The Health Care Investor

An Ideal Time for Hospitals to Reevaluate Strengths & Strategies for Using those Strengths

Amber Walsh — Wed, 01 Sep 2010 10:36:59 -0500

Our McGuireWoods colleagues, Scott Becker and Bart Walker, recently published an article entitled "Strategies for Hospital Leadership and Identifying Strengths, Allocating Hospital Resources and Focusing on Profitable Niche Leadership" which contains key concepts on strategic planning for hospitals. In light of healthcare reform legislation, trends in reimbursement, growing interest in accountable care organizations and other issues facing the U.S. healthcare industry, now is an ideal time for hospital leaders to reevaluate their strengths and use those strengths to meet their challenges

Market Trends for Orthopedic and Spinal Device Manufacturers

Kristian Werling — Sat, 21 Aug 2010 06:38:03 -0500

Krist Werling was interviewed by Becker's Orthopedic and Spine Review on current trends and issues for orthopedic and spinal device manufacturers. The interview addresses a wide variety of issues for ortho and spine manufacturers including the impact of healthcare reform on spine and orthopedics, changes at FDA and the impact of new physician transparency requirements. Read the interview here.

11 Leading Private Equity Investors that Invest in Healthcare

Kristian Werling — Fri, 20 Aug 2010 15:38:44 -0500

The following is a list of eleven of the more experienced and active private equity investors in the health care and life science space. These investors are from large private equity funds that specialize primarily in growth-stage, buyout and platform funding transactions.

1. Robert Womsley, Jim Connelley and Ned Villers – Water Street Healthcare Partners. Mr. Womsley, Mr. Connelley and Mr. Villers each work with the Chicago-based firm of Water Street Healthcare Partners. Water Street has over $1 billion in capital under management. Water Street exclusively invests in the health care and life sciences space with portfolio investments across both medical device, medical device distribution and health care providers. Several of their portfolio companies include Medical Specialties Distributors, Sarnova and Access MediQuip. More information is available about Water Street at www.wshp.com.

2. Craig Frances, M.D. Craig Frances leads the health care team at Summit Partners. Summit Partners is one of the nation’s largest private equity funds with headquarters in both Palo Alto and Boston. Dr. Frances serves as a director of HealthCare Partners, National Veterinary Associates and Physicians Formula Holdings. Dr. Frances can be reached at cfrances@summitpartners.com and more information about Summit Partners is available at www.summitpartners.com.

3. Scott Perricelli and David Stienes – LLR Partners. LLR Partners is a large Philadelphia-based private equity fund that invests in a variety of different sectors including healthcare services. Mr. Perricelli and Mr. Stienes led a recent transaction by LLR Partners to fund a platform company called Vivera Health which will seek to build out fertility surgical and laboratory facilities throughout the country. Scott is available at sperricelli@llrpartners.com and David is at dstienes@llrpartners.com and more information about LLR Partners is available at www.llrpartners.com.

4. David Koo and R. Craig Collister – RoundTable Healthcare Partners. RoundTable Healthcare Partners is based in Lake Forest, Illinois and was founded by senior executives from Baxter International and American Hospital Supply. Mr. Collister and Mr. Koo represent the next generation of leadership at RoundTable and focus on investing in various sectors of the healthcare space including medical devices. RoundTable has deep experience in investing in disposable and generic sectors of both medical device and pharmaceutical industries. More information about Mr. Koo and Mr. Collister and RoundTable Healthcare Partners can be found at www.roundtablehp.com.

5. Jeremy Silverman – Frontenac Company. Jeremy Silverman is a managing director at Frontenac Company. Frontenac is a Chicago-based private equity fund that invests in a variety of sectors and focuses portions of its funds on the healthcare space. During the 1990s, Frontenac was a leader in the practice management consolidation. Current Frontenac portfolio investments include Crescent Healthcare and E+ Cancer Care. More information about Jeremy Silverman and Frontenac can be found at www.frontenac.com.

6. Reeve Waud and David Neighbours – Waud Capital. Reeve Waud is the founder of Waud Capital and David Neighbours is a Partner at Waud Capital which is a manager of over $1 billion of funds also based in Lake Forest, Illinois. Waud Capital has invested in Acadia Healthcare and Hospitalists Management Group, LLC and has had significant success in the healthcare space. To further their management expertise, Waud Capital Partners has brought on board Gary Mecklenburg, the former CEO of Northwestern Memorial Hospital in Chicago, Illinois as an Executive Partner. More information about Waud Capital can be found at www.waudcapital.com.

A Courting Process Part III: Still More Thoughts on Selecting an Investment Bank That is Right for You

Amber Walsh — Tue, 17 Aug 2010 14:44:40 -0500

In two prior posts regarding, we addressed various questions for a seller to consider when selecting an investment bank to help the seller achieve its transaction goals. Those questions, as well as those below, are just a handful of questions that we suggest companies consider . Ultimately, if you determine that working with an investment bank makes sense for your transaction, a bank can help you move a transaction along in an efficient, low stress and financially rewarding way if you are able to find the right bank for you.

Is the magnitude and type of transaction exciting to the investment bank such that it will keep the bankers’ attention and keep energy focused on pushing the deal through to completion? In other words, does the deal fall within the bank’s sweet spot? Deals that are at the larger end of a bank’s typical transaction size may mean that the bank has fewer contacts with the types of investors/buyers that should be targeted. Deals that are in the smaller end of a bank’s typical transaction size may not keep the bankers’ attention to drive the deal efficiently toward closing.

Will the investment bank be willing to follow your management’s lead on the key deal terms (including which targets are contacted, how the various stages of the process will run, etc.)? With the seller management team, does the bank have strong relationships with one or a few leaders that you perceive would be favored over other seller leadership? Alternatively, do you as the seller prefer an investment bank that will lead you through the process and is the investment banker able to do this for you?

Are the bankers willing and able to provide significant research and insight into potential buyers? For many sellers, choosing a buyer turns on not only the purchase price but on the buyer’s reputation and own strategic goals as well. This is particularly true when all or some of the seller management team will be staying with the buyer going forward. Most investment banks have research teams who can provide the desired information, but if in-depth information relating to the buyers is important to you, this is one aspect of the bankers’ services that should be discussed.

Does the proposed timing and track of the deal process proposed the investment bank make sense to you and work with your needs and goals?

Finally, what do the bankers’ clients have to say about them? The bankers should offer the ability to contact references from current and former clients. Discussing your questions with these references, particularly former sellers, may prove to be very enlightening as to the road ahead.

A Courting Process Part II: Additional Thoughts re Selecting the Investment Bank That is Right for You

Amber Walsh — Tue, 10 Aug 2010 14:28:59 -0500

As a follow-up to our prior post on the topic, below are a few key additional questions that sellers can consider when evaluating investment banks in order to find the bank that will ultimately meet the sellers' needs. These questions are excerpted from a recent article authored by Krist Werling, Scott Becker and me.

One additional question sellers should ask ia How many investor/buyer targets does the investment bank intend to contact with the request for proposal? More specifically, how many potential investors/buyers does the investment bank intend to contact at each stage of the process? Investment banks can very greatly in their philosophy of which and how many targets to contact. Some believe in disseminating the RFP to as many possible targets as are available in the industry whereas others chose to limit distribution to a few select potential investors/buyers that they believe would have the most interest and that would be the best match for you. You should ask how many targets does the bank intend to initially contact and sign confidentiality agreements, how many will receive RFPs, how many will be invited to management meeting and with how many will the bank negotiate offers/letters of intent? Investment banks can very greatly in their philosophy of which and how many targets to contact. Depending on your own sales philosophy, this is another way that you can distinguish among investment banks.

Within the spectrum of investors/buyers that the investment bank intends to contact, how many strategic buyers vs. financial buyers such as private equity funds will be targeted? Strategic buyers are existing players in the industry that may seek to purchase or invest in your business in order to expand an existing business in a strategic fashion, and this may be a more or less attractive option for you as a seller depending on your relationships with your competitors in the industry, your willingness to divulge confidential information to competitors, etc. Financial buyers often will be willing to ultimately pay a higher price for the business where strategic buyers are often more stream-lined in their acquisition methodology and thus more likely to close the deal quickly and efficiently. To this end, challenges can arise with investment banks when they have too high a comfort level in one part of the market vs another. For example, in one healthcare transaction for a small specialty hospital chain with outstanding earnings, a client hired an investment bank for the principal purpose of seeking financial buyers. There, the bankers spent the great majority of their efforts with strategic buyers seeking, in the client’s view, the easier close but not necessarily the maximum price. Ultimately, the client perceived that it already knew each of the strategic buyers and that pricing from the strategic buyers would not permit a deal.

Do the investment bankers understand why your company is ready to sell at this time? Have they worked out the background story of the sale – essentially explaining why, if the business is such a great thing, you now want to part with it? Buyers will want to know why you are selling and your story about why you want to sell thus becomes an important part of the process.

Do the bankers believe you need to take significant measures to get the business more fully in shape to sell at a maximum price and are you willing to takes these steps?

What is the investment bank’s philosophy with respect to the completion of due diligence and negotiation of the form of purchase agreement/investment documents before signing a letter of intent? In other words, is the investment bank comfortable with signing a letter of intent before diligence is substantially complete and before at least a rough form of purchase agreement is agreed upon? Investment banks have different philosophies on the wisdom of signing of letters of intent early vs. further long in the process and it is important you be comfortable with the bank’s intended approach although the determination of which negotiation approach will likely be as dependent on the negotiation power of the seller (i.e. on the strength of the seller’s business and interest it generates) as it does on the investment bank’s own philosophy.

What are the fees to be charged by the bank? Most banks will charge a retainer fee (which will be treated as a deposit on payment of the full fee) as well as a sliding scale fee based on achieving targeted outcomes.

Who at the investment bank will be contacting the potential investors/buyers? In other words, will be bankers that you meet with during the initial selection process and works with most closely at the senior leadership level actually be contacting the targets and doing much of the ground work? Likewise, will those particular bankers be present at management presentations and at other key discussions with potential buyers after initial contact is made?

What does the investment bank believe is the range of value for your business? Specially, what assumptions of earnings are used to generate the value range, what multiple of earnings do they anticipate an investor/buyer paying? Within the total purchase price, what does the bank anticipate will be the buyer’s split of cash and debt financing? Although it is important for you to know that the investment bank values your business and will strive hard to achieve the most lucrative deal possible, it is also important to insure that you are working with an investment bank that sets aggressive but reasonably achievable targets.

In addition to the questions raised in Part I of this discussion, these are just a handful of questions that we suggest companies consider when assessing the value of various investment banks. In Part III we will discuss a few remaining issues for sellers' consideration when making this important decision.

How Will Proposed New Quality Improvement Program (QIP) Requirements Impact Dialysis Provider Reimbursement?

Amber Walsh — Tue, 03 Aug 2010 21:09:09 -0500

On July 23^rd, at the same time that it released the final rule relating to the new bundled payment methodology for renal dialysis providers, CMS issued a proposed rule that would create a new Quality Incentive Program (QIP) for dialysis services, tying a facility’s payment to how well it meets the QIP performance standards. The QIP, which is the first pay-for-performance program in a Medicare fee-for-service payment system, is scheduled to begin on January 1, 2012.

The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) required CMS to develop the QIP to improve the quality of care facilities provide to dialysis patients. The proposed rule utilizes just three dialysis quality measures, all of which are measured on a facility-wide basis by looking at the total patient population of the facility as compared to national averages: Hemoglobin above 12 grams per deciliter (g/dL), Hemoglobin below 10 g/dL and URR (urea reduction ratio) above 65%. These common measures of dialysis quality are what most industry experts expected to be included in the rule and are consistent with CMS’s own QIP outline released in September 2009. However, in light of comments received during the bundled payment rule-making process, CMS proposes to weight Hgb <10 as the most important of the three measures, accounting for 50% of a facility’s score, while the other two measures would each count for 25%. Each of the three measures would factor into the Total Performance Score, a 30 point scale which measures performance against 2008 national averages (or 2007 performance, if it is lower). The proposed rule includes a sliding scale of payment reductions for 2012, where the minimum Total Performance Score (TPS) that facilities would need to achieve in order to avoid a payment reduction would be 26. If a particular facility does not achieve a TPS of at least 26, the reimbursement withhold would be in .5% increments.

If this methodology becomes final law, CMS estimates that 3,205 facilities would achieve a TPS of at least 26 and thus see no payment reduction in 2012. On the other hand, CMS estimates 709 facilities would see a 0.5% payment reduction due to TPS of 21 to 25; 183 facilities would see a 1.0% payment reduction for TPS between 16 and 20; 184 facilities would see a 1.5% payment reduction for TPS between 10 and 15; and only 30 facilities would see a 2.0% payment reduction for TPS 10 or below. Thus 1,106 (or 27%) of all dialysis facilities would receive some payment reduction. However, viewed in terms of dollars only, for an industry estimated to receive $8.5 billion in Medicare payments in 2012, CMS’s estimate of approximately $17.5 million withheld in 2012 appears much less significant at roughly just 0.2%.

In addition to using the quality measures in determining the TPS for reimbursement, CMS proposes to continue publishing facilities’ results online (as has been the practice of CMS for many years on its own Dialysis Facility Compare website) as well on a certificate that would be displayed in the facility and likely tied to the facility in other CMS-mandated manners. Comments on the proposed rule are due by September 24, 2010 and use of the certificates is one topic about which CMS is actively soliciting commentary. CMS anticipates releasing a final rule on the QIP later this year.

A Courting Process Part I: Selecting the Investment Bank That is Right for You

Amber Walsh — Fri, 30 Jul 2010 08:24:26 -0500

For many healthcare companies, when it is time to sell or refinance their business, finding an investment bank that fits the needs, philosophies and goals of the seller can be an important component for success during the sale/refinance process. Earlier this year, Barclays PLC represented biopharmaceuticals company Ception Therapeutics, Inc. as it closed the $250 million sale of 100% of its capital stock to Cephalon, Inc., arguably helping Ception to achieve optimal pricing. Likewise, in 2006, when hospital system HCA went private via a $33 billion management leveraged buyout, the largest in history at the time, Merrill Lynch Healthcare Investment Banking Group acted as financial advisor to HCA through the process, likely increasing HCA shareholders’ return.

Utilizing an investment bank is not necessary for all companies in all transactions, but an investment bank can help the seller successfully market the business and attract the right potential investors/buyers and ultimately can result in not only a more lucrative deal but a transaction that otherwise meets the seller’s goals. Assessing which investment bank is right for a seller can be a daunting process, but there a few key questions that you as the seller can pose to your leadership when evaluating the various banks in order to find the bank that will ultimately meet your needs. In a recent article authored by Krist Werling, Scott Becker and me, we addressed a number of questions that a seller should consider during the selection process.

One of the first key questions a seller should ask is this: How well versed is the investment banker in your particular industry? Not only are there investment banks that specialize in healthcare (either boutique investment banks that focus on healthcare or healthcare divisions of larger more diverse investment banks) but some investment banks have specialized experience and knowledge about a particular industry within healthcare such as surgery centers, imaging facilities, etc. For example, Bank of America-Merrill Lynch, William Blair, Goldman Sachs, Morgan Stanley, JP Morgan and others have significant health care banking groups within their larger investment banking segments and have made headlines with some of the most substantial healthcare M&A deals in the past calendar year, including Pfizer’s purchase of Wyeth for $66.2 million, Roche Holding’s acquisition of the remaining 44% of Genentech and Merck’s purchase of Schering Plough. Middle market more general investment banks like Dresner Partners also often have healthcare experience. Other banks like Cain Brothers, Leerink Swann and Edgemont Capital Partners have the advantage of focusing nearly exclusively on health care services. Working with an investment bank that understands the complexities of your industry enables the bankers to jump right into a transaction without the need for you to educate them about your industry or to explain basic fundamentals about your business.

The seller should also ask Does the bank understand your individual company as an entity with a unique model, management team and philosophy? Have they taken the time to get to know your corporate culture and special aspects of your product and service delivery and do they appreciate the ways in which your company differs from your industry competitors?

The seller should further consider Is investment banking a main focus of the company? We generally caution people against hiring parties to do investment banking services where this is not a core part of their efforts. For example, one client hired a big four accounting/consulting firm a few years ago to help sell its specialty pharmaceutical business. Investment banking was a newer business line for the big four firm. After months without good results, the client hired William Blair, a company that does focus in investment banking and in part in healthcare and had much better results: i.e. the client ultimately completed a transaction which exceeded essentially all of its targets.

There are a number of additional considerations when selecting the right investment bank discussed in the article. In future posts, we will address these questions.

CMS Issues Long Awaited Bundling Rule for Renal Dialysis Providers

Amber Walsh — Tue, 27 Jul 2010 15:52:17 -0500

Yesterday, CMS issued a release regarding the much anticipated final rule laying out the new bundled prospective payment system (PPS) for renal dialysis facilities. The rule itself was published on July 23, 2010.  Under the new  PPS, CMS will make a single bundled payment to the dialysis facility for each dialysis treatment that will cover all renal dialysis services and home dialysis commencing on January 1, 2011. It replaces the current system which pays facilities a composite rate for a defined set of items and services, while paying separately for drugs, laboratory tests, or other services that are not included in the composite rate.   At the same time, CMS issued a proposed rule that would create a new Quality Incentive Program (QIP) for dialysis services that will link a facility’s payment to how well it meets the QIP performance standards, which will be discussed in a separate blog post.

Currently and through the remainder of this year, Medicare makes a composite rate payment to ESRD facilities for furnishing outpatient maintenance dialysis in the facility or in the beneficiary’s home. The composite rate payment covers dialysis treatment costs and certain routinely furnished ESRD-related drugs, laboratory tests, and supplies.  The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) required CMS to develop a new, fully bundled prospective payment system for renal dialysis services to replace the existing composite rate payment methodology.

According to the CMS issuance, CMS received nearly 1500 public comments in response to the ESRD PPS proposed rule that appeared in the September 29, 2009 Federal Register. Among the major concerns raised by the comments were the proposals surrounding payment for home dialysis training; inclusion of additional payment adjustments for patient characteristics in the payment methodology; and inclusion of former Part D prescription drugs related to ESRD treatment in the payment bundle.   In the final rule CMS:

1) Creates a home or self-care dialysis training payment adjustment specifically directed to patients trained by facilities certified to provide home dialysis training.

2) Finalizes payment adjustments for dialysis treatments furnished to adults for patient age, body surface area, and body mass index, onset of dialysis, and certain co-morbidities, but does not finalize adjustments for the patient’s sex or the patient’s race or ethnicity.

3)   Finalizes a payment adjustment for dialysis treatments furnished to pediatric patients, based on patient age and dialysis modality, but not co-morbidities.

4)   Finalizes a definition for renal dialysis services that includes ESRD-related oral-only drugs, but postpones payment for such drugs under the ESRD PPS until Jan. 1, 2014.

We have discussed in prior posts that the new bundling reimbursement is likely to impact dialysis providers differently. Small dialysis organizations (SDOs) and large dialysis organizations (LDOs) will likely be impacted differently due to LDO purchasing and contracting power and, in some cases, vertical integration. Additionally, dialysis providers may be differentially impacted based on the dialysis modalities on which they focus (e.g. home or in-clinic peritoneal dialysis (PD) versus in-clinic hemodialysis and variations of these types) and/or based on geographic factors.

The new bundled payment system will be phased in over a four-year period beginning on January 1, 2011. However, providers may choose to be paid entirely under the new payment system beginning on January 1, 2011. Dialysis providers of all size, modality focus and patient population will now be assessing more fully the potential impact on their businesses and strategies for keeping costs low and quality high.

Part II - Potential Impact of Healthcare Reform on Medical Device Companies

Kristian Werling — Tue, 20 Jul 2010 06:44:08 -0500

This blog post is the second in a series examining the potential impact of health reform on medical device companies. The first post can be accessed here.

1. Payment Reductions. The Healthcare Reform Act did not include direct payment reductions that apply to specific types of medical devices, however there are provider payment reductions that will indirectly affect medical device manufacturers. For example, total payment reductions to hospitals during 2011 are expected to be in the range of.35% less than 2010 payments, according to the American Hospital Association.The Congressional Budget Office estimates that this will amount to $112.9 billion in hospital payment reductions over the next ten years. These reimbursement reductions will directly affect hospital budgets for certain types of capital spending and for spending related to devices that are not reimbursed as part of a Diagnostic Related Group. Device manufacturers should understand their customers’ budgets so they can anticipate whether their hospital and other provider customers may decrease their budget allocations for device purchases.

2. Stricter Fraud and Abuse Scrutiny. The Healthcare Reform Act amends certain federal fraud and abuse laws. Specifically, the Act amended the False Claims Act (“FCA”), the Anti-Kickback Statute (“AKS”) and the Federal Sentencing Guidelines. The FCA subjects a person to monetary penalties and/or imprisonment for knowingly and willfully falsifying, concealing or covering up a material fact, making materially false representations, or using a document known to contain any materially false statement. More significant to medical device manufacturers is the elimination of the FCA’s “Public Disclosure Bar.” The Public Disclosure Bar prevented a qui tam plaintiff from using publically available information as the basis for a claim against an entity suspected of violating the FCA. The removal of this bar will increase the potential financial reward for certain qui tam plaintiffs. Therefore, the number of claims brought against medical device manufactures will likely increase significantly.

3. Shared Cost-Savings Reimbursement Programs. The Healthcare Reform Act sets forth certain reimbursement programs focused on rewarding providers for reducing the cost of care, including the formation of so called accountable care organizations, or “ACOs,” and extends an existing gainsharing demonstration program. An ACO is essentially an organization of physicians and other healthcare providers that is assigned a population of Medicare beneficiaries and is paid a share of savings achieved through coordinated care efforts, provided certain quality standards are achieved. Additionally, the Act authorized extension of the gainsharing demonstration program. While ACOs and gainsharing programs are not expected to have an immediate impact on medical device manufacturers, if these types of organizations gain traction, the utilization of certain devices and procedures may decrease. Device manufacturers that are preparing future sales projections should be aware of the development of these organizations and the potential impact thereof.

4. Medical Device Innovation Funding. The Healthcare Reform Act included funding for grant monies to spur medical device innovation. The grant program, called the Cures Acceleration Network, enables the Director of the National Institutes of Health to award grants in order to promote innovation in technology supporting advanced research, development and production of so called “high need cures,” including through the development of medical products. To receive grant money, an entity must submit an application containing detailed information about the project for which the entity is seeking the grant, contribute non-federal funds to the project in the amount of $1 for every $3 awarded under the grant, and must also issue a final report at the end of the project describing the project outcomes. The award maximum is $15 million per project for the first fiscal year that the project is funded, with the possibility of receiving additional monies of up to $15 million in the subsequent fiscal year. Currently, Congress has authorized $500 million for the program for fiscal year 2010. In addition to the grant program, the Healthcare Reform Act authorized the Qualifying Therapeutic Discovery Project, which grants a tax credit for any taxable year in an amount equal to 50% of the investment in any qualifying project.

5. Pay for Quality. The Healthcare Reform Act includes numerous new initiatives pursuant to which provider reimbursement will be increased or decreased depending on the quality of care that providers are able to demonstrate. For example, Section 3008 of the Act provides that hospitals in the top quartile with respect to national rates of hospital acquired conditions will have their Medicare payments for all discharges reduced by 1%. Similarly, Section 3007 of the Act directs the Secretary to develop and implement a system where physicians are paid additional amounts for providing quality health outcomes for Medicare beneficiaries at a lower cost. These changes to payment systems will occur over an extended time period, but demonstrate that the CMS is moving toward a system focused less on payment for individual services, and more on paying for efficient, high quality, low cost care. Even more so than in the past, to successfully market devices, manufacturers will be required to demonstrate that hospitals and healthcare providers can improve efficiency, quality and value through the use of their medical devices.

Potential Impact of Healthcare Reform on Medical Device Companies

Kristian Werling — Fri, 16 Jul 2010 09:15:19 -0500

As investors consider potential investments, it is important to take into account the future impact of the recently passed health reform legislation. This blog post is part I of an itemization of 10 areas of the health reform bill that will likely have an impact on companies that manufacture medical devices and supplies. Some of these effects may be positive and some may be negative – but any investor in a device company should be aware of these areas of the health reform legislation.

1. Expanded Coverage. The primary purpose of the Healthcare Reform Act was to expand coverage to a broader range of patients in the United States. In part, the Act accomplishes this expansion through a significant broadening of the eligibility criteria for enrollment in Medicaid. Specifically, the Medicaid expansion enables most individuals with incomes of less than 133% of the Federal Poverty Level to enroll in the Medicaid program. Additionally, the mandatory insurance requirement and broader availability of health insurance through Health Benefit Exchanges will help to ensure that there are more patients that have access to health care. Increases in access to care may result in a positive near-term impact on some device manufacturers, as a result of the increased demand for medical services.

2. Future Cuts? The Act does not contain significant changes to reimbursement methodologies or major decreases in reimbursement for healthcare providers. Therefore, Congress will likely be back at the table within the next three to ten years to address the cost issues that are attendant with the expansion of availability of healthcare services. It is unclear how Congress will address these cost issues, but one possibility is that it will decrease reimbursement in the future. Device manufacturers that are in high-tech, high-cost niches should begin to plan for potential reimbursement reductions in their sector. Additionally, it will be important for all device manufacturers to be able to differentiate their products as providing true clinical benefits instead of simply building a “better mousetrap.”

3. Medical Device “Tax”. The Act included new “industry fees” or taxes that are applicable to pharmaceutical and medical device manufacturers, insurance companies, and pharmacy benefit managers. The medical device fee is effective 2012, and manufacturers of a medical devices will be required to pay 2.3% of the sales price for such device as an industry fee. The definition of a “taxable medical device” includes any device that is defined in Section 201(h) of the Federal Food, Drug and Cosmetic Act and is intended for human use. A limited number of medical devices, including eyeglasses, contact lenses, hearing aids and any other device that is determined by Centers for Medicare and Medicaid Services (“CMS”) to meet the “retail exception,” are exempted from this fee. Unlike the pharmaceutical fee, the medical device fee applies to all manufactures, regardless of size and revenue levels.

4. Comparative Effectiveness. The Act laid the groundwork for future inclusion of comparative effectiveness measures when CMS makes payment decisions by funding a new independent entity called the Patient Centered Outcomes Research Institute (“PCORI”). The PCORI will study the effectiveness of various services, products and therapies and will issue reports regarding their effectiveness. The reports that are generated by PCORI may be relied on by CMS or other third party payors making decisions about payment, coverage and treatment.

5. Physician Payment Sunshine Act. The Healthcare Reform Act included the Physician Payment Sunshine Act. This will require covered manufacturers that make a payment or other transfer of value to a physician or teaching hospital to report such payments annually in electronic form. Payments or transfers of value include consulting fees, payments for clinical trial participation, charitable donations, royalties and a variety of payments that may be made to physicians and teaching hospitals. There are some payments that are exempted from the disclosure obligations. These exempted payments include annual aggregate payments to a recipient of less than one-hundred dollars and individual payments of less than ten dollars, payments that are made entirely through market research organizations, and the provision of samples to a physician or teaching hospital for the benefit of patients.

Two Steps in the Evolution of Telemedicine: CMS Proposed Rules re Cross-Credentialing and Expanded Telemedicine Services May Open Some Doors for Telemedicine Companies

Amber Walsh — Fri, 09 Jul 2010 06:37:39 -0500

On May 26th, CMS released a proposed rule setting out new credentialing and privileging processes for physicians and other healthcare professionals who provide telemedicine services, a move which may lesson burdens on healthcare providers considering telemedicine options. Further, next week CMS is expected to release an additional proposed rule re additional services which may be reimbursed by Medicare if provided via telemedicine. Both rules, if they become law, could increase opportunities for growth in telemedicine companies.

Proposed Rule re Cross-Credentialing

Prior to January 1, 1999, Medicare coverage for services delivered via a telecommunications system was limited to services that did not require a face-to-face encounter under the traditional model of medical care, such as interpretation of an x-ray or electrocardiogram or electroencephalogram tracing, and cardiac pacemaker analysis. Then on October 1, 2001, section 223 of the Medicare, Medicaid and SCHIP Benefits Improvement Protection Act of 2000 significantly expanded Medicare telemedicine services services to include consultations, office visits, office psychiatry services, and certain other services that have been added over the years. However, in addition to state licensure and other issues faced by hospitals and physicians providing these services, one challenge for hospitals has been the process of granting credentials to these physicians. Under existing Medicare Conditions of Participation (CoP), the governing body of a hospital must make all privileging decisions based upon the recommendations of its staff, after the staff has examined and verified the credentials of practitioners applying for privileges. Thus a hospital must conduct individual appraisals of its prospective members and examine the credentials of each candidate to make a privileging recommendation to the governing body. Hospitals may use third-party credentialing verification organizations, but the governing body remains responsible for the privileging decisions.

By contrast, the proposed rule released on May 26th would allow the governing body of a hospital whose patients receive telemedicine services to grant privileges based on recommendations from its medical staff, which, in turn, would rely on information provided by the distant-site hospital. In the proposed rule, CMS would require the local hospital to verify that:

1. The distant-site hospital is a Medicare-participating hospital.

2. The physician is privileged at his own hospital and that the distant-site hospital provides the local hospital a current list of the physician’s privileges.

3. The physician holds a license issued or recognized by the state in which the local hospital is located.

4. The local hospital has evidence that the distant-site hospital conducts an internal review of the physician’s performance of his privileges.

The local hospital must provide relevant information to the distant-site hospital for its use in periodically evaluating the physician, including all adverse events that might have resulted from telemedicine services provided by the physician to the local hospital’s patients, as well as all complaints the local hospital has received about the physician. CMS believes its proposal would "allow for the advancement of telemedicine nationwide while still protecting the health and safety of patients." CMS is currently taking comments on the proposed rule through July 26th.

Anticipated Proposed Rule re Additional Telemedicine Services

According to the American Telemedicine Association, on or about July 13th CMS is expected to release an additional proposed rule re additional services which may be reimbursed by Medicare if provided via telemedicine. At a minimum, these two proposed rules suggest a greater degree of acceptance of telemedicine services than ever before. If the proposed rules becomes law, many hospitals will likely take advantage of such cross-credentialing options and opportunities to bill Medicare for additional telemedicine services, and telemedicine providers may flourish in the process.

State CON Laws & How They Impact Investments in Healthcare

Amber Walsh — Tue, 22 Jun 2010 21:35:55 -0500

One aspect of investing in a healthcare facilities business of which investors should be aware is the impact of state certificate of need (CON) laws. A CON is a state regulatory review process that requires an application to the appropriate state board for the grant of a CON prior to developing, or in some states expanding or modifying, a covered healthcare facility. CON laws arose in the 1960’s as many states attempted to curb rising healthcare expenditures through planning and regulation. In 1974, Congress passed the National Health Planning and Resources Development Act, mandating that all states adopt CON laws. A decade later, Congress allowed the federal law to expire, and several states quickly repealed or let sunset their CON laws. Now, according to the National Conference of State Legislatures, 36 states plus the District of Columbia have CON laws that govern some healthcare facilities. Some state laws govern primarily hospitals while other state laws govern a broader array of facilities. Supporters of CON programs believe they help ensure access to healthcare, keep quality high and lower costs by evaluating whether a particular service or facility is actually needed in the proposed area. Opponents believe it stymies healthy competition that is needed to keep quality high.

Investors should become familiar with the CON requirements, if any, in the states in which their target businesses operate, including the facilities governed by the CON laws and the rules on expansion and modification. Investors should consider whether such restrictions work to the businesses’ benefit currently and whether the restrictions will continue to be beneficial in the future. The presence or lack of state CON requirements also will likely factor into valuation of the business. In certain circumstances, a CON can be considered a valuable asset of the business that was hard-fought and costly to obtain, and state CON requirements can in some cases function as a protection for the business against emerging competitors in at least the short term. However, in most states, CONs are tied very specifically to a designated location and designated size (e.g. based on number of beds, procedure rooms etc) and facilities in a CON state can have less flexibility in terms of modifying business lines as facilities in non-CON states. In those CON states closely regulating expansion and modification, obtaining the necessary approvals can be an expensive and lengthy process.

Additionally, investors should understand the workings of the state CON board and the current political and legal issues facing those boards. For example, the gle provides that no person shall construct, modify or establish certain types of healthcare facilities or acquire major medical equipment without first obtaining a CON or exemption from the Health Facilities and Services Review Board (the Board). In a recent article, McGuireWoods healthcare attorneys Jeff Clark, Jason Greis and Joe Hylak-Reinholtz discussed some key recent changes to the Illinois CON law impacting Illinois healthcare providers and their investors. The authors discussed that on March 1, 2010, an important provision in the Illinois law relating to the legislature's decision to alter, yet again, the number of members on the Board (increasing its size from five to nine members) became effective. The change represents the third time since 2003 that the state legislature has altered the number of members on the Board. The change is important because the addition of four Board members could create new opportunities or lead to unforeseen challenges for future CON applicants. The viability of potential projects may be shaped by the individuals Governor Quinn appoints to fill the new Board vacancies. Changes such as these in state CON laws and boards can have significant impacts on a business and should be carefully considered by investors as well.

Physician Hospitals of America (PHA) and Texas Spine & Joint Hospital (TSJH) File Suit Challenging Healthcare Reform Restrictions on Expansion/Development

Amber Walsh — Thu, 03 Jun 2010 13:42:48 -0500

In prior posts I’ve discussed the significant impact of the Patient Protection and Affordable Care Act (the PPACA, more commonly referred to as the healthcare reform legislation) on the physician-owned hospital industry. Section 6001 of the PPACA stymies growth of the industry by prohibiting expansion of existing physician-owned hospitals and bans any new physician-owned hospitals that are not Medicare-certified by December 31, 2010 (i.e. hospitals violating those limitations will not be permitted to bill Medicare/Medicaid for referrals made by their physician owners). Although a number of exceptions apply to the expansion prohibition, most industry analysts believe meeting the exceptions will be challenging to virtually impossible for existing physician-owned hospitals.

According to a press release issued today by Physician Hospitals of America (PHA), the trade association for the industry, there are approximately 265 existing physician-owned hospitals, 29 of which are scheduled to open and receive their Medicare certification by December 31, 2010. An additional 45 hospitals are currently under development and are not expected to be open or Medicare-certified by December 31, 2010. According to PHA, there were also 39 hospitals that were previously under development but were abandoned as projects due to passage of Section 6001.

In response to Section 6001, PHA and Texas Spine & Joint Hospital (TSJH) jointly filed suit today in U.S. Federal Court, Eastern District of Texas, challenging the constitutionality of Section 6001 on grounds that the law is a violation of due process and equal protection rights, and that the Section is void due to a contradictory, vague and arbitrary nature. TSJH is a privately owned hospital specializing in orthopedic and spine surgery, procedures, and tests which had sought and won local zoning approval to expand its facility with an additional 20 Medicare beds, which expansion project would now be prohibited by Section 6001.

Industry supporters and opponents will be carefully following progression of the lawsuit as the resolution is anticipated to have a profound impact on the ability of the physician-owned industry to thrive.

Scott Oostdyk and Victor Moldovan of McGuireWoods are representing PHA and TSJH in the lawsuit.

China's Impact on the Medical Device and Medical Supply Market

Kristian Werling — Wed, 02 Jun 2010 08:23:04 -0500

We recently had the opportunity to travel with Amsino International to visit several of Amsino’s medical device manufacturing facilities located in and around Shanghai, China. The experience prompted two key observations regarding the global health care system and its impact on medical device manufacturers. Investors in medical device companies would be well served to factor these two key issues into plans and projections.

1. The “China Price” is Not Just Labor Cost Driven. Many commentators have spoken about the importance of the “China Price” in driving lower cost of medical devices, pharmaceuticals and medical supplies. At the same time, there has been concern expressed about whether the “China Price” will remain low if labor costs increase significantly in China. This has particularly been a concern as recent protests at auto manufacturing plants and other activities have shown that the Chinese government and Chinese workers may push for higher compensation, and benefits for Chinese workers. However, in talking to medical device manufacturers in China, it is clear that the “China Price” is not just driven by low-cost labor. Instead, many manufacturing districts in China have organized in such a fashion that they are able to deliver extremely low-cost and high-quality medical products due to the mix of resources that is available in these manufacturing districts.

The resources include the availability of supplies and suppliers, the availability of low-cost machines and tooling, access to transportation, expertise in manufacturing, quality control, and other necessary inputs. Shanghai in particular has organized itself around manufacturing and delivery of low-cost, high-quality goods with its convenient port access to the Yangtze River and the Pacific Ocean. It is clear that although labor costs may rise in China, the other factors that elevated China into a manufacturing hub will not soon change. Therefore, even if labor costs go up, there will still be significant value that Chinese manufacturers can deliver.

2. The Growing Middle Class and China’s Version of Health Care Reform Will Significantly Expand the Market for Medical Devices, Supplies, and Pharmaceuticals in China. The second observation that one immediately comes to in traveling around Shanghai is the amazing growth of the Chinese middle class. This increasingly fairly compensated group is demanding more from their government class in the form of health care and other essential services. It is this growing middle that has pushed the government in part to announce last year an ambitious health care reform plan that will “fix the ailing medical system” and “insure fair and affordable health services for 1.3 billion citizens”.

Over the past year the Central Committee of the Communist Party of China and the State Council have expanded on what China’s version of health care reform will encompass. Most importantly, it will include the spending of approximately 850 billion Yuan ($124 billion US dollars) over the next three years. One of the cornerstones of this reform is the construction of an astounding number of new hospitals and health care facilities throughout rural China. Each of these new hospitals will require initial equipment purchases, as well as a new source of medical supplies and pharmaceuticals. These health care reform activities will clearly drive increased utilization in China.

Compliance Plans Under the PPACA: One More Reason for Careful Compliance Program Analysis

Amber Walsh — Tue, 25 May 2010 21:21:39 -0500

Now more than ever, it is critical that anyone contemplating investment in a healthcare sector carefully review the target company’s compliance protocols. We have always strongly recommended that investors analyze the company’s compliance program, as well as efforts at adhering to the program requirements, in order to better gauge the company’s overall goals and philosophy regarding compliance. Understanding a company’s compliance culture can help the buyer assess the risks it may be taking with investment in the company and what challenges, if any, may be on the horizon for the company.

Now, under the Patient Protection and Affordable Care Act (the PPACA, more commonly referred to as the healthcare reform legislation), certain healthcare providers, as a condition to participation in Medicare, must have in place a compliance plan that meets the requirements to be laid out by the Secretary of HHS. The PPACA lists several detailed requirements for the compliance plans of skilled nursing facilities (SNFs), likely due to the industry’s historical scrutiny and highly publicized investigations from the SNF industry in the past few years. SNFs must implement these compliance plans pursuant to the requirements of Section 6102 of the PPACA within 36 months following passage of the PPACA, and regulations must be issued by the Secretary of HHS for SNFs with additional guidelines no later than two years following passage of the PPACA.

By contrast, the Secretary of HHS is mandated with determining which provider types must have compliance plans in place and what those plans must entail. HHS has informally indicated that it would likely roll out the compliance plan requirements on an industry-by-industry basis. It is likely that the requirements for most industries will closely follow the key components of the DHHS Office of Inspector General model compliance plan published for healthcare providers in 1997, which has subsequently been updated.

For healthcare providers without compliance plans that wish to make early moves toward a full compliance program, or for buyers who seek additional comfort through early implementation, an article entitled “A Practical Compliance Plan Approach for ASCs” authored by Scott Becker, Melissa Szabad and myself is available here. Although this article speaks specifically to the ambulatory surgical center industry, it has practical implications for most healthcare providers.

Key Issues re Investment in the Dialysis Industry

Amber Walsh — Tue, 18 May 2010 23:01:42 -0500

On Wednesday, March 12^th, McGuireWoods hosted our 8^th Annual Business & Legal Issues in Dialysis & Nephrology Symposium. Leaders from various perspectives in the industry provided presentations and lead discussions on a wide array of topics, including the effects of the Patient Protection and Affordable Care Act (the PPACA, commonly referred to as the Health Care Reform Law), key compliance issues and investment scenarios.

Various themes emerged from the day, including the following:

1) Many people continue to view investment in the dialysis industry as a viable option. Even with the uncertainties of the bundling system and the impact of healthcare reform generally, many believe there are still great opportunities for investment in dialysis programs and nephrology/dialysis-related vendors.

2) Not surprisingly, the impending conversion to bundled reimbursement by Medicare for dialysis providers is a focal point for providers. The response from small dialysis organizations (SDOs), large dialysis organizations (LDOs) and others is varied, but most look forward to the results of a General Accounting Office (GAO) study on the impact of the inclusion of oral drugs in the dialysis bundle, which was mandated by the PPACA. The deadline for delivery of the GAO report is a year from passage (i.e., March 23, 2011). Most dialysis companies are encouraged by the mandate for investigation and are hopeful that it will help illustrate whether or not those drugs are being adequately priced and if there are any quality of care concerns. For more detail regarding the bundled payment structure and its potential impact on different dialysis providers, see our prior post entitled twww.thehealthcareinvestor.com/2010/03/articles/healthcare-services-investing/dialysis-industry-prepares-for-new-payment-methodology-how-might-bundling-effect-providers-differently/

3) Nephrology physician practices face a variety of challenges these days, including both from a patient care and daily practice administrative perspective as well as from the perspective of their roles in the delivery of dialysis care as Medical Directors and/or joint venture partners. We discussed opportunities for facing those challenges through practice merger or other consolidation into larger organizations such as a hospital system or Physician Practice Management (PPM) or Management Services Organization (MSO).

4) The industry is closely examining the potential for increased liability of dialysis companies under various state and federal laws aimed at curbing fraud and abuse, including The Fraud Enforcement and Recovery Act (FERA) which was signed into law by President Obama in April of 2009. FERA implemented significant changes tothe federal False Claims Act, including the expansion of prohibited conduct under the False Claims Act to include not justthe improper filing to collect monies, but also the known retention of overpayments by hospitals or other health careproviders. The 2009 amendments also make clear that false claims submission to a state Medicaid program, although not directly submitted to the federal government, does constitute a violation of the False Claims Act. We discussed the impact of these changes and other compliance concerns for the dialysis industry.

5) Accountable care organizations (ACOs) are a hot topic for many healthcare sectors, including dialysis providers. ACOs have been officially endorsed in the PPACA, Section 3302. Under the ACO provisions, groups of providers that work together to manage and coordinate care for Medicare beneficiaries can qualify to receive additional Medicare payments if they achieve specified cost savings and meet a range of criteria, including standards established by CMS relating to quality, reporting, and governing structure. In essence, if they are able to improve outcomes and lower costs then those ACOs can potentially share in the savings. The PPACA provides that the ACO program is to be established no later than January 1, 2012. It leaves much discretion to the Secretary of the Department of Health and Human Services (DHHS) to determine the policies and procedures that will apply to ACOs.

6) Various existing and new laws effect day-to-day clinical care and administration in dialysis facilities such as the revised Conditions for Participation in the Medicare/Medicaid programs. Changes to the National Fire Protection Association's Life Safety Code (commonly called the Life Safety Code) applicable to dialysis providers and other recent changes in the Conditions for Participation must be understood and properly implemented by dialysis providers. In their article entitled Applying the Life Safety Code: Are you Ready?, Bob Bednar and Ron Reynolds discuss the Life Safety Code changes implemented in 2010 in detail.

7) Compliance plans, which were previously highly recommended for the dialysis industry and nephrology providers, are now mandated by the PPACA for certain providers who participate in Medicare/Medicaid. While details of the compliance plan requirements for skilled nursing facilities (SNFs) are set out in detail in the PPACA, the Secretary of DHHS was given the authority to designate the types of providers that will be required to have compliance programs in place and the details of such programs. State Medicaid programs also must require participating providers to have programs in place that meet the federal guidelines to be issued. DHHS has indicated that details of those programs will likely be issued on an industry-by-industry basis, and we generally expect the components of the programs to be similar to the key components of the DHHS Office of Inspector General model compliance plan first published for healthcare providers in 1997 and since updated.

8) Investment opportunities in businesses ancillary to the dialysis industry, including nephrology-specific electronic health records (EHR) systems and vascular access programs remain attractive options for some investors. Vascular access centers provide a particularly critical service to patients suffering from end-stage renal disease (ESRD), who require, prior to beginning dialysis, the surgical creation of a site in which the patient’s vascular system can be accessed during dialysis. The various methodologies for creating the access site are reimbursed by Medicare and other payors. There are a number of regulatory issues governing the investment and referral relationships that need to be examined prior to creating vascular access company.

All of these topics will be addressed in further detail in future posts. For additional details on any of these issues in the interim, please contact the authors.

Advance Directives: Implications for Patients, Healthcare Providers and Emerging Healthcare IT Businesses

Amber Walsh — Fri, 23 Apr 2010 09:50:51 -0500

In recent years there has been growing public awareness of end of life decisions and the importance of documenting advance healthcare decisions. In fact, April 16^th is National Healthcare Decisions Day, a nationwide educational event founded by McGuireWoods partner Nathan Kottkamp. Advance directives are legal documents, prepared by patients in advance of the need for healthcare services, that directs the healthcare the patient does or does not want if he or she becomes unable to make decisions. Advance directives may include durable powers of attorney, living wills and organ donation directions. Nathan recently discussed advance directives, including issues arising out of healthcare reform debates, on Countdown with Keith Olbermann.

From the perspective of many healthcare providers, providing information about advance directives is required by law. The Conditions of Participation in the Medicare and Medicaid programs require hospitals, critical access hospitals, skilled nursing facilities, nursing facilities, home health agencies, providers of home healthcare (and for Medicaid purposes, providers of personal care services), hospices, ambulatory surgery centers, and dialysis facilities to inquire about and provide information to patients regarding advance directives. Further, the Conditions of Participation require all of these healthcare providers, except ASCs and dialysis providers, to provide public education about advance directives. Additionally, healthcare accreditation bodies Joint Commission and AAAHC have accreditation standards requiring facilities to honor advance directives.

In connection with the national focus on advanced healthcare decisions, new companies have emerged to assist patients and healthcare providers with the advance directives process. Embark Health, for example, has developed and is actively distributing Advance Directive Solution (ADS), a comprehensive online and telephonic resource with all the information and legally current forms to create an enforceable advance directive. Embark Health is also in the process of rolling out The Personal Legacy Solution (PLS), an electronic repository for tracking the location of assets, the location of other important items or documents, and for storing important messages to loved ones (all of which will be retrievable in accordance with the individual member’s specifications). Embark Health markets these products directly to patients as well as to and through large systems such as health plans, hospitals and other providers. Burgeoning companies like Embark Health and others may provide an opportunity for investors interested in healthcare and healthcare IT services.

Biopharmaceutical Companies Cephalon and Ception Merge; Choice in Investment Bank One Key Component of Deal Success

Amber Walsh — Mon, 19 Apr 2010 10:16:07 -0500

On April 6^th, US-based biopharmaceutical company Cephalon, Inc. (NASDAQ: CEPH) acquired all of the outstanding capital stock of Ception Therapeutics, Inc., also a US-based biopharmaceutical company focused on developing novel products to address areas of unmet medical need, for $250 million. The transaction resulted from the January 2009 purchase by Cephalon of an option to acquire the Ception stock. Cephalon heralds the merger as a unique opportunity to expand its biologics pipeline, including the anticipated introduction to the market of CINQUIL™ (reslizumab), which is currently in Phase III studies and is intended to treat eosinophilic asthma.

In the transaction, Barclays PLC served as financial advisor to Ception and is credited by many with helping to achieve optimal pricing for Ception. For Ception, like many healthcare companies facing the sale or refinance of their business, finding an investment bank that fits its needs, philosophies and goals was an important component for success. Utilizing an investment bank is not necessary for all companies in all transactions, but an investment bank can help the seller successfully market the business and attract the right potential investors/buyers and ultimately can result in not only a more lucrative deal but a resulting transaction that otherwise meets the seller’s goals. Assessing which investment bank is right for a seller can be a daunting process, but there a few key questions the seller can pose to its leadership when evaluating the various banks in order to find the bank that will ultimately meet its needs. In future posts we will discuss in greater detail these key questions.

Transparency Initiatives in Health Reform Bring Burdens and Opportunities

Kristian Werling — Sun, 11 Apr 2010 09:57:10 -0500

The Patient Protection and Affordable Healthcare Act (commonly known as the "healthcare reform" bill) includes significant new transparency and disclosure obligations that apply to physicians, hospitals, and medical device and pharmaceutical manufacturers.

Some of these transparency and disclosure obligations are based on legislation introduced by Sens. Chuck Grassley (R-Iowa) and Herb Kohl (D-Wis.), which was previously entitled ‘‘the Physician Payments Sunshine Act of 2009.’’ The transparency and disclosure obligations have been included in the Act in an effort to reign in costs of expanded health care availability. The premise behind the obligations is that ‘‘sunshine’’ on physicians' financial relationships with industry will reduce conflicts of interest by deterring industry from spending excessive amounts of money on such relationships and consequently reduce the negative impact such relationships have on prescribing practices. The transparency initiatives impact physicians, pharmaceutical and medical device manufacturers and PBMs. For a full description of each new requirement, please read this article by Krist Werling and Holly Carnell published in BNA's Health Care Fraud Report.

These new initiatives will impact healthcare investors in two ways. First, investors should be aware of added burdens on target investments. For example, for medical device manufacturers, these disclosures will require added infrastructure to address tracking and reporting requirements. Second, investors may find opportunities in these burdens. Software, web services and consulting services have sprung up to assist physicians, pharmaceutical manufacturers and device manufacturers in remaining compliant with new obligations.

Due Diligence on Dialysis and Physician Practice Management Investments

Kristian Werling — Thu, 25 Mar 2010 21:23:14 -0500

On March 25th McGuireWoods hosted a webinar for private equity investors that provided an overview of key business issues and due diligence process for investments in the dialysis and physician practice spaces. If you missed the webinar, an archived copy of the webinar is available on our webite. This entry provides a brief summary of one of the most important aspects of making an investment in any space: due diligence.

The dialysis market has been a lucrative area for investment by a number of private equity funds. Here are a few key areas for conducting diligence on these investments:

Referral streams - understanding where referrals for the facilities come from is essential. Further, investors must ensure that relationships with referral sources are in compliance with the Anti-Kickback Statute and Stark Act.
Medical Director Agreements - ensuring that facilities are properly staffed with CMS-mandated medical directors and that medical director relationships meet appropriate regulatory requirements and include enforceable non-competes.
Payor Contracting - conducting an analysis of reimbursement rates and ability to retain payor contractrs from commercial payors.

After being decimated in the late 90s, the physician practice management space is again seeing interest from investors. When investing in this market, a few key diligence areas include:

Structural Issues - state corporate practice of medicine laws typically prohibit employment of physicians by corporations that are owned by non-physicians. As such, physician practice management companies are typically structured as a management relationship with a "professional corporation."
Management Agreement Structure - state laws prohibiting fee splitting impact the structure of management agreements. It is important to confirm compliance with fee splitting laws to ensure enforceability of management agreements.

For a copy of the full presentation, email us at kwerling@mcguirewoods.com or awalsh@mcguirewoods.com.