1. Healthcare reform. Healthcare remains one of the great positive drivers of the American economy. The services are difficult to outsource, they are people intensive and they provide a great deal of jobs at all levels of income. Two of the great risks of healthcare reform are 1) that it reduces payments across the board for healthcare and thus reduces the ability of the healthcare industry to be a driver of employment in the country and 2) that miscalculations of the costs of reforming healthcare provide serious damage to the overall long term economy. In essence, will these changes, combined with other changes, cost so much that it will be extremely difficult to ultimately pay back the debt that the nation is taking on. Will this mean reduced national economic strength and flexibility?
Dr. Tom Price, a Congressman from Georgia, and the Chairman of the Republican Committee, discusses Tom Daschle’s thoughts on rationing in a recent Wall Street Journal op-ed piece on Jan. 7, 2008. There, he was quoted as follows:
“For a preview, look no further than “What We Can Do About the Health-Care Crises”, a book published this year by former Sen. Tom Daschle, President-elect Barack Obama’s choice for Secretary of Health and Human Services. Atop the list of worrisome ideas proposed by Mr. Daschle is the creation of an innocently termed “Federal Health Advisory Board”.
This board would offer recommendations to private insurers and create a single standard of care for all public programs, including which procedures doctors may perform, which drugs patients may take, and how many diagnostic machines hospitals really need. As with Medicare, for any care provided outside the board’s guidelines, patients and physicians would not be reimbursed.
Mr. Daschle is quick to note the board’s standards would serve only as a suggestion to the private market. Yet to ensure that there are not rogue private insurers, he has proposed making the employer tax deduction for providing health insurance dependent on compliance with the board’s standards. In an overtly political ruse, Democrats will claim they are dictating nothing to private providers, while whipping noncompliant insurers in place through the tax code.
To be sure, this strategy seeks to eliminate private providers completely. Forced into accepting rigid Washington rules and unsustainable financing mechanisms under Mr. Daschle’s plan, most private insurers would be quickly eradicated. Or as Mr. Daschle soberly predicts in this book, “the health-care industry would have to reconsider its business plan.”
Covering the uninsured
The most compelling reason for healthcare reform is the interest in covering the nation’s uninsured population. The uninsured population can broadly be broken down into three core categories. First, those that are eligible for Medicaid that have failed to sign up properly for Medicaid. This is generally estimated at approximately 33 percent to 35 percent of the uninsured. Second, those that are very poor and make very small incomes and simply cannot afford to buy health insurance but are not covered by Medicaid. Third, those that can afford health insurance and simply make the economic and budgetary decision that they do not desire to buy health insurance.
The simplest way to solve this problem is similar to the Massachusetts approach. It is costly but not nearly as costly as some of the other alternatives being presented and not nearly as disruptive to the industry. This includes, in short, (1) providing additional assistance to assure that the 15 million or so or population that are eligible for Medicaid but not enrolled for Medicaid are enrolled, (2) offering some amount of stipend to those that are very poor and can’t afford healthcare but aren’t yet poor enough to be eligible for Medicaid, and (3) making compulsory the buying of health insurance by those people who choose not to buy it. On the third point, this can be a slippery slope if, e.g., the government is the party that provides the health insurance, essentially, allowing people to buy “Medicare or Medicaid coverage” when they otherwise wouldn’t be eligible.
Presidential appointments
I am not impressed with the choices of the incoming President on the healthcare side, namely Tom Daschle and Peter Orszag. However, I do believe that the greatest promise of this administration lies in the ability of Pres. Obama to recruit the best and brightest of his generation. Not since the efforts made by FDR will we see a president reach so deeply into the private sector and be able to convince extremely capable people, like the leadership of McKinsey, to join the administration and take time out from their private business interests. I believe that having the best and brightest in several levels of government is much more likely to help the country effectively uncover and handle problems in the banking or finance sectors and to at least assure there are serious debates on issues. The benefits of a listening-approach are even apparent thus far in the changing of the game on the stimulus package. Rather than a straight stimulus package, it is now being partially re-crafted into a tax reduction concept. Whether this may smart marketing, or truly an ability to listen and see different sides of an issue, this is a much more palatable approach towards government stimulus.
2. Surgery center transactions. There continues to be a certain amount of acquisitions of surgery centers at majority interest pricing. However, the pool of buyers and the amount of capital being directed towards acquisitions of majority interest transactions temporarily slowed towards the end of last year. Consequently, pricing for such majority interest transactions tended to move from a 7 to 8 times multiple down to a 6 to 7 times multiple. There seems to be more companies looking at investing in turnaround centers than ever before as well as a more active role by hospitals in seeking to buy majority interests in surgery centers.
We were privileged to be able to help several parties close transactions at the end of last year. These included the sale of part of a hospital to another hospital in Ohio, the acquisition by a hospital of part of an orthopedic-driven ASC in Washington, the sale of an ophthalmologic-driven ASC in Maryland to a national company, the sale of a substantial portion of an ASC to a large orthopedic group in Kentucky as well as several other ASC and hospital transactions.
3. Physician-owned hospitals. Physician-owned hospitals survived for another year in 2008. However, there remains tremendous pressure on physician ownership of hospitals at the federal level. This pressure has been increased by such appointments as Peter Orszag and Tom Daschle. Each tends to be quite negative towards physician ownership of hospitals. Both the physician-owned hospital industry and the surgery center industry should be leery of the increased power of these two persons. To see an article entitled “Will the Federal Government Shut Down Surgery Centers and Physician Owners Hospitals?” visit www.BeckersASC.com or www.HospitalReviewMagazine.com. FTC Commissioner J. Thomas Rosch delivered a speech at the 6th Annual Washington Healthcare Summit entitled “Enforcement Strategies in the Health Care Industry”, and the following is a quote from his speech:
“On the one hand, specialty hospitals are a new type of competition for pre-existing full-service hospitals, and new competition is usually a good thing. On the other hand, specialty hospitals are often owned by referring physicians, and that raises a host of ethical and fiduciary duty concerns that complicates the competition issues. Furthermore, whether for good or naught, specialty hospitals take profit away from full service hospitals, and that creates complications too.
The pitfalls that arise are threefold. First, physician referrals of patients from a full service hospital where the physician has admitting privileges to a specialty hospital in which they have an ownership interest can raise ethical issues surrounding the physicians’ fiduciary duty to their patients. This is due to the financial incentives created by the physicians’ ownership interest in the hospital — they stand to profit from their investment in the hospital by the referral, separate and apart from the quality of care provided to the patient. For example, it is argued that these hospitals may offer only the most expensive procedures — e.g., heart surgery. Or, these hospitals may order more expensive procedures than most patients need. In short, it is argued that inevitably profit motives incentivizes cream skimming or cherry picking (referral of the most profitable patients to the physician-owned hospital).
Alternatively, a full-service hospital may also try to control the cream skimming problem by eliminating the privileges of the physicians who refer to specialty hospitals, or removing those physicians from staff. It may also create “quotas” for these physicians. These actions can also lead to litigation, this time by the referring physicians against the full service hospital.
Second, even in situations where physician owners of specialty hospitals do not engage in self dealing, full service hospitals sometimes claim that specialty hospitals leave the lion’s share of the most costly obligations, such as emergency care and uninsured care/charity care, to the full service hospitals, which taxpayers may ultimately have to finance."
4. Upcoming healthcare private equity event. Our upcoming private equity event will be held at the Palmer House in Chicago on Feb. 26. For a copy of the invitation, please email me at sbecker@mcguirewoods.com. We would be delighted to invite you to join us at this event at no charge. A sample of the topics and speakers is as follows:
- Keynote Speaker — Craig Frances, M.D., Managing Director, Summit Partners
- What Will the Next 5 Years Bring to Health Care? — Brian Scullion, MD, Principal, William Blair & Company; Daniel Gill, Managing Partner, Silver Oak Partners; David Bacon, Jr., CEO, Meridian Surgical Partners; Scott Becker, Partner, McGuireWoods
- Investing in the Lower Middle Market of Health Care — John C. Riddle, Principal, Savvain; John Hoesley, Partner, Prism Capital; Jeff Gonyo, Founder/President, Geneva Glen Capital; Geoffrey Cockrell, Partner, McGuireWoods; Keith Koeneman, Managing Partner, Kingsman Capital
- The Capital Markets as an Exit Strategy — John C. Fennebresque, Jr., Managing Director, Fennebresque & Co.; Brian Scullion, MD, Principal, William Blair & Company
- The View from Inside — Ned Villers, Partner, Wall Street Health Care Partners; Tracy Warren, Battelle Ventures; Mark Kromkowski, Partner, McGuireWoods
- Examining a Spectrum of Opportunities in Healthcare — Thomas Michaud, Founder/CEO, Foundation Surgery Affiliates
- Orthopedic & Neurological Trends and Opportunities – A Forecast for the Next Five Years — John Cherf, MD, Neurosource
- Improving & Changing Models of Patient Care — Pat Alagia, MD, President, Safe Sedation; Warren Brennan, COE, SMA Infomatics
- Key Issues in Health IT & Healthcare Business Processing Outsourcing — Kevin Greene/Joe Schiesel, Triple Tree; Bradley Salmon, Associate, McGuireWoods; Mel Gunawardena, CEO, MediGain
- Observations Gleaned from Founding & Operating Health Care Companies in Distinct Sectors – David Bacon, Jr., CEO, Meridian Surgical Partners; Tom Mallon, CEO, Regent Surgical Health; Thomas Michaud, Founder/CEO, Foundation Surgery Affiliates; Scott Becker, Partner, McGuireWoods
- Adding Value through Technology & IT Diligence — Marion K. Jenkins, CEO, QSE Technologies
5. Orthopedic-, Spine- and Pain Management Focused Ambulatory Surgical Center Conference. We have two upcoming ambulatory surgery center conferences this year. First, we have our Orthopedic, Spine and Pain Management Focused ASC Conference on June 11-13, 2009, at the Westin Hotel on North Michigan Avenue. This conference includes a great deal of sessions on profiting from and adding musculoskeletal services, turning around surgery centers, benchmarking, recruiting physicians, and a whole set of other subjects. The Ambulatory Surgery Foundation and ASC Association again joins us in this conference. We think it will be a terrific event. If you have an interest in attending or exhibiting opportunities for this event, please email me at sbecker@mcguriewoods.com or go to www.BeckersASC.com.
We are also hosting our 15th Annual Ambulatory Surgical Center conference on Improving Profits and Business and Legal Issues for ASCs on Oct. 8-10, 2009. Here, we will have an exceptional lineup, and we again host this conference in conjunction with the Ambulatory Surgery Foundation and ASC Association.
To join the ASC Association, please call (703) 836-8808.
6. Becker’s ASC Review; The Hospital Review; Becker’s Orthopedic & Spine Practice Review. We added last year, to the longstanding Becker’s ASC Review, two additional publications. First, we added a publication from ASC Communications entitled The Hospital Review. This magazine focuses on business and legal issues for hospitals and health systems. We also added a publication entitled Becker’s Orthopedic & Spine Practice Review. This magazine focuses on business and legal issues for orthopedic and neurosurgical practices. For information regarding the magazines or a complimentary subscription to The Hospital Review or the Becker’s Orthopedic & Spine Practice Review, please email me at sbecker@mcguirewoods.com. To learn more about these publications, visit www.BeckersASC.com or www.HospitalReviewMagazine.com.
Overall, we expect 2009 to be a challenging but much better year than people are anticipating.
Should you have any questions, please feel free to contact me at (312) 750-6016.
Very truly yours,
Scott Becker