Editor: Please tell our readers about your firm's activities and particularly your own practice?
Zall: Proskauer has been representing the health care industry for decades. Today, approximately 20 lawyers in our firm spend their full time representing health care clients, and another 50 spend a significant portion of their time doing so. We represent clients in virtually every segment of the industry in corporate transactions, regulatory navigation and compliance, third party reimbursement and payment matters, and dispute resolution. My own practice is focused on the corporate transactional side, including mergers and acquisitions, physician and commercial joint ventures, restructurings, and financings.
Editor: Health care reform will change the landscape not only for the healthcare industry but for all businesses and individuals. Can you summarize what the President has proposed?
Zall: The President's first objective is to come as close to universal coverage as possible - to bring in roughly 50 million Americans who don't have any insurance and improve the coverage of another 50 million underinsured. We can expect the Medicaid and Child Health Insurance Programs to be expanded and the federal government will subsidize the purchase of health insurance by the working poor (up to 300-400 percent of the poverty level) who can't afford it.
Secondly, the President wants to institute a variety of insurance reforms that would make it easier for people to obtain coverage, and he wants to establish insurance exchanges where consumers can secure their insurance if their employers don't offer it.
Lastly, the President seeks to pay for the insurance expansion by reducing health care costs. The Congressional Budget Office estimates that coverage expansion will cost about a trillion dollars over ten years. There are a variety of methods under consideration to find the money, none of which are popular. These include cuts in provider payments, taxing health benefits, and raising taxes on high-income individuals.
Editor: Does anyone seriously dispute that health costs must be brought down?
Zall: Virtually all observers agree that our current health care spending and rate of growth is unsustainable. We spend more per capita on health care than similar countries, and we don't get better outcomes for our citizens across the board due to well-documented variations in quality and utilization. And the high cost of health care services not only creates access problems for consumers, it also presents a crushing burden on our business community and on taxpayers who foot the bill for private and public insurance programs. Of course, the real challenge for the country -and many of my clients - is how to bend the cost curve without jeopardizing the things that are working well in our medical care system.
Editor: How will health reform affect your clients in the short run?
Zall: Well, it depends in part on the client. But there are certain things that we know are likely byproducts of the changes under consideration.
First, as a result of the proposed reductions in Medicare and Medicaid, we expect reduced growth factors or even cuts in payments to hospitals, nursing homes, physicians and diagnostic centers. These reductions will tend to marginalize the weakest players and may trigger bond defaults and other financial distress. In fact, we are already seeing an increase in the number of bankruptcy filings.
Further, we will likely see consolidation of provider organizations, with stand-alone hospitals and medical groups agreeing to be purchased by the stronger, larger organizations. In addition to horizontal consolidation, it is likely that there will be vertical integration with physicians selling their practices to health systems, which will also acquire long-term care facilities so that they can offer the full continuum of care. Even though we expect a more aggressive antitrust enforcement posture from the Obama Administration, in many markets provider consolidation should not trigger serious anticompetitive problems.
On the payer side, it is likely that there will be reductions in Medicare and Medicaid payments to health plans.
Editor: I'd like to follow-up on your point about health care restructurings. How active have you been in this area?
Zall: Both the firm and I have been very involved with a number of bankruptcies, where we represent hospitals or nursing homes that have filed for Chapter 11 protection. For example, in New York, we represented two not-for-profit hospitals that acquired other facilities in their market in 2006. In one case, our client was able to arrange commercial financing, renegotiate more favorable payor and vendor contracts, and complete a successful turnaround of the acquired hospital. In the other case, our client could not turn the red ink to black ink and we had to file a Chapter 11 proceeding and close the facilities they had acquired.
Editor: Is there activity by private equity groups in restructuring?
Zall: Yes, there is more than many people realize. In some cases, these investors own hospitals or other health service companies that were heavily leveraged and now have debt coming due and need to refinance. In other cases, the restructuring need is occasioned by operating difficulties, reduced reimbursement, or problems working with physicians. In those later cases, the restructuring has had to include either selling the facilities or filing bankruptcy.
But, as you know, sometimes restructuring situations present attractive investment opportunities. Strong companies can pick up facilities that can be turned around and operate profitably. There is also sometimes opportunity in taking distressed properties, shedding the unproductive assets while leaving the more productive assets.
Editor: Some, including the President, have pointed to the Cleveland and the Mayo Clinics where physicians are employees of the clinic, which establishes the benchmarks on care and then decides how successful each doctor is in meeting them. Those clinics have converted to electronic medical records. Do you think such ideas would make a significant difference?
Zall: Most practitioners in the country are either in solo practice or practice with just a few colleagues. There is ample evidence that there is greater efficiency and better care in group practices. It's also a fact that these larger groups are purchasing electronic health records in larger numbers and these information systems equip them to operate more cost effectively.
But it isn't realistic to assume that most doctors in the country will be able to establish this type of integrated multi-specialty clinic in the near term. One of the concerns many of my clients have is that there doesn't seem to be enough thinking about how the delivery system becomes more efficient. Where are the resources - money and technical assistance - necessary to accomplish the transformation that many agree is desirable but most acknowledge is difficult to achieve overnight?
Editor: What about the other major players in the health care system? How will they be affected?
Zall: Our life science clients are worried too. There is going to be a ripple effect in the pharmaceutical and the medical device sectors that previously were selling into a fast growing health care industry. For example, doctors and hospitals are going to be buying less equipment and they will be penalized if they prescribe brand drugs instead of generics. And the government payers are likely to engage in more competitive bidding contracts.
These pressures are likely to result in a form of Darwinian "survival of the fittest." Our clients that are well-managed and capitalized believe with good reason that the tougher competitive marketplace will enable them to achieve advantage over more marginal players. We are already beginning to see acquisition activity wherein consolidators are emerging in certain sectors - such as population management, hospitals, assisted living - and buying weaker, poorly positioned competitors.
Editor: What are the other areas of opportunity that your clients see in health reform?
Zall: Let me mention three. First, the cost pressures facing the industry have led to opportunities for low-cost service providers to emerge. For example, we represent a private-equity backed retail health company that is offering convenient, affordable walk-in medical care as an alternative to expensive emergency room care.
A second area of opportunity lies in providing more information to consumers so they can take more responsibility for their own health care management. We represent a company that has developed a web-based personal health record. There are a number of legal issues raised by this emerging technology, including ownership and management of health data, HIPAA privacy and data security requirements, and the relationship of the consumers to their employers and insurers.
Thirdly, there is no question that health care information is transforming medical care, with the potential to lower costs and improve results. We represent a client that has automated the physician office, providing hosted practice management and clinical records. Their applications have lowered the costs of running the office, and enabled the medical groups to recover their receivables more quickly and in higher amounts than before.
Editor: How much will government's role in regulating the health care system increase?
Zall : For better or worse, government will be actively involved in regulating the system. Government currently pays for about 50 percent of all health care costs through Medicare, Medicaid, Child Health and other government programs. In the future, this percentage will increase. And, as you know, "she who pays the piper calls the tune."
In addition, we are seeing government step up its enforcement activity around what they call "fraud and abuse." Both federal and state government agencies are hiring prosecutors to root out "false claims" and seek to recover funds. As a result, a very active part of our practice at the firm involves representation of providers and plans and others in developing compliance programs to manage this risk, and defending government investigations and recovery efforts when necessary.
If the proposed Health Reform plan passes, I expect we'll see at least two new areas of new regulation. First, the plan calls for the creation of insurance exchanges in which consumers can assess and purchase health insurance. These exchanges will likely be established at the state or regional level, each requiring extensive regulation.
Secondly, the President suggested that the federal government create an independent body of medical experts - almost like a Federal Reserve Board - to conduct comparative effectiveness of new treatments. If this goes into effect, there will need to be rules about how these bodies will conduct their business and what power they will have over the approval of new drugs and devices and treatment modalities.
Editor: Can you foresee how all of this is going to shake out?
Zall: Of course, no one can safely make predictions these days. But there is a consensus that the status quo needs to change. Although some may be willing to keep what we have, and there has certainly been fierce political backlash to the initial Congressional proposals, most objective observers agree that if we don't implement changes, the health care system will fall of its own weight. In my opinion, the Congress will pass a reform bill, though it is likely to be less comprehensive than originally proposed.
Published September 1, 2009.
