Gastroenterology: An Emerging Trend in Private Equity Healthcare Transactions

Written by Vincent M. Kickirillo, CFA, CVA, Savanna Dinkel, Landon Miner Over the past 10 to 15 years, private equity (“PE”) firms have displayed an increasing interest in the healthcare provider industry. Recently, PE firms have set their focus on certain specialty physician practices with the intent to consolidate and grow practices in traditionally fragmented markets. Historically, ophthalmology and dermatology practices, among others, have been the targets of PE consolidators; however, gastroenterology (“GI”) has emerged as a specialty of interest. In 2016, the first major PE transaction in the GI physician practice space occurred between Audax Group and Gastro Health. Since then, GI physician practices have been hot targets for PE buyers, a trend expected to continue in the coming years. There are a multitude of attributes that attract potential PE buyers to GI physician practices. In particular, the current GI market dynamics and opportunities for PE firms to create value are driving the investments in this space.

MARKET DYNAMICS

The population of US citizens over the age of 65 is expected to more than double from 46 million in 2016 to 98 million by the year 2060.1 According to the American Cancer Society, there are estimates of 101,420 new cases of colon cancer and 44,180 cases of rectal cancer expected in 2019. Further, this study showed that one in every 22 men as well as one in every 24 women will develop colorectal cancer.2 With the growing aging population and increasing incidence of colorectal cancer in the United States, the need for gastroenterologists will be as prevalent as ever. In addition, while the demand for GI physicians is high, studies have shown a consistent lack of GI specialists throughout the US. With over 14,000 active gastroenterologists currently in the US, it is predicted that by 2025, there will be a shortage of more than 1,500 gastroenterologists.3,4 The mismatch between the supply and demand for active gastroenterologists presents an attractive opportunity for PE firms who invest in GI practices. Further, the GI market is extremely fragmented. Currently, there are large portions of GI physician practices that operate independently. Due to increased operating expenses and progressively strenuous healthcare regulations, operating a private practice today has become increasingly difficult. As physicians look for ways to reduce these burdens, many independent physician practices who wish to consolidate lack the means to do so on their own. As a result, PE firms have begun to emerge as attractive partners for these private physician practices. Continue to the full article. 

Are your management services agreements fair market value & commercially reasonable?

Written by Jen Johnson and Spencer Coronado The healthcare reimbursement environment’s shift towards value-based care aimed at generating cost savings and improved clinical outcomes has driven growth of management service organizations (MSOs), entities designed to provide management functions to entities in various healthcare sectors. MSOs allow clinical personnel to focus on patients, while providing sector specific expertise related to reimbursement, quality reporting, and oversight. Often, MSOs have a referral relationship to the provider of the services, whether through physician ownership, or the MSO is a business that refers to the providing entity. As a result, it is important that fees stated in management services agreements (MSAs) between MSOs and healthcare entities are fair market value (FMV) and commercially reasonable (CR). MSOs may include national, regional, health system, or physician-owned management service companies, and are increasingly providing specialized services through MSAs. These services vary and may include comprehensive ‘turn-key’ management services, revenue cycle management services, and other a la carte services. The goal is often to allow the healthcare entity to focus on clinical functions for improved patient outcomes. MSOs often provide management services with greater efficiency and economies of scale as a result of servicing multiple facilities such as ambulatory surgery centers (ASCs), imaging centers, physician practices, and hospitals. More recently, there have been a growing number of highly specialized MSOs including rehabilitation, wound care, freestanding emergency departments, urgent care centers, behavioral health, and pharmacy, among others. While MSAs have been present in the healthcare sector for decades, and certain MSAs may exhibit standard fees and services (such as ASC MSAs), other growing or highly specialized segments provide more varied compensation and services. As a result, it is important to understand exactly what services are being provided by an MSO when determining whether the proposed fee is reasonable. It is important to note, the MSOs addressed in this article reflect management services related to personnel provided to oversee and guide a business. Comprehensive MSOs, often seen in Corporate Practice of Medicine states and inclusive of operational personnel, rent, and other expenses, will be covered in a subsequent article. Continue to the full article. 

End Users & Consolidators: The Next Possible Wave of Transactions in Urgent Care

Published by The Journal of Urgent Care Medicine Urgent message: The idea of a “typical” urgent care operation buyer is evolving along with the industry. While private equity has been an essential player in market growth, healthcare organizations with longer-term vision are now more commonly involved in acquisitions. It’s no secret private equity (PE) has a played a paramount role in the design, development, and growth of the urgent care industry. Collectively, these firms have invested billions of dollars to create the level of awareness, acceptance, and reliability that is enjoyed by patients across the country. In the industry’s pioneer period, urgent care chain transactions among private equity companies were commonplace. Since PE firms typically operate under 3- to 6-year investment time horizons, it is inevitable that many of these urgent care chains have and will continue to be sold. Today, we find evidence that urgent care chains are increasingly acquired by health systems, managed care organizations, and existing PE-backed portfolio companies (ie, market consolidators). These new buyers are expected to have possibly longer investment horizons and varying transaction motivations. Table 1 illustrates the prevalence of transactions among PE firms earlier in the decade. These firms have generally held their investments for 3-6 years and sought 20%–30% annual investment returns that were largely achieved by expanding the size, scale, and penetration of their urgent care chain. While not all-inclusive, there are currently seven urgent care chains held by a PE firm that could be for sale in the short-term based on this average historical hold period. Click to continue to the full article. 

Fair Market Value in Today’s Healthcare Transaction Environment: An FMV Primer

Written by: John Meindl, Brad Parker and Evangeline Lalangas (Gray Reed & McGraw LLP) Published by: American Health Lawyers Association (AHLA) The phrase “Fair Market Value” (“FMV”) is often touted amongst healthcare attorneys, but depending on the context it has a specific, defined meaning. Importantly, however, FMV is often the driving factor in identifying whether a particular transaction is compliant with federal (and sometimes state) regulations. It is thus important to understand how the FMV concept relates to these below-listed laws. The following regulations utilize the FMV standard, albeit using slightly different approaches: Click to continue to the full article.

5 Reasons New Tax Laws had Less Impact on Healthcare Business Valuation

Published by Becker's Hospital Review Ever since the Tax Cuts and Jobs Act (“Tax Act”) became law on December 22, 2017, the valuation community has been trying to understand its impact on business appraisal.  At the time of passage, most valuation professionals agreed the provisions in the Tax Act would have a directionally upward impact on company value. Some experts believed the law would further fan the flames of a 10-year “bull” market in stocks; others viewed the law with more modest expectations.  Time will ultimately reveal the long-term impact of the Tax Act; however, some insights may be obtained as we conclude 2018. As a reminder, key provisions of the law that are positive for valuation include the following:
  • Lower corporate tax rate1
  • Tax depreciation advantage for small businesses2
  • Tax depreciation advantage for large businesses3
Alternatively, key provisions of the law that partially offset the law’s benefits include:
  • Caps on deductibility of interest expense4
  • Changes to tax carryforward and carryback rules5
While most agree the Tax Act increased company value (all else equal), other dynamics seem to be at play which have muted its full benefit in 2018.  The 21.1% increase of the S&P 500 index in 2017 may be partially attributable to the anticipated Tax Act; however, it is difficult to fully ascribe these gains to the Tax Act given large uncertainty surrounding the new laws even up to its passage in late December 2017.   Since the new provisions became law, the performance of S&P 500 index has been surprisingly flat. Other dynamics the market seems to weighing include the following: Continue to the full article. 

Understanding Alternative Payment Models and Related Regulatory Issues

Published by The Health Lawyer Colin McDermott, CFA, CPA/ABV, VMG Health and Lisa G. Han, Esq., Jones Day With the advent of the Patient Protection and Affordable Care Act (“PPACA”), (1) the healthcare industry has since made great strides in transforming from a fee-for-service (“FFS”) system to value-based models. PPACA provides policymakers and the Centers for Medicare & Medicaid Services (“CMS”) with great flexibility to test payment models for Medicare FFS patients. (2) In 2015 the U.S. Department of Health and Human Services (“HHS”) announced its goal of shifting 30 percent of Medicare FFS by the end of 2016, and 50 percent by the end of 2018, to value through alternative payment models (e.g., accountable care organizations (“ACOs”) and bundled payment arrangements). (3) As authorized by PPACA, CMS established the Center for Medicare & Medicaid Innovation (“CMMI” or “Innovation Center”) to test innovative payment and service delivery models that improve care, lower costs, and better align payment systems to support patient-centered practices. (4) The programs implemented by CMMI focus on Medicare, Medicaid and the Children’s Health Insurance Program (“CHIP”). CMMI has since implemented a number of value-based initiatives, such as the patient centered medical home, (5) the Medicare Shared Savings Program (“MSSP”), (6) the Bundled Payment for Care Improvement Initiative (“BPCI”), (7) the Comprehensive Care for Joint Replacement Model (“CCJR”)8 and the NextGen ACO program. (9) Although some of the programs have been scaled back or terminated in the past few years, CMMI has noted that it may add or reintroduce them later and has continued to introduce new programs, such as the direct provider contracting model. (10) While alternative payment models are not new in the commercial insurance industry, the passing of PPACA and the implementation of many innovative value-based programs by CMMI for the government healthcare programs have accelerated the development of value-based contracting for commercial payors. Commercial payors have followed the trend led by CMMI by implementing a variety of value-based programs with a diverse group of providers, especially ACOs and clinically integrated networks (“CINs”). ACOs originated from the MSSP part of PPACA, and many providers use the ACOs formed for MSSP purposes as a platform to develop relationships with commercial payors. CINs refer to a group of providers that are organized based upon the principles of clinical integration. (11) ACOs and CINs are not mutually exclusive, and many ACOs are organized to operate on the basis of clinical integration. This article reviews value-based contracting models between payors (government payors and commercial payors) and providers and discusses the relevant legal, regulatory and valuation issues arising under the value-based contracting arrangements in both Medicare and the commercial market. (12) Click to continue to the full article. 

Micro-Hospital Real Estate: Six Key Considerations

Written by: Victor McConnell & Anne McGinn 1. What is a micro-hospital?: A micro-hospital is broadly defined as a fully-licensed, semi-acute inpatient facility with anywhere from 15,000 to 50,000 square feet and five to fifteen inpatient beds which provides typical “core services” including an emergency department, an inpatient pharmacy and lab, and imaging. Other additional services include women’s services, dietary services, primary care and surgical services. Micro-hospitals seek to provide services at a lower cost to patients as compared to similar services performed at a larger hospital facility. Additionally, these services are provided 24 hours a day, seven days a week. 2. History, Current Supply & Key Players: Emerus is the nation’s first and largest operator of micro-hospitals, with 28 micro-hospitals currently in operation nationwide and 20+ new facilities under development through joint-venture (“JV”) partnerships. Emerus’ JV partners include Baptist Health System, Baylor Scott & White, SCL Health, Dignity Health, the Hospitals of Providence, Saint Alphonsus, Integris, Allegheny Health Network, Memorial Hermann and Baylor Health Care System. Although Emerus was the first, many operators and developers have since entered the micro-hospital sector. An overview of some recently developed micro-hospitals is discussed below:
  • Baptist Health runs six micro-hospitals out of San Antonio;
  • Baylor Scott & White opened its eighth location (Summer 2017) in Grand Prairie, Texas. “Baylor Scott & White and Emerus officials have worked with Duke Realty to develop and open six other emergency medical centers between 2014 and 2015 in the Texas cities of Keller, Murphy, Rockwall, Burleson, Colleyville and Mansfield.”Their seventh location in Colleyville, Texas comprises a 20,000-square-foot facility with seven emergency department (“ED”) beds and eight inpatient beds.
  • CHRISTUS Health opened Louisiana’s first micro-hospital in 2017, with CHRISTUS Health Shreveport-Bossier's CEO, Isaac Palmer, quoted as saying "The days of us building 200,000-square-foot hospitals are over."
  • Dignity Health has one micro-hospital in Phoenix with another on the way and four “neighborhood”/micro-hospitals opening by Q2 of 2018 in Las Vegas.
  • The Franciscan Alliance (headquartered out of Indianapolis, Indiana) recently constructed a 20,000-square-foot facility for $12 million. The facility features 12 emergency exam rooms and eight inpatient beds, along with a full-service pharmacy and lab, with CT and MRI imaging.
  • Hospitals of Providence opened a 40,000-square-foot micro-hospital in Horizon City, Texas (outside of El Paso) on September 6, 2017 through a joint-venture partnership with Emerus Holdings;
  • Integris Health reportedly plans to open at least four micro-hospitals in Oklahoma City (far west OKC, northwest OKC and Del City) over the next two years with each facility featuring eight to ten emergency treatment bays and eight to ten inpatient beds. Integris’s Moore micro-hospital will be 50,000 square feet and is set for a completion date of January 2019;
  • SCL Health has developed four “community hospitals”/micro-hospitals in Denver with their typical size being approximately 38,000 square feet (their Southwest Facility opened in May and features two operating rooms).
  • St. Luke’s Health System is planning to supplement its existing hospitals with four plus micro-hospitals featuring eight to ten beds.
  • St. Vincent Health has plans to build four micro-hospitals with “seven private emergency rooms, including one for trauma patients and four in-patient rooms for as many as eight overnight patients” per facility.
Click to continue to the full article.

CMS Guidance May Require New Strategies for Short-stay Hospitals

Written by Kevin McDonough and Kyle Rizos Current quality and cost-cutting trends are taking patient care away from large, inpatient focused hospitals towards lower acuity settings. Subsequently, there has been an increase in the construction and operation of short-stay hospitals. Micro-hospitals for example, have become increasingly common as a way to serve markets with convenient care offerings that have inadequate demand for full service hospitals. Plus, there are hundreds of specialty and surgical-focused hospitals, many of which have considerably more outpatient care than traditional hospitals. As a result, CMS is beginning to pay closer attention to what it means to be a licensed, acute care hospital and eligible to receive the reimbursement premiums that accompany hospital licensure when compared to lower acuity, outpatient facilities. Specifically, CMS has taken a more active role in introducing policy and guidance aimed at reducing the cost of patient care by clarifying the characteristics that should be exhibited by an acute care hospital. While most general acute care hospitals would easily exceed the stated inpatient threshold to be considered “primarily engaged” and eligible for hospital reimbursement, non-traditional hospital providers should understand CMS’ current guidance related to this standard. It is critical for these short-stay hospitals in particular to be aware of changing CMS policy and guidance. These new standards could impact their financial performance, organization structure or licensure requirements. In fact, it may be that some short-stay hospitals around the country will need to rethink strategy in order to ensure compliance and a sustainable business. Click to continue to the full article.

Compensation and Benefits: Employee Costs Bear Scrutiny, Deliver Results

With contributions from Jen Johnson Healthcare leaders have to address physician compensation, because physicians understand that the third-party payers are now reimbursing not just fee for service, but also for quality and shared savings,” says Jen Johnson, managing director and chief commercial officer with VMG Health, Dallas. “The physicians are typically the ones who drive the clinical outcome and the shared savings, and they want to participate in the incentives that are coming to the health system.” The underlying shift of healthcare payments from a fee-for-service model to payment for performance is affecting healthcare compensation at every level. The impact of this shift is evidenced by the ongoing efforts of many health systems and hospitals to determine how best to compensate physicians to account for their contributions to quality. But that proposition frequently is not as straightforward as it first appears. “It gets tricky, because most physician payment models that are a year or two old are basically fee-for-service models,” Johnson says. “So you want to move to value-based purchasing, but you've got these old models in place. You're trying to have them work together, which sounds great. But that raises a compliance issue in making sure that you can support your payments to physicians as fair market value.” And that task, too, has become more complicated than it used to be. Years ago, employers periodically would look at surveys to establish benchmarks to use in determining fair market value of physician services. But with the evolution of payment plans away from strictly a fee-for-service basis, that no longer works. “Although fee-for-service and value-based purchasing are coexisting in many facilities, most salary surveys do not break out, or even reflect, how much is allocated for quality or shared savings payment,” Johnson says. “So with that data no longer readily available, the guidance for determining fair market value is limited.” Click to continue to the full article.

What is the Certificate of Need (CON) in Your Transaction Worth?

Published by AHLA A Certificate of Need (CON) is a permit granted by a state authorizing a health care facility to establish, modify, or construct certain health care institutions, and to initiate certain health care services. In essence, obtaining a CON is a prerequisite for health care facilities to receive state licensure. Without the CON and subsequent licensure, a facility would not be able to contract with payers, treat patients, or operate. In most instances, once the CON has been implemented (i.e., the proposed construction or modification is complete) and licensure granted, the CON is no longer a unique asset, but rather a component of the license. Therefore, a CON can be viewed as either a legal right that has not yet been implemented or as part of an entity’s license. CON laws are intended to help curtail growth in health care costs by preventing unnecessary duplication and allowing coordinated planning of health care facilities and services. CON programs are not federally mandated. Currently, 35 states and the District of Columbia have some form of CON regulation (see figure 1). CON requirements and program complexities also vary from state to state. For example, Tennessee CON law covers 23 types of health care institutions, services, and related activities, (2) whereas Ohio CON law applies only to long term care facilities. (3) With so many states regulating health care facilities through CON laws, companies, attorneys, and consultants should be aware of how CON laws may affect a particular transaction. At the outset, it should be noted that most states place significant legal restrictions on the transferability of a CON. For example, Tennessee law prohibits the “sale, assignment, lease, conveyance, purchase, grant, donation, gift or any other direct or indirect transfer of any nature whatsoever of a certificate of need.”(4) While it is risky to make generalizations about CON rules across state lines, it is more likely than not that a CON cannot be freely sold or otherwise transferred as an independent asset, but rather be sold as part of the purchase of an entire organization/entity or after going through some regulatory process concerning the transfer. Click to continue to the full Certificate of Need article. This article is a part of the AHLA Healthcare Transactions Resource Guide.