Hedge Fund Led By ‘World’s Most Feared Investor’ Buys Stake In South Florida Medical Company
Elliott Management, a $34 billion hedge fund, has acquired a 7 percent stake in Mednax and intends to engage company leaders regarding “strategic options.”
In August, Bloomberg published an article called “Elliott Management head Paul Singer the ‘World’s Most Feared Investor.’” The article said Singer’s activist investor strategy led to the ousting of Arconic Inc.’s CEO and a battle with fellow billionaire Warren Buffett over the takeover of Oncor Electric. He was also in the headlines for battling Argentina’s government over its debt limits.
Now Singer has turned his attention to Sunrise-based Mednax (NYSE: MD), which owns medical practice groups across the country and several health care technology and billing firms.
On Nov. 16, New York-based Elliott Management and its affiliates disclosed that they obtained a 7 percent stake in Mednax worth about $84.9 million.
“The reporting persons believe that the securities of the issuer are undervalued and seek to engage in a constructive dialogue with the issuer’s management and board of directors regarding strategic options and operational opportunities to maximize shareholder value,” Elliott Management stated in the SEC filing. “The reporting persons believe that there is substantial upside from the issuer’s unaffected share price level of $43.37 per share, the closing price of the issuer’s shares on November 3, 2017, the last trading day prior to the reporting persons’ increased share accumulation.”
Upon disclosure of the news, Mednax shares jumped $6.11, or 13.9 percent, to $51.76 Thursday.
Mednax officials couldn’t immediately be reached for comment.
CFRA Research equity analyst Danny Yang kept a “hold” on Mednax shares and said a partial or full sale of the company appears possible and would be a positive for shareholders. However, Thursday’s gain in stock value was “purely speculative.”
Mednax is greatly impacted by the future of the Affordable Care Act, especially the Medicaid expansion that provides more coverage to the children’s health services offered at its pediatrics division.
Reimbursement Changes, ACA And Disruptive Technology Redefining Healthcare Real Estate
Healthcare real estate has been changing and evolving according to payment reimbursement changes and increasing demand for medical office space due to growing patient populations since the passage of the Affordable Care Act and the entry of baby boomers to the Medicare population.
Cushman & Wakefield Senior Director in San Diego Travis Ives asked panelists at Bisnow’s San Diego Healthcare and Life Science Summit how increased demand for healthcare services and disruptive technology are impacting healthcare real estate. He said over the past six to eight years, the healthcare sector has enjoyed increasing absorption and declining vacancy.
“There’s more demand space, but type of space is the focus,” said Scott Mackey, a principal at local design and engineering firm Lionakis.
The ACA was intended to create value, so it allows patients to make informed decisions about where they want to receive care based on preferences like location, convenience, facility efficiency and timing, he said. So delivery of care became more patient-focused, with providers placing medical office buildings and clinics in neighborhoods close to the patients they serve.
Providers are motivated by cost containment, Mackey said. So when construction costs shot up, they began looking for ways to deliver care more cost-effectively. Providers began putting healthcare facilities in all types of spaces people frequent or congregate, beginning by backfilling retail space vacated by brick-and-mortar retailers as e-commerce gained market share and in grocery stores and big-box retail stores like Walmart.
Healthcare providers are beginning to take advantage of the drive to add outdoor spaces and other amenities in the workplace, according to Swinerton Project Executive Elizabeth Hawkins.
“Healthcare is sidling-up next to that,” she said, noting providers are adding on-site outpatient services as workplace amenities.
Mackey cited Scripps Health’s new clinic on Qualcomm’s office campus as an example, and said Hoag Health recently opened a clinic at a 24-Hour Fitness center, which also provides the flexibility to offer other programs like weight loss.
Mackey said in building out spaces, providers are looking for value and are moving to modular wall systems that provide the flexibility to change the use quickly and cost effectively. He said even complex uses like surgery centers and imaging facilities are moving in this direction and cited a mobile surgery suite created by Cedars Sinai for battlefield use. Mackey said this prototype could be adapted to civilian use and is the ultimate in flexibility, because it can easily be moved to different locations as needed.
Nationally there is a trend toward the merger of healthcare systems. Mackey said doctors once wanted to own their own buildings, but now work for health systems, which are buying out physician groups and other independent providers. As a result, big hospital systems own the majority of healthcare real estate and control delivery of care in their markets, which is impacting the build environment and providing them leverage for negotiating reimbursement deals with insurers.
Hawkins said San Diego is unique in that the huge life science/biotech sector is converging with hospital systems to create the biggest system of healthcare in the nation.
“The future is about tailoring care to a patient’s specific DNA makeup,” she said. “We’re in a better position to do that than any other place in the nation, because we have all the key pieces needed in San Diego.”
With value and volume the top priorities for providers, sustainability continues to be an important aspect of designing healthcare facilities, Hawkins said. She said it is commonplace and integral to the building process.
Mackey said inclusion of sustainable features comes down to cash flow — it has to make sense and provide a return.
“Utility bills at healthcare facilities are enormous, and anything you can to do lower costs is important,” he said.
This is why infrastructure in old buildings is being replaced with more efficient systems, he said, noting that as providers pursue ownership, they anticipate a 30-year horizon for new buildings, so LEED makes good sense.
Disruptive technology like Skype, which allows patients to have a video appointment with a doctor anytime via mobile devices, will eventually impact the medical office building footprint, Mackey said. Hawkins said providers are already pulling back on space commitments. But due to low MOB vacancy and changes in reimbursements by the Centers for Medicare and Medicaid Services, her company is still building ground-up MOBs and refurbishing or repositioning existing buildings in the community as MOBs.
She said legislation made reimbursement site-specific by requiring the CMS to reimburse providers based on type of license, with higher payments for services provided at hospital facilities. This legislation is driving hospital systems to expand MOBs on hospital campuses, rather than off-site, she said.
Disruptive technology, such as the Skype appointments, is making healthcare more accessible, consumer-friendly and cost-efficient, as well as improving price transparency. Hawkins said patients can take a picture of a rash, send it to a physician service via a mobile device and get a diagnosis for $9, or perform an EEG that would cost hundreds of dollars at a hospital inexpensively on an electronic tablet. She said technology will increasingly dictate where people get care and lower costs. Providers cannot ignore this trend and will shift to accommodate it, she said.
Transitioning to electronic medical records is also about adding value, but EMRs are not attaining their full potential for data generation, which could improve outcomes across populations, because paper copies are being scanned into the system rather than entered as data, Mackey said. He said EMR data could also provide greater price transparency and help providers determine where to locate facilities.
Mackey also noted rumors that Amazon may plan to enter the healthcare arena, partnering with patients to provide access to medical records and access to low-cost healthcare services. Amazon’s involvement could provide a big data resource for medical researchers with collection of medical records data, if patient privacy issues regulated by the Health Insurance Portability and Accountability Act can be resolved, he said.
How Affordable Care Act And Millennials Are Changing Healthcare Real Estate
Healthcare commercial real-estate is a unique, subspecialized segment of the entire commercial real-estate industry. According to NAIOP Research Foundation, U.S. nonresidential construction spending in 2016 totaled $455.3 billion. Of this, approximately $41.4 billion (~9%) was spend on healthcare construction.
Strong demand from an aging population in setting of industry consolidation continues to propel the construction of large, consumer-friendly patient care facilities. Colliers International states that in 2016, over 22 million square feet of new healthcare commercial space was delivered, following 14.6 million square feet of deliveries in 2015. Despite a robust supply of new healthcare commercial office space, national vacancy rates, according to Colliers, continue to hit all time lows (7.4% at year-end 2016) with full service gross rents rising by almost 8%.
To better understand these trends, Clineeds, a free online platform designed to connect commercial brokers with healthcare professionals looking for office space, conducted a survey of its users consisting of healthcare professionals, hospital executives, and commercial brokers specializing in healthcare real estate. Over 79 commercial brokers along with 85 healthcare professionals/executives responded either partially or fully to the survey request and provided commentary on several questions.
“As a healthcare real estate tech platform, it’s important for us to understand the trends in the industry,” said Clineed co-founder Rishi Garg. “How are these trends impacting future decisions to construct, purchase or lease commercial office space?”
Here are the results, summarized below:
Retail clinics are on the rise. Cost-effective, convenient care provided at retail clinics has struck a chord with millennials. In an effort to capture this market, healthcare organizations have begun to partner and lease space within traditional retail outlets in lieu of purchasing offices. These leases, unlike traditional commercial leases, are faced with regulations regarding proper use, zoning, biohazard and medical waste. Also at play are issues regarding Starks Law and other anti-kickback regulations, often requiring the additional expertise of a healthcare lawyer.
Commercial office space close to hospitals retain value. Healthcare professionals continue to face declining reimbursement from insurers and government healthcare programs. This has indirectly impacted rent rates of commercial offices near hospitals.
To make up for lost income, physicians have substantially increased their productivity by adding new patients and extending office hours. Medical providers, especially surgeons, overwhelmingly stated they would prefer to rent an office near a hospital and not waste time commuting. As a result, commercial office space near hospitals continue to retain significant value. According to some brokers, in certain areas of New York City and San Francisco, rent may even exceed that of Class A commercial office space. For this reason, hospital executives continue to show a strong willingness to construct commercial space near their facilities with the added benefit of making making millions from services ordered by an affiliate physician. Large healthcare real estate investment trusts (REITs) have also shown a willingness to purchase large offices near medical campuses and hospitals given above market rent rates. Unfortunately, given the size of most transactions, small investors remain outmatched in this market.
Conversions costs remain significant barrier to supply. Transitioning a commercial real estate office to healthcare space are fraught with challenges. This has limited supply of these offices in certain markets. Aside from the myriad of regulations, the build out costs for many physician and dental offices remain significant. Owners and operators of large commercial buildings are hesitant to invest in such projects given the everchanging healthcare landscape.
What’s In Store For 2018?
Recently in an article titled The U.S. Medical Office Market Could Be Heading For A Bubble, David Park, senior SVP of Construction Novant Health, raises the concern of a potential bubble in healthcare commercial market due to a “population lull and changing technology.” Although most respondents failed to agree or disagree with that statement, a resounding concern exist about the impact changes to the ACA (Affordable Care Act) may have on yearly budgets. Short term, many hospital executives stated they may have to re-evaluate FY 2018-2019 capital expenditures, depending upon the costs of implementing new regulations and potentially lost revenue from changes to the ACA.
Although this may disrupt upcoming projects, long-term healthcare executives and commercial brokers continue to remain optimistic and bullish.
“Healthcare real estate is a unique subset of the commercial real estate market, influenced by factors beyond supply and demand. It’s essential that medical professionals partner with brokers knowledgeable in this field, and use specialized data to help them make smart leasing and construction decisions,” added Garg.
A Look Forward To Health Care In 2017: Top Five Trends
The new year is already underway and we expect both a new Republican-dominated Congress and President Donald Trump to bring ambitious policy changes to health care. With significant pent up energy among the Republicans and a limited 18-month window for legislation, lawmakers will be in an immediate all-out policy-making mode. This is particularly true for health care, which many in Congress consider a top issue on the docket. With an eagerness for change, health care is in flux, and difficult decisions will need to be made that will directly affect Americans both socially and economically. In this world, many are left wondering what to expect in 2017. Here are the top five health care trends to watch in the New Year.
In all likelihood, legislation to repeal to the Affordable Care Act (ACA) will be sitting on Trump’s desk in short order. But a replacement plan will be missing and will require the balance of the year or later before it is complete.
Despite all the rhetoric around “repeal and replace,” the governing realities are much more complex. For one, Republicans have a lot of finer points to work out. Five lawmakers and two conservative think tanks have introduced different health care blueprints and Republicans will work to get at least a handful of Democrats to sign onto their proposal, meaning we’re in for a year of consensus building as essential questions are answered and final proposals are built.
For 2017, that may not be too much of an issue. Open enrollment closed on January 31 and those that have ACA coverage will keep it, but the clock is ticking. Insurers will need certainty around the law so they can design plans, set rates and premiums, and decide where they want to participate before some or all of the ACA exchanges phase out. If no replacement is forthcoming, the consequences could be significant, particularly for hospitals and health systems that must provide care regardless of insurance status, with reduced overall payments to offset the expense.
And the pressure is on for lawmakers, as well. Millions of people now depend on the ACA’s benefits — from those who have gained coverage through the marketplaces and Medicaid, to children that can stay on their parents’ plans until age 26, to those receiving no-cost preventive services. A total overhaul could mean taking those benefits away completely, or shifting people into the ranks of the underinsured.
Similar to an elaborate game of Jenga, our health system is made of interconnected pieces that if pulled at the wrong time or the wrong way, may result in the collapse of the entire structure. No question, change is needed. But we also can’t return to the days of millions of uninsured, coverage lock-outs due to pre-existing conditions, emergency rooms as the site of primary care, an unmanaged population that is invisible to the health care system, and ever-escalating costs.
In the end, 2017 will be the year that we move beyond some of the partisan stand offs that have tainted the ACA. One hallmark of these reforms will be moving away from the top-down federal mandate approach toward one that prioritizes customization and state-led innovations.
Health Care Hunger Games
Last year, I wrote about MACRAnomics, or organizational and financial changes to be unleashed with the new physician payment model. The question for 2017 is whether the Republicans will keep expanding current alternative payment models with some necessary improvements, build only on physician-led approaches, or turn the entire movement over to the private sector to figure out on its own.
Each choice has implications, some more advantageous than others. Letting the markets figure it out is in line with Republican ideology about getting government programs out of the way of private sector innovation and consumer choice. And it could be accomplished with Medicare Advantage (MA) plans — a favorite of Republicans because they provide private plans with fixed amount for care, allowing the plans themselves to push providers into alternative payment models (APMs) if that is effective at reducing costs and risk. But to date, such a push has been slow to materialize, with CMS finding that most MA providers remain in fee-for-service (FFS) and focus on cutting rates, not incenting the redesign of care. Moreover, even if MA plans embraced APMs, only about one-third of beneficiaries are covered in these plans, with even lower adoption in some states (2 percent in Wyoming). This means the status quo of FFS payment in Medicare for most providers, which keeps the system tied to volume-based payments that could lead to unsustainable cost growth and budget overruns.
The second option is to alter the current APM through rulemaking to favor physician-led approaches and physician-owned hospitals and outpatient clinics. These approaches could lead to greater employment and consolidation of physicians, as well as a temptation to avoid caring for the highest-risk populations. This in turn would lead to some patients delaying care or turning to emergency rooms for ambulatory treatments.
The last and most advantageous choice is to build on the APMs that are currently in place, with improvements to ensure they work to their full potential. Significant provider sector investments have already been made in these models, and any reversal of the current movement toward value-based care would cost the sector billions. Moreover, they are bearing the predicted fruit. Today, about 30 percent of all Medicare reimbursements are now flowing through an alternative payment model, and just in the Medicare Shared Savings Program, participants have generated $1.29 billion in savings since 2012, while improving quality in 84 percent of all quality indicators. Premier’s experience with our ACO collaborative has actually been even better, delivering three times the return as all the other ACOs in 2015.
Rather than throwing the baby out with the bathwater, I think Republicans will largely keep the current value-based care models in place today, while creating new options that give physicians greater choice. This is the only antidote to perpetual cuts to fee-for-service (which we can most definitely expect in any repeal and replace plan), as well as rising costs for medical devices and drugs. We will see substantive policy changes, such as added use of legal waivers, changes to the measures and benchmarks, fixes to the risk adjustment methodology, and potentially changes to the savings shared back with providers. But no matter how it’s organized, the writing is on the wall — we are long past the days of rewards based on consumption. In 2017, value becomes the new economy and measurement its currency.
50 Shades Of Health Care
While the ACA was predominantly a federal program pushed down to the states, the opposite dynamic is likely to be central to the Republican replacement plan, instead pushing greater control to the states to design their Medicaid programs as they deem fit. This will likely make Medicaid expansion more palatable to conservative Governors and legislatures that previously rejected it, as they will now be given the freedom to structure programs to include personal responsibility requirements such as employment, co-pays, or lifestyle changes. But, to gain the best results, providers need to find more efficient and innovative ways to care for Medicaid recipients. And to make the most of what is likely to be reduced federal financial support, states will need to explore delivery system reforms that improve the health of communities and control costs.
Tapping new advancements in data and enlisting health systems that share the same goal to align their performance to benefit all residents, more providers may push states to pursue Medicaid waivers, particularly those that test delivery system reform. These programs align well with the alternative payment models in MACRA, are budget neutral, and have been shown to align financial incentives with evidence-based best practices in population health management. Using these waivers, states are able to foster a locally driven move away from the fee-for-service mindset that focuses on treating the sick, to a system that emphasizes prevention and wellness — and saves a lot of money in the process.
Take Alabama, which last year won a waiver to provide care to 60 percent of the state’s Medicaid beneficiaries through regional care organizations (RCOs) that receive a set per member, per month fee for all care delivered. Similar to other payment programs, if quality is maintained and the care delivered costs less than what was allotted, the providers keep the remainder. If it costs more, the providers are at risk for the overage. Although Alabama is still working to set this program up, other states, such as Colorado, Maryland, and Washington, with similar experience with these types of waivers have reported strong health care cost and quality gains.
Still other states, such as Ohio and Arkansas, have applied for and won grants to test episode-based bundled payments for certain high-cost acute care episodes, with providers eligible to receiving bonus payments for cost savings if outcome goals are met.
In 2017, I expect many more of these innovative programs to produce results, and states that have been waiting to see the returns will follow with applications modeled on the most successful programs. I also expect that 2017 will be the year that providers increasingly leverage these programs through the creation of provider-sponsored Medicaid managed health plans that contract directly with the state, aligning the financial risk directly with performance across the continuum of care.
Year Of Living Competitively
With this election, many pharmaceutical companies may have thought they would get a reprieve on pricing, but escalating drug costs remains a huge issue on the table.
Drug price increases affect consumers in a number of ways, including insurance premium costs and higher co-pays for therapies. In fact, Blue Cross Blue Shield of Idaho recently increased costs for its plans by 49 percent, attributing 41 percent of the increase to escalating drug costs for beneficiaries. Similarly, in 2016, the top 10 Medicare Part D prescription drug plans increased their premiums by an average of 8 percent, with five of the plans raising premiums by double digits, the highest rate of increase in the program’s history.
Driving some of these price increases are anti-competitive economics. A recent Senate Special Committee on Aging Report found several market dynamics that contribute to the problem, including sole source drugs that allow for monopoly pricing power, small markets that do not provide enough competitive leverage, and closed distribution channels that prevent new competitors from accessing the drug for necessary generic or bioequivalence studies. We expect 2017 to be the year where Congress, the states, and the courts focus less on price controls and more on closing loopholes and market anomalies that have to date worked to prevent competitive forces from modulating prices.
At the regulatory level, we expect bipartisan support for new legislation that would require the Food and Drug Administration (FDA) to fast track new generic drug applications in cases where there are two or fewer manufacturers in the market, levying a decision within 150 days, as opposed to the four plus years it can take today. It’s also safe to assume we’ll see action on efforts to ease closed distribution regulations to allow generics competitors to gain appropriate access to samples that would enable testing of therapeutic equivalence.
In the courts, state, and federal attorneys will take up a myriad of anti-competitive dynamics that have been used for years to extend patents or prevent competition in the marketplace. Suits have already been filed to challenge the biosimilar 180-day waiting period, which today requires biosimilar competitors to notify the brand maker of their intent to market after they have FDA approval, as opposed to in tandem with their filing. This can delay market entry by six months or more. And we can expect more scrutiny of pay-for-delay deals where branded manufacturers reach agreements with generic companies to delay market entry for new products in exchange for cash or other payments of value.
Through The Looking Glass
Consumerism has been on the rise in health care for the better part of a decade, but it hasn’t truly materialized as many would have envisioned. Consumers today have more cost and quality information than ever before, but it can still be difficult to uncover meaningful differences between the various options. In other cases, the information is not personalized to them, providing information on total costs as opposed to their individual out-of-pocket expenses. Moreover, even in cases where consumers have a clear choice, they may not be able to act on it due to health plan or other restrictions.
But as we move into a post-ACA world, we can expect more consumers to become directly exposed to costs through health savings accounts (HSAs) and high-deductibles, meaning that they are going to seek care choices that provide the most value and convenience to them. The net is that providers need to start thinking more broadly in this new world — not just about how they deliver care, but about the total experience. Is the website easy to use and mobile friendly? Can patients book lower cost FaceTime appointments for non-emergency consults? Does the organization provide enough parking? Do patients understand costs up front, before receiving prescribed care? Can you describe your quality in terms that patients can really understand? Is the billing system easy to understand and straightforward?
On the policy front, that could involve some substantial changes, particularly at the state level, where new laws could be enacted to protect or empower consumers that are increasingly becoming the payers for health care services. Already, four states (California, Florida, Connecticut, and Utah) have passed legislation that would cap the amounts that can be collected from “surprise billing” or the practice of billing for out-of-network costs that the individual had no knowledge of receiving. Still more passed laws requiring disclosure of out-of-network costs and billing estimates. And five states (California, Florida, Maryland, Oregon, and New Jersey) have comprehensive sites that allow consumers to compare the prices and charges for common procedures. Going forward, it’s reasonable to assume that there will be greater transparency around cost, quality, and co-pay data to enable consumers to make more informed choices.
Not only is care going beyond the four walls of the provider organization, but so is the entire buying experience. For 2017, clinicians need to stop thinking exclusively about just performing better than their local competitors and start thinking about providing a customer experience that rivals the top consumer brands.
Without question, 2017 is going to be a year of change. But through it all, we must remember the larger purpose. Republican or Democrat, we’re all aligned behind designing a health care system that is coordinated, innovative, cost-effective, high-quality, available, and affordable for all Americans. If we keep the end goals in focus, this could be the year of tremendous promise and progress.
Source: Health Affairs
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