one in five visits to hospital emergency rooms could be treated at an urgent care clinic, potentially saving $4.4 billion annually in healthcare costs.