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AHLA's Speaking of Health Law
How Current Challenges Will Change the Business of Health Care
Tynan O. Kugler, Principal, PYA, leads a discussion on some of the current challenges affecting health care business transactions, including trends and motivations related to doing deals, balancing antitrust enforcement, the overlap of federal and state regulatory oversight, and reimbursement and cost constraints. Tynan’s panel includes Douglas K. Anning, Shareholder, Polsinelli PC, Alexis J. Gilman, Partner, Crowell & Moring LLP, and Lawrence W. Vernaglia, Partner, Foley & Lardner LLP. They spoke about this topic at AHLA’s 2023 Annual Meeting in San Francisco, CA.
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Speaker 2:This episode of A H L A speaking of health law is brought to you by A H L A members and donors like you. For more information, visit American health law.org.
Speaker 3:Hello, I'm Tynan Coogler with p y a, and I am here with several colleagues to, to talk about , um, a topic near and dear to our hearts. Um, how current challenges will change the business of healthcare. Um, I'm gonna introduce myself and I'll, I'll pass it to Alexis, Doug and Larry to, to introduce themselves, but I'm a principal with p y a based in our Atlanta office and, and spend the majority of my, my practice in compensation and services valuation, but can't help but, but be a part of , um, active things that are going on in healthcare that, that inform what I do daily. So, Alexis, I'll turn it over to you.
Speaker 4:Thanks, Titan . Uh , I'm Alexis Skillman. I'm a partner in the Antitrust and Competition Group at Cole and Mooring in Washington, dc . Been here about , uh, six years before that, I spent seven years at the Federal Trade Commission, including three as head of the division that investigates provider mergers and acquisitions. Uh , and before that, I spent , uh, eight years at another firm.
Speaker 5:Hello everyone. This is Doug Ning from polsinelli. Uh, I am in our healthcare mergers and acquisitions group , uh, and all of my work is with hospitals and health systems and all the myriad different , uh, types of transactions they're involved in from , uh, hospital , uh, mergers and acquisitions , uh, to , um, joint ventures and ancillary deals , uh, and down to physician , uh, practice acquisitions.
Speaker 6:I guess I'm last , uh, Larry Vern here , uh, Foley and Lardners Boston office. I'm a healthcare generalist. I've been at this for about 30 years. A number of my clients are hospitals and health systems, just like my colleagues , uh, here, and I'm really looking forward to our chat this morning.
Speaker 3:Yeah , so what I, what I like about this is, is we've got, you know, so many different perspectives represented, which was, you know, ultimately the goal. And , um, for those who are, who may be listening, this was a, a , a presentation we actually gave at the A H L A annual meeting, 2023 , uh, during, during one of the lunch sessions and, and got some great feedback and some good conversation there. So I , I'm just gonna start it out at a, at a really high level with just some statistics , um, you know, through sort of the, the first half of, of 2023. And I certainly , um, you know, welcome any input on whether you all are seeing anything different. But I know PWC actually publishes a mid-year deals outlook. And, you know, one of the things that was interesting was that they said that, you know, deal volumes from, from the folks that they spoke to and surveyed have, have remained relatively resilient despite, you know, some of the headwinds we've, we've had over the last 12 months or so. And even, even though they said that, that the report said that, you know, ending mid-May 2023 health services deals were down, I think they cited by about 4% in volume. They were still at twice the levels, or nearly twice the levels as they were from 2018 to 20. So, so still lots of activity, which I , I think, you know, at least some of us can attest to from a dollar standpoint. Interestingly, the deal vol , the 2022 deal value was about a hundred billion. And there were, there were more mega deals then than there , than all, than all other deals. Um, and, you know , um, month to date , last trailing 12 months, that was at, at about, dropped to about 85 billion. So still pretty significant. Um, but that just sort of sets the stage as to why, why we're here today and why we're talking. And, you know, one of the things, you know, I know would , would be helpful for, for those listening to hear is, and , and Doug, I'll turn this over to you, is just, just to get some high level understanding of the, the general mechanics of deals that we're currently seeing and sort of your, your perspectives on some trends and mo and motivations for why folks are doing deals.
Speaker 5:Sure, sure. Thanks, Tynan . So deals are strong, right? That's what you're saying. Uh, and that's what the ppy , uh, PWC report is SA saying is that overall , uh, the deal market , uh, writ large is still seems to be strong and resilient. There might be a downtick a little bit in some hospital deals, so maybe fewer hospital deals and an uptick perhaps in lots of the ancillary deals. Um, the JVs, the service line initiatives, things like that. But I wouldn't say that hospital deals are dead and the mega deals may not be dead. They're just , um, not, not as plentiful. I think what's driving this some is that when hospitals do present themselves or health systems present themselves for a deal or an acquisition, they often come with negative margin and some deferred capital needs. So they're less attractive , uh, in the deal market now than they used to be when capital was plentiful and cheap a couple years ago when interest rates were lower. Uh, so there , there's there what I think part of what's driving market trends right now is a relatively lack , uh, a relative lack or scarcity of capital , uh, that's getting caused somewhat by decreasing margins across the industry. I think all of our health system clients and hospital clients are seeing , uh, a squeeze on their margins. There's also increased financing costs that are brought about by the higher interest rates and in the current borrowing market, and some systems are coming close to tapping out their debt capacities. So, and, and there's increased regulatory oversight, which you , you know, which Alexis and , and Larry will talk about too. And so all that's driving , uh, I think a movement in the market away from what traditionally were the more expensive types of transactions, say buying a hospital , uh, because those have high purchase price , uh, uh, costs associated with them, or high capital investment demands associated with them, and a movement in the market towards maybe some more cost efficient transaction options like ancillary deals, service lines , uh, and, and JVs. So I wouldn't say that hospital deals are dead and ancillary deals are thriving. Uh, I'd say they're , they're , they're really smaller, smaller adjustments and movements in the market. Uh, and, and some of what I'm seeing now, which I know Alexis will, <laugh> , will respond to from an antitrust perspective, is what I see as defensive deals rather than offensive deals. So when, when, when cash was readily available and it came cheap , uh, health systems would, would do deals mm-hmm . <affirmative> , now they're being more discriminating in, in the deals that they choose. And sometimes what they're choosing to do is be defensive rather than offensive, and that is to pursue a deal to keep maybe one of their competitors from pursuing a deal. Uh, so those are just some of the, the, the, the drivers that I'm seeing in the market right now that are, that are causing , uh, our clients , uh, either to make a, a buy decision or not make a buy decision.
Speaker 3:And I, I think that's interestingly, you know, more and more so even since we, we, we were together earlier in the summer, I think that's one of the things you talk about the service line network agreements, I mean, those seem to be the areas where there's been a , a little bit of an up uptick for us. Um, you know, the other thing is, you know, you , you , you mentioned , um, opportunities. I think one of the other things too is supply and demand. You know, there, there are lots of people who are potentially looking for those dance partners, but dance partners are gonna be fewer and fewer to har harder to come by as, as, you know, as deals slow down , um, or, or transform. So there there're fewer and fewer opportunities. And so the value proposition has to, has to be there and the, the cultural aspect has to be there. The one other thing I'll, I'll share from, from, you know, the p y A side and what I know several of my colleagues are dealing with are that, you know, the academics also seem to be a little bit more active for us than they have been historically. And , um, you know, that's presenting some interesting challenges because some of 'em are doing it for the first time and, and are having to, to wrestle with things like, you know, open medical staffs and , um, seem to be, they seem to be a , a popular landing spot in a variety of different types of affiliations for community hospitals. So, to , to add onto , you know, what, what Doug shared, Larry Alexis, love to, to hear any additional insights that you all have.
Speaker 6:Um , I'll be happy to kick it off Ty and , and , uh, Doug and Ty , that was a really good intro and I'll associate myself with all of those , uh, those comments. I think you're, I think you're spot on. And obviously there's material differences between the , uh, sort of the private equity market for ancillaries or , uh, other , uh, sort of healthcare adjacent transactions as opposed to the core strategic transactions between hospitals and physician organizations , uh, which many of us spent a lot of time on. And I , I'll comment on them just briefly as we kick this off. Thinking about the motivations was your question, Ty and, and from the independent hospitals, and there still are some , uh, at the , and at the risk of being , uh, accused of being overly dramatic, for some of them that motivation remains pure survival. Mm-hmm. <affirmative> . And when you think about where we've been, you know, how many of those independent providers have the capacity to weather another storm like the pandemic we just got through? How many of 'em can afford to continue to staff their facility to full capacity when we have patients boarding in ERs, but empty floors , uh, when we've got psych patients who are looking for discharges who can't get them, who has the cash to do that? Who has the resources to do that if they're independent? The answer is really , um, they need to have a greater economy of scale to do so. And I really think that the same is true for physician groups and physician group transactions. I mean, there's still roll up deals going on out there, and I see the specialty deals as well, but there are a lot of independent physician groups who are in a struggle to survive, at least in certain markets. And here I am in Massachusetts, we just saw one significant , uh, physician group practice , uh, file for bankruptcy , um, and, and with no ready dance partner. Uh, so real interesting time for the, for the direct providers of service, particularly the nonprofit hospital community . Alexis?
Speaker 4:Yeah, I , I agree with all , all that. I think big picture, a lot of it has to do with pressure on reimbursement and higher costs and the variety of ways that appears, whether it's, you know, labor costs , apply costs or interest rates. Um, so I , I think we see a lot of these deals driven by parties who are either in a position of strength or on the flip side in the position where they're declining or worried about declining. So they wanna do a deal sooner rather than later. But a lot of it is driven by financial considerations, but then relatedly or adjacent to that are , or reasons like, you know, better cost efficiencies, better purchasing, lower borrowing costs, getting better access to capital , um, and making those investments that , uh, you , Larry and Doug mentioned about surviving or, or ideally thriving. Um, other reasons are, you know, expand geographically to new areas to integrate vertically into new service lines , um, combining clinical expertise with a partner. So lots of different reasons that we're seeing deals, but a lot of it , um, as you guys noted , is , is driven by financial and , and regulatory reasons.
Speaker 3:So since we've, you know, talked about, we've talked a good bit about the, the , the capital challenges. Doug teed this up a little bit earlier, and , uh, Alexis, I'm , I'm , I'm gonna see if we can continue with you, but you know, one of the, the challenges obviously that, that some of the strategic partners or individuals or organizations that are looking to partner, you know, are, are faced with is how , how do they balance that antitrust, enfor enforcement, you know, how do they, they navigate through that? And then I know one of the things we've also talked about is, is not just at a federal level, but how are some of these state healthcare transaction , uh, laws impacting, impacting these deals? So Alexis, I'm gonna turn it back to you to, given your, your F T C experience and to , to give us sort of a lay of the land of , of what we're seeing or, and or not seeing , um, from the F T C and others as it relates to folks that are trying to get some deals done.
Speaker 4:Yeah, I mean, I think the , the headline maybe to no one's surprise is that this is a pretty tough environment. Uh, the current leadership at the Federal Trade Commission, which is primarily responsible for investigating healthcare mergers and acquisitions, particularly provider mergers, but, but also at the DOJs antitrust division, the leadership at the agencies at federal level are very skeptical, if not a bit hostile, I'd say, to consolidation , uh, across the board, but perhaps particularly in healthcare. Um, so we're seeing very high levels , uh, of enforcement activity, very aggressive enforcement. It's not a massive change necessarily. You know, historically the FTC and D O J have been very active in healthcare for, for years now, about half of the FTCs enforcement actions have come in the healthcare space in one form or another. Um, I think that's still roughly true now, but I think the process has become a bit more intense and cumbersome getting through the merger review process at agencies , uh, in the last administration. So what does that mean as a practical matter? Well , uh, we're seeing the agencies take a deeper and broader look at various issues while they're investigating a merger. So, for example, they're taking a much greater focus on vertical issues and mergers, you know , taking , uh, a renewed interest or perhaps a novel interest in labor market issues that , uh, can arise in transactions. They're exploring new, even novel theories of harm like cross market when, when hospitals aren't even in the same , uh, purported geographic market. So you look at a , a deal like Atrium advocate, that's a deal, I think in prior administrations gets cleared in in 30 days , but , uh, they spent seven months trying to get through the FTC review process in that deal. Uh , it also means we're seeing more broad and cumbersome second request, which of these giant subpoenas for documents and information from merging parties. Um, the agencies have other procedural tools that they've , um, used to slow down the process, like stop granting early termination of the HAR Scott Rodino waiting period. Um, the remedy process has gotten more difficult , uh, and comes with new requirements and new new vetting , um, thresholds we're, we're starting to see, and I guess most recently , uh, even since our, our panel at the annual meeting , um, both the D J F T C released draft of new merger guidelines, and , uh, we could spend a whole program on that, and I'm sure the H L H L A will , uh, but those really lowered the bar for the F T C finding , um, deals to be problematic and increase the bar, if not, take away some of the defenses and arguments , uh, merging parties would have. So this applies not just in healthcare, but across the board, but we're certainly gonna see it when the market share thresholds and the market concentration thresholds have been lowered , um, in terms of leading to presumptions of competitive harm. So overall really , um, tough regulatory review process, although perhaps still one silver lining is we haven't seen that increase , that increased rhetoric translate into many more litigations challenging provider mergers. Um, I think the , the statistics that I kind of back of the envelope calculator only about one to one point a half percent of our deals across the board, not just healthcare, they get filed with the agency result in a merger challenge. And those numbers haven't changed significantly under the , the current administration. So while the environment is tougher, the re rhetoric is tougher in the process is tougher in terms of actual litigation and enforcement actions . The numbers haven't really changed that much. We'll see if that changes after these , the merger guidelines. But , um, um, that's, that's kind of where we stand on the federal , uh, enforcement front.
Speaker 6:And , uh, I'm , I'm real interested in your perspectives on those new guidelines as well. So I'll be keeping an eye out for that. Alexis, I guess I'll confess that , uh, living in Massachusetts, I have a , a perspective on the impact of the state authority over transactions. Um, and it's, I think it's significantly growing and it's growing fast across the country. So from Massachusetts, anyway, you know, we were among the first states to move to improve access to care with a precursor to the Affordable Care Act, which is sometimes referred to as romneycare , um, which got a lot more people health insurance. And then later on we decided we want to tackle the cost issue . So we're now about 10 years since we passed new legislation here in the Commonwealth in an attempt to staunch rising healthcare costs. And what we did was we created a new agency called the Health Policy Commission. It was really a , I think the first of its kind watchdog agency to monitor these costs and their cost growth. Um, we set a target to limit spending growth, which is an arbitrary 3.6%, and think about that, we'll talk about that in a minute. Um, we also imposed , uh, burdensome h s r like process to review transactions and so-called material changes to , uh, organizations, which included a lot of the kinds of affiliations that Doug was mentioning in his opening remarks, not governance level deals at all. The , uh, which that, that additional deal scrutiny had principally targeted the larger systems in our market. You won't be surprised , uh, to hear. Um, they went after , uh, the largest health system, which had plans to acquire two independent community hospitals , uh, which really did need the support. Um, and the theory being that it was too expensive for consumers. So our then New Attorney General, and now our new governor, Moore Healey threatened to sue, and those deals were eventually called off. Um, last year. They raised concerns about some plans by our largest , uh, provider to build three new outpatient surgery centers. And those plans ultimately got scrapped too , as a result of the scrutiny that these new agencies , uh, bring to it. Um, but I guess I wouldn't be doing my job as a hospital lawyer if I didn't point out that the state let , uh, cruise through the merger of the second and third largest health insurers in our market. Uh, Harvard Pilgrim , uh, and Tufts created a new entity called , uh, point 32 . But I do wanna go back to the cost question, which is really what we were hoping to get at when we passed our laws a few years ago. And I think that the pandemic and the staffing crisis that we're in really exposed the absurdity , uh, in my opinion of that 3.6% benchmark. And just think about this, you know , if costs of every good being acquired in service, being acquired by a hospital is say 10% a year, but you're held to a 3.6% , uh, cost growth benchmark. It doesn't take much of a health economist to observe that this is a recipe for crisis, and I'm not being , uh, dramatic on that average. Like the stay went up, you know, 10% from 19 to 22 costs increased 20% in that same period of time. So this , this is , those are real numbers. Um, and despite that disparity between the arbitrary , uh, growth benchmarks and the realities of the costs, there are still cries in our Commonwealth for more teeth to our health policy commission. And so it's not, it's not just Massachusetts. There's a slew of new state laws around the country that are either pre-loss notifications , uh, like New York's new physician transaction law , uh, 4 5 5, 1 of the public health law, certainly worth looking at their definition of material transactions. But California, Indiana, New Jersey, Mississippi, Virginia, Washington, Illinois, Minnesota , um, and we're starting and we're really seeing that , that these new laws and oversights significantly curtailing transactions that many of us would've thought were the right thing for the market. I've gone on too long time and lemme turn it back to you, <laugh> . No ,
Speaker 5:You're , let me real quick, let weigh in on something that Larry was just talking about, if I could, Ty , and just to tell kind of a , you know, a , a boots on the ground story, you know, all this regulatory oversight that, that Alexis and Larry are talking about from a federal and estate perspective. I recently did a deal actually pulled out of a deal where we had four parallel regulatory oversight processes going on at the same time with the same transaction. There was the H SS R, there was three state inquiries going on with this transaction, which really wasn't that big of a transaction. And , and, and the state regulators weren't looking at it because they thought anything was amiss or anything was, was they were concerned about. It's just the statutory processes that this state has, one of which was a Department of Health , uh, oversight, and then two from the atten attorney general's office, two parallel tracks , uh, with the ags office from the charity division of the ags office, looking at just the normal hospital transaction statute. And then , um, the antitrust , uh, division of the ags office and, and then a, a third parallel , um, uh, joint oversight by the Department of Health and the ag. So when all the dust settled, we had four, maybe four and a half or five parallel regulatory review processes going on at the same time for the same transaction with this relatively small community hospital. And the cost in both true dollars, you know, paying consultants, paying appraisers, paying attorneys, and just, you know, people power and , and document production kind of killed the deal. I mean, finally everyone just kind of walked away from it. 'cause just the regulatory burden , uh, was, was overwhelming and not cost of , you know, wasn't the right cost benefit analysis for this small transaction. So it , it really is happening, you know, there, there is a a , a tremendous upswing in regulatory oversight, especially at the state level .
Speaker 6:We could all come up with our 10 figure wasted regulatory process stories, and there aren't, that's not the only one. There's a lot of Right . Absolutely . Right. Absolutely. Right.
Speaker 3:You know, and part of the, part of the challenge with that is, you know, especially when you talk about some of these cash strapped smaller organizations, you know, they're only gonna have so many at bats with the , with the dollars that, that you've talked about, Doug. And so, you know, again, I think then it , then it becomes a function of where where are you gonna place those eggs? And you're certainly not gonna do it for a deal that , um, you know, that you think is not gonna go through. So, we'll talk a little bit, I think one of, when we talk about takeaways, but you know, one of the things that comes to mind too is as we talk about these kinds of, of deals and and oversight is, you know, what should our boards, what should health system boards and how should boards be considering and, and educated and evaluating these kinds of challenges? And, and Doug, I know you provided some insight. This was actually a question that, that one of my colleagues raised as we were preparing is, you know, how, how are the , the Doug's, the Larry's and the Alexis's advising their, their clients' boards as it relates to all of the , the issues we've, we've been talking about. So Doug, I loved your, your perspective on that.
Speaker 5:Sure, sure. Well, you know, I've always said boards and management are gonna do the deals they want to do, right? That's, that's not gonna change. Um , deals usually start at the management level. Um , you know, the C-suite level , uh, among CEOs and CFOs and COOs and chief strategy officers, that's where deals usually start, and then they get to the board , uh, when, when the board has to make its decision on sort of a go, no go , or, you know, do we pursue this or do we, do we not? And I think, you know, he , hospitals and health systems at the management and board level , um, are still gonna do deals that they think or still try to pursue deals that they think make financial and strategic sense for their organization. But in the current climate, we're trying to advise both management teams and boards at the front end as just , just not just dissuade them from doing a deal, but just to sort of sound the, the, the warning bell that this is a different industry and it's a different market than it was a couple years ago or five years ago. Partly the financial pressures that we already talked about and , and really more the , um, regulatory pressures that Larry and Alexis have been talking about. And so for me, it's just really kind of educating management teams and boards on the front end that this could be a long slog, you know, to get through some of this and to know , uh, on the front end what the time commitment's gonna be. You know, some of these state processes can take six or nine months, so you're not gonna close a deal in 30 days. Uh, so educating them as to what the time commitment's gonna be, the , the financial commitment to get through some of these regulatory , uh, oversight , um, uh, hurdles. And then , um, also educating the board and management about what it is that the regulators are gonna be looking at. So we don't say and do stupid things on the front end , uh, that will come back and haunt us on the back end when a regulator is looking at a memo or a regulator is looking at board minutes , uh, or a regulator is looking at a PowerPoint. I know Alexis deals with us all the time , uh, in the four C and four D document productions , uh, that, that he has to do for H S R, but we always, it seems like by the time the regulators are getting there and doing their part, are sort of scratching our head and frustration that what was said , uh, in , in a meeting or put in a PowerPoint that we're trying to do a little bit of damage control , uh, to, to fix when the regulator takes it outta context.
Speaker 4:Yeah, I guess I'll jump on on that, Doug. That's a , a great lead in . Uh, I think I would , um, double down on a couple things you said. One is the early engagement. I, I like to be involved early on, but specifically to , in this environment, to alert the board of what the environment does look like and that they should be prepared for, you know, more time, more cost , and more uncertainty given the current environment. Again, it's, it's not that deals can happen, deals are still happening, they're still getting cleared , um, but there's just, you gotta prepare for a greater , uh, and longer , uh, review from the agencies, which, you know, occurs more time and cost and there can be more uncertainty to the process. But early engagement on the substance too is really important. As you were saying. Um, on the document creation piece, we, we like to talk about good antitrust hygiene and also say , uh, bad documents kill good deals. The agencies do really , um, look to what the merging parties say in their deal documents and in the ordinary course documents they prepare about what the competitive landscape looks like, what they say about competition from their merger partner. And to the extent that helps the agencies, they'll certainly , uh, wave that in front of you during the investigation and we'll plaster it all over their , um, pleadings if they actually sue to challenge their case. So , um, early engagement with , with the business teams on thoughtful , um, and careful document creation, not to have any , uh, unforced errors or ambiguities or misstatements about what the true purpose and effect of the transaction will be are really important. But that kind of early engagement with, with the business team and with the board is really important from, from my perspective too. And Larry , you wanna add anything there?
Speaker 6:Well, only to , uh, second it and some of the things that we see that are the most damaging , uh, show up long before the lawyers arrive at the scene, and they're often in sort of aspirational documents , uh, pro formas designed by bankers or others who are trying to show that a particular transaction will will pay for itself. And, you know, all the best of intentions there , uh, that , that's where those things are created. They're often not created underprivileged. Um, they were designed by people who don't even, who aren't, don't work for the system, they're, they're third parties and consultants. No offense, Ty never seen that from you, by the way. Um, but these are folks who are putting together documents to try to impart, sell their , uh, client on their services . And unfortunately, that's where some of the compliance pornography shows up, for lack of a better term, whether it's antitrust, compliance, pornography, or fraud and abuse issues, which also raised their head. And we'd be remiss to not mention 'em here as well.
Speaker 3:Yeah. Thank , thank you all. And, and Larry, I'm , I've got big shoes to continue to fill, I guess with, with that , um, with those kudos. So thank you <laugh> . Um, we talked a little bit about, you know, cost constraints, rising costs , reimbursement constraints, and I mean, I know that's an area where we, we just, you know, continue to see our clients challenged and it's, you know, it's clinically, it's operationally, it's financially. And, you know, a couple of the things we haven't maybe necessarily talked about yet are , you know, obviously the , the staffing costs, the workforce costs have been huge constraints. Um, I think some of our, our hospital clients are, are seeing that that spend, especially for, you know, traveling nurses and things like that come down, which is good, you know, it, and, and e m r costs continue to , uh, play a big role in, in , you know, cybersecurity and all of that is, is, I know always top of mind nowadays. And Doug already touched on, I think some of the access to the capital markets. But, you know, one of the things that, that we've also been , um, you know, when you think about motivations and you think about access to, to payers and contracts with third party payers and , and arrangements, whether it's, you know, smaller practices looking to align with, with community hospitals or , um, hospital, hospital transactions, you know, we, we've been seeing that it's, it's not necessarily now all about the, you know, the contract rates themselves. I mean, that's still a big part of it from a back to your sort of tell the story, you know, is it a good de , is it a , does it make good business sense, Larry? But it's also the, the access to sort of the volume and the infrastructure to, to continue to, or try and at least tap into value-based care. So I , I'm , I'm not sure, and , and again, that could be a , a whole nother topic about value-based contracts and care, but I, I think hopefully, you know, what some of the, the cost pressure has done is, is may , may accelerate some of the, the , the focus on that value-based care. And back to your, your point, Larry, about, you know, looking at the costs and streamlining the costs . So just a little from, from our perspective as , as to what we're seeing from a, from a cost reimbursement. But, you know, the one thing that, that I'd, I'd love to challenge, you know, the three of you on, and again, you know, in full transparency, a question from, from one of my esteemed colleagues was, you know, if, if these kinds of challenges continue, especially, you know, on the cost side , um, you know, how are, how are providers and they can't sort of manage their way out, let's say, of of the, the situations that they're in financially. Um, do we think, or do you all think there will be, you know, some kind of legislative or regulatory action that that, that may help facilitate that and , um, you know, make some, make, make the opportunity to, to , to do some more affiliations amidst the head waves more appealing. So , um, Alexis, why don't I turn it over to you first?
Speaker 4:Sure. Um, so I think at the , when I think about federal fixes , uh, I don't see that happening. I think , uh, I'm really skeptical of , of anything getting done at the federal level that's at all controversial or , or that big , um, especially with a split house and senate. Um, last congress when there was, and Democrats were in charge of everything, there was this big movement to pass a many trust legislation and almost nothing got done. So I , I just don't see that really happening. Certainly not any legislation that would make it any easier for providers to combine , um, through mergers and acquisitions. I think there's probably the opposite need in Congress, if anything. Um, at the state level, I think it's more of a mixed bag. We've seen some states , um, either pass or update their certificate of public advantage laws or COPA laws , um, to provide providers a pathway to combining and not facing antitrust , um, challenges from the F T C in court. And , uh, you know, in the last few years , uh, a handful of providers have taken advantage of those laws to combine over F T C objections to state approvals of those transactions pursuant to these COPA laws. Um, but on the other hand, you have a state like Maine that just recently repealed its COPA law and took that avenue away from providers. So I think it's inid bag , and as we talked about, some states are now , um, putting up pre-merger , um, regimes in their states or updating their substantive merger laws to focus or give the attorneys general more power to review mergers and acquisitions. So we're really seeing a mixed bag and some cross currents in state level , um, laws that affect healthcare provider mergers. So , um, maybe a little bit more of an opportunity at the state level, but I don't see that at the federal level.
Speaker 6:I think , uh, you're right that we're not gonna see federal legislation that is gonna support the provider community in a meaningful way right now on those issues. Uh, I do think there's probably a lot of bad ideas that, that could actually , uh, see light of day these days. And they are raising , uh, fundamental threats to the hospital care model. Uh , if you ask me, and that's a topic that I find myself, counseling boards and c-suites on regularly, including this morning right before this call, that was really the, the question. And we're looking at things like site neutrality, which in my view, cripples hospital's ability to deliver effective outpatient care and pulls the rug out from under health systems if the , if it goes the way someone like it , uh, pulls the rug up from under those hospital systems at the time when they really can't afford that. And I'm not seeing the second half of the equation, which is, if you change outpatient hospital reimbursement, fundamentally, is Congress willing to make it up on the inpatient side? Uh, that that's the second half of the conversation. You don't , uh, see too much. Um, when we did this program together, friends at A H L A, I had , um, stuffed in the, my jacket pocket, the latest issue of modern healthcare , which had an interesting conversation about this issue, asking about , uh, the site neutrality rules and will that cause hospitals to stop acquiring physician practices back to our overall topic of , uh, deals in the healthcare space. Um, and I think that that , uh, the , the journalist had it right at noting that , uh, site neutrality and changes to outpatient hospital reimbursement doesn't necessarily chill the need for the, for the physician hospital transaction , um, because these deals aren't really what the O I G thinks they are, which is just a way to, to flip the switch on a medical practice and make more money for it. Um, but if these deals need to happen for other perfectly understandable , uh, quality of care, continuity of care, for vision of access, keeping doctors in the Medicaid program, all the right reasons , um, those deals might still happen, but just make it even harder for a hospital to survive , uh, post that. And so that's causing the question that you sort of , uh, hinted at Tynan about what other kind of transactions are out there and whether it's value-based care or not. I do think that there's a real good question about whether hospitals are gonna be hospitals , uh, like we see them today in the future. Are they gonna be something else? Are they gonna be principally inpatient, surgical, high acuity locations? And therefore, will the survivors be those who can, can do that? Uh, I am intrigued by some of the more interesting changes by the way hospitals are operating in this environment. I think the hospital at home concept , uh, is one of the more interesting developments. I find myself , uh, helping a number of hospitals with them and , uh, just this week, a new transaction where they're saying, all right , um, we need to expand our footprint for providing care to patients. We have a limited amount of revenue. Uh , maybe this is a model that we should be taking more seriously in our market.
Speaker 5:Yeah, I have very little to add to, you know, the very astute comments that, that, that Larry and Alexis made. I don't, I don't see life getting easier, and I certainly don't see a legislative fix either at the federal level or the state level. And even if there is one or two states that maybe ease the burden a little bit , um, most of our health systems now are doing business in , in multiple different states, and you know what , what , what they make up in one state, they get dinged in another. So it's just a really challenging , uh, climate out there right now between financial pressures and regulatory pressures, and , and I don't see it getting better. I think things always move fast in healthcare, and I'm, I'm not a good prognosticator of the future at all. But Larry, some of the things that you were mentioning , uh, seem to be perhaps where the industry might head and, you know, it could, there , there's a , with Covid, there was a lot of movement towards telehealth. Uh, there's a lot of movement to , um, uh, health at home , uh, and the hospital at home , uh, concept is , is really intriguing to me. And so I think what's gonna happen is something that we don't even know what it is yet. Uh, it could be some of those things, but my guess is over the next three to five to seven years, the industry is gonna start to pivot somehow to find a way out of this morass that it's in, and it's gonna be innovative new , um, ways to deliver care that we haven't quite thought of yet. And it could be , uh, AI that's driving it. It could be , um, technology that's driving it. It could be changes in genome sequencing and the way we're producing drugs and creating new drugs. So I, I think there's it , while it , the current climate is frustrating, I think there's so much potential , uh, both with our ingenuity , uh, and , and our, and our ability to develop that. It'll be really, I think, fascinating to see where we are three years from now, five years from now. And despite regulatory pressures, despite financial pressures, despite federal and state , uh, bodies that are trying to make it tougher , um, it'll, it'll be interesting to see , uh, where the ingenuity that's natural to the industry , uh, takes us.
Speaker 6:It's gonna be an interesting ride. Doug
Speaker 5:<laugh>, or are we gonna hang around to see it to its end <laugh> ? Well ,
Speaker 3:I was gonna say, I think, I think you've , um, you've, you've put a, a date on the calendar of three years from now for this group to get back together and, and talk through some of the same things and see where we are. We are then . Perfect.
Speaker 5:Um ,
Speaker 3:Doug , see you then , Doug . Yeah, Doug, you did a, you did a great job of, of, you know, kind of getting us, I think to the close to the end of our time together. And I know one of the things that we all felt strongly about when we presented in at annual was, you know, making sure we each kind of had a, a , a , a takeaway that, that as, as folks that are listening can sort of leave with , leave with, and use in their practice, guide their clients, think about , um, you know, a a little bit more. And , um, I'd like to just sort of go around , go around the, the , the table and, and get your all's sort of closing thoughts on takeaways. And , um, just for ease of reference, I can start and then then turn it over to, to Alexis, Doug and Larry. Um, and, and I don't, I don't think I probably gave this appropriate due diligence during our conversation, but, you know, one of the things I think has been a key takeaway for, for the work we've done is, is really thinking about what we call upstream due diligence. And it really gets more towards some of the cultural governance issues. Um, you know , obviously financial and operational are important , but , but I mean, Doug mentioned he was, you know, had a transaction that, that they've walked away from. I mean, I think we've had that experience too, and , and especially in areas where the , the potential target had more robust compliance policies, procedures, and, you know, certainly didn't wanna go backwards and that that was the, the , the, the nail in the coffin for that deal. So , um, I think one of the things takeaway for me is that, that the, the upstream due diligence for somebody that you're looking at transact, transacting with is, you know, just as important as all of the regulatory and the, the , um, you know, sort of the operational and , and structural things that have to get done. So don't forget the upstream due diligence is my takeaway. Alexis, turn it over to you.
Speaker 4:Yeah, I think I probably hinted at , at this a little bit. I think given the current anti trust environment, parties need to prepare early and prepare for the worst, but not to give up because even though the environment is, you know, as tough as, as it ever has been, and you know, there'll be deals where there'll be more time, cost , and uncertainty , uh, the law hasn't changed. So, and we haven't seen a massive jump in the , the cases that the FTCs been filing. So there is still pretty good wide scope to do a lot of deals , uh, in the current environment. And while the F T C is exploring some new theories , um, in , in investigations, it hasn't brought a case on some of the more novel theories. And if it does or tries to use , uh, these new draft merger guidelines in a way that , uh, really pushes the bounds. Um, we've started to see courts , uh, reject , uh, F T C and D O J merger challenges , uh, in cases recently. So , um, so, so don't give up hope. And that may sound a little self-serving as an N H Ss lawyer, but , uh, there , there really is a , a wide scope to continue to do deals, but this is an environment where just we have to be more careful and thoughtful. Um, earlier on in the process, I'd say, Doug ,
Speaker 5:Thanks Alexis. Um, we've been talking a lot about trends, and I always like to say that , um, we drive trends, trends don't drive us. And so my advice, my takeaway, I guess is , um, do the deals keep doing deals, <laugh> do the deals that make strategic and financial sense for you? Sure, it's a tough marketplace out there right now. There's financial pressures, there's regulatory pressures, but in , in some ways, the world is what it's always been. Do the deal that makes strategic and financial sense for you. But because of all this regulatory pressure and oversight that we, we have, that we that we've been talking about, do your homework, like Alexis says on the front end. So keep doing the deals, do the deals that make strategic and financial sense, but do a lot of prep on the front end so that you're, so that you're ready on the backend when the regulators , um, walk through your door.
Speaker 6:And , uh, let me add a corollary to that, Doug. 'cause I agree with you that we were , we're supposed to drive trends , uh, but we're talking to a , a group of lawyers and just amongst ourselves, I think we can agree that we're often a reactive bunch. Um, we will sometimes wait until the laws are done and tell our clients , uh, what they mean. But I think this is a terrible time to do that. I think that not just lobbyists or lawyers who are in the government affairs space, I think transactional lawyers and regulatory guys like me need to be much more responsive to policy changes that we see coming. The states are legitimately concerned , uh, with cost containment, I get it. Um, and they're targeting transactions because that's what they're, that's what they're seeing in other markets. They're seeing it in my market and others, and they're introducing new laws around the country and they're popping up like mushrooms. So my advice to my brothers and sisters in the bar, in the healthcare bar particularly, is to really be alert to these changes in your markets and learn from the mistakes that we've done in other parts of the country. So , and then let your legislators know , uh, we have seen , uh, some of these bad ideas , uh, get chilled down when the providers , um, either through their associations or just directly speaking to their legislators , explain, Hey, this bill if passed, will cause us to not make investments in the community because we can't, or we won't be able to answer the questions that our board members are demanding. So that's a call to action. Um, I hope , uh, I hope it didn't come off as too preachy, but , uh, that's my answer.
Speaker 3:Well certainly, certainly appreciate spending time with the three of you. It's, it's in , in my self-serving way. It's, it's been really great to hear your expertise, learn from you all , um, be able to spend time together, not only once, but twice. And , um, I think, I think we are gonna hold Doug to his suggestion. And if we don't see each other, hopefully within three years, three years, we'll , we'll be back. So , um, I think with that, we're done.
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