Editor: Please tell us about your backgrounds.
Mills: Before joining Proskauer three years ago, Monte and I were with McDermott Will & Emery, practicing healthcare law and, on my part, tax exemption law. My 28-year healthcare law practice includes transactional and regulatory matters as well as tax and related corporate and governance matters for tax-exempt organizations.
Dube: I’ve been practicing healthcare law for 30 years. Elizabeth and I joined Proskauer to start the firm’s Chicago and Midwestern healthcare practice. Our practices are national in scope, with mine involving some international healthcare work. Nearly 100 percent of our clients are in the healthcare industry. We tend to work with our clients consummating “big deals” and navigating “big problems.”
Editor: What are the current trends in M&A within the healthcare industry?
Dube: Increasingly and for multiple reasons, U.S. hospitals and healthcare systems of all types are looking for potential partnerships or affiliations. Financially distressed organizations are seeking capital and expertise to help them weather the storm, and governmental hospitals are looking to privatize, often for the purpose of monetizing assets or balancing the budget.
We’re also seeing strong and vibrant hospitals and healthcare systems conclude that they need greater access to capital, expertise and critical mass, including a large and integrated network of physicians. Hospital boards are exploring partnerships, including mergers and consolidations with competitors or like-minded nonprofit hospitals and healthcare systems.
While local hospital boards historically have focused on maintaining local control to achieve their mission, today’s assessments have shifted, and boards are more open to the possibility that consolidation may better enhance their missions, even if that means sharing control. In broad terms, healthcare reform, with its anticipated reductions in Medicare and Medicaid reimbursement, is clearly a driver for the overall trend toward consolidation.
Editor: Please talk about the use of public funds in healthcare management.
Mills: For a long time, governmental funds have been the primary funding source for healthcare services, largely through Medicare and Medicaid. Many governmental hospitals do not enjoy additional subsidies from tax revenue; thus, there is a trend toward privatization because these organizations already are surviving (or not surviving) on their own. They perceive benefits in being able to act as private, nongovernmental players in the market, without being subject to limitations that are imposed on governmental entities, such as strict governmental guidelines for open meetings, contracting and procurement.
Editor: Do nonprofit healthcare organizations have different standards of care from for-profit providers?
Dube: This is an age-old question, and the answer is, at best, equivocal. It is not at all clear that nonprofits provide higher quality care than for-profits, and there is a similar question as to whether nonprofits provide greater access to care, particularly to indigents and underserved populations. I have seen poorly managed nonprofits as well as extraordinarily well-managed for-profits, so generalized statements about large segments of the industry aren’t particularly helpful.
Editor: Please talk about metrics for a standard-of-care assessment.
Mills: On the access to healthcare side, the metrics include the extent of charity/uncompensated care or financial assistance and other community benefits provided by the healthcare organization.
The nonprofit hospital sector is accustomed to reporting these metrics on their annual IRS filings, and it has developed measurement systems for that purpose. There is much public discussion on this topic. For instance, here in Illinois, there is lively debate on property tax exemption for nonprofit hospitals, pursuant to a Supreme Court case holding that such exemption was not allowed. In Ohio, a number of cases are being resolved the opposite way.
One frequently discussed metric pertains to the percentage of charity care and seeks to quantify the value of that care, given the hospital knows it will not be compensated. Practically speaking, this metric is almost impossible to track because all hospitals operate fundamentally on a “treat first and ask for money later” basis.
Many legislative programs and incentives are designed to address the quality and effectiveness of healthcare more broadly, focusing on populations versus individuals. Such metric allows healthcare providers to assess and allocate resources based on community needs, rather than focusing on procedures for their own sake.
Dube: Regarding quality-oriented metrics, there is a strong trend toward increased transparency in reporting. For instance, Medicare’s website provides substantial data about readmission rates and patient outcomes; however, many question whether that information actually helps the average consumer in selecting healthcare services. Further, this potential benefit relies on the assumption that the consumer has the luxury of choice in the first place.
Increasingly Medicare/Medicaid programs and private payers are moving away from volume-based assessments to value-based models like pay-for-performance; thus, there is an incentive to produce metrics that reflect better, less expensive outcomes. Specific examples include less money paid to hospitals with high re-admission rates, but more broadly reflect that healthcare reform has embraced a carrots-and-sticks approach to bend the cost curve to benefit consumers.
Editor: How can metrics figure into a healthcare institution’s marketing efforts?
Dube: One option is to correlate volume of services and quality of outcomes. If an institution performs one thousand neurosurgeries per year, it is reasonable to conclude that it will achieve better results than will a smaller hospital with lower volume. Many academic medical centers, for example, position themselves as centers of excellence, i.e., “super specialists” that provide not only tertiary care but also very advanced quaternary care. Obviously, all providers are subject to truth in advertising laws, so statements must be credible, but the goal is to attract patients who have the luxury of choice.
Editor: What are the unique issues for healthcare providers in rural areas?
Dube: Given the increasing trend towards ambulatory outpatient care, many urban hospitals and healthcare systems are establishing facilities in the suburbs, where patients with disposable incomes are more likely to seek out elective surgery and other medical procedures. These newer facilities create competition for freestanding community hospitals, which may compromise the local institution’s ability to achieve its mission while remaining independent.
Local hospitals are losing market share to competing physician practices, clinics and ambulatory care facilities in their own backyards, forcing difficult decisions about the need to join larger, more modern healthcare systems in order to better serve their communities. Conversely, nationwide, there are hundreds of small, typically rural facilities with 25 beds or fewer, known as “critical-access hospitals” that enjoy favorable Medicare reimbursement and are more likely to remain vibrant, sustainable independent facilities.
In all events, the best time to consider a consolidation is when the organization is still strong and has negotiating power. At Proskauer, we work with boards of directors and management teams to examine these strategic issues – timing being key – and then form a plan of action that enables boards to fulfill their fiduciary duty when undertaking a big deal.
Mills: Our national presence is very helpful because it enables us to take valuable lessons and successful strategies from our work in one state and apply them to another state or region, such as we do in the Midwest.
Editor: Please discuss the potential impact of healthcare legislation regardless of the Supreme Court’s pending decision on the Affordable Care Act.
Mills: With its overarching goal of transparency, healthcare reform legislation has enormous implications for both providers and employers – for instance, mandating how employers provide healthcare insurance and changing how health insurance companies function. Because many provisions have been implemented since 2010, it is difficult for me to imagine that these well-established changes will be affected, even by a Supreme Court decision that no part of the law can survive.
Dube: Much of the legislative action will occur at the state level and will be driven by budgetary concerns, such as those arising from Medicaid’s extraordinary financial distress. We anticipate action in Illinois and at the federal level to reduce healthcare expenditures by creating both incentives for payment based on performance and disincentives for inappropriate or unnecessary care. This kind of action contributes to the momentum toward consolidation that we’ve been discussing.
Moreover, these legislative pressures on the healthcare industry are magnified by regulatory requirements, with resulting enforcement issues. One irony we now see is that federal and state governments are, on the one hand, encouraging consolidation through legislation that incentivizes economies of scale and, on the other hand, stepping up antitrust efforts that discourage that very same consolidation. For some organizations, the decision will be clear, so our efforts center on analyzing the markets, often in a broad geographical context, and on structuring transactions that will succeed in the current regulatory enforcement environment.
Editor: What are the most pressing compliance risks for healthcare organizations?
Dube: Risk number one involves the fact that the Medicare and Medicaid reimbursement system is extraordinarily Byzantine, with great uncertainty surrounding the appropriate coding of and billing for healthcare services. Increasingly the federal government is alleging that good faith reimbursement claims are false claims, which can carry penalties as high as three-times the original claim.
Further risk is associated with the complexity of the Stark Laws and regulations regarding appropriateness of financial or other relationships with physicians and other referral sources.
We work with many clients to structure deals that will fall within exceptions to Medicare and Medicaid prohibitions on self-referral, and to determine if or when a client should self-report behavior that, in retrospect, may have been inappropriate. Such analyses are a regular part of M&A due diligence we do for both strategic and financial investors (such as private equity firms).
On the M&A side, due diligence is a huge compliance issue, often involving the board of directors to ensure that fiduciary duties are met, that there is no conflict of interest and that the deal is structurally sound, in fact, bulletproof. These risks pertain fundamentally to the legal, business and reputational impact of M&A transactions; thus, the importance of properly documenting these efforts cannot be overstated.
Mills: I would add another risk factor that applies particularly to nonprofit hospitals relating to charity care and financial assistance programs. Currently, as a condition of maintaining federal tax-exempt status, healthcare reform provisions require very specific process requirements for determining the nature and extent of collection efforts from uninsured patients. While hospitals have been complying in spirit for many years, collection efforts and disclosure of financial assistance programs are now a matter of strict compliance.
Editor: Elizabeth, you’re a member of Proskauer’s Health Care Reform Task Force. Please tell us about this aspect of the firm’s healthcare practice.
Mills: Proskauer is unique in having an extraordinarily strong practice in so-called welfare benefits, which refers to health insurance and other types of non-retirement benefits, as well as our strong healthcare industry practice. As such, we are at the forefront of analyzing legislation and regulations pursuant to healthcare reform, and we are able to take a 360-degree view in its implications for the entire industry.
Of particular concern is the fact that healthcare providers are also employers and, as such, legislative and regulatory actions can hit these companies from both sides. In serving these clients, we must be fully responsive to the entire spectrum of their needs, and the Task Force page on our website offers numerous resources, including information that has served clients well in the healthcare reform arena. At bottom, the Task Force reflects the firm’s deep commitment to the healthcare industry.