As we head into 2013, we see distinct winners and losers in the new healthcare economy. This article briefly outlines some of our observations on various sectors for 2013.
1. Hospitals and health systems. Hospitals and health systems face certain tailwinds and headwinds. On the positive side, hospitals are as politically protected as any sector given their importance in almost every district of every politician. Further, they were the clear winners in the healthcare reform legislation. Hospitals and health systems are the clearest party capable of building an integrated system that can take on risk for a large percent of the payor dollar (very large physician groups can also accomplish this). Between 2009 and 2010, Medicare spent roughly $153 billion on roughly 10 million inpatient admissions and $166 million hospital outpatient services. Under Medicare payment systems, hospitals typically receive higher reimbursements than individual doctors and other providers such as freestanding surgery centers and imaging facilities for the same services1. This desire to build an integrated system and disparity in reimbursements are two factors driving the trend of acquisitions of physician-practices by hospitals. Hospitals and health systems also face several headwinds. Hospitals face hurdles with regard to the challenging combination of expanded eligibility for Medicaid participation as a result of the Patient Protection Affordable Care Act coupled with slower and lower Medicaid pay2. Furthermore, many systems have high operating costs and liability/debt levels that may not flex well with reimbursement changes, increasing labor costs and physical plant needs. For example, many hospitals and health systems face large unfunded or critically underfunded pensions. Also, through increasing employment of physicians, hospitals have growing ongoing carrying costs. These pitfalls make some hospitals and health systems ill-positioned for the reduction/change in reimbursement rates or transition from fee-for-service to shared-risk or whole-risk contracting.
2. Ambulatory surgery centers. Ambulatory surgery centers have been a great business in the past and still remain a very good business despite obstacles in surgeon numbers and reimbursement rates. On the plus side, surgery centers are a true cost saver to Medicare and can be for other payors too. Movement of surgical procedures from hospital outpatient departments to ASCs reduces aggregate program spending because Medicare pays ASCs substantially less than HOPDs for the same services. In 2010, ASCs provided services to roughly 3.3 million Medicare beneficiaries — an increase of 0.9 percent from 20093. ASCs have reasonable political strengths due to their numbers, the ASC Association and their presence in most states. The number of Medicare-certified ASCs increased by 1.9 percent from 2009 to 5,316 ASCs nationwide in 2010. The industry also has great management company leadership in several places. Surgery center revenues, however, are wholly dependent on the number of cases multiplied by the reimbursement for services provided. Centers face some erosion and pressure on both fronts. Independent surgeons are declining in numbers, and increased payor and hospital control over the payment dollar places pressure on reimbursement. Out of network and workers' compensation payments are also increasingly under attack.
3. Urgent care. Urgent care is a booming sector of healthcare whose greatest strength is that it provides consumers with services they truly want and truly need. An estimated 3 million patients visit an urgent care clinic each week4. Urgent care clinics have seen a rapid boom in popularity and are becoming one of the fastest growing specialties in medicine5. Since 2008, the number of facilities has increased by 17 percent and growth is expected to occur at an even quicker rate over the next several years. This growth coincides with the PPACA's insurance mandate requiring health coverage for many currently uninsured Americans. Typically services provided at urgent care centers are a cost-effective proposition — they cost less than those provided at hospitals and are typically reimbursed similar to primary care6. The lower costs of urgent care have drawn the attention of payors who seek urgent care as a way to get patients out of emergency departments and to bypass the increased costs that comes with ER visits. A 2010 RAND study found that almost 1 in 5 visits to hospital ERs could be treated at urgent care centers, potentially saving $4.4 billion annually in healthcare costs. While the typical price of a visit to an urgent care center is comparable to a doctor's office visit (approximately $100), the visit can be multiple times cheaper than a visit to the ER. Hospitals and health systems are also driving business in the urgent care sector by adding their own urgent care centers. For example, in July 2012, Dignity Health, the nation's 5th largest hospital system, bought U.S. HealthWorks, the 2nd largest urgent care chain, with 147 centers.
4. Home healthcare. In 2011, about 3.4 million Medicare beneficiaries received home healthcare services from almost 11,900 home health agencies7. According to preliminary data, Medicare spent roughly $19.4 billion on home health services in 2010. Moreover, in 2010, about 80 percent of agencies had positive margins8. The introduction of home health benefits, decades ago, was one of the government's great miscalculations. Between 1990 and 1995, the number of annual users of home health services increased by 75 percent and the number of visits more than tripled to about 250 million a year. Spending also increased from $3.7 billion in 1990 to $15.4 billion in 1995 and in an effort to curb the spending on home healthcare services the government is continuously researching methods of cost savings and increasing regulation of this area through investigation, introduction of co-payments and other efforts. In 2011, Medicare implemented two major changes to strengthen program integrity for Medicare home health services. One, the PPACA includes several reductions intended to bring payments more in line with costs, which includes a reduction in the standard 60-day episode rate by 2.5 percent. Two, CMS implemented a new requirement for tighter supervision of therapy services provided under the home health benefit. In addition to the hefty costs and governmental scrutiny, the home healthcare industry also faces challenges in finding highly qualified personnel to handle the demands of home care services and increased billing complexity. In all, opportunities in home healthcare remains fairly fragmented.
5. Skilled nursing facilities. The skilled nursing facility business is estimated at close to a $180 billion a year industry, and Medicare spent $32 billion on SNFs in 20119. SNFs remain an interesting area for investors in part fueled by unlimited demand from an aging population, notwithstanding the uncertainty of regulatory investigations and periodic efforts at payment reform. Despite the demand, the great issue that recycles in nursing homes and SNFs is payment ability as states wrestle with Medicaid costs. In four years, states have made almost a complete reversal from the number of states providing rate increases (37 in fiscal year 2009) to the current situation of 31 states implementing rate restrictions in fiscal year 201210. Medicaid is by far the single largest payor for SNF services and an area of intense budgetary challenges. Changes in reimbursement and eligibility lead entrepreneurial owners to seek out different types of patients, e.g., developmentally disabled, sub-acute care and others. For example, as Medicaid reimbursement suffered, nursing homes more aggressively marketed to Medicare patients. In its March 2012 report to Congress, MedPAC noted that "in 2010, the average Medicare margin for freestanding SNFs was 18.5 percent; it was the 10th year in a row with Medicare margins above 10 percent." Furthermore, MedPAC noted that "non-Medicare margins improved between 2008 and 2010 but remained slightly negative (-1.2 percent), while total margins for all payors and all lines of business improved to 3.6 percent in 2010." Despite Medicare cost reductions, we expect that Medicare patients will continue to be a real focus of homes. Typically nursing homes have countered payment cutbacks with reduced staffing; however, in the long-term, this move can impact the quality of care provided and create increased financial, regulatory and litigation risk profiles for the SNFs. Major players in the nursing home industry include ManorCare, Golden Horizons, and Kindred, operating, respectively, nearly 500, 300 and 230 nursing homes.
6. Medical devices. The medical device industry faces significant headwinds driven by pressures on overall economic growth, pressure from the medical device tax and pressure on hospital spending and cost containment. In 2012, approximately 7,000 jobs were shed in the medical device industry, representing approximately 1.5 percent of the industry workforce11. The medical devices business is facing the greatest pressure to date from increased efforts by buyers to cut reimbursement and the price paid for devices. The revenue growth rate decreased by 12 percent from 2005 to 2011, according to an October 2012 report by PwC. The device business, as one looks at all of the factors, leads one to conclude that while the sector was once an incredible business it is still a very good business. The $12 billion U.S. orthopedic market is now growing by only 2 percent to 3 percent a year, according to Frost and Sullivan, a market research firm. But, the Chinese orthopedics market is expected to soar from $1.6 billion last year to $2.7 billion by 2015, according to Frost, along with a broader surge in Chinese health spending that has attracted investors 12. Analysts note that the numbers are on the side of the sector — from the increasing number of baby-boomers reaching retirement age, living more active lives and willing to pay out of their own pockets for procedures they find valuable to the burgeoning middle class in the BRICS (Brazil, Russia, India, China and South Africa) countries seeking access to new medical devices. Analysts also predict large growth in the market combining health information technology with medical devices. InMedica predicted the telehealth market to expand by 55 percent globally in 201313, and the mobile health technology market, which includes apps, devices and services, was approximately a $1.2 billion global industry in 2012 and is predicted to reach $10.2 billion in 201814.
7. Dental practice management. There remains tremendous investor interest in the dental practice management arena. This is for at least two key reasons. First, everyone needs a dentist. Second, many state Medicaid programs have supported dentistry fairly well, especially children's dental needs. DPM companies now account for approximately 8 percent of U.S. dentists. According to CMS, Medicaid payments for dental care rose 63 percent to $7.3 billion from 2007 to 201015 and CMS predicts overall spending on dental services to have modest increases16. Certain large dental practice management companies in the United States have achieved more than $100 million in annual revenue and revenues continue to increase. We see tremendous interest in dental from many fronts. The biggest headwinds in the DPM sector come from increased regulatory and litigation scrutiny to DPM structures and increased budget pressure at the state level. For example, during 2012 in Texas, a DPM company agreed to pay a $1.2 million settlement agreement related to Medicaid fraud and a bill was introduced in the legislature to strengthen regulation of DPM companies17. Another DPM firm faces a class action lawsuit.
8. Rehabilitation and addictive treatment. This is a tremendous growth area driven much like the urgent care center sector is driven. That is, rehabilitation and addictive treatment is something consumers actually want, and treatment is needed by a not insignificant part of the community. Results from the 2011 National Survey on Drug Use and Health show that a large treatment gap exists in the U.S. In 2011, "an estimated 21.6 million Americans (8.4 percent) needed treatment for a problem related to drugs or alcohol, but only about 2.3 million people (less than 1 percent) received treatment at a specialty facility."18 It is also increasingly paid for by payors and it is the kinds of treatment families are willing to expend large sums for. From 2002 to 2011, the National Survey found increases in respondents using Medicaid (23.1 percent increase) and Medicare (19.5 percent increase) payments for treatment and in 2011, 46.4 percent of survey respondents reported using out-of-pocket funds for treatment. Overall, the U.S. addiction treatment industry is expected to increase revenues by 55 percent from 2005 to 2014 and experience revenues of $34 billion by 201419.
9. Hospital-based specialists. The demand for hospital-based specialists remains fairly strong, including hospitalists, anesthesiologists, neurology, surgery, obstetrics and radiologists. The number of hospitalists has grown rapidly from around 1,000 hospitalists fifteen years ago to approximately 30,000 hospitalists in 201120. Hospitalists can be effective in reducing the time demands on revenue-generating admission-driven physicians. An article in JAMA noted that specialty hospitalists can act in a variety of cost-efficient ways for healthcare systems. For example, the potential for reduced liability costs associated with the continuous on-site presence of an obstetrician hospitalist or the satisfaction of the Level I trauma center requirement of always having a surgeon on-site with the presence of with a surgeon hospitalist21. Anesthesia management remains a quickly growing business with more and more focus around the hospital. Finally, hospitals continue to generate serious margins from interventional radiology.
10. Health information technology. We are starting to see the next generation of efforts aimed at utilizing data mined from an abundance of technology being deployed in healthcare. A first generation of efforts aimed to automate many functions in healthcare. A second generation of efforts aimed at putting electronic medical records in place. Now, as a third generation effort, we are witnessing huge data mining efforts by health systems and companies. Analysts argue that "understanding how to transform disparate data sources into meaningful tools to both improve patient care, patient safety, improve security and ultimately profit from it is the next great challenge."22 On Jan. 15th, the Wall Street Journal reported on a new effort by UnitedHealth Group to combine efforts with Mayo Clinic to mine data and glean insights23. Some efforts are being driven for basic research motives. Some efforts are more applied and more focused. Others are aimed at marketing efforts. According to recent surveys a multitude of players in the healthcare industry expect to hire technical analysts to perform clinical analytics. Thirty-five percent of providers plan to hire additional clinical informaticists, 70 percent of insurance companies are boosting their clinical analytics staff, and hospitals are predicted to experience a rapid increase in the use of data analytics tools from only a 10 percent implementation rate in 2011 to an approximately 50 percent adoption by 201624. In any event, there appears to be an infinite number of new products, services and initiatives being introduced to try and utilize some of the technology that has been put into place. See, for example, Teletracking efforts and offerings aimed at capacity management. Spending on non EMR efforts are predicted to expand as many hospitals have already paid out substantial sums for EMR.
11. Chronic disease. Increasingly, and as a recurrent theme, a huge amount of healthcare dollars are spent on chronic diseases, including asthma, diabetes, and chronic obstructive pulmonary disease. A recent report from the Cleveland Clinic noted that "personal health behaviors are a major cause of the unsustainable medical costs and chronic illnesses that are overwhelming [the U.S.] healthcare system. Almost three-fourths of all medical costs are for four chronic conditions: cardiovascular disease, obesity, diabetes and cancer."25 Sixty to 90 percent of these ailments are preventable and approximately 96 percent of all Medicare dollars are used for people with chronic illnesses. Cost-effective maintenance and treatment of chronic diseases will continue and become an even greater area of growth as the population ages and individuals live longer with an ever-increasing number of co-morbidities. A January 2013 Modern Healthcare article highlights the large increase in accountable care organizations in part to create more coordinated care efforts for chronically ill patients26. The article noted that Walgreens joining the ACO market shows the ability to better manage the medications and improve care for chronically ill patients with the potential to cut costs, improve revenues, and receive ACO financial incentives from the government.
12. Cancer and oncology driven care. A tremendous amount of money is being invested in oncology related products and services. Certain of these are in the radiation therapy sector, and others are in infusion therapy and physician practice management. Oncology Business Review reports that oral oncology drugs now account for 25.9 percent of all oncology drug sales, sales have more than tripled to $20.6 billion in five years, and 48 percent of oncologists are more likely to prescribe an oral oncology drug compared to an intravenous drug if the two were clinically equivalent27. There is concern, however, because there is an increasing shift of cancer drug spending to hospitals, away from physician practices, and hospitals have more access to the 340B pricing program, which limits the cost of drugs to federal purchasers28. Furthermore, payors are implementing cost-effectiveness measures to attempt to control spending on oncology pharmaceuticals including a large increase in the use of biomarkers and diagnostic tests to ensure appropriate use and the development of clinical pathway programs to "maintain health outcomes while lowering cost and treatment variability."
13. Hospice sector. Private equity investors have displayed a renewed interest in the hospice sector, shifting the industry from non-profit control to for-profit dominance. Of the 2,225 hospices in 1999 participating in Medicare, 1,381 (62 percent) were nonprofits29. In 2009, of the 3,342 hospices participating in Medicare only 1,161 (35 percent) were non-profit while 1,741 (52 percent) were for-profit. Between 2000 and 2009, 80 percent of new hospices that began participating in Medicare were for-profit. Overall, the supply of hospices increased 53 percent between 2000 and 2010, with the number of for-profit hospices growing by 150 percent from 2000-2010, while the number of nonprofits declined by 1 percent. The hospice sector is benefiting from an aging population and remains ripe for consolidation, creating opportunity for investors to gain market share and make profits as the demand for hospice services increases. On the other hand, however, Medicare spending on hospice services has more than quadrupled over the past decade causing the OIG to focus on activities relating to hospice in 2013, namely inspection of hospice’s marketing materials, practices and financial relationships with nursing homes30.
14. Wound care. In general, the wound care sector is comprised of medical supply and outpatient wound care management companies. Most of the market is driven by the aging population, rise in chronic diseases (such as diabetes and hypertension) and technological advancements. A variable explosion of private equity investing in wound care firms has been occurring while the demand for portable and easy to use devices is expected to fuel the growth of the wound care market in the coming years. According to a market report the total market for advanced wound care reached at $3.4 billion in 2010, and is predicted to continue to grow to $4.6 billion by 201631. The market for wound care dressings, sealants and anti-adhesion products reached $2.0 billion in 2010 and is expected to grow to $3.0 billion by 2016. Furthermore, the market for wound healing devices/equipment segment reached $1.4 billion in 2010 and is expected to reach $1.5 billion in 2016. Overall, the wound care sector has experienced substantial growth in recent years and is expected to continue growing.
15. Physical therapy. Investors have been, and continue to be interested in the outpatient physical therapy business. The demand for physical therapy services has grown rapidly in the past several years due to a few factors. First, with the number of Americans 65 and older estimated to grow by 36 percent between 2010 and 2020 the need for outpatient services, like physical therapy, for our aging population will continue to rise. Second in an effort to contain costs, payors are demanding that physicians first refer patients to physical therapists rather than referring cases for surgery; this applies both to private payors and workers compensation. The increased growth in this area is drawing more and more attention by investors who find physical therapy companies with a healthy payor mix and diverse referral base attractive to private equity funds. Examples of recent deals in the physical therapy sector include Accelerated Holding's LLC, together with its affiliates and related companies, who in 2012 acquired Newsome Physical Therapy, Premier Physical Therapy and WorkSport Rehabilitation Services, increasing Accelerated to 113 locations in the Chicago area32. In addition, U.S Physical Therapy, Inc., a leading national operating of outpatient physical therapy clinics acquired a majority interest in a seven clinic physical therapy group in 201233.
16. Revenue cycle management. Revenue Cycle Management can be divided into multiple smaller groups. There are RCM companies that act as a service and provide a full range of hands on RCM services (e.g., Accretive and National Medical Billing Services), there are companies that manage just a portion of RCM, and then there are companies that are more akin to technology solutions companies that sell the software and technology needed for RCM (e.g, Craneware). There are reports of increased spending for the technology that is sold for RCM as many hospitals had put off the spending while focusing on EMR. According to a study by Capsite, a healthcare technology research and advisory firm, the RCM market over the next 24 months will be active as more than 20 percent of U.S. hospitals will be replacing their core RCM solution while another half will be investing in upgrades of their current core RCM solution34. The sales cycle for RCM at larger institutions is very lengthy. Here the challenges in large client acquisition have also led to merger activity in the sector as buyers choose acquisition over organic growth. For example, Conifer Health Solutions, a subsidiary of Tenet Healthcare, acquired Dell's Revenue Cycle Solutions line of business for hospitals and healthcare systems in late 201235. Additionally, SucessEHS announced the acquisition of Integrated Physician Systems, a comprehensive healthcare professional services firm in 201236. Further, despite organic growth challenges, publicly traded RCM firms trade at very high multiples37.
17. Imaging centers. Over the years, physicians and health systems as well as independent chains have profited substantially from imaging. As rates for physician-owned imaging centers decreased, imaging in many forms remained highly profitable for hospitals and less profitable for independent chains. Today, imaging remains a very significant profit center in a fee for service environment for hospitals and health systems. Increasingly, industry discussion focuses on the movement of imaging from a profit center to a cost center (i.e., as it becomes part of a bundled payment or shared risk/savings system, the focus by providers will become reducing imaging expense not growing imaging procedures38). There, aside from same store growth in imaging center volumes, the authors also spoke of a very active transaction market often focused on health systems buying imaging centers. According to the authors, increased transactions in this area have occurred as hospitals "desire to maintain consistent subspecialized professional coverage across all inpatient and outpatient radiology."39
Footnotes:
1 "Hospital Medicare Cash Lures Doctors as Costs Increase," Bloomberg News, Nov. 19, 2012.
2 "Delays in Medicaid Pay Vex Hospitals," Wall Street Journal, Jan. 16, 2013.
3 "MedPAC, Report to Congress: Medicare Payment Policy, Chapter 5: Ambulatory Surgical Center Services," March 2012.
4 "Urgent Care Centers Are booming, Which Worries Some Doctors," The Washington Post, Sept. 17, 2012
5 "The Rise of Urgent Care Clinics," Insight Magazine, Jan. 4, 2010
6 "No Appointment Needed: The Resurgence of Urgent Care Centers in the United States," California HealthCare Foundation, September 2007.
7 "MedPAC, Report to Congress: Medicare Payment Policy, Chapter 8: Home Health Care Services," March 2012.
8 "MedPAC, Data Book, Health Care Spending and the Medicare Program," June 2012.
9 "MedPAC, Report to Congress: Medicare Payment Policy," Chapter 7: Skilled Nursing Facilities, March 2012.
10 John K. Iglehart, "Expanding Eligibility, Cutting Costs – A Medicaid Update," 366(2) NEJM 105, Jan. 12, 2012.
11 Brian Johnson, "Medical Device Companies: 3 Thoughts for 2013," Mass Device, Dec. 31, 2012.
12 "Stryker Offers to Acquire China Spine-Products Firm," Wall Street Journal, Jan. 18, 2013.
13 "10 Predictions for 2013 in the Medical Electronics Industry," Dec. 14, 2012.
14 "MHealth Market - Global Mobile Health Industry Analysis, Size, Share, Growth, Trends and Forecast, 2012 – 2018," Jan. 15, 2013.
15 Donna Domino, "Private Equity Firms Eye Big Profits in Dentistry," May 30, 2012, available at http://www.drbicuspid.com
16 U.S. Government Report Shows Dental Spending on the Rise, Jan. 11, 2013, available at http://www.drbicuspid.com
17 Donna Domino, "Texas Legislators to Consider New DSO Regulations," Dec. 28, 2012, available at http://www.drbicuspid.com
18 "Results from the 2011 National Survey on Drug Use and Health: Summary of National Findings," Center for Behavioral Health Statistics and Quality, Substance Abuse and Mental Health Services Administration, September 2012.
19 Catherine New, "The Real Tab for Rehab: Inside the Addiction Treatment Biz," June 3, 2011, available at http://www.dailyfinance.com
20 Victor R. Fuchs, PhD, "Major Trends in the U.S. Health Economy Since 1990," 366(11) NEJM 973, March 15, 2012.
21 John R. Nelson et al, "Specialty Hospitalists: Analyzing an Emerging Phenomenon," 307(16) JAMA 1699, April 23, 2012.
22 Brian Johnson, "Medical Device companies: 3 thoughts for 2013," Dec. 31, 2012, available at http://www.massdevice.com/blogs/brian-johnson/medical-device-companies-3-thoughts-2013-0
23 "Researchers Mine Data From Clinic, Big Insurer," Wall Street Journal , Jan. 15, 2013.
24 Paul Cerrato, "5 Trends Will Reshape Health IT In 2013," InformationWeek:Healthcare, Aug. 27, 2012.
25 "Top 10 Medical Innovations: 2013, Cleveland Clinic
26 Melanie Evans, "Big boost in ACO Numbers" Modern Healthcare, Jan. 14, 2013.
27 Rhoda Dunn, "Oral Anticancer Agents Present a Complex Set of Affordability Issues," Oncology Business Review, Aug. 10, 2012.
28 Lujing Wang et al, "Study Provides Recommendations for Copying with Oncology Market Access Challenges," Oncology Business Review, Sept. 27, 2012.
29 "Study Finds Hospice Industry Has Experienced Turbulence," HealthCareFinance, July/August 2012, available at http://www.healthcarefinancenews.com/news/study-finds-hospice-industry-has-experienced-turbulence-0
30 Work Plan Fiscal Year 2013, Office of Inspector General
31 Markets for Advanced Wound Care Technologies, BCC Research, October 2011.
32 Claire Bushey, "Accelerated Bulks up for Physical Therapy Competition," Chicago Businesss.com, Oct. 11, 2012.
33 "U.S Physical Therapy Makes Seven Clinic Acquisition," Businesswire.com, May 22, 2012.
34 "Capsite Study Predicts Changes to Revenue Cycle Management," ICD 10 Watch, available at http://www.icd10watch.com/headline/capsite-study-predicts-changes-revenue-cycle-management
35 Marc Pramuk, "Conifer Health Solutions Acquires Dell’s Revenue Cycle Management Business, Deal Supporting RCM Business," NelsonHall, Nov. 5, 2012, available at http://www.nelson-hall.com/sourcing-expertise/healthcare-insurance-sourcing/healthcare-insurance-bpo-insight/conifer-health-solutions-acquires-dells-revenue-cycle-management-business-dell-supporting-rcm-business.html
36 "SuccessEHS Announces Acquisition of Integrated Physician Systems," Ulitzer, Sept. 13, 2012, available at http://acquisitions.ulitzer.com/node/2360362
37 Healthcare Services: Revenue Cycle Management, Industry Insights, Duff & Phelps, Summer 2010.
38 C. Elliot Jeter and Colin McDermott, "The Impact of Industry Trends on Imaging-center Valuation," available at http://www.imagingbiz.com/articles/view/the-impact-of-industry-trends-on-imaging-center-valuation
39 C. Elliot Jeter and Todd Sorenson, "Why Hospitals Buy Imaging Centers," available at http://www.imagingbiz.com/articles/view/why-hospitals-buy-imaging-centers
1. Hospitals and health systems. Hospitals and health systems face certain tailwinds and headwinds. On the positive side, hospitals are as politically protected as any sector given their importance in almost every district of every politician. Further, they were the clear winners in the healthcare reform legislation. Hospitals and health systems are the clearest party capable of building an integrated system that can take on risk for a large percent of the payor dollar (very large physician groups can also accomplish this). Between 2009 and 2010, Medicare spent roughly $153 billion on roughly 10 million inpatient admissions and $166 million hospital outpatient services. Under Medicare payment systems, hospitals typically receive higher reimbursements than individual doctors and other providers such as freestanding surgery centers and imaging facilities for the same services1. This desire to build an integrated system and disparity in reimbursements are two factors driving the trend of acquisitions of physician-practices by hospitals. Hospitals and health systems also face several headwinds. Hospitals face hurdles with regard to the challenging combination of expanded eligibility for Medicaid participation as a result of the Patient Protection Affordable Care Act coupled with slower and lower Medicaid pay2. Furthermore, many systems have high operating costs and liability/debt levels that may not flex well with reimbursement changes, increasing labor costs and physical plant needs. For example, many hospitals and health systems face large unfunded or critically underfunded pensions. Also, through increasing employment of physicians, hospitals have growing ongoing carrying costs. These pitfalls make some hospitals and health systems ill-positioned for the reduction/change in reimbursement rates or transition from fee-for-service to shared-risk or whole-risk contracting.
2. Ambulatory surgery centers. Ambulatory surgery centers have been a great business in the past and still remain a very good business despite obstacles in surgeon numbers and reimbursement rates. On the plus side, surgery centers are a true cost saver to Medicare and can be for other payors too. Movement of surgical procedures from hospital outpatient departments to ASCs reduces aggregate program spending because Medicare pays ASCs substantially less than HOPDs for the same services. In 2010, ASCs provided services to roughly 3.3 million Medicare beneficiaries — an increase of 0.9 percent from 20093. ASCs have reasonable political strengths due to their numbers, the ASC Association and their presence in most states. The number of Medicare-certified ASCs increased by 1.9 percent from 2009 to 5,316 ASCs nationwide in 2010. The industry also has great management company leadership in several places. Surgery center revenues, however, are wholly dependent on the number of cases multiplied by the reimbursement for services provided. Centers face some erosion and pressure on both fronts. Independent surgeons are declining in numbers, and increased payor and hospital control over the payment dollar places pressure on reimbursement. Out of network and workers' compensation payments are also increasingly under attack.
3. Urgent care. Urgent care is a booming sector of healthcare whose greatest strength is that it provides consumers with services they truly want and truly need. An estimated 3 million patients visit an urgent care clinic each week4. Urgent care clinics have seen a rapid boom in popularity and are becoming one of the fastest growing specialties in medicine5. Since 2008, the number of facilities has increased by 17 percent and growth is expected to occur at an even quicker rate over the next several years. This growth coincides with the PPACA's insurance mandate requiring health coverage for many currently uninsured Americans. Typically services provided at urgent care centers are a cost-effective proposition — they cost less than those provided at hospitals and are typically reimbursed similar to primary care6. The lower costs of urgent care have drawn the attention of payors who seek urgent care as a way to get patients out of emergency departments and to bypass the increased costs that comes with ER visits. A 2010 RAND study found that almost 1 in 5 visits to hospital ERs could be treated at urgent care centers, potentially saving $4.4 billion annually in healthcare costs. While the typical price of a visit to an urgent care center is comparable to a doctor's office visit (approximately $100), the visit can be multiple times cheaper than a visit to the ER. Hospitals and health systems are also driving business in the urgent care sector by adding their own urgent care centers. For example, in July 2012, Dignity Health, the nation's 5th largest hospital system, bought U.S. HealthWorks, the 2nd largest urgent care chain, with 147 centers.
4. Home healthcare. In 2011, about 3.4 million Medicare beneficiaries received home healthcare services from almost 11,900 home health agencies7. According to preliminary data, Medicare spent roughly $19.4 billion on home health services in 2010. Moreover, in 2010, about 80 percent of agencies had positive margins8. The introduction of home health benefits, decades ago, was one of the government's great miscalculations. Between 1990 and 1995, the number of annual users of home health services increased by 75 percent and the number of visits more than tripled to about 250 million a year. Spending also increased from $3.7 billion in 1990 to $15.4 billion in 1995 and in an effort to curb the spending on home healthcare services the government is continuously researching methods of cost savings and increasing regulation of this area through investigation, introduction of co-payments and other efforts. In 2011, Medicare implemented two major changes to strengthen program integrity for Medicare home health services. One, the PPACA includes several reductions intended to bring payments more in line with costs, which includes a reduction in the standard 60-day episode rate by 2.5 percent. Two, CMS implemented a new requirement for tighter supervision of therapy services provided under the home health benefit. In addition to the hefty costs and governmental scrutiny, the home healthcare industry also faces challenges in finding highly qualified personnel to handle the demands of home care services and increased billing complexity. In all, opportunities in home healthcare remains fairly fragmented.
5. Skilled nursing facilities. The skilled nursing facility business is estimated at close to a $180 billion a year industry, and Medicare spent $32 billion on SNFs in 20119. SNFs remain an interesting area for investors in part fueled by unlimited demand from an aging population, notwithstanding the uncertainty of regulatory investigations and periodic efforts at payment reform. Despite the demand, the great issue that recycles in nursing homes and SNFs is payment ability as states wrestle with Medicaid costs. In four years, states have made almost a complete reversal from the number of states providing rate increases (37 in fiscal year 2009) to the current situation of 31 states implementing rate restrictions in fiscal year 201210. Medicaid is by far the single largest payor for SNF services and an area of intense budgetary challenges. Changes in reimbursement and eligibility lead entrepreneurial owners to seek out different types of patients, e.g., developmentally disabled, sub-acute care and others. For example, as Medicaid reimbursement suffered, nursing homes more aggressively marketed to Medicare patients. In its March 2012 report to Congress, MedPAC noted that "in 2010, the average Medicare margin for freestanding SNFs was 18.5 percent; it was the 10th year in a row with Medicare margins above 10 percent." Furthermore, MedPAC noted that "non-Medicare margins improved between 2008 and 2010 but remained slightly negative (-1.2 percent), while total margins for all payors and all lines of business improved to 3.6 percent in 2010." Despite Medicare cost reductions, we expect that Medicare patients will continue to be a real focus of homes. Typically nursing homes have countered payment cutbacks with reduced staffing; however, in the long-term, this move can impact the quality of care provided and create increased financial, regulatory and litigation risk profiles for the SNFs. Major players in the nursing home industry include ManorCare, Golden Horizons, and Kindred, operating, respectively, nearly 500, 300 and 230 nursing homes.
6. Medical devices. The medical device industry faces significant headwinds driven by pressures on overall economic growth, pressure from the medical device tax and pressure on hospital spending and cost containment. In 2012, approximately 7,000 jobs were shed in the medical device industry, representing approximately 1.5 percent of the industry workforce11. The medical devices business is facing the greatest pressure to date from increased efforts by buyers to cut reimbursement and the price paid for devices. The revenue growth rate decreased by 12 percent from 2005 to 2011, according to an October 2012 report by PwC. The device business, as one looks at all of the factors, leads one to conclude that while the sector was once an incredible business it is still a very good business. The $12 billion U.S. orthopedic market is now growing by only 2 percent to 3 percent a year, according to Frost and Sullivan, a market research firm. But, the Chinese orthopedics market is expected to soar from $1.6 billion last year to $2.7 billion by 2015, according to Frost, along with a broader surge in Chinese health spending that has attracted investors 12. Analysts note that the numbers are on the side of the sector — from the increasing number of baby-boomers reaching retirement age, living more active lives and willing to pay out of their own pockets for procedures they find valuable to the burgeoning middle class in the BRICS (Brazil, Russia, India, China and South Africa) countries seeking access to new medical devices. Analysts also predict large growth in the market combining health information technology with medical devices. InMedica predicted the telehealth market to expand by 55 percent globally in 201313, and the mobile health technology market, which includes apps, devices and services, was approximately a $1.2 billion global industry in 2012 and is predicted to reach $10.2 billion in 201814.
7. Dental practice management. There remains tremendous investor interest in the dental practice management arena. This is for at least two key reasons. First, everyone needs a dentist. Second, many state Medicaid programs have supported dentistry fairly well, especially children's dental needs. DPM companies now account for approximately 8 percent of U.S. dentists. According to CMS, Medicaid payments for dental care rose 63 percent to $7.3 billion from 2007 to 201015 and CMS predicts overall spending on dental services to have modest increases16. Certain large dental practice management companies in the United States have achieved more than $100 million in annual revenue and revenues continue to increase. We see tremendous interest in dental from many fronts. The biggest headwinds in the DPM sector come from increased regulatory and litigation scrutiny to DPM structures and increased budget pressure at the state level. For example, during 2012 in Texas, a DPM company agreed to pay a $1.2 million settlement agreement related to Medicaid fraud and a bill was introduced in the legislature to strengthen regulation of DPM companies17. Another DPM firm faces a class action lawsuit.
8. Rehabilitation and addictive treatment. This is a tremendous growth area driven much like the urgent care center sector is driven. That is, rehabilitation and addictive treatment is something consumers actually want, and treatment is needed by a not insignificant part of the community. Results from the 2011 National Survey on Drug Use and Health show that a large treatment gap exists in the U.S. In 2011, "an estimated 21.6 million Americans (8.4 percent) needed treatment for a problem related to drugs or alcohol, but only about 2.3 million people (less than 1 percent) received treatment at a specialty facility."18 It is also increasingly paid for by payors and it is the kinds of treatment families are willing to expend large sums for. From 2002 to 2011, the National Survey found increases in respondents using Medicaid (23.1 percent increase) and Medicare (19.5 percent increase) payments for treatment and in 2011, 46.4 percent of survey respondents reported using out-of-pocket funds for treatment. Overall, the U.S. addiction treatment industry is expected to increase revenues by 55 percent from 2005 to 2014 and experience revenues of $34 billion by 201419.
9. Hospital-based specialists. The demand for hospital-based specialists remains fairly strong, including hospitalists, anesthesiologists, neurology, surgery, obstetrics and radiologists. The number of hospitalists has grown rapidly from around 1,000 hospitalists fifteen years ago to approximately 30,000 hospitalists in 201120. Hospitalists can be effective in reducing the time demands on revenue-generating admission-driven physicians. An article in JAMA noted that specialty hospitalists can act in a variety of cost-efficient ways for healthcare systems. For example, the potential for reduced liability costs associated with the continuous on-site presence of an obstetrician hospitalist or the satisfaction of the Level I trauma center requirement of always having a surgeon on-site with the presence of with a surgeon hospitalist21. Anesthesia management remains a quickly growing business with more and more focus around the hospital. Finally, hospitals continue to generate serious margins from interventional radiology.
10. Health information technology. We are starting to see the next generation of efforts aimed at utilizing data mined from an abundance of technology being deployed in healthcare. A first generation of efforts aimed to automate many functions in healthcare. A second generation of efforts aimed at putting electronic medical records in place. Now, as a third generation effort, we are witnessing huge data mining efforts by health systems and companies. Analysts argue that "understanding how to transform disparate data sources into meaningful tools to both improve patient care, patient safety, improve security and ultimately profit from it is the next great challenge."22 On Jan. 15th, the Wall Street Journal reported on a new effort by UnitedHealth Group to combine efforts with Mayo Clinic to mine data and glean insights23. Some efforts are being driven for basic research motives. Some efforts are more applied and more focused. Others are aimed at marketing efforts. According to recent surveys a multitude of players in the healthcare industry expect to hire technical analysts to perform clinical analytics. Thirty-five percent of providers plan to hire additional clinical informaticists, 70 percent of insurance companies are boosting their clinical analytics staff, and hospitals are predicted to experience a rapid increase in the use of data analytics tools from only a 10 percent implementation rate in 2011 to an approximately 50 percent adoption by 201624. In any event, there appears to be an infinite number of new products, services and initiatives being introduced to try and utilize some of the technology that has been put into place. See, for example, Teletracking efforts and offerings aimed at capacity management. Spending on non EMR efforts are predicted to expand as many hospitals have already paid out substantial sums for EMR.
11. Chronic disease. Increasingly, and as a recurrent theme, a huge amount of healthcare dollars are spent on chronic diseases, including asthma, diabetes, and chronic obstructive pulmonary disease. A recent report from the Cleveland Clinic noted that "personal health behaviors are a major cause of the unsustainable medical costs and chronic illnesses that are overwhelming [the U.S.] healthcare system. Almost three-fourths of all medical costs are for four chronic conditions: cardiovascular disease, obesity, diabetes and cancer."25 Sixty to 90 percent of these ailments are preventable and approximately 96 percent of all Medicare dollars are used for people with chronic illnesses. Cost-effective maintenance and treatment of chronic diseases will continue and become an even greater area of growth as the population ages and individuals live longer with an ever-increasing number of co-morbidities. A January 2013 Modern Healthcare article highlights the large increase in accountable care organizations in part to create more coordinated care efforts for chronically ill patients26. The article noted that Walgreens joining the ACO market shows the ability to better manage the medications and improve care for chronically ill patients with the potential to cut costs, improve revenues, and receive ACO financial incentives from the government.
12. Cancer and oncology driven care. A tremendous amount of money is being invested in oncology related products and services. Certain of these are in the radiation therapy sector, and others are in infusion therapy and physician practice management. Oncology Business Review reports that oral oncology drugs now account for 25.9 percent of all oncology drug sales, sales have more than tripled to $20.6 billion in five years, and 48 percent of oncologists are more likely to prescribe an oral oncology drug compared to an intravenous drug if the two were clinically equivalent27. There is concern, however, because there is an increasing shift of cancer drug spending to hospitals, away from physician practices, and hospitals have more access to the 340B pricing program, which limits the cost of drugs to federal purchasers28. Furthermore, payors are implementing cost-effectiveness measures to attempt to control spending on oncology pharmaceuticals including a large increase in the use of biomarkers and diagnostic tests to ensure appropriate use and the development of clinical pathway programs to "maintain health outcomes while lowering cost and treatment variability."
13. Hospice sector. Private equity investors have displayed a renewed interest in the hospice sector, shifting the industry from non-profit control to for-profit dominance. Of the 2,225 hospices in 1999 participating in Medicare, 1,381 (62 percent) were nonprofits29. In 2009, of the 3,342 hospices participating in Medicare only 1,161 (35 percent) were non-profit while 1,741 (52 percent) were for-profit. Between 2000 and 2009, 80 percent of new hospices that began participating in Medicare were for-profit. Overall, the supply of hospices increased 53 percent between 2000 and 2010, with the number of for-profit hospices growing by 150 percent from 2000-2010, while the number of nonprofits declined by 1 percent. The hospice sector is benefiting from an aging population and remains ripe for consolidation, creating opportunity for investors to gain market share and make profits as the demand for hospice services increases. On the other hand, however, Medicare spending on hospice services has more than quadrupled over the past decade causing the OIG to focus on activities relating to hospice in 2013, namely inspection of hospice’s marketing materials, practices and financial relationships with nursing homes30.
14. Wound care. In general, the wound care sector is comprised of medical supply and outpatient wound care management companies. Most of the market is driven by the aging population, rise in chronic diseases (such as diabetes and hypertension) and technological advancements. A variable explosion of private equity investing in wound care firms has been occurring while the demand for portable and easy to use devices is expected to fuel the growth of the wound care market in the coming years. According to a market report the total market for advanced wound care reached at $3.4 billion in 2010, and is predicted to continue to grow to $4.6 billion by 201631. The market for wound care dressings, sealants and anti-adhesion products reached $2.0 billion in 2010 and is expected to grow to $3.0 billion by 2016. Furthermore, the market for wound healing devices/equipment segment reached $1.4 billion in 2010 and is expected to reach $1.5 billion in 2016. Overall, the wound care sector has experienced substantial growth in recent years and is expected to continue growing.
15. Physical therapy. Investors have been, and continue to be interested in the outpatient physical therapy business. The demand for physical therapy services has grown rapidly in the past several years due to a few factors. First, with the number of Americans 65 and older estimated to grow by 36 percent between 2010 and 2020 the need for outpatient services, like physical therapy, for our aging population will continue to rise. Second in an effort to contain costs, payors are demanding that physicians first refer patients to physical therapists rather than referring cases for surgery; this applies both to private payors and workers compensation. The increased growth in this area is drawing more and more attention by investors who find physical therapy companies with a healthy payor mix and diverse referral base attractive to private equity funds. Examples of recent deals in the physical therapy sector include Accelerated Holding's LLC, together with its affiliates and related companies, who in 2012 acquired Newsome Physical Therapy, Premier Physical Therapy and WorkSport Rehabilitation Services, increasing Accelerated to 113 locations in the Chicago area32. In addition, U.S Physical Therapy, Inc., a leading national operating of outpatient physical therapy clinics acquired a majority interest in a seven clinic physical therapy group in 201233.
16. Revenue cycle management. Revenue Cycle Management can be divided into multiple smaller groups. There are RCM companies that act as a service and provide a full range of hands on RCM services (e.g., Accretive and National Medical Billing Services), there are companies that manage just a portion of RCM, and then there are companies that are more akin to technology solutions companies that sell the software and technology needed for RCM (e.g, Craneware). There are reports of increased spending for the technology that is sold for RCM as many hospitals had put off the spending while focusing on EMR. According to a study by Capsite, a healthcare technology research and advisory firm, the RCM market over the next 24 months will be active as more than 20 percent of U.S. hospitals will be replacing their core RCM solution while another half will be investing in upgrades of their current core RCM solution34. The sales cycle for RCM at larger institutions is very lengthy. Here the challenges in large client acquisition have also led to merger activity in the sector as buyers choose acquisition over organic growth. For example, Conifer Health Solutions, a subsidiary of Tenet Healthcare, acquired Dell's Revenue Cycle Solutions line of business for hospitals and healthcare systems in late 201235. Additionally, SucessEHS announced the acquisition of Integrated Physician Systems, a comprehensive healthcare professional services firm in 201236. Further, despite organic growth challenges, publicly traded RCM firms trade at very high multiples37.
17. Imaging centers. Over the years, physicians and health systems as well as independent chains have profited substantially from imaging. As rates for physician-owned imaging centers decreased, imaging in many forms remained highly profitable for hospitals and less profitable for independent chains. Today, imaging remains a very significant profit center in a fee for service environment for hospitals and health systems. Increasingly, industry discussion focuses on the movement of imaging from a profit center to a cost center (i.e., as it becomes part of a bundled payment or shared risk/savings system, the focus by providers will become reducing imaging expense not growing imaging procedures38). There, aside from same store growth in imaging center volumes, the authors also spoke of a very active transaction market often focused on health systems buying imaging centers. According to the authors, increased transactions in this area have occurred as hospitals "desire to maintain consistent subspecialized professional coverage across all inpatient and outpatient radiology."39
Footnotes:
1 "Hospital Medicare Cash Lures Doctors as Costs Increase," Bloomberg News, Nov. 19, 2012.
2 "Delays in Medicaid Pay Vex Hospitals," Wall Street Journal, Jan. 16, 2013.
3 "MedPAC, Report to Congress: Medicare Payment Policy, Chapter 5: Ambulatory Surgical Center Services," March 2012.
4 "Urgent Care Centers Are booming, Which Worries Some Doctors," The Washington Post, Sept. 17, 2012
5 "The Rise of Urgent Care Clinics," Insight Magazine, Jan. 4, 2010
6 "No Appointment Needed: The Resurgence of Urgent Care Centers in the United States," California HealthCare Foundation, September 2007.
7 "MedPAC, Report to Congress: Medicare Payment Policy, Chapter 8: Home Health Care Services," March 2012.
8 "MedPAC, Data Book, Health Care Spending and the Medicare Program," June 2012.
9 "MedPAC, Report to Congress: Medicare Payment Policy," Chapter 7: Skilled Nursing Facilities, March 2012.
10 John K. Iglehart, "Expanding Eligibility, Cutting Costs – A Medicaid Update," 366(2) NEJM 105, Jan. 12, 2012.
11 Brian Johnson, "Medical Device Companies: 3 Thoughts for 2013," Mass Device, Dec. 31, 2012.
12 "Stryker Offers to Acquire China Spine-Products Firm," Wall Street Journal, Jan. 18, 2013.
13 "10 Predictions for 2013 in the Medical Electronics Industry," Dec. 14, 2012.
14 "MHealth Market - Global Mobile Health Industry Analysis, Size, Share, Growth, Trends and Forecast, 2012 – 2018," Jan. 15, 2013.
15 Donna Domino, "Private Equity Firms Eye Big Profits in Dentistry," May 30, 2012, available at http://www.drbicuspid.com
16 U.S. Government Report Shows Dental Spending on the Rise, Jan. 11, 2013, available at http://www.drbicuspid.com
17 Donna Domino, "Texas Legislators to Consider New DSO Regulations," Dec. 28, 2012, available at http://www.drbicuspid.com
18 "Results from the 2011 National Survey on Drug Use and Health: Summary of National Findings," Center for Behavioral Health Statistics and Quality, Substance Abuse and Mental Health Services Administration, September 2012.
19 Catherine New, "The Real Tab for Rehab: Inside the Addiction Treatment Biz," June 3, 2011, available at http://www.dailyfinance.com
20 Victor R. Fuchs, PhD, "Major Trends in the U.S. Health Economy Since 1990," 366(11) NEJM 973, March 15, 2012.
21 John R. Nelson et al, "Specialty Hospitalists: Analyzing an Emerging Phenomenon," 307(16) JAMA 1699, April 23, 2012.
22 Brian Johnson, "Medical Device companies: 3 thoughts for 2013," Dec. 31, 2012, available at http://www.massdevice.com/blogs/brian-johnson/medical-device-companies-3-thoughts-2013-0
23 "Researchers Mine Data From Clinic, Big Insurer," Wall Street Journal , Jan. 15, 2013.
24 Paul Cerrato, "5 Trends Will Reshape Health IT In 2013," InformationWeek:Healthcare, Aug. 27, 2012.
25 "Top 10 Medical Innovations: 2013, Cleveland Clinic
26 Melanie Evans, "Big boost in ACO Numbers" Modern Healthcare, Jan. 14, 2013.
27 Rhoda Dunn, "Oral Anticancer Agents Present a Complex Set of Affordability Issues," Oncology Business Review, Aug. 10, 2012.
28 Lujing Wang et al, "Study Provides Recommendations for Copying with Oncology Market Access Challenges," Oncology Business Review, Sept. 27, 2012.
29 "Study Finds Hospice Industry Has Experienced Turbulence," HealthCareFinance, July/August 2012, available at http://www.healthcarefinancenews.com/news/study-finds-hospice-industry-has-experienced-turbulence-0
30 Work Plan Fiscal Year 2013, Office of Inspector General
31 Markets for Advanced Wound Care Technologies, BCC Research, October 2011.
32 Claire Bushey, "Accelerated Bulks up for Physical Therapy Competition," Chicago Businesss.com, Oct. 11, 2012.
33 "U.S Physical Therapy Makes Seven Clinic Acquisition," Businesswire.com, May 22, 2012.
34 "Capsite Study Predicts Changes to Revenue Cycle Management," ICD 10 Watch, available at http://www.icd10watch.com/headline/capsite-study-predicts-changes-revenue-cycle-management
35 Marc Pramuk, "Conifer Health Solutions Acquires Dell’s Revenue Cycle Management Business, Deal Supporting RCM Business," NelsonHall, Nov. 5, 2012, available at http://www.nelson-hall.com/sourcing-expertise/healthcare-insurance-sourcing/healthcare-insurance-bpo-insight/conifer-health-solutions-acquires-dells-revenue-cycle-management-business-dell-supporting-rcm-business.html
36 "SuccessEHS Announces Acquisition of Integrated Physician Systems," Ulitzer, Sept. 13, 2012, available at http://acquisitions.ulitzer.com/node/2360362
37 Healthcare Services: Revenue Cycle Management, Industry Insights, Duff & Phelps, Summer 2010.
38 C. Elliot Jeter and Colin McDermott, "The Impact of Industry Trends on Imaging-center Valuation," available at http://www.imagingbiz.com/articles/view/the-impact-of-industry-trends-on-imaging-center-valuation
39 C. Elliot Jeter and Todd Sorenson, "Why Hospitals Buy Imaging Centers," available at http://www.imagingbiz.com/articles/view/why-hospitals-buy-imaging-centers