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What’s the real state of health care in America?
Depends on whom you ask. And how you ask the question. Truth is, with a keen eye, an open mind and an understanding of the role of the federal government as a regulator, a purchaser and a funder of health care interests, any company can mitigate its risks materially or reap a harvest that otherwise could not be expected.
By Aaron Dalton


Anywhere you turn these days, you face dire news about the U.S. health care system. A recent article in The Economist, for example, took a close look at health care around the world and concluded that while "everyone, it seems, has a health problem," no country "has a bigger health problem than America."

According to The Economist, Americans spend twice as much of their GDP (16 percent) on health care as the average rich nation, despite the fact that the U.S. remains the only one of those nations without universal health insurance. Indeed, the magazine pointed out, some 46 million Americans are now uninsured, and 60 percent of the nation’s $1.9 trillion health care spend is currently being picked up by the government, whether through Medicare, Medicaid or via tax-subsidies for employer-provided health coverage.

Going deeper, The Economist noted that health spending in the U.S. has increased 40 percent since 2000, while average insurance premiums have risen by some 60 percent, and federal health spending is predicted to double as a share of the economy by 2020.

Other observers, including such groups as the Commonwealth Fund and the Center for Studying Health System Change, have looked critically at a system that is so "fragmented" and inefficient that, the CSHSC suggests, "it is a misnomer to call [it] a system at all."

The underlying issue in this environment, suggests former Senator John Breaux, a senior counsel with Patton Boggs, "is finding ways to make health care affordable." The question, he says, "is simple: How do we pay for it?" The problem, he adds, that everyone involved in health care faces is "finding new and creative ways to meet this challenge, ranging from preventative health care to information technology to innovative insurance programs."

Given the importance of health care—and the fact that this is one industry that, by definition, can’t be offshored or imported—it’s clear that the U.S. health care industry can’t afford to wring its hands, waiting for an overarching solution to emerge. Companies and consumers, faced with greater costs, have no choice but to look for alternatives. Investors and industry stalwarts, as a matter of survival, are intent on finding new options. And all the while, government, the most powerful payor and therefore the most powerful player in the game, is taking a range of actions that are sure to ripple through the economy.

That means that no matter where a company sits on the health care playing field, whether it’s an active player in the industry, a vendor to a health care provider, an investor in health care companies or simply an employer with a workforce to insure, overcoming the obstacles, meeting the challenges, taking advantage of the opportunities, understanding the role of government and winning the health care game are all possible if the company pays attention, finds the right advisor and takes a proactive stance.

"A challenge to most capital providers to the health care sector is that they tend to underestimate the economic impact of the presence and behavior of the federal government," says Jim Chadwick, a partner at Patton Boggs who leads the firm’s Corporate Finance practice. "It is imperative that any institution placing debt or equity capital at risk underwrite the specialized risks and opportunities posed by the federal government’s dual roles as the primary regulator and the primary funding source of this country’s massive health care market."

Here are four key places to start:

1. Government Reimbursement

What it is: What type of impact can government polices have on the health care industry? Consider that in the mid-1990s, when the federal government drastically changed the way it reimbursed nursing homes for providing care, many of these nursing homes were forced into bankruptcy. The government is such an important health care payor that any significant changes in the way it reimburses providers create major repercussions throughout the sector.

What could happen: Charlie Miller, the partner who chairs Patton Boggs’ Business Department nationally, says there are a number of issues in play around Medicare reimbursement of hospices, specialty hospitals and nursing homes. Although hospices originally started in the nonprofit realm, hospice care has become a big for-profit business. If the rules change in a way that lowers government reimbursements to these providers, Miller notes, many players will face challenges similar to those the nursing home industry faced 10 years ago.

How to win: Understanding the implications of current and future trends in reimbursement is essential, says Rossi Felix, managing director of GMAC-RFC Health Capital, which provides financing to health care service providers. Felix’s company does this by employing an analyst whose sole responsibility is to follow Medicare regulatory issues. As a result of her analysis, Felix has steered the company away from investing in such areas as long-term acute care and specialty hospitals that are going through myriad reimbursement changes. Instead, he prefers to build a portfolio reflective of the largest health care sectors—hospitals, nursing homes and home health.

Felix believes that the continuing outsourcing trend among large hospital systems is creating opportunities for GMAC-RFC to invest in the growth of new businesses. " One sector where we are seeing a lot of growth is the outsourcing of teleradiology," says Felix. "Hospitals, radiologists and imaging companies that perform MRI and CAT scans are outsourcing the reading of those scans to other companies." Felix also says the e-health arena is ripe for investment, with a number of companies that store huge amounts of patient data for hospitals and clinics starting to move beyond the VC stage and beginning to generate profits.


2. Fraud Enforcement

What it is: Like any highly regulated field, health care is prone to some degree of error and confusion, as well as lapses in judgment and worse by profiteers looking to stretch financial rules for their own benefit. Fraud can take many forms, including civil false claims, criminal kickbacks, adulteration or misbranding of pharmaceuticals or medical devices, and manipulations of cost and price reporting to the government. Every segment of the industry is vulnerable to the enforcement efforts of the Department of Justice, especially under the expansive civil False Claims Act and its qui tam (whistleblower) provisions.

What could happen: According to Laurence J. Freedman, a Washington, DC based partner in Patton Boggs’ Health Care Practice, the Department of Justice has made health care enforcement a top priority, and this shows in the number of actions taken and the dollars recovered. Freedman, who was previously an assistant director in the Department of Justice’s Fraud Section, says that civil recoveries in the last fiscal year yielded approximately $1.5 billion, largely from health care settlements in the amount of over $1.1 billion.

"Health care cost and safety are uppermost in the minds of state attorneys general," says Nick Allard, a Patton Boggs partner and deputy director of the firm’s Public Policy and Regulatory departments. In particular they have demonstrated that they want to protect consumers from escalating costs. Allard says that the AGs have focused their attentions on pharmaceutical pricing. "The pharmaceutical, biotech and device industries are in their crosshairs," he says.

A sustained and intense government crackdown on fraud should reduce cost increases due to, for example, illegal off-label promotions and price manipulations, but it will raise costs in other areas as firms are forced to defend themselves from whistleblowers and proceed cautiously in areas of legitimate business practices. The qui tam provisions under the False Claims Act, Freedman notes, give whistleblowers an enormous incentive to file claims since they may stand to get 15-20 percent of the proceeds of any settlement.

How to win: Investors and companies involved in M&A activity must be extraordinarily careful in conducting due diligence. "You need a deep understanding within your business niche of what is going on in the reimbursement and enforcement world," says Freedman.

As to government investigations, "companies must also have a strategic approach to compliance and responding to government investigations," he adds, "especially in light of the ever-changing enforcement environment that lacks clear rules or guidance. It is essential," he stresses, "to understand the government’s enforcement objectives, not just its tactics."

For companies that fear they might find themselves an AG’s target, Allard recommends an internal audit. "Make sure you are in compliance and that you have a good understanding of how your business objectives also advance the public health," he says.

Should a company find itself facing an AG fulminating against outrageous pricing, for example, the best defense is solid preparation and a response on the merits. "The reasons for high prices are legion," says Allard. "Your prices can be high, for example, because you are complying with federal and state pricing regulations, because of the enormous cost of discovering and developing drugs, or because the drug you are selling provides a cost-effective alternative to hospitalization." The key, he says, is being prepared and having an internal consensus and pricing rationale to advance on the merits of a proactive defense.


3. Health Savings Accounts

What it is: Health Savings Accounts (HSAs) are a product of the Medicare bill of 2003 and part of a trend toward consumer-driven health care, which some believe will force the system to improve efficiency and effectiveness by encouraging consumers to patronize only health providers who provide good outcomes at reasonable cost. Used either alongside high-deductible health plans (HDHPs) or by people with no other health insurance, HSAs allow employers and/or employees to put away money for health expenses on a pre-tax basis.

What could happen: As health costs continue to rise, the big payors supporting the system—government and employers—are feeling the pressure. Both groups have already tried to shift some costs to individuals, and John Jonas, a partner in the Washington, DC, office of Patton Boggs and chair of the firm’s Public Policy and Regulatory departments, believes that more cost-shifting is on the way. HSAs are one way to make the shift more politically palatable, but placing the burden of paying for health care largely on the shoulders of individuals will affect the whole system. "The net bottom line is that employee resources are smaller than employer resources," says Jonas. "The net amount of money going into health care would shrink. The question is: Can a system supported until now by a big flow of dollars take the squeeze?"

How to win: If individual consumers are the ones mostly paying for health care through savings accounts, they will inevitably become more price-conscious. In that case, the provider offering the best health care at the lowest cost will win. In this scenario, "the outpatient facility beats the hospital bed, and the specialty hospital beats the general hospital," says Jonas.

While the industry has a strong incentive to make the sort of consumer-driven health care exemplified by HSAs work, it’s unclear, says Jonas, "whether competitive market forces can keep costs down. There’s not a lot of evidence that they are doing it yet, which may mean that the government has to step in with a much greater regime of price controls that tend to have their own kind of rough justice effect."

While efficiency will be key to competing in a more price-sensitive environment, Jonas points out that there will be room in the market to appeal to upscale consumers and offer a better product.


4. Health IT and Electronic Medical Records (EMRs)

What it is: In today’s medical world, information exists in silos. Patients are notoriously bad at remembering what procedures and treatments they have received over the years, and a single patient’s records are often scattered among numerous medical offices, either buried in filing cabinets or trapped in incompatible computer systems. Champions of Electronic Medical Records (EMRs) see them providing each patient with a portable medical history that can be universally accessed by health providers. Jonas says the government has been trying to incentivize the creation of such a system, but in the absence of enough progress, may just step in and force its creation.

What could happen: The government and advocates of EMRs hope they could prevent unnecessary duplication of services and give providers information on past treatments that a patient might not otherwise be able to provide. Various organizations, in the U.S. and, particularly, in Canada, are engaged in building databases of patients who have received care, called electronic health registries, as an intermediate step they hope will lay the groundwork for EMRs.

How to win: There will be lots of IT needs associated with such a scenario: health care providers and insurance companies will need help figuring out how to implement EMRs, and individuals will need guidance on using them. In a consumer-driven health care model, the first health care providers to implement and support EMRs would have a considerable first-mover advantage.


In Conclusion

Figuring out how to win at health care—by shifting costs, by making or forcing improvements, by investing wisely in growth sectors and by, of course, avoiding fraudulent behavior—is more challenging in an environment where many see an industry beset by intractable problems. In many ways, however, what some consider health care’s greatest obstacle—federal regulation and financial involvement—may in fact, be its greatest strength. At least for those companies that, with the proper guidance, can assess the risks and identify and exploit the opportunities. CT

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