United States: Health Care MarketTrends | September 2019, Issue 2

Last Updated: September 23 2019
Article by Jana L. Kolarik, Christopher J. Donovan, Roger D. Strode and Judith Waltz

Welcome to Foley & Lardner LLP's Health Care MarketTrends. In this issue, we examine private equity investment in specialty areas of the health care industry, specifically dermatology and orthopedics.

Positive or Perilous: The Impact of Private Equity on the Health Care Industry

The U.S. health care industry is currently undergoing a transformation to consumerism. Patients are no longer passive recipients of health care services, but have begun to actively participate in managing their own health. They seek an experience similar to that which they experience during online shopping—services that incorporate clear and compelling communication with convenience.

As a result, the health care industry is slowly adopting strategies successful in the retail market segment—developing locations that answer the consumer's emphasis on convenience, adopting lower cost, less capital-intensive delivery systems, and creating solutions that optimize scale within local markets. Health care is "moving to meet people where they are"—both physically and experientially by growing outpatient market share and improving facility aesthetics, improving technology access, offering transparent pricing, etc. Since consolidation and efficiency are watchwords of the private equity investor, this alteration of a business model for maximum audience appeal is extremely attractive. Success, then, depends on finding a physician partner in a specialty area such as dermatology, dental, vision, urgent care, and other segments who is open to blending the retail and health care missions.

Private equity deals in the U.S. health care market more than doubled over the past decade, jumping from 325 in 2008 to 788 in 2018, according to PitchBook. Private equity in particular has historically been attracted to ancillary service offerings resulting from the increase of outpatient procedures as well as falling reimbursement levels, which make greater scale and scope increasingly favorable.

Private equity investors bet on what a company could become rather than what it is. Aligning a number of similar practices can increase the size and scale of offerings, thereby improving leverage in negotiations with physicians and payers. For this reason, private equity investors view fragmented industry segments—like dermatology and orthopedics—as attractive profit-generation platforms. For example, in 2011, only one private equity investor was present in the dermatology market; in 2018, there were over 30 such investors.

The Rise in Dermatology Private Equity Investment

According to a 2018 report authored by Provident Healthcare Partners, "Dermatology has been one of the fastest growing subsectors within physician services in recent years. The $13 billion market is expected to grow at a rate of 5.8 percent to upwards of $16 billion through 2019." The dermatology sector has been very active in terms of M&A activity. Private equity, again, plays an important role in the large consolidation trend in dermatology.

The dermatology niche has been, and continues to be, targeted by private equity investors for a variety of reasons: its status as a growth market, a durable recession-proof segment, the opportunity for consolidation, its retail component, and repeatable customer population. Dermatologists, in turn, view private equity as a way to shift some of the administrative burdens—particularly regulatory compliance, to renew their focus on patients, and, unsurprisingly, to achieve personal financial stability.

But even in a perceived win-win relationship, there are risks to consider. By its very nature, the private equity business model is based on buying for the purpose of selling for a profit for investors and involves taking on debt to finance deals. Practitioners who accept private capital can lose decision-making control and experience greater pressure to grow the practice at an accelerated rate.

Orthopedic Practices Welcome Private Equity Investment

The aging population and its demands for quality specialists will keep the health care industry (for lack of a better term) "healthy" for the foreseeable future. As such, private equity investors continue to identify specific services seniors will require as they age. This exploration has revealed (1) a dramatic increase in hip and knee replacements and (2) the migration of those surgeries to less expensive outpatient settings. The health care industry could, very likely, expect to see a flurry of investment from private equity into orthopedic practices over the next five years.

Two surprising factors fueling growth in this space include an increase in the number of procedures that the Centers for Medicare & Medicaid Services (CMS) now allows to be done in an outpatient setting, which is encouraging to investors, and falling reimbursement rates, which causes practitioners concern. This trend has allowed private orthopedic practices to develop alternatives to partnering with local health systems and create new facilities with a variety of patient services, such as physical therapy, urgent care, X-ray, MRI, pain management, durable medical equipment (DME), and more. Trends within the health care sector continue to favor large providers with scale, strong management, strategic vision, and access to capital. The recent partnerships between investors and orthopedic practices will surely be the first of many in a wave of outside investment into the orthopedic space.

One thing to note is that unlike traditional "retail" practices, such as dermatology, orthopedic practices involve very little self pay, and the creation of scale is expensive. Moreover, orthopedic surgeons tend to be very entrepreneurial and independent and may resist outside investment. These factors are going to put pressure on financial investors to prove their merit to these practices.

It is important for investors and orthopedic physicians alike to consider the following before investing: valuations, recasting EBITDA, purchase price and tax, the impact of Ambulatory Surgery Centers (ASC) or other outpatient settings, clearly defining ownership of ancillary services, diligence, and regulatory compliance.

Legal Update

While there are pros and cons to private equity investment in any specialty area, it is important to investigate the following if you are engaged in these types of transactions.

Anti-Kickback Issues - The Federal Anti-Kickback Statute (AKS) makes it illegal to knowingly and willfully offer, pay, solicit or receive remuneration, in cash or in kind, in order to induce or reward the referral of business reimbursable under federal health care programs (e.g., Medicare and Medicaid). The most common AKS risk attendant to orthopedic deals is often found in ASC investments by the group or its physicians. We often see private equity investors take substantial stakes in ASCs owned by practices or physicians, thus making the AKS risk something relevant to those investors.

Stark Law Issues - The Stark Law is a federal anti-referral statute that prohibits certain referrals by a physician for designated health services (DHS) to any entity with which the physician has a financial relationship, whether through ownership of the entity or a compensation arrangement with the entity. The Stark Law is of concern to investors because a physician's referrals for DHS to his or her own group practice can implicate the law, specifically when the practice owns and bills for services such as imaging, physical therapy, DME, and orthotics. Violations of the Stark Law can render referrals to the practice illegal and can negate the practice's billings to Medicare and Medicaid (because they are not payable if billed in violation of the Stark Law), requiring repayment to CMS along with possible penalties and fines.

Billing and Coding Issues - It is common (and highly recommended) for acquirers to undertake audits of the coding and billing practices of acquired groups. Persistent mistakes in the coding and billing of procedures or services can affect the quality of a practice's earnings, to say nothing of invoking compliance risks, which may not otherwise surface until after the deal has closed.

Where We Are Going

Visit Foley at the ACC Annual Meeting taking place from October 27-30, 2019, in Phoenix. Spend time with us at Booth 524 or attend our educational sessions, including "Anatomy of a Deal: Health Care Style," on October 29 from 9:00 a.m. – 12:30 p.m. MT.

The Association of Community Cancer Centers (ACCC) 46th Annual Meeting & Cancer Center Business Summit (AMCCBS) is scheduled for March 4-6, 2020, in Washington, D.C. Representatives from Foley, in conjunction with the ACCC and the CCBD Group, as well as oncology leaders from across the country, will address the intersection of business, technology, and policy. Private equity investment and nontraditional funding of oncology services will be covered during this annual event. We encourage you to join us.

For a complete listing of where we are going,  click here.

Foley Resources

We invite you to subscribe to Health Care Law Today, Foley's Health Care Blog. Health Care Law Today provides timely updates on health care legal issues. Subscribers receive the most recent information on M&A activity, considerations for private equity investors, health care policy, digital health and telemedicine, health care regulatory actions, and much more.

In addition to the written blogs, we are excited to announce the launch of the Health Care Law Today podcast, your connection to timely health care legal updates. We invite you to listen to Orthopedics in the New Millennium: The Evolution of the Business of Orthopedic and Spine Medicine, in which Partner Roger Strode is joined by Dr. Todd Albert, Surgeon in Chief, Chief Medical Officer, and Korein Wilson, Professor of Orthopedic Surgery at the Hospital for Special Surgery (HSS).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions