1. Management and Co-Management Arrangements.  We have seen a renewed interest in both management and co-management type arrangements between hospitals and physicians for various service lines.  This is likely due in large measure to the elimination of the “under-arrangements” or “contractual joint venture” model of hospital-physician collaboration.  Under the management agreement or co-management agreement, a group of physicians or a newly-formed management entity owned at least in part by the physicians takes responsibility for managing certain clinical and/or administrative functions related to the operation of a particular hospital service line.  Because this is often a financial relationship between a hospital and referring physicians, the management agreement or co-management agreement needs to satisfy the Stark exception for personal services arrangements and management agreements.  For example, the arrangement would need to cover all of the services to be furnished by the physician or physician management company; the services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement; the compensation to be paid over the term of each arrangement is set in advance, does not exceed fair market value, and is not determined in the manner that takes into account the volume or value of any referrals or other business generated between the parties; the agreement must be in writing; the agreement must be for at least one year, etc.  The key concept for management agreements is that the compensation must reflect fair market value paid for services actually performed by the physician or the physician entity.  The best way to obtain an accurate fair market value assessment is to engage a third party appraiser to conduct a valuation.  In this context we always strongly recommend obtaining a third party valuation.  Under this model, a small percentage of the overall fee paid can be devoted to the achievement of certain quality or efficiency measures or benchmarks.  We have seen hospitals and physicians using this model where equity ventures are not possible due to legal or economic constraints, and also in other areas where it makes more financial sense to have a management agreement versus an equity arrangement.

2. HOPD vs. ASC.  Another recent trend that we have noticed is that the decision between operating a provider-based hospital outpatient department (“HOPD”) versus a free-standing ambulatory surgery center (“ASC”) has become a much closer call when considering physician alignment and financial involvement.  Over the last ten years or so there was tremendous growth in the free-standing ASC space with an increasing number of physician-hospital joint ventures, and in non-certificate of need states, a growth of physician owned surgery centers.  Recently this trend has shifted.  As you probably know, Medicaid reimburses ASCs at approximately 60% of the current HOPD rates.  As a result, often times in terms of overall gross revenue or reimbursement, a hospital outpatient department will generate more revenue than an ASC.  However, physicians cannot own directly in an HOPD.  In an ASC, although physicians can own equity interests, there is also risk associated with that investment.  In other words, when a physician invests capital in a surgery center, there is a lot of upside if the center is financially successful.  By the same token there is also substantial downside risk in that the investment may be lost or additional capital calls will be required to keep the surgery center operating. In addition, an equity investment in a surgery center could also require debt guarantees which will not be required in HOPD management relationship. Similar to the management arrangement model discussed above, parties often choose to use a management arrangement in connection with an HOPD in order to more closely align physician interests with the outpatient services being provided.  The downside of a management arrangement from a physician’s perspective is that the income is generally fixed and does not vary no matter how successful the HOPD is.  On the other hand, there is not as much risk as investing in an ASC.

3. Call Coverage and Employment of Physicians.  We have seen renewed interest in both compensating physicians for call coverage as well as direct employment of physicians by hospitals.  Using cardiology as one recent example, reimbursement cuts have caused that particular specialty to move strongly towards direct employment by hospitals.  Just a few years ago this would have been unheard of in the cardiology specialty.  Other specialties have experienced this in the past.  In addition, due to a number of factors including lifestyle choices and shortage of certain specialties, a number of hospitals are moving towards compensating for call coverage.  There are two exceptions to the Stark law that are potentially applicable to call coverage arrangements – the personal services arrangement exception and the fair market value exception.  From an Anti-Kickback Statute perspective, there are also two recent OIG advisory opinions that deal directly with the issue of call coverage.  In those advisory opinions, OIG highlights a few characteristics that weigh in favor of permissible arrangements.  For example, in call coverage arrangements it is critical that the agreement cover substantial, quantifiable services provided by the physician, and the compensation is consistent with fair market value.  It is also helpful if the call coverage compensation is offered uniformly to all physicians in the relevant specialties rather than just a select few.  Care should also be taken that the call coverage arrangement is not compensating physicians for services for which they are also reimbursed by insurers or patients resulting in the physician being paid twice for the same services.

4. Mergers and Acquisitions.  Over the last year or so we have seen an increase in the number of mergers and acquisitions, both in the hospital and physician area as well as continued interest in the areas of surgery centers, dialysis facilities and radiation oncology facilities.  Again, this is being driven in part by  physician apprehension about future reimbursement rate cuts, on the one hand,  and a desire by hospitals to more closely align their physicians’ interests with their own economic and clinical goals, on the other hand.  Although financing is still not readily available for leveraged acquisitions, there has been a loosening of the credit market and at least anecdotally, quality deals are being funded to the extent that debt is required.

For the past 12 years, Pratt has been the chief of the Office of Emergency Medical Services (OEMS). Jeff Hortonhas been the acting interim director of DHSR since Bob Fitzgerald’s retirement in mid-2008.

Horton will return to his previous position as deputy director of DHSR.

The full press release can be found here.

1. Bill Sharbaugh noted that employers need to focus more on wellness programs and the health of employees. Mr. Barto acknowledged that New Hanover Regional Medical Center was also implementing incentives for its own employees to conduct an annual health assessment. In addition, he stated that in their cafeteria, for example, they charge less for healthy foods than they do for unhealthy foods (i.e., it costs less for a Diet Coke than a regular Coke and costs less for fruit than processed junk food). He also acknowledged the role N.C. Prevention Partners played in implementing this program.

2. Mr. Barto stated that New Hanover Regional Medical Center was in the process of expanding its homecare business. He believes it is critical for healthcare providers going forward.

3. Mr. Barto also mentioned that he views health information exchanges as a key component to improving efficiency and quality in healthcare. Further to Mr. Barto’s point, Mr. James emphasized the need to “tighten the transitions in care”. For example, when a patient moves from acute to post-acute to long-term or home care, there needs to be better coordination and attention to the transition.

4. Mr. James also stated that there needs to be more transparency, generally, in the healthcare industry. Mr. Scott agreed on greater transparency on price as well as transparency on quality and outcomes data.

5. One of the innovations Mr. Sharbaugh mentioned was that PPD has an in-house medical clinic for routine medical problems of its employees. We have seen a number of large employers take this route to help combat workplace absenteeism due sickness and doctor’s appointments for minor illness.

6. Overall Mr. Barto was generally bullish on healthcare in Wilmington but not nationwide. He stated that the Wilmington area has one main hospital, cooperative physicians and excellent post-acute care. He said that formula would lead them to success where others would face challenges. Overall the mix should allow that area to respond more quickly than others to change.

7. Overall the presenters were generally upbeat about the prospects for healthcare in the future, viewing the recent legislative regulatory changes and the current difficult economic environment more as opportunities for success rather than challenges or insurmountable difficulties.

The Wilmington Business Journal did a fantastic job putting on this conference.

Four key trends emerged from our panel discussion:

1. Greater Physician Integration. Several of the panelists highlighted the fact that they saw increasing integration between hospitals, physicians and ASCs and other outpatient services.  These come in the form of joint ventures, co-managements and direct employment of physicians by hospitals. This is especially true as several provider types are moving towards an accountable care organization (“ACO”) model, where closer integration and shared cost savings and efficiencies will become critical.  In particular, Jennifer Schenk pointed out that there is increasing integration in technology where hospitals and physicians are increasingly using the same information technology and collaborating on the types of medical supplies used in patient care. In the clinical setting physicians are having greater input into the way care is delivered. Similarly, in management, physicians are having more involvement with (and responsibility for) achieving efficiency and quality improvement.  Increased integration is also being seen within existing organizations.  For example, Ted Lotchin identified that there has been a renewed focus at UNC to more tightly integrate the UNC Hospitals with UNC Physicians and Associates and the recently established Triangle Physician Network, all of which are under the UNC Healthcare System umbrella.
2. Decreased New Development and Continued Funding Challenges. As specifically pointed out by Jeff Fox, the number of de novo or new development projects in the healthcare world has drastically dropped the last couple of years.  This is due in large part to economic factors and, as downward pressure on reimbursement continues, the healthcare industry and the capital markets have much less appetite new investments.  In certain states there is even a perceived over-supply of certain types of provider types.  In several states across the country, transactional activity has centered on turn-around projects and mergers to achieve economies of scale rather than new development of healthcare facilities.  In addition, funding challenges continue for any projects that require debt financing. Although we have seen somewhat of a loosening of the credit markets, lending is still limited to those most creditworthy projects that need financing.
3. Distributed Care Models. Andrea Wever highlighted the key trend of distributed care models with which Carolinas Healthcare System has had direct recent experience.  In November 2009 it opened its first “healthplex” or health pavilion location at CMC-Steele Creek.  This is the first health facility of its kind in the region and features eight emergency department beds, two observation beds as well as a laboratory, diagnostic imaging, a pharmacy and a medical office building for physicians.  This is a facility designed to be open 24 hours, but is akin to a “hospital without beds” where patients can receive urgent and emergency care but is not intended as an overnight or long term in-patient hospital care setting.  This highlights the trend away from a single hospital facility model to a more distributed model of care with new urgent care and healthplex-type facilities in outlying areas where population growth and market forces would not justify building an entirely new in-patient tertiary care facility.
4. Consolidation. All of our speakers highlighted the movement toward consolidation across all areas of the healthcare industry.  For example, Jeff Fox mentioned that much of his company’s development efforts are focused on adding existing centers to their chain in connection with physicians and hospitals.  Similarly, Carolinas Healthcare System now manages more hospitals than it owns.  This is true as well on the physician side as evidenced by OrthoCarolina, which is the largest leading orthopedics group in the region.  From hospitals to ASCs to physician groups, all of these areas are experiencing tremendous consolidation and we expect this trend to continue for the foreseeable future.

In addition to the panel discussion, Howard Salmon’s presentation on the “State of Healthcare 2010:  A Watershed Year” was excellent.  He highlighted a number of key statistics regarding healthcare costs including expenses related to medical device spending, the impact of chronic diseases and obesity, and the interplay of cost with quality.  He went on to describe some of the challenges and opportunities that the healthcare reform legislation poses.  He repeatedly stressed the need for greater focus on value and quality in delivery of care.  Premier, for example, is involved in key solutions such as providing focus on value-based purchasing, pay for performance and the soon-to-be implemented accountable care organization (ACO) model.  If you would like a copy of Howard’s presentation, please feel free to contact one of us directly.

Although not typically on this scale, these types of investigations and inquiries into billing and reimbursement practices have been increasing in frequency and intensity over the past several years and especially over the past 18 months. To give you a sense of how important this issue is, we have begun recommending that anyone planning to acquire a company that bills payors or Medicare directly for goods or services conduct a billing and coding audit. It is quickly becoming a standard part of our recommended due diligence process.

Complimentary Webinar

Post-Acute Care Investments:
Key Business, Deal Structure & Diligence

Thursday, June 24, 2010
12:30 – 1:30 p.m. (ET) | 11:30 a.m. – 12:30 p.m. (CT) | 9:30 a.m. – 10:30 a.m. (PT)

Please join us for the second in a series of informative webinars where we will delve into investing in different healthcare segments. Our second program deals with the post-acute sector, specifically skilled nursing facilities (SNFs) and long-term acute care hospitals. Topics will include:

• An overview of business models, revenue generation and key players
• Options for structuring deals
• Key diligence considerations for each niche

Who Should Attend

Private equity funds, hedge funds, venture capital firms and operators considering or pursuing strategic acquisitions and divestitures.

Presenters

Michael Megill, M.B.A., Principal of LW Consulting, Inc.
Jason Greis, McGuireWoods (Chicago)
Victor Moldovan, McGuireWoods (Atlanta)
Amber Walsh, McGuireWoods (Chicago)
Krist Werling, McGuireWoods (Chicago)

Online registration is available. Login information will be sent to registrants prior to the event. For more information, contact David Bellamy at 804.775.4755 or dbellamy@mcguirewoods.com, or Amy McGlynn at amcglynn@mcguirewoods.com.

McGuireWoods is ranked among the top 10 largest law firms by the American Health
Lawyers Association.

http://www.justice.gov/atr/public/speeches/258898.htm

I usually don’t directly plug my firm, but in this case I’ll make an exception. McGuireWoods has fairly deep experience with healthcare antitrust matters, generally, and more specifically as they will relate to ACO’s in the coming years. If you have any questions, please let me know and I can connect you with the right people.

In this issue:

1. North Carolina Healthcare Leaders Reception
2. Four Trends for Hospitals and Physicians – Management Arrangements, HOPD vs. ASC, Call Coverage and Mergers
3. Upcoming Events
4. Recent White Papers

The State of Healthcare in North Carolina: Hospitals & Surgery Centers

Complimentary Seminar
Space is Limited

May 26, 2010
3 – 6 p.m.
The Ritz-Carlton, Charlotte
201 East Trade Street
Charlotte

McGuireWoods invites you to join us for a limited-attendance event covering some of the top issues impacting ASC and hospital revenue streams as well as the role of regulatory reform in the shifting care delivery model. Our interactive panel discussion will feature some of our region’s healthcare leaders. A question and answer session and networking reception will follow. Attendance is limited to 50 to maximize lively discussion and interaction among attendees and participants.

AGENDA

3 – 4 p.m. – The State of Healthcare 2010: A Watershed Year
Howard Salmon, MHA, FACHE, Vice President, Premier Consulting Solutions

4 – 5 p.m. – Panel Discussion

Growth of ASCs and Co-Management Arrangements
Jennifer Schenk, General Counsel, OrthoCarolina

Physician Employment and Challenges for Academic Medical Centers and Faculty
Ted Lotchin, Assistant General Counsel, UNC-Chapel Hill

Hospital Management Strategy and the Healthplex Model
Andrea Wever, Associate General Counsel, Carolinas Healthcare

Decline of de novo ASCs and Growth of Hospital Joint Ventures
Jeff Fox, Vice President of Development, Surgical Care Affiliates

5 – 6 p.m. – Networking Reception

MODERATORS

Barton C. Walker, Attorney, McGuireWoods LLP
Elissa K. Moore, Attorney, McGuireWoods LLP
Elaine L. Gilmer, Attorney, McGuireWoods LLP

Space is limited. Online registration is now available. For more information, contact Amy Norris at anorris@mcguirewoods.com or 704.343.2228.