Sitting Down with Our Industry Experts: Andrew Maller

April 17, 2024

At VMG Health, we’re dedicated to sharing our knowledge. Our experts present at in-person conferences and virtual webinars to bring you the latest compliance, strategy, and transaction insight. Sit down with our in-house experts in this blog series, where we unpack the five key takeaways from our latest speaking engagements.

1. Can you provide a high-level overview of what you spoke about at the American Society of Ophthalmic Administrators/American Society of Cataract and Refractive Surgery Annual Meeting? 

The course itself, Physician Compensation Trends for Employed and Owner Providers, had two main focal points. We discussed current compensation and benefits trends for employed providers in group practices, as well as tips for assessing the feasibility of adding new providers in today’s challenging recruitment environment. We also discussed common income and expense sharing models for owner providers in group practices. 

2. What do you think the audience was the most surprised to learn from your presentation?

The biggest surprise for attendees was just how competitive the current recruitment environment is for practices looking to hire new providers. There truly is a supply and demand imbalance, meaning that there are more practices looking to hire providers than there are available ophthalmologists looking for positions. The combination of this challenge with influences from private equity–backed companies has resulted in higher, guaranteed starting salaries for providers on the job market.

All of this is happening while practices are facing declining reimbursement and ever-increasing operating expenses, making the challenging decision to hire a new provider even more complicated.

Many practices I work with feel that this is a challenge to them specifically, based on geography or practice situation. However, the reality is that ophthalmic practices across the country are all struggling to recruit.

3. How do you think your presentation helped healthcare leaders better prepare for challenges? 

One of the key topics of discussion focused on developing a thorough feasibility analysis when determining whether the timing is right to hire a new provider. Practices can exponentially increase their likelihood of making the right decision by taking a disciplined approach in assessing the revenue opportunity for the new provider, their estimated compensation, and other incremental overhead costs. The hiring decision should not be made based on a gut feeling, but instead through a review of objective data points given the potential positive (or negative) impact to the practice.

4. What resources would you suggest for those interested in learning more? 

BSM Connection for Ophthalmology has a several fantastic resources for practices in the recruitment process, including the New Provider Feasibility Analyzer and the Key Contract Considerations Guide for ophthalmologists and optometrists, which provide guidance on compensation and benefit trends. The Provider Recruitment section of the website also includes a Contract Review Worksheet and a sample Letter of Understanding, although we always recommend practices work with legal counsel to ensure appropriate documentation is completed.

For information regarding income and compensation models, our experts have written articles related to income-sharing models for group practices. VMG Health also offers a Provider Needs Assessment.

5. If someone takes only one message from your presentation, what would you want it to be?  

With all areas of practice management, leaders must make business decisions using a disciplined approach. That starts with being educated and realizing the challenges that exist right now when it comes to provider recruitment.

As it relates to owner income and expense-sharing models, the takeaway is the need for transparency. Practice administrators and executives are often the ones charged with administering the compensation model, so the key is to remain neutral and transparent throughout the entire process.

Our team serves as the single source for your valuation, strategic, and compliance needs.  If you would like to learn more about VMG Health, get in touch with our experts, subscribe to our newsletter, and follow us on LinkedIn.  

Categories: Uncategorized

Sitting Down with Our Industry Experts: Regina Boore

March 28, 2024

At VMG Health, we’re dedicated to sharing our knowledge. Our experts present at in-person conferences and virtual webinars to bring you the latest compliance, strategy, and transaction insight. Sit down with our in-house experts in this blog series, where we unpack the five key takeaways from our latest speaking engagements.

1. Can you provide a high-level overview of what you spoke about at Caribbean Eye?

I was part of a panel discussion called, “Regulatory Compliance and Insurance Trends for ASCs.” Representing Progressive Surgical Solutions (PSS): A Division of VMG Health, I focused on two new regulatory issues in the ambulatory surgery center (ASC) space: the new water quality standard and putting together a whole program for water quality inspection, testing, and maintenance requirements throughout the year; and then I gave an update on Medicare’s mandatory quality reporting requirements for surgery centers.

The big thing that I focused on is the Outpatient Ambulatory Surgery Consumer Assessment of Healthcare Providers and Systems (OAS CAHPS) requirement, which is now 34 questions. This assessment will be mandatory as of January 1, 2025, and ASCs must work with a vendor approved by the Centers for Medicare & Medicaid Services (CMS). There are only so many CMS-approved vendors, and there are thousands of surgery centers, so it’s important to get on it and decide which vendor you’re going to work with, and then start the implementation process.

2. What do you think the audience was the most surprised to learn from your presentation?

I think many people were just unaware of this new water quality standard, and I don’t think they had a good grasp on what is involved in administering this survey. ASCs must work through one of the CMS-approved vendors, and there is a process to getting set up to be able to implement it.

3. How do you think your presentation helped healthcare leaders better prepare for challenges? 

Knowledge is key. Many attendees took pictures of my slides, and I provided resources for them to find the most updated information of the OAS CAHPS program. It was imperative to give them that knowledge and empower them to stay a step ahead as the new requirements are implemented.

4. What resources would you suggest for those interested in learning more? 

Our eSupport membership program contains a wide array of resources. The PSS team has intimate knowledge of ASC operations from years of hands-on experience. We constantly update eSupport so ASCs can remain compliant, successful, and confident—even when regulations change.

To dive into the continued evolution of ASCs, check out VMG Health’s ASCs in 2023: A Year in Review article, which includes everything from market dynamics to provider reimbursement.

5. If someone takes only one message from your presentation, what would you want it to be?  

Be prepared. The downside of being unprepared with this water management program is that you could get a deficiency citation on a survey, announced or unannounced. As for the OAS CAHPS survey, if an ASC fails to submit the required number of surveys in 2025, it will be hit with a 2% penalty on its Medicare reimbursement in 2027. Both situations should be avoided at all costs, and staying prepared is key.

Our team serves as the single source for your valuation, strategic, and compliance needs.  If you would like to learn more about VMG Health, get in touch with our experts, subscribe to our newsletter, and follow us on LinkedIn.  

Categories: Uncategorized

What You Need to Know About Medical Transport and Fair Market Value 

March 27, 2024

Written by Alex Wiederin, CVA and Nicole Montanaro, CVA

Over the past few years, the medical transport industry has experienced constant growth, which is projected to continue into the foreseeable future. This growth can be attributed mainly to the increasing number of vehicle accidents, the growing elderly population, and medical tourism. As part of this trend, medical transport arrangements with hospitals have come under increased scrutiny from regulators as it relates to fair market value and compliance.  

When entering into a medical transport arrangement with a third-party provider, it is important for hospitals to understand what services are being provided, the reimbursement environment for medical transports, and the impact of any compliance issues. Services are often provided not just by the medical transport vendor, but also by the hospital, which may offer services to the medical transport vendor as well. From a compliance perspective, fees for both sets of services should be at fair market value (FMV). Based on VMG Health’s extensive experience in valuing medical transport arrangements, we have outlined some fundamental questions to help hospitals/facilities understand the elements of their arrangement and determine which services need to be valued. 

  1. Which transports are covered by Medicare? The Medicare Ambulance Fee Schedule (AFS) lists the levels of ambulance service that are covered under Medicare Part B. The Medicare AFS payment structure is a base rate plus a mileage rate. Reimbursement is tied to the particular level of service transport provided and includes compensation for staff, vehicle, equipment, and supplies. The rates are updated annually and adjusted by locality. Please see the chart below for the list of HCPCS codes included in the Medicare AFS and the corresponding level of service. 
HCPCS Code Level of Service Description 
A0425 Ground Mileage – Loaded per mile 
A0426 Advanced Life Support I – Non-emergency 
A0427 Advanced Life Support I – Emergency 
A0428 Basic Life Support – Non-emergency 
A0429 Basic Life Support – Emergency 
A0430 Fixed Wing Transport 
A0431 Rotor Wing Transport 
A0432 Paramedic Intercept 
A0433 Advanced Life Support II 
A0434 Specialty Care Transport 
A0435 Fixed Wing Mileage 
A0436 Rotor Wing Mileage 
  1. What transports are not covered by Medicare? The Medicare AFS does not have an analogous Medicare HCPCS code for all transport types; therefore, contracted rates for these transports cannot be tied to the Medicare AFS. Some examples of transports not covered by the Medicare AFS are non-emergency transports (ambulatory, wheelchair, and stretcher), bariatric transports, and ride-share services. These types of transports are most commonly used to assist patients by getting to and from their medical appointments, discharges from the hospital, and transports between facilities. The ride-share services are fairly new to the medical transport market but are expected to make a significant impact by offering lower-cost rides, allowing the patient to schedule their own rides, and by reducing the number of missed medical appointments. Transports not covered by the Medicare AFS should be valued to ensure compensation aligns with FMV. 
  1. What additional services are provided in the arrangement? Medical transport agreements can be tailored to the specific needs of each hospital or facility, usually associated with the provision of specialty care transports (neonatal, pediatric, and/or high-risk obstetrics). In some cases, the transport vendor can be contracted for exclusive transport services and/or the hospital or facility can provide support services to assist the transport vendor in providing the transports. These support services can include the provision of staff, medical supplies, medical equipment, program management, business outreach, medical direction, helipad, crew quarters, and branding. Generally, compensation for these additional services cannot be tied to the Medicare AFS and would need to be valued separately to ensure the fees are consistent with FMV. 
  1. Which party is financially responsible for the transports provided in the arrangement? One of the most frequently asked questions related to medical transports is, Who is paying for the transport? The answer to this question ultimately depends on what the transport is for and where is the patient going. Medically necessary transports to a hospital, critical access hospital (CAH), or a skilled nursing facility (SNF) are typically covered by Medicare Part B. For Medicare Part B transports, the transport vendor should seek payment from the patient or the patient’s insurance. However, a patient admitted to a hospital, CAH, or SNF may require transportation to another level or site of care as an inpatient. Reimbursement for these transports is generally included in Medicare Part A payments to the hospital/facility. For Medicare Part A transports, the transport vendor can seek payment from the hospital, CAH, SNF, or the entity that received the Medicare Part A payment. 
  1. What are the FMV/compliance risks associated with medical transport? With medical transport arrangements being under close watch by regulators, it is important to understand the risks around these types of arrangements. Some factors that can lead to noncompliant arrangements include oral arrangements, old contracts, transports not medically necessary, fees not covering the costs of the service, and “swapping.” One of the biggest compliance risks associated with medical transport arrangements is the risk of swapping. Swapping occurs when a transport vendor agrees to provide below-market (or sometimes below-cost) transports to the hospital or facility in exchange for sending the more lucrative transports covered by Medicare, other governmental payors, or commercial payors. To mitigate these factors, review the services provided by both parties, identify the transport direction (i.e., transports to or from the hospital or facility), tie fees to the Medicare AFS when possible, and watch out for services being provided for free or at a discount. 

Medical transportation plays a critical and necessary role in the healthcare industry. Arrangements for medical transportation services can be extremely complex. VMG Health has extensive experience valuing payments for all kinds of medical transport arrangements and understands the numerous risks associated with these types of valuations, which helps clients enter arrangements compliant with FMV. 

Categories: Uncategorized

Proceed with Caution: Five Key Considerations in Quality of Revenue Analysis 

March 20, 2024

Written by Melissa Hoelting, CPA and Lukas Recio, CPA

In healthcare-related mergers and acquisitions (M&A), quality of revenue analysis represents both the most vital piece of due diligence and its most unique aspect given the nature of healthcare revenue. For many transactions, buyers rely on due diligence advisors to provide independent net revenue hindsight analyses to facilitate valuation efforts, such as growth potential, risk analysis, and financial stability. Quality of revenue analysis becomes even more crucial in healthcare transactions due to the added complexity of payor contracting and unique reimbursement mechanisms by vertical. Due to this complexity, investors and advisors need to know the key indicators that arise in quality of revenue analysis to address the issues and properly assess the merits of the transaction. In this article, our financial due diligence team previews five key considerations: 

1. Payor Concentration 

When revenues are concentrated with a select few payors, there is potential for future revenue loss from either unfavorable reimbursement rate changes or the loss of in-network status. Even minor changes in reimbursement rates may have a material impact on top-line revenue when applied to key groups. A key consideration when evaluating payor concentration comes from a large reliance on government payors, as the rates can change year to year without the company’s input or control. Payor concentration in and of itself will not impact the revenue hindsight analysis, as collections for previous dates of service will follow the current contracts, but investors and their advisors should make it a priority to understand the payor mix to properly identify and assess the inherent risks. Additionally, any upcoming contract negotiations should be discussed to evaluate the potential near-term impact of negative price adjustments to make necessary pro forma/forecasting assumptions. 

2. Increasing Days Sales Outstanding (DSO) 

Aging accounts receivable balances indicate difficulties in the billing and/or collection process, which directly impact the company’s cash flows and the reliability of reported revenues for companies on an accrual basis. Increasing DSO could be the result of certain non-recurring events, such as the loss of key personnel in the billing department or converting revenue cycle management systems, or may be indicative of deeper issues at play within the company. In the case of third-party payors, increased DSO could point to two potential issues: 

  1. Disputes with payors, or  
  1. Insufficient collections of copays, coinsurance, or deductibles. If it is discovered that increased DSO for certain third-party payors stems from remaining patient responsibility, the company could be under-collecting copays, coinsurance, and deductibles at the time of service. This misstep in the collection process can leave a company exposed to an accounts receivable balance overly weighted toward patient balances, which can be more difficult to collect.  

Regardless of the payor type exhibiting increased DSO, decrease in collection speed should always alert the investment team that more analysis and discussion is required to properly determine the collectability of accounts receivable, and thus, the revenue accruals themselves.

3. Reconciliation Irregularities 

Revenue analysis fundamentally begins with a reconciliation of the payment data to the bank statements to anchor the data to verifiable cash inflows. Variances between collections from the billing system and bank statement deposits could indicate that the company does not deposit all collections, certain revenue streams do not run through the billing system, or there are significant delays in posting cash receipts to the billing system. By comparing the reported revenue to the bank statements, teams can identify overstatements of revenue that are not supported by bank deposits. Regardless of the variance’s cause, any discrepancies should be investigated and discussed with management to ensure data completeness and integrity before using the billing system reports for any revenue analysis.  

4. Variability in Gross-to-Net Ratios 

An entity’s gross-to-net ratios (net collections as a percentage of total gross charges) often highlight changes in underlying processes or outcomes for a given period of service; therefore, they are a key consideration during the due diligence process. Effective gross-to-net ratio analysis starts at the lowest level, such as by CPT code by payor. Significant variations at this level from month to month or quarter to quarter may indicate rate changes, an altered chargemaster, or increased/decreased denial activity. At a less detailed level, changes in this ratio may also illustrate changes in payor mix or procedure mix. In any case, the underlying drivers must be identified and their impact to future cash flows assessed to determine the true quality of the underlying revenue streams.  

5. Billing and Coding Irregularities 

A foundational component in the revenue recognition process, the billing and coding process can be the area most susceptible to downside surprise. Investors and their advisors should focus on CPT code-level trending to determine key metrics, such as payment per code and code distribution. By comparing these metrics to contracted rates and industry or specialty norms, irregularities in coding practice can be identified and investigated. For example, if an organization has higher concentration in level one or level five evaluation and management codes, it could indicate consistent undercoding to avoid payor scrutiny or overcoding for work performed, respectively. On a similar note, if an organization receives similar reimbursement on office visit codes for a doctor and a mid-level provider, it could indicate that the billing team is not coding and charging the proper rates. Identified irregularities in the coding metrics should be discussed in detail, as inappropriate coding can result in downward adjustments to both historical collections and any outstanding collections, as well as takebacks owed to insurance companies for prior periods.

Conclusion

For any healthcare transaction, revenue analysis remains the most essential and most complicated part of the diligence process. Because of the payor contracts that underpin most healthcare revenues, investment teams must identify any variances in reimbursement, charges, and coding that could indicate errors or changes in the billing process. When considering adjustments or estimating future collections, teams must consider the changes and errors they have identified through these variances. These five considerations represent just a portion of the potential intricacies and issues that arise during quality of revenue analysis. Thus, an organization looking to enter into a transaction, whether on the buy-side or the sell-side, would benefit from the services of a financial due diligence and/or coding and compliance firm to bring an additional layer of confidence to the target’s revenues. 

Categories: Uncategorized

Supply-Side Constraints and Operational Headwinds in Skilled Nursing Valuation

March 19, 2024

Written by Grace McWatters, Danny Cuellar, Carlos Flores-Rodriguez, Blake Pierro, and Cameron Tolbert

Inflation, a shaky supply chain, and rate hikes have extended production schedules and increased the cost and risk associated with developing new skilled nursing facilities. While new supply is constrained, existing nursing facilities grapple with staffing shortages and weak reimbursements. Despite positive chatter about recovering occupancy, rent growth, and a looming “silver tsunami” of retirees, the industry sits in a precarious position.

The inflated cost to build, buy, and operate skilled nursing facilities has led to a downward pressure on valuations. This affects the risk profile of the sector, both from a regulatory risk perspective (in the context of joint ventures or lease renewals, for instance) and from an underwriting or acquisition/disposition perspective (due to the elevated cost of debt combined with rising operating costs).

Strong Demand, Weak Performance

Strong demand for skilled nursing facilities is primarily driven by an aging populace in the United States; over the next 10 years, the 75+ population is projected to grow by 44%. According to research funded by the National Investment Center for Seniors Housing & Care, 60% of this population will have mobility limitations, with 20% requiring high healthcare or functional needs.

Cushman and Wakefield predict consumer demand for senior housing and care facilities, including independent living, assisted living, memory care, and skilled nursing, will overwhelm the market within the next five years. It would take approximately 3,100 new skilled nursing facilities by 2030, or about 500 net openings annually, to meet the forecasted need. Despite robust demand, skilled nursing inventory fell 1% in 2023.

Over the last year, closures continually outpaced openings as financial pressures from inflation, poor reimbursement rates, and staffing shortages led to industry-wide “right sizing” to control cost and mitigate labor shortages. For example, in 2022 and 2023 when labor shortages became a flashpoint, operators, bound by minimum staffing requirements, had to consider contract labor. The contract nursing labor utilization increased 56% in 2022, which “equates to approximately $400,000 in additional costs for the average facility in the country.” Average overall nursing wages increased 10.6% in 2022, a much faster clip than revenue growth.

These cost surges came at a price, and without a mechanism to raise prices, taking beds offline was often inevitable. The American Health Care Association surveyed thousands of skilled nursing facilities in an August 2023 report and found that 21% of homes are downsizing beds or units, and 24% have closed a wing, unit, or floor because of the labor shortages.

Since 2020, an estimated 579 facilities have closed (approximately 162 per year, over the 43-month period), and 38% of these closures were 4- or 5-star rated facilities. Only three skilled nursing facilities opened in 2023, down significantly from an average of 64 openings in both 2020 and 2022.

The tight supply has supported rent growth and occupancy recovery across the industry, but these gains have been outpaced by increased costs for staffing and supplies, exacerbating structural forces specific to the industry. From 2019 to 2022, Clifton Allen Larson analyzed cost reports for 10,500 facilities (nearly two-thirds of all Medicare-certified SNFs in the country) and found that expenses have consistently grown faster than revenues.

Operating expense growth in other industries can be mitigated by “shrinkflation” or higher prices, but in healthcare, providers cannot ethically reduce the amount of care administered, nor can they regularly renegotiate their contracts and expect immediate increases in Medicare reimbursements.

In 2023, Clifton Larson Allen analyzed cost reports of 10,500 nursing facilities and found a significant downward trend in the median net margin ratio since 2020. This ratio measures a facility’s efficiency in controlling costs in relation to its total revenue by comparing net income or loss to total revenue.

Heightened Risk, Lower Reward

Construction for new facilities has dwindled since 2020, as high interest rates and inflation have developers wary. Costs are rising, but market valuations have not necessarily followed, which means developers would take on more risk for potentially less reward. These factors have decreased the overall incentive for developers to initiate new projects.
When analyzing the all-in construction costs of 142 senior housing developments in 2022, CBRE reported the average cost had increased 17.8% per unit since 2020, clarifying that this increase “is largely attributable to higher labor and materials costs, as well as operating expenses and outlays for entitlements.”

This is mostly attributable to hard cost increases, but there were significant increases in soft costs and FF&E costs as well. Hard costs, which include site work, foundation, shell, and finishes, increased 24% per revenue unit (i.e., per bed) since 2020. Soft costs, which can cover architect and design fees, permitting and inspection fees, rose 14% per unit, and FF&E bumped up 10% per unit . Similarly, an index based primarily on mechanical and electrical equipment in new construction showed a significant uptick in their average cost in 2022 (increased by 15.1%) and 2023 (increased by 10.4%).

While FF&E represents a small part of the overall senior care development budget (CBRE estimates 3% overall) , any transactions and leases involving FF&E at senior living and care facilities are subject to regulatory scrutiny, just like real property.

Those willing to take the risk of building a new facility find it difficult to acquire capital in the wake of rate hikes and bank failures in the broader economy. A significant amount of funding for the purchase of senior living and care assets originates from commercial bank loans, but lending grew scarce following the failings of Silicon Valley Bank and Signature Bank in March 2023.

As other banks teetered on the edge of bankruptcy and commercial bank stocks dropped up to 50%, banks began to stop the flow of lending, and instead focused on cleaning up their balance sheets. Preserving limited capital, banks began to raise interest rates and stiffen security terms for available loans. This folded into rising rates on a larger macroeconomic scale, as the Federal Reserve hiked their rates to curb inflation, increasing interest rates by 525 basis points in 2022 and 2023.

Higher interest rates lend themselves to higher projected operating costs of acquired facilities. This increase in operating costs has been offset by a substantial decrease in purchasing prices. Cain Brothers reported a 20–30% decrease in skilled nursing facility valuations since the beginning of 2023, citing several deals in their report, including a New York facility that declined in value 47% in less than two years, and a Kentucky facility that dropped 28% in less than one year. Haven Senior Investments notes valuation declines between 15% and 30% but emphasizes the influence of factors like rising property taxes and insurance premiums, as well as the portfolio penalty.

Regulatory Implications

The inflationary environment combined with longer-term industry headwinds continue to place pressure on the senior living and skilled nursing industry. Over the last two years, the cost of capital has increased, and commercial loans have become less available, making it more expensive and time consuming to acquire the funds necessary for new developments or strategic acquisitions. Operating costs continue to outpace revenue growth, and the median net margin ratio for two-thirds of the country’s facilities was negative 3.3% in 2022. This environment has contributed to rising capitalization rates and downward pressure on valuations.

The decline in skilled nursing facility valuations has increased the industry’s risk profile, both from a regulatory risk perspective and from an underwriting or acquisition/disposition perspective. The turbulent market conditions over the last 18 months have created a need for increased diligence when developing, buying, or selling senior living assets. However, long-term demographic trends will continue to drive transaction activity in the sector, as market participants seek solutions to address demand in the face of rising costs and increased cost of capital.

Sources

Beets, K., Ferroni, L. (2024). Seniors Housing & Care Investor Survey and Trends. JLL. https://www.us.jll.com/en/trends-and-insights/research/seniors-housing-care-investor-survey-and-trend-outlook

Pearson, C., et. al. (2019). The Forgotten Middle: Many Middle-Income Seniors Will Have Insufficient Resources For Housing And Health Care. HealthAffairs. https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2018.05233

Boywer, Z. (2023). ​​Investor Survey and Trends Report: U.S. Senior Living & Care. Cushman & Wakefield. https://www.cushmanwakefield.com/en/united-states/insights/senior-living-and-care-investor-survey-and-trends-report

Shuman, T. (2023). How Will America’s “Silver Tsunami” Impact Demand for Nursing Homes? Seniorliving.org. https://www.seniorliving.org/nursing-homes/nursing-home-demand-projections/

Vison, N. (2024). 4Q23 Market Fundamentals. NIC MAP Vision. https://info.nicmapvision.com/rs/016-QJL-848/images/4Q23-NIC-MAP-Market-Fundamentals-PDF.pdf

Connect, C. (2024). 38th SNF Cost Comparison and Industry Trends Report: One Industry, Thousands of Stories. CLA. https://www.claconnect.com/en/resources/white-papers/snf-cost-comparison-industry-trends-report

Vance, M., et. al. (2022). 2022 Seniors Housing Development Costs. Intelligent Investment. https://www.cbre.com/insights/reports/2022-seniors-housing-development-costs

SourceBlue. (2023). 2023 MEP Cost Index Q4. https://media.licdn.com/dms/document/media/D4E1FAQFQj5FKBkLXVg/feedshare-document-pdf-analyzed/0/1705173887049?e=1711584000&v=beta&t=FlP19mqHb4j8iSVBePK8gHaWLHauSTUgdorcMH2TTlg

Goldreich, M. (2023). 2023 Debt Capital Markets Impact on Senior Living Asset Valuation. Cain Brothers Industry Insights. https://www.key.com/content/dam/kco/documents/businesses___institutions/Industry_Insights_11.15.23.pdf

Investments, H. (2023). The Present and Future of Senior Living Sector Acquisitions. Haven Senior Investments. https://havenseniorinvestments.com/downloadable/the-present-and-future-of-senior-living-sector-acquisitions/

Categories: Uncategorized

MAT Clinics: At the Nexus of Healthcare Expansion and Investment  

March 14, 2024

Written by William Teague, CFA; Justin Vachon; and Ash Midyett, CFA

Since the start of the opioid epidemic in the late 1990s, over one million overdoses have been recorded. This figure continues to climb at an accelerated rate following the COVID-19 pandemic and the proliferation of fentanyl. Since 2020, opioid overdoses increased 64%, prompting lawmakers and regulators alike to initiate widespread deregulation and funding of Medication Assisted Treatment (MAT) for Opioid Use Disorder (OUD) to increase access to care amidst what is widely considered a national crisis.1  

Medication-assisted treatment (MAT) is a primary method for treating opioid use disorder (OUD) and integrates prescription opioid agonists, which can help manage cravings and withdrawal symptoms, with comprehensive care. Typically, this care combines prescription medications with behavioral health and occupational therapy, drug screenings and occupation advocacy, and other counseling services. MAT can widely be categorized as formal opioid treatment programs (OTPs) and less formalized office-based opioid treatment programs.  

OTPs were first established in the mid-1960s from the established medical community’s reluctance to treat the stigmatized patient group and unwillingness to prescribe opioid drugs to those suffering from OUD. Traditionally, OTPs have relied on Methadone, a synthetic analgesic drug similar to morphine, to ease opioid withdrawal symptoms while patients simultaneously attended mental health and occupational counseling.  

Office-based opioid treatment (OBOT) refers to outpatient treatment services provided outside of licensed OTPs by clinicians. OBOT treatment allows patients to obtain care at the convenience of their typical primary care provider or local healthcare facilities and does not require comprehensive behavioral health services to be integrated into the delivery model.  

Methadone treatment remains the preferred drug type for high-acuity addiction and can be prescribed by a physician, physician’s assistant, nurse practitioner, or clinical nurse specialists, and is typically administered daily through a liquid shot and occasionally as a pill. After a detoxification process at progressive dosing, the patient’s response is typically monitored through a series of physicals. Afterward, maintenance dosages are prescribed on a daily frequency for a recommended one-year period. Methadone may only be distributed through a SAMHSA-certified and DEA-registered OTP clinics.  

Since its initial approval by the FDA in 2002, Buprenorphine, a partial opioid agonist, is increasingly relied upon within the OTP and OBOT settings for OUD detoxification and maintenance for less acute addiction. As a partial opioid agonist, Buprenorphine has a lower risk profile than methadone and is thus more widely accessible. For instance, while Methadone may only be distributed in an OTP setting, Buprenorphine can be distributed in an OBOT setting. By market share, Buprenorphine currently dwarfs similar medications for opioid use disorder.2  

New OUD Treatment Regulations to Expand Access 

Because opioid agonists are inherently prone to abuse, regulation of MAT has been historically stringent to prevent further misuse or illicit trade. All OTPs are required to receive full certification by the Substance Abuse and Mental Health Services Administration (SAMHSA), and many states require a Certificate of Need. SAMHSA also regulates prescription protocols and procedures.  

On January 31, 2024, SAMHSA made the most impactful change to MAT regulation in decades by finalizing recommendations initiated during the COVID-19 pandemic.3 Most notably, SAMHSA eliminated the one-year OUD qualification and further expanded eligibility for Methadone take-home doses. Additionally, guideline updates granted permanent approval for Buprenorphine telehealth induction without an in-person exam, expanded the definition of “practitioner,” and eliminated the X-waiver requirement, which formerly authorized the outpatient use of Buprenorphine and stipulated patient caps per prescriber.  

Market Growth and Transaction Activity

According to the Opioid Treatment Program Directory, patient demand in conjunction with deregulation and clinical advocacy has resulted in a near doubling of OTP clinics nationally over the past two decades. As federal funding and popular outcry grows, OTP growth continues to gain momentum.  

The growth in OTPs over the past two decades has resulted in a highly fragmented industry where several notable players hold significant leverage in what will likely become a consolidating market. There are many examples of private equity (PE)–backed companies beginning to participate in merger and acquisition activity in the MAT space.  

BayMark Health Services, backed by Webster Equity Partners, claims to be the largest provider of MAT services in North America. BayMark, with over 280 facilities in North America, has acquired over a dozen facilities since the pandemic throughout the U.S.

Acadia Healthcare is the largest publicly traded behavioral health provider in the United States and maintains a significant focus on opioid use disorder. Recent comments from Acadia’s CEO, Chris Hunter, chart an ambitious acquisition strategy to acquire 14 OTPs in fiscal year 2024 after kicking off the year with two MAT acquisitions in North Carolina.4

Key players in the behavioral health industry that are building a presence in the MAT space include, but are not limited to, the following:  

Other notable behavioral healthcare providers growing their presence in the industry’s substance use disorder (SUD) and MAT sub-sector include Acadia Health and Universal Health Systems. However, it’s difficult to determine how many stand-alone MAT clinics they have in operation from publicly available information.  

Based on data from Irving Levin Associates, Inc., SUD transaction activity has grown significantly over the past decade while having receded marginally from pandemic highs.

MAT Reimbursement Landscape 

MAT clinics operate with a unique reimbursement model compared to other healthcare sectors, and OTPs specifically bill under a set of HCPCS G-Codes. Upon admittance, new patients are billed under an intake code while maintenance visits are reimbursed by the Centers for Medicare & Medicaid Services with bundled payments based on weekly episodes of care.  

The table below outlines frequently utilized HCPCS G-Codes for OTP services:  

HCPCS Code Description of Services 
G2076 Intake activities, including medical exam, physical evaluation, initial assessment, and preparation of comprehensive treatment plan.  
G2067 Weekly bundle for medication assisted treatment (Methadone). Includes the drug itself, administration, substance use counseling, therapy, and toxicology testing.  
G2068 Weekly bundle for medication assisted treatment (Buprenorphine, oral). Includes the drug itself, administration, substance use counseling, therapy, and toxicology testing. 
G2078 7-day, take-home supply of Methadone 
G2079 7-day, take-home supply of Buprenorphine  

Over the past two decades, Congress has made strides to expand public and private insurance coverage for MAT care. According to the National Survey on Drug Use and Health, roughly 84% of those who suffer from OUD in the United States are covered by some form of insurance (see chart below for total payor mix). Nonetheless, out-of-pocket expense for OUD treatment remains prohibitively expensive for many patients, and sporadic and disparate coverage discourages many operators from accepting insurance. This may change as Congress continues to pass legislation improving affordability of OUD treatment.

On January 1, 2020, Congress passed the SUPPORT Act,5 which established a new Medicare Part B benefit for OUD treatment services provided by OTPs and mandated that all states cover OTP services in their Medicaid programs effective October 1, 2020.6  

As of 2020, only eight states and the District of Columbia require commercial insurers to provide coverage of medications for opioid use disorder (see map below).7 Although many plans provide coverage regardless of state requirements, coverage is often restricted to a provider network or limited to a cap on services and many MAT clinics choose to pursue an out-of-network or self-pay strategy.8

States That Require Commercial Insurers to Cover OUD Medication

Grant revenue is critical in lowering out-of-pocket costs for OUD patients and can play a significant role in the operational sustainability of MAT clinics. In 2017, the U.S. Department of Health and Human Serviced committed $485 million in grants to be distributed through SAMSHA, which is intended to increase access for patients, bolster existing MAT operations, and catalyze continued facility expansion.  

Conclusion

As access and reimbursement for OUD treatment expands, we expect the supply of care to continue to lag demand for the foreseeable future. In addition, we expect PE-backed platforms to continue consolidating the fragmented industry, driving transaction activity. We also anticipate federal funding, patient inelasticity, and a lack of competition within many markets to fortify pricing while demand continues to attract practitioners into the market—ultimately incentivizing further industry growth and higher valuations.

Sources

1 NSC. (2021.) Drug Overdoses. Injury Factshttps://injuryfacts.nsc.org/home-and-community/safety-topics/drugoverdoses/data-details/  

2 Faizullabhoy, M. et. al. Opioid Use Disorder Market – By Drug (Buprenorphine [Sublocade, Belbuca, Suboxone, Zubsolv], Methadone, Naltrexone), By Age, By Route of Administration (Intravenous, Oral), By Distribution Channel, Global Forecast 2023-2032. GMIhttps://www.gminsights.com/industry-analysis/opioid-use-disorder-market#:~:text=OUD%20Drug%20Market%20Analysis&text=Based%20on%20drug%20type%2C%20the,continue%20during%20the%20forecast%20period

3 SAMHSA. (2024). The 42 CFR Part 8 Final Rule Table of Changes. SAMHSAhttps://www.samhsa.gov/medications-substance-use-disorders/statutes-regulations-guidelines/42-cfr-part-8/final-rule-table-changes 

4 Larson, C. (2024). Acadia Healthcare CEO: ‘M&A Will Be a Focus for Us in 2024 and Beyond. Behavioral Health Business. https://bhbusiness.com/2024/03/15/acadia-healthcare-ceo-ma-will-be-a-focus-for-us-in-2024-and-beyond/?mkt_tok=NjI3LUNQSy0xNjIAAAGR8QypR-X5kqkF13vlTMemkLPjc9HrQkCohRl5m3BJW-6PGihP1pbXWREONNPExs-ZmjjZapnsDC1-6TKdnqewr8hn5XCGQleZfTGK-JO7lgw

5 CMS. (2020). Opioid Treatment Programs: Enrolling in Medicare. Medicare Learning Networkhttps://www.cms.gov/files/document/opioid-treatment-program-training-slides.pdf 

6 CMS. (2023). Opioid Treatment Programs: Medicaid. https://www.cms.gov/medicare/payment/opioid-treatment-program/medicaid 

7 Staff, P. (2020). Commercial Insurance and Medicaid Coverage of Medications for Opioid Use Disorder Treatment. PDAPShttps://pdaps.org/datasets/medication-assisted-treatment-coverage-1580241551 

8 Aetna. (2024). Opioid FAQs for individuals and families. https://www.aetna.com/faqs-health-insurance/opioid-faqs.html 

Categories: Uncategorized

Non-Compete Agreements: A Prevailing Quagmire

March 6, 2024

Written by Ingrid Aguirre

On January 5, 2023, the Federal Trade Commission (FTC) indicated that it would be proposing a rule to ban non-compete clauses.  

Non-compete clauses are industry agnostic and cover a wide gamut of professions. The purpose of a non-compete is to protect the employer’s interest when hiring new employees. The non-compete inhibits an employee from opening a competing business or joining a competing firm within a certain geographical distance and for a certain period. The FTC argues that, in addition to inhibiting competition, non-compete clauses also lower wages for workers who are subject to them as well as workers who are not. The FTC has provisioned an exception to this ban, which would be applicable in the sale of a business where the person subject to a non-compete has an ownership interest of at least 25%. 

Within the healthcare industry, physician non-competes are common and often accompany an employment agreement. Whether large health systems or smaller physician groups, many providers are subject to non-competes when employed by these entities. For example, if a physician owner hires two other providers to operate out of her practice, those two physicians may be subject to non-compete agreements. In hiring and training the two new providers, the physician owner may use her eminence in the marketplace, time, patient contacts, and resources to establish the two new providers in the market. Without a non-compete, those two new physicians would be able to join any competing practice nearby to the detriment of their first employer. This problem may become cyclical. The practice that hired those physicians would also be subject to the same risk and, without non-compete agreements, may see those same physicians leave to another competing practice around the corner. VMG Health has been engaged in various situations to determine the value of buying out a non-compete for either litigated matters or transactional matters. 

It is important to note, however, that as health systems expand and more physicians are employed by those health systems, it becomes more difficult for physicians to practice out of the geographic limitations set forth by the non-compete if they do choose to leave their employer.  

Following this announcement by the FTC, some states have begun moving legislature regarding non-competes. Recently, in January 2024, New York Governor Kathy Hochul vetoed a similar proposal to ban non-competes. Delaware Supreme Court recently ruled in favor of holding non-competes in place in a ruling regarding a financial services company. For example, in California, Oklahoma and North Dakota, non-competes are either not enforceable or outright banned.  

The American Medical Association (AMA) echoed the limitations of non-competes noted by the FTC. The AMA supports any policy that would “prohibit covenants not-to-compete for all physicians in clinical practice.”1  The case could also be made for the removal of non-compete agreements due to the current provider shortage around the country.  

In drafting non-compete agreements, employers may consider a liquidated damages provision in anticipation of damages. This provision could speak to a reasonable buy-out requirement for a physician seeking to leave and compete nearby. Given the complexities of valuing the buy-out of a non-compete, it is important to engage an expert who understands certain key components: the term of the non-compete, enforceability of the non-compete, the market and competitive landscape, and the financial impact of potential competition. 

Across its client base, VMG Health has been engaged to quantify any damages resulting from a client’s workforce leaving for a competitor or to form their own business entity to then compete with their prior employer in the same geographical area. In situations like these, VMG Health has been engaged to determine the value of a non-compete for a litigated matter or for transactional purposes.  

It is important to note that the enforceability of physician non-compete agreements can vary depending on the specific language of the agreement, the jurisdiction in which the case is heard, and the facts and circumstances of the case. If you are facing a legal issue related to a physician non-compete agreement, it is imperative to seek legal advice from a qualified attorney and valuation expert who can provide you with personalized guidance based on your situation.  

Categories: Uncategorized

Public Sector Predictions for Healthcare Utilization in 2024

March 5, 2024

Written by Jordan Tussy, Colin McDermott, and Madi Whyde

Contributing researchers: Bill Jordan, Ryan Mendez, Molly Smith, Rashika Tomar, and Michael Welcer

The public sector often provides valuable insights on broader industry trends, which may be particularly helpful for the private sector in planning for the 2024 calendar year and beyond. VMG Health has identified a select number of companies that operate within the healthcare sector and reviewed the latest earnings calls to develop an understanding of how recent financial and operational trends may provide an indication of future utilization. Identified companies include distributors, equipment suppliers, facility operators, and managed care organizations, all of which are integral in the deployment of healthcare services in the United States and deeply invested in the underlying drivers of future utilization. 

We have included some of the most interesting statements made by the leaders of these organizations below. 

For medical equipment suppliers and distributors, 2024 predictions were primarily driven by 2023’s utilization, with many companies reporting continued growth over 2023 due to persisting patient backlogs.  

“…Average system utilization [procedures per installed clinical system] continues to be above long-term trends, increasing by 9.0% for the full year of 2023. Higher system utilization reflects both a higher mix of shorter-duration, benign procedures and the need to address patient backlogs.” – Jamie E. Samath, Senior Vice President and Chief Financial Officer, Intuitive Surgical, Inc. FQ4 Earnings Call, January 23, 2024. 

“During the quarter, we saw strong procedural demand… Additionally, demand for our capital products remained very robust in the quarter, with double-digit organic growth in Medical, Instruments and Endoscopy.” – Jason Beach, Vice President of Investor Relations, Stryker Corporation. FQ4 2023 Earnings Call, January 30, 2024. 

“Second quarter revenue increased 3.0% to $3.9 billion, which, as Jason alluded to, reflects quarterly revenue growth for the Medical segment for the first time in over two years. This increase was driven by growth in both at-home solutions and global medical products and distribution…” – Aaron E. Alt, Chief Financial Officer, Cardinal Health, Inc. FQ2 2024 Earnings Call, February 1, 2024. 

“There is a bolus of patients coming out into the market after COVID-19, which has made 2023 market growth faster than historical averages.” – Joaquin Duato, Chief Executive Officer and Chairman, Johnson & Johnson. FQ4 2023 Earnings Call, January 23, 2024. 

As key customers of medical equipment suppliers and distributors, healthcare operators mirrored their observations of continued growth in utilization, particularly in the fourth quarter of 2023. 

“But at a structural level, there is nothing to suggest that our surgical volume trends are going to change for the year, we had really solid volume growth in surgery. And we continue to invest heavily in our programs, both on the outpatient side and supporting our inpatient activity with more acute in complex program offerings.” – Samuel N. Hazen, Chief Executive Officer and Director, HCA Healthcare, Inc. FQ4 2023 Earnings Call, January 30, 2024. 

“We finished the year strong and delivered results in the fourth quarter that were well above the expectations we set. This was driven by continued volume strength as well as cost and utilization management.” – Saum Sutaria, Chairman and Chief Executive Officer, Tenet Healthcare Corporation. FQ4 2023 Earnings Call, February 8, 2024. 

These companies were also consistent in crediting the elevated utilization trends to volume growth in a few key specialties. 

“As we have noted, we believe that in 2023, we saw recovery in demand that included some impact from deferred volume, particularly in GI and ENT services. – Saum Sutaria, Chief Executive Officer, Tenet Healthcare Corporation. FQ4 2023 Earnings Call, February 8, 2024. 

“Throughout the year, we saw ongoing strength and recovery in GI, urology and ENT procedures. This organic growth was driven by continued expansion of service lines and growth in our population of partnered and affiliated physicians as well as the fundamental tailwinds of patient demand for safe and convenient surgical care options.” – Saum Sutaria, Chief Executive Officer, Tenet Healthcare Corporation. FQ4 2023 Earnings Call, February 8, 2024. 

“Starting first with procedures, growth for the full year was 22.0%. Areas of strength included general surgery in the United States… In the U.S., general surgery procedure growth was led by cholecystectomy, with foregut procedures rising as well. Colon and hernia procedure growth was also healthy for the year. Bariatric procedures grew year-over-year.” – Gary S. Guthart, Chief Executive Officer and Director, Intuitive Surgical, Inc. FQ4 2023 Earnings Call, January 23, 2024. 

While volume recovery resulted in top line revenue growth for operators and their vendors, payors expressed higher-than-expected medical costs driven by the strong utilization.  

“…In the non-inpatient space, despite the recent decline in observation events, we saw a sequential uptick in overall medical cost per member per month (PMPM) in the fourth quarter, driven largely by increases in physician, outpatient surgical and supplemental benefits cost categories.” – Humana Inc. Fourth Quarter 2023 Prepared Management Remarks, January 25, 2024. 

“Care patterns remain consistent with those we shared with you in the first half of ‘23. Activity levels continue to be led by outpatient care for seniors—with orthopedic and cardiac procedure categories among the more prominent. As we’ve noted, our benefit design approach assumed these activity levels persist throughout ’24, and the care patterns we observed exiting ’23 reconfirm that decision.” – John Rex, Chief Financial Officer, UnitedHealth Group. FQ4 2023 Earnings Call, January 12, 2024. 

2024 Expectations

The companies were nearly unanimous in their expectations that 2023 growth trends will persist throughout 2024, driven by the elevated backlogs, stabilizing macroeconomic trends, and an aging population.  

Healthcare Manufacturers and Distributers  

“We project MedTech operational sales growth to be relatively consistent throughout the year, expecting procedures in 2024 to remain above pre-COVID levels.” – Joseph J. Wolk, Executive Vice President and Chief Financial Officer, Johnson & Johnson. FQ4 2023 Earnings Call, January 23, 2024. 

“And we see that trend [faster market growth post-COVID] continuing into a good part of 2024. And therefore, being a tailwind into 2024. There’s a lot of factors playing into that. But overall, we see the amended procedures continuing into, at least, the first half of 2024.” – Joaquin Duato, Chief Executive Officer and Chairman, Johnson & Johnson. FQ4 2023 Earnings Call, January 23, 2024. 

“…We continue to see an increased volume of procedures in orthopedics based on coming out of COVID. And we don’t see any change in that, neither in the hips or in the knee area, or in any of the segments that we compete. So, we are optimistic about our orthopedics trajectory.” – Joaquin Duato, Chief Executive Officer and Chairman, Johnson & Johnson. FQ4 2023 Earnings Call, January 23, 2024. 

“So, embedded in the guidance for 2024, which we’re very confident on the 5.0% to 6.0%, is macro and micro reasons. So, from a macro perspective… the markets are going to continue to be healthy. You got better patient demographics, younger patients, you got the dynamic of cases moving into an ASC… You’ve seen shorter, better rehabilitation processes.” – Ivan Tornos, Chief Operating Officer, President, Chief Executive Officer, and Director, Zimmer Biomet Holdings, Inc. FQ4 2023 Earnings Call, February 8, 2024. 

“The size of our pipeline is twice what it used to be in 2018… This is not the same market growth profile that we used to have. Patient demand is strong. Procedure volume is very strong given a variety of reasons.” – Ivan Tornos, Chief Operating Officer, President, Chief Executive Officer, and Director, Zimmer Biomet Holdings, Inc. FQ4 2023 Earnings Call, February 8, 2024. 

Procedure volumes are strong. The capital markets are very strong. Hospitals are spending. We have exited the year with more backlog than we began the year, which means, obviously, our orders are continuing to be strong for capital equipment.” – Kevin A. Lobo, Chairman, Chief Executive Officer, and President, Stryker Corporation. FQ4 2023 Earnings Call, January 30, 2024. 

“We continue to expect the ortho markets will remain strong in 2024, driven by continued adoption in robotic-assisted surgery, demographics, a more favorable pricing environment, and healthy patient activity levels with surgeons… Hospital CAPEX budgets remain healthy, and our capital order book remains elevated as we enter 2024.” – Jason Beach, Vice President of Investor Relations, Stryker Corporation. FQ4 2023 Earnings Call, January 30, 2024. 

“Based on our momentum from 2023, strong procedural volumes, healthy demand for capital products, and a stabilizing macro-economic environment, we expect 2024 organic net sales growth to be in the range of 7.5% to 9.0%.” – Glenn S. Boehnlein, Vice President and Chief Financial Officer, Stryker Corporation. FQ4 2023 Earnings Call, January 30, 2024. 

“…Our overall procedure guidance range assumes that growth moderates from last year, given the elevated backlog benefit we experienced in 2023.” – Brian King, Head of Investor Relations, Intuitive Surgical, Inc. FQ4 2023 Earnings Call, January 23, 2024. 

“…Utilization continues to be quite good and predictable. So, we’re in a nice environment for ongoing growth…” – Jason M. Hollar, Chief Executive Officer and Director, Cardinal Health, Inc. FQ2 2024 Earnings Call, February 1, 2024. 

Healthcare Operators

“The volume strength was also very good during the year. And so, I think that we believe that we’ll continue to see acute care recovery in 2024 like we saw in 2023. And if we’re able to open up capacity effectively to service the demand that we want, which again is consistent with our high acuity strategy, I think that’s what gets us to the upper end of our guidance, right? It’s really the volume potential there.” – Saum Sutaria, Chief Executive Officer, Tenet Healthcare Corporation. FQ4 2023 Earnings Call, February 8, 2024. 

“…I think we’re reading continued strong demand. We saw really strong enrollment in the health insurance exchanges across our states… We believe we continue to see strong economic indicators and employments and our access to contracted lives remaining well.” – William B. Rutherford Executive VP and Chief Financial Officer, HCA Healthcare. FQ4 2023 Earnings Call, January 30, 2023. 

“…We are really judging our business and thinking about 2024 optimistically around where the demand for healthcare is at least in our markets.” – Samuel N. Hazen, CEO and Director, HCA Healthcare. FQ4 2023 Earnings Call, January 30, 2023. 

“Our initial assumption for volume growth assumes that volume will build as the year progresses, reflecting the historically high same-store case growth that we saw in the first quarter of 2023. We are very confident in the long-term growth rates of this business.” – Saum Sutaria, Chief Executive Officer, Tenet Healthcare Corporation. FQ4 2023 Earnings Call, February 8, 2024. 

Managed Care

“Given the recency and magnitude of the uptick in the utilization trend, we have prudently assumed that the higher costs seen in the fourth quarter persist throughout 2024. Based on our review of our initial claims data, we believe that the seasonal factors are not driving the increase.” – Bruce Dale Broussard, Chief Executive Officer and Director, Humana Inc. FQ4 2023 Earnings Call, January 25, 2024.   

“Looking at January data, which is very early—so we only have really some look into the first two weeks—we would say [utilization] is continuing to stay at the elevated levels that we saw in the fourth quarter.” – Susan Marie Diamond, Chief Financial Officer, Humana Inc. FQ4 2023 Earnings Call, January 25, 2024. 

Conclusion

The prevailing theme noted in the earnings calls VMG Health reviewed pertained to the elevated utilization in 2023 and its persistence into 2024. Particularly notable were the trends around volumes recovering post-COVID (especially for otolaryngology, orthopedics, and urology services). This was coupled with a recovering macroeconomic environment and favorable patient dynamics. While an encouraging trend for operators, device companies and distributors, higher utilization translated to increased medical claims on the payor side. 

Based on this commentary and insight from the public sector, the VMG Health team is optimistic that 2024 will be a strong utilization year for our healthcare service provider clients. 

Categories: Uncategorized

Insights into Healthcare Provider Compensation Trends for 2024

March 4, 2024

Written by Ben Minnis, Tyler Navarro, and Anthony Domanico

With significant changes to the Medicare Physician Fee Schedule (MPFS) in recent years and an aging physician population leading to potentially significant shortages of over 100,000 physicians by 2030,1 how organizations recruit and retain these key healthcare providers continues to evolve and become more competitive. As we hit the midway point of 2024’s first quarter, VMG Health’s experts have identified important trends in physician enterprise strategy that will impact the physician landscape in 2024 and beyond.

Recruiting Is Becoming More Creative

In today’s competitive recruitment landscape, organizations are innovating their approaches to attract and retain top physician talent. Beyond traditional compensation packages, which still include higher pay and signing bonuses in specialties facing shortages, institutions are prioritizing lifestyle enhancements like flexible scheduling and remote work options. Institutions are also promoting several non-traditional benefits and enhancements that attract and retain physicians:

  1. Enhanced Benefits: Organizations are increasingly offering comprehensive health insurance coverage, retirement programs with generous employer contributions, childcare assistance, and wellness programs.
  2. Physician Leadership Development Programs: Making the transition from a seasoned physician to a physician leader can be challenging to say the least. Organizations that offer and advertise strong leadership education opportunities can set themselves apart.
  3. Broader Loan Forgiveness / Retention Programs: While student loan forgiveness is not a new concept, VMG Health is increasingly seeing loan forgiveness offered as an all-purpose incentive— to buy a house, send kids to college, etc. In other words, the terms are being offered regardless of a physician’s student loan status.
  4. Hard-to-Recruit Model Adjustments: Recruiting can often be a time-sensitive operation. Many organizations are starting to implement hard-to-recruit question rubrics that allow compensation models modest flexibility without triggering committee pathways that can belabor a recruitment effort and lead to one-off compensation models.
  5. Investing in Technology and Infrastructure: Physicians are well aware of the importance technology and infrastructure has to the success and performance of their practice. Organizations that promote and invest in electronic health record (EHR) advancements and medical infrastructure will be in a better position to recruit physicians going forward.

One-Size-Fits-All Models No Longer Work

The era of one-size-fits-all compensation models in multispecialty healthcare is coming to an end. As service lines within healthcare delivery settings evolve, so do their operational dynamics and corresponding compensation structures. Each service line has unique requirements, such as call coverage, sub-specialization (e.g., heart failure, ERCP), and supervision of advanced providers, among others. Attempts to enforce rigid standardization across various specialties within a physician enterprise are increasingly impractical and counterproductive in today’s complex landscape. Instead, organizations are recognizing the need to tailor compensation models to suit specific circumstances. Striking a balance between innovation and standardization is key for organizations seeking to optimize their compensation frameworks, as evidenced by VMG Health’s experience working with a variety of organizations and approaches.

Models That Focus on Work-Life Balance

Physicians are placing an increasing emphasis on achieving a healthier work-life balance. This shift in priorities is prompting healthcare organizations to reassess and refine their compensation packages to better align with the needs of modern physicians. Flexible scheduling options, including compressed work weeks or part-time arrangements, are gaining popularity because they allow physicians to better manage their time and commitments outside of work. Moreover, the widespread adoption of telemedicine has opened new avenues for physicians to practice medicine remotely, offering them greater flexibility in how and where they work. Additionally, paid time off (PTO) allowances are expanding to ensure physicians have ample opportunity for rest, relaxation, and personal pursuits.

A 2023 survey by Merritt Hawkins2 asked final year medical residents, “What is important to you as you consider practice opportunities?” Notably, 82% of respondents marked “lifestyle” as very important, indicating a clear preference for work arrangements that afford them the time and freedom to pursue personal interests and maintain a healthy work-life balance. Similarly, 80% of respondents cited the importance of having adequate personal time. Financial considerations remain unsurprisingly significant, with 78% of respondents emphasizing the importance of a good financial package. However, it is more and more evident that the pursuit of a fulfilling lifestyle and sufficient personal time are increasingly taking precedence in the minds of physicians when evaluating practice opportunities. This trend underscores the importance for healthcare organizations to adapt their compensation strategies to meet the evolving needs and priorities of today’s medical professionals.

  • Understand the care models deployed by your organization and the level of burden associated with physician and provider work effort:
    • Which areas are ripe for burnout, disruption, and turnover?
    • Pay special consideration to on-call panels and shift models.
  • Consider how part-time and non-traditional schedules fit into practice and compensation models, especially when designing new compensation models.

Continued Bracing for Split/Shared Evaluation and Management (E/M) Changes

The Centers for Medicare & Medicaid Services (CMS) have continued to delay implementation of proposed changes to the time-only definition of “substantive portion” of a split/shared E/M visit in the facility setting until December 31, 2024. Delays are due to a reportedly large backlash by facilities, with concerns over care team disruptions and issues with integrating a time-based rule into billing and EHR systems.

While VMG Health anticipates additional delays or even changes to the policy, it would be wise for organizations to prepare inpatient care models and related compensation models to ensure a proper plan is in place—or could quickly be implemented—when final rule changes do take effect.

  • Catalogue all physician and APP models (employed and independent) where split/shared billing occurs today.
  • Document perceived challenges that may result from a time-based approach to capturing split/shared volumes, including workflows, billing, and compensation.

Aligning Compensation Models with At-Risk Incentives

In contemporary compensation structures, non-productivity incentives often include a substantial portion of compensation tied to high-quality metrics, ideally serving as a significant motivator and leading to better patient outcomes. While certainly not limited to a 2024 trend, forward-thinking organizations are continuing to leverage compensation design initiatives to bolster their ACO/CIN strategies, particularly those with health plans and/or substantial capitation risk within their payor contracts. As these organizations assume greater risk, compensation models can be tailored to distribute value-based earnings among physicians.

Remain Mindful of Regulatory Constraints

While physician shortages and increased demand continue to drive organizations to innovate compensation models and incentives, it’s crucial to operate within regulatory boundaries and adhere to laws governing healthcare practices. This point is underscored by recent cases, such as the one involving Community Health Network Inc., which agreed to pay $345 million to settle allegations of violating the False Claims Act by unlawfully submitting Medicare claims.3 The lawsuit alleged that Community Health Network overpaid specialists and awarded bonuses tied to referrals, ignoring warnings and providing false compensation figures. The settlement includes a five-year Corporate Integrity Agreement with HHS-OIG. The case originated from a whistleblower complaint filed in 2014. The government’s intervention underscores its commitment to combat healthcare fraud using tools like the False Claims Act.

In FY2022, the U.S. Justice Department collected $2.2 billion in settlements and judgments, the second-highest amount ever recorded in a single year. These statistics underscore the critical need for maintaining vigilance and compliance, particularly in an environment where regulatory scrutiny is significant.

Continued Migration to APP Workforce

Health systems are increasingly turning to advanced practice providers (APPs) as a strategic solution to address the pervasive challenges of physician shortages. Unlike for physicians, where organizations are competing nationally for talent, supply and demand trends for APPs are driven by local factors.

The rise of nurse practitioners, physician assistants, and other APPs is seen as a pragmatic response to the growing demand for healthcare services. These providers bring advanced education and training, offering a multifaceted approach to patient care that aligns with the evolving needs of modern healthcare. Organizations are looking to APPs for cost-effectiveness and because APP training programs are generating a higher number of graduates than medical schools. This allows organizations to fill needed vacancies quicker while considering changes to the care model that will drive down the total cost of care.

With competitive recruitment strategies and tailored compensation packages, health systems recognize the crucial role that APPs play in ensuring the continued delivery of high-quality and accessible healthcare services. This collaborative model enhances patient access, care coordination, and overall efficiency and fosters a supportive work environment where professionals can learn from one another and leverage their respective skills and expertise.

Conclusion

The trends shaping provider compensation in 2024 reflect a strategic response to ongoing challenges like physician shortages, regulatory constraints, and evolving workforce preferences. Physician enterprises will continue to face these challenges from a care model and compensation model perspective. VMG Health’s experts in physician enterprise strategy and compensation design can help your organization establish and refine your physician enterprise strategy to ensure your organization’s continued ability to recruit and retain top physician and APP talent.

Sources

1 Chakrabarti, R., et. al.(2021). The Complexities of Physician Supply and Demand: Projections from 2019 to 2034. American Association of Medical Colleges. https://www.aamc.org/media/54681/download?attachment.

2 AMN Healthcare. (2023). Survey of Final Year Medical Residents. https://www.amnhealthcare.com/siteassets/amn-insights/surveys/survey-of-final-year-medical-residents-2023.pdf

3 United States Department of Justice. (2023). Indiana Health Network Agrees to Pay $345 Million to Settle Alleged False Claims Act Violations. https://www.justice.gov/opa/pr/indiana-health-network-agrees-pay-345-million-settle-alleged-false-claims-act-violations

Categories: Uncategorized

Oncology: Private Equity and Corporate Investment in Cancer Care 

February 23, 2024

Written by Jordan Tussy, CVA; Hunter Hamilton; and Vincent Kickirillo, CVA, CFA

Following the emergence of several oncology private equity (PE)–backed platforms in 2018, there has been an uptick of tuck-in acquisition activity in the oncology space, both by these PE-backed entities, as well as by other prominent public and corporate-backed oncology platforms. These platforms have targeted geographic expansion and economies of scale through strategic affiliations with practices and physicians.  

In fact, a Harvard study published in JAMA Internal Medicine indicated that over 700 oncology practices had partnered with or had been acquired by a PE firm from 2003 to 2022. According to the study, this number represented approximately 10% of total oncology practice locations in the US.  

While increased regulatory scrutiny and a more difficult funding environment have hampered overall physician practice transaction activity, several notable platform and tuck-in acquisitions have defined the recent environment for investment in oncology.  

Verdi Oncology

After a quiet couple of years from Pharos Capital Group’s Verdi Oncology, it was announced in November 2023 that the platform’s two practices, Nashville Oncology Associates and Horizon Oncology, had joined The US Oncology Network. Additionally, Verdi Cancer and Research Center of Texas, formed in August 2019, announced its closure in September 2023. With Verdi Oncology having been founded in March 2018 through the initial acquisition of Horizon Oncology, Pharos Capital Group’s assumed exit after nearly six years aligns with typical PE holding period expectations. 

OneOncology

Perhaps most notable among recent transactions in the oncology space was the $2.1 billion acquisition of OneOncology from General Atlantic by TPG and AmerisourceBergen Corporation, which closed in June 2023. TPG will be the majority owner in the new joint venture, as AmerisourceBergen reportedly purchased a minority interest of approximately 35% for around $685 million in cash. TPG also has a one-year put option effective on the third anniversary of the deal closing. If exercised, this option would require Amerisource Bergen to purchase the remaining interest in OneOncology at a price equal to 19.0x the company’s adjusted EBITDA for the most recently ended 12-month period. AmerisourceBergen will also have a call option to purchase the remaining interest at the same price between the third and fifth anniversaries. Applying the 19.0x multiple to the transaction price of $2.1 billion would imply approximately $110 million of EBITDA for OneOncology today.  

General Atlantic originally invested $200 million in OneOncology in September 2018 and held the investment for nearly five years. In that time, OneOncology has expanded considerably in both size and geography. The platform now includes 19 practices across 15 states with just under 1,000 providers. The structure is that of an affiliation model in which OneOncology charges a management fee and introduces partner practices to new ancillaries (e.g., oral pharmacy, laboratory services, radiation therapy) as well as lower drug-purchasing costs. Providers further benefit from a reduction in administrative burden and a resulting increase in clinical autonomy. In addition, OneOncology also has robust data analytics capabilities, which it utilizes to help define better clinical pathways, improve outcomes, and monetize the data.  

Since the announcement of OneOncology’s acquisition by TPG and AmerisourceBergen in April, several additional practice partnerships have been announced, including the affiliation of Coastal Cancer Center and Pacific Cancer Care in May, Mid Florida Cancer Centers in November, and Pacific Cancer Medical Center, Maury Regional Medical Group, and Genesee Cancer and Blood Disease Treatment Centers in December. On January 12, 2024, it was announced that OneOncology had finalized a partnership with Huntsville, Alabama–based Clearview Cancer Institute, which—with 25 medical oncologist providing care across 13 clinics—was identified in the announcement as one of the five largest community oncology practices in the nation and the largest in Alabama. 

Integrated Oncology Network

After its recapitalization by Silver Oak Services Partners in October 2018, Integrated Oncology Network (ION) has continued its geographic expansion and now operates from more than 50 centers across 14 states in the US. Like OneOncology’s model, the independence of partner practices is also maintained under ION’s model, which, in addition to the preservation of clinical autonomy, offers to reduce the regulatory burden and increase access to the enhanced technology and resources of a larger network. ION specifically advertises its fully supported EHR and the immediate access its providers have to accurate data analytics. Most notably, in April 2022, ION announced the acquisition of California Cancer Associates for Research and Excellence (cCARE), an integrated cancer care network that provides medical oncology, radiation oncology, diagnostic imaging, and other ancillary services in the Fresno and San Diego markets. Furthermore, the platform expanded its cCARE operations with the September 2023 acquisition of High Desert Oncology of Victorville, California as well as the December opening of its new clinic in Riverside, California.  

GenesisCare

KKR-backed GenesisCare filed for Chapter 11 bankruptcy in June 2023, announcing that its US operations would be spun out from the broader enterprise. At the time of the announcement, David Young, CEO of GenesisCare, said, “The past three years have presented significant operational and financial challenges, requiring a comprehensive restructuring of the operations and balance sheet of the company.” No disruption of patient care was anticipated, and in November 2023, it was reported that GenesisCare had developed a reorganization plan to reduce its debt load by approximately $1.7 billion, down from the $2.0 billion it had at the time of filing. The US segment will continue to operate as a sister company to the businesses in Australia, Spain, and the UK, as the enterprise entertains interest from potential buyers.  

According to bankruptcy filing documents, a number of winning bids for GenesisCare assets across the country have already been announced. Assuming these transactions close at the indicated prices (as defined in the respective purchase agreements), it would imply total cash proceeds of over $100 million.  Furthermore, the sales of these 31 practices have an implied consolidated equity value of approximately $131 million.  

Additionally, it was announced in October 2023 that GenesisCare’s Orange County radiation oncology centers were acquired by UCI Health.  

Oncology Care Partners

New to the scene is Oncology Care Partners (OCP). Backed by Welsh, Carson, Anderson, & Stowe’s healthcare platform, Valtruis, and partnering with oncology and cardiology care management provider Evolent Health, OCP opened its first two practices in Phoenix and Miami in January 2023 with the goal of advancing value-based care, particularly among Medicare Advantage patients. Based on the launch announcement of these first two practices, OCP appears to operate a hybrid model of practice partnership. The launch of its Arizona practice came in partnership with American Oncology Network, while its Miami-based medical group practice appears to have been an outright acquisition. Under both agreements, OCP says it will provide value for payors and at-risk primary care groups through the introduction of a new patient journey and digital tools to allow community providers to spend more time with their patients and reduce barriers to access.  With the launch of its most recent location in Broward County, Florida in October 2023, OCP plans to continue expansion efforts across the country to further accelerate its value-based care initiatives. 

The US Oncology Network

McKesson’s The US Oncology Network (The Network) has also remained active expanding its footprint in California, New Mexico, and Kansas with the 2023 acquisitions of Epic Care, Nexus Health, and Cancer Center of Kansas, respectively. In April 2023, The Network also announced a strategic partnership with Regional Cancer Care Associates, a multispecialty oncology with more than 20 sites of service and over 60 providers throughout the Northeast. As previously mentioned, it was announced in the fourth quarter that Verdi Oncology’s Nashville Oncology Associates and Horizon Oncology had joined The Network as well. Under The Network’s affiliation model, the operational and clinical activities of its partner practices are converted to value-based care through greater focus on the negotiation of value-based contracts for revenue optimization, empowerment of practice transformation with proven solutions, alignment of GPO and payer contracts, and support for all oncology specialties. As of the most recent transactions, The US Oncology Network’s total provider count exceeds 2,400. 

Cancer Treatment Centers of America

Previous stand-alone operator Cancer Treatment Centers of America (CTCA) was acquired by City of Hope in February 2022 for $364.4 million. At the time of its acquisition, the business operated three oncology hospitals located in Atlanta, Chicago, and Phoenix, as well as five outpatient facilities. On the one-year anniversary of the transaction, it was announced that CTCA was officially being re-branded to bear the City of Hope name at its facilities, further cementing the evolution of the organization into a national system. 

American Oncology Network

In April 2023, American Oncology Network (AON) received a $65 million strategic growth investment from AEA Growth Partners “to help further AON’s goals of supporting community practices and improving the patient experience,” according to the Company’s press release. As a result of the investment, AEA Growth gained a minority interest in the business. AON opened Lone Star Oncology in Georgetown, Texas in June and announced the affiliation with Florida Oncology & Hematology in Safety Harbor, Florida in July. AON also ventured into urology through its affiliation with Triple Crown Urology on September 1. As a result of this transaction, AON’s platform now includes over 200 providers across 85 locations in 19 states and the District of Columbia. AON has a partnership model through which affiliated practices enter a management agreement and are charged a central services fee. Synergies realized through a partnership with AON are advertised as new revenue streams through centralized ancillaries, including oral pharmacy, clinical lab, and pathology as well as economies of scale with vendor services and drug pricing. With such revenue enhancements and cost reductions, providers can earn more than they otherwise might have as independent practices. 

Most notable among AON’s recent transaction activity was the closing of a business combination with Digital Transformation Opportunities Corp., a special purpose acquisition company (SPAC), in September 2023. As a result of the transaction, AON began trading on the Nasdaq on September 21, 2023 under the ticker AONC. The transaction had an implied enterprise value of $497 million, with an implied TEV/Revenue multiple of 0.4x and an implied TEV/EBITDA multiple of 13.8x. 

The Oncology Institute

In November 2021, The Oncology Institute (TOI) was acquired by DFP Healthcare Acquisitions Corp., a SPAC, and became the first publicly traded oncology company. At the time of the acquisition, TOI’s pro forma enterprise value was $842 million. Underperforming initial expectations, the company ended 2023 with an enterprise value of approximately $148 million. To address these issues, TOI completed a corporate restructuring in Q2 2023 and has a strategic plan to eliminate cash burn and generate positive adjusted EBITDA by the end of 2024. According to their most recent earnings call, the company also plans to improve margins in legacy markets through expansion in capitated partnerships, radiation oncology, and clinical trials program. As part of this initiative, TOI acquired Southland Radiation Oncology Network in June 2023, which includes five radiation oncology clinics in the Los Angeles market. Despite the operational difficulties, The Oncology Institute remains the largest value-based care oncology operator in terms of lives served and revenue under value-based arrangement. To advance these efforts, The Oncology Institute acquires and employs the providers of its partner practices. The synergies it promotes include access to clinical trials, transfusions, and additional care delivery models more typically associated with the most advanced care delivery organizations.  

Conclusion

Burdened with reimbursement headwinds and rising costs, it is anticipated that oncologists will continue to seek out strategic affiliations. Platforms such as OneOncology and The US Oncology Network offer an attractive alternative that allows physicians to maintain their independence while receiving the infrastructure and growth support of a large entity.   

Furthermore, the long-term performance of major players in the oncology value-based care space remains to be seen, as does The Oncology Institute’s ability to achieve on its path to profitability in 2024.  

Lastly, with the acquisition of OneOncology, ION is one of the last pureplay, PE-backed oncology platforms that has yet to recapitalize. Given Silver Oak Services Partners has held onto this investment for over five years now, it would not be surprising if there was a recapitalization of this platform within the next couple of years.  

Sources

Silver Oak Services Partners LLC. (2023). Integrated Oncology Network acquires California Cancer Associates for research & excellence. PR Newswire. https://www.prnewswire.com/news-releases/integrated-oncology-network-acquires-california-cancer-associates-for-research–excellence-301530782.html 

Integrated Oncology Network. (2023). Integrated Oncology Network announces High Desert Oncology joins cCare. PR Newswire. https://www.prnewswire.com/news-releases/integrated-oncology-network-announces-high-desert-oncology-joins-ccare-301933873.html 

Integrated Oncology Network. (2023). Integrated Oncology Network announces cCare expansion with specialty clinic in Riverside, California. PR Newswire. https://www.prnewswire.com/news-releases/integrated-oncology-network-announces-ccare-expansion-with-specialty-clinic-in-riverside-california-302009492.html 

Sebastian, D. (2023). KKR-Backed Radiotherapy Group GenesisCare Files for Bankruptcy. Wall Street Journal. https://www.wsj.com/livecoverage/stock-market-today-dow-jones-06-01-2023/card/kkr-backed-radiotherapy-group-genesiscare-files-for-bankruptcy-LIVUzBoTLS8Z2Z8qPcP9 

GenesisCare. (2023). GenesisCare’s Plan of Reorganization Confirmed by Bankruptcy Court with Overwhelming Support from Voting Creditors. GenesisCare Newsroom. https://www.genesiscare.com/us/news/genesiscares-reorganisation-plan-confirmed-with-overwhelming-support-from-voting-creditors 

UCI Health. (2023). UCI Health purchases GenesisCare radiation oncology centers. UCI Health News. https://www.ucihealth.org/news/2023/10/fountain-valley-radiation-oncology#:~:text=Acquisition%20expands%20access%20to%20world,cancer%20care%20in%20Orange%20County&text=Orange%2C%20Calif.,filed%20for%20Chapter%2011%20bankruptcy

American Shared Hospital Services. (2023). American Shared Hospital Services Enters Into Agreement to Acquire 60% Majority Interest in Three Radiation Therapy Cancer Centers in Rhode Island. GlobeNewsWire. https://www.globenewswire.com/news-release/2023/11/20/2783147/0/en/American-Shared-Hospital-Services-Enters-Into-Agreement-to-Acquire-60-Majority-Interest-in-Three-Radiation-Therapy-Cancer-Centers-in-Rhode-Island.html 

United States Securities and Exchange Commission. (2023). Form 8-K for American Shared Hospital Services. https://app.quotemedia.com/data/downloadFiling?webmasterId=101803&ref=317881267&type=PDF&symbol=AMS&cdn=1833bea1c9c3490a4573fbbc20a1fc5e&companyName=American+Shared+Hospital+Services&formType=8-K&formDescription=Current+report+pursuant+to+Section+13+or+15%28d%29&dateFiled=2023-11-21 

Oncology Care Partners. (2023). Oncology Care Partners Launches First Three Locations, Bringing Patient Experience Focus to Cancer Care in Phoenix, Miami. PR Newswire. https://www.prnewswire.com/news-releases/oncology-care-partners-launches-first-three-locations-bringing-patient-experience-focus-to-cancer-care-in-phoenix-miami-301724825.html 

Oncology Care Partners. (2023). Oncology Care Partners Launches Broward Location Expanding Value-Based Cancer Care in South Florida. PR Newswire. https://www.prnewswire.com/news-releases/oncology-care-partners-launches-broward-location-expanding-value-based-cancer-care-in-south-florida-301947441.html 

American Oncology Network. (2023). American Oncology Network, a Rapidly Growing Network of Community-Based Oncology Practices, Receives Strategic Investment from AEA Growth. American Oncology Network News. https://www.aoncology.com/2023/04/28/american-oncology-network-receives-strategic-investment-from-aea-growth/ 

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