The latest episode of the Governing Health podcast gets back to basics: the board’s responsibility for monitoring the impact of key economic trends and indicators. McDermott partner Michael Peregrine welcomes special guest John Challenger, CEO of executive outplacement firm Challenger, Gray & Christmas, who recently appeared on the Today Show and is one of the foremost thought leaders on the US economy and workforce. Together, John and Michael delve into today’s top economic issues and their significance for health system board governance.

Today’s “million dollar question:” How long is the economy expected to grow, and when should the finance committee look for signs of a recession?

Like canaries in a coal mine, the early warning signs of a slow-down are already present—if you know where to look. The current job creation statistics and record low unemployment numbers signal a tight job market for skilled workers. Companies may start to put expansion plans on hold for fear of being unable to recruit enough skilled workers to staff new plants or operations. “You can’t get to this full of an employment situation without the risks of a recession starting to grow,” John said. “Two years from now, it seems inevitable we’re going to be in some kind of recession.”

What are the governance ramifications of the most recent unemployment and job creation statistics?

Despite low unemployment and competition for skilled workers, wages are not going up. The board should engage with HR executives and recruiters to analyze how best to allocate capital toward growth-oriented plans. Retention of high-performing and high-skilled employees should be at the top of the board’s agenda. “Look at your talent inside your organization and understand who your key leaders are—the people you need most to stay at the organization and not be recruited away,” John said. “Fighting to keep them and making sure there are plans in place to hold them is really critical, because replacing them means you have to find new people with those same skills.” Even if you can find the right skillset in this tight job market, the new hires will not have the corporate memory or know-how that makes your current employees so valuable, he said.

Recent employment statistics also indicate that ambulatory jobs are at the forefront of job creation in the health sector. “This suggests that we’re beginning to see direct manifestations of health systems moving their focus to ambulatory care and away from the inpatient facility,” Michael said.

Does John Flannery’s departure from GE after just over a year as CEO indicate a new phase of “short termism” in board oversight of the CEO?

More than 150 CEOs were discharged in September 2018, a sharp uptick from the previous month. “That may be an anomalous situation, but it’s interesting that it happened at the same time that John Flannery left GE,” John said. “Usually when you see CEOs leave within less than a year, or just over a year in this case, there are communication problems inside the board and the C-suite. There was a sense from the news reports that the board expected much quicker decisive action on the new CEO’s part that wasn’t being taken.”

Today’s boards are quick to act in response to perceived CEO performance issues. If an organization’s share price is dropping, it often means that the CEO’s days are numbered, John said. To combat potential communication problems, a close relationship between the board and the CEO in his or her first year—and particularly the first 100 days—is helpful. “Alignment in terms of what’s expected and what the objectives are is crucial,” John said. “It shouldn’t be the kind of situation where the CEO is acting on his or her own with a board that’s not engaged in the strategic decisions being made.”

How much longer will the current trend of “older CEOs keeping their jobs longer” continue?

Recent statistics suggest that boards are more willing to retain senior CEOs longer than they did previously. This is likely due to the economy, John said. Because so many companies are posting excellent results, there is no immediate impetus to move a long-tenured CEO out.

What are the broader implications of recent “organizational justice” developments, such as Amazon’s decision to raise wages?

“It’s always the most successful companies that can make these kinds of decisions,” John said. “Sometimes they lead the way and others follow.” Because Amazon is a market leader, the real question is whether less successful competitors will be able to follow suit. That will determine whether Amazon’s minimum wage increase is the beginning of a broader trend.

In a similar development, Harvard University (John’s alma mater) recently increased its employee wages as a means of corporate social responsibility. In John’s view, the move was an ethical rather than a business decision. At the same time, the economic implications of large-scale wage increases is a significant matter that boards should monitor. “We’ve seen minimum wage laws in places like Seattle and other cities get enacted that would move wages up for people in the low-skilled or semi-skilled area of the workforce,” he said. “There’s always the question, if that were instituted on a wider basis, whether that would depress job creation, as companies could afford fewer workers. It’s an open issue and it’s going to become even more important.”

Click here to listen to the full episode.

As the health care and life sciences fields experience ever-increasing levels of disruption, diverse entities across the industry are teaming up to embrace and foster innovation. These new pairings are shaping the future of health care, as organizations come together to tackle the industry’s most pressing issues with redoubled agility and pooled resources.

In an environment of change and uncertainty, this trend of Collaborative Transformation is yielding improved financial outcomes, increased operational efficiencies, and a fresh infusion of diverse talent and perspectives—all of which result in enhanced quality of care.

This is where the McDermott Health and Life Sciences team comes in. As a top-ranked US health law practice and a leader in life sciences with decades of experience advising the leading players in US and cross-border health and life sciences, we have the skill, market insight and ingenuity to partner with you wherever your innovation takes you. Whether you are forming innovative alliances across borders and industries, creating or implementing groundbreaking technologies and services, or restructuring investments to position your organization at the cutting edge of the market, our team can work alongside yours to achieve excellence.

Click here to learn more about McDermott Health, our recent work executing collaborative transformations on behalf of our clients and how we can help your organization form innovative business relationships.

On October 10, 2018 President Trump signed two bills that ban “gag clauses” in pharmacy contracts. Congress passed the two bills—one for Medicare prescription drug plans (“Know the Lowest Price Act”) that will go into effect in January 2020, and another for commercial employer-based and individual policies (“Patient Right to Know Drug Prices Act”) effective immediately—by almost unanimous vote in September 2018.

While many states have already prohibited the use of these clauses, this is the first such action on a federal level.

Gag clauses are sometimes found in contracts between pharmacies and insurance companies, pharmacy benefit managers or group health plans and bar pharmacists from telling customers that they could save money by paying cash for their prescriptions rather than using their health insurance. If pharmacists violate the gag rule, they risk penalties and/or contract termination. Under the new legislation, pharmacists are not required to tell patients about the lower cost option, but they also cannot be contractually prohibited from engaging in the cost conversation.

The legislation is consistent with the position of the Centers for Medicare & Medicaid Services (CMS), which, in May of this year, issued guidance stating that “gag clauses” are unacceptable in the Medicare Part D program.

It has now been one month since the US Department of Health and Human Services (HHS) Office of the National Coordinator for Health Information Technology (ONC) sent its proposed information blocking rule to the Office of Management and Budget (OMB) for required review.

We expect OMB to approve the much-anticipated proposed rule and ONC to release it soon with the usual opportunity for public comment. While we wait, there are some things that health information technology developers, health information exchanges, health information networks and health care providers who may be subject to the information blocking prohibition and enforcement actions can do to prepare for the upcoming comment period. But before we get to comments, let’s remind ourselves about how we got to this point.

By way of background, Congress asked ONC to produce a report describing the extent of information blocking and a strategy to address it. ONC submitted that report to Congress in 2015 (the 2015 Report) noting, among other things, enforcement authority gaps and indicating that successful information blocking prevention strategies would likely require congressional intervention. In the 21st Century Cures Act, which became law in 2016, Congress granted the HHS Office of Inspector General investigative and enforcement authorities for prohibited information blocking conduct. The Cures Act defined information blocking as a practice that “except as required by law or specified by the Secretary…, is likely to interfere with, prevent, or materially discourage access, exchange, or use of electronic health information [(EHI)].” As part of the law, Congress tasked the Secretary of HHS with issuing rules that identify “reasonable and necessary activities” that will not be considered prohibited information blocking. This is one purpose of ONC’s proposed rule.

At this point, we do not know precisely what kinds of activities ONC will propose to permit by carving them out of the broad information blocking prohibition. However, from the Cures Act we do know the types of practices Congress believed “may” be information blocking, namely:

  • restricting authorized access, exchange and use of EHI for treatment and other permitted purposes, and
  • implementing technology in ways that are:
    • nonstandard and likely to substantially increase the burden or complexity of access, exchange and use of EHI;
    • likely to impede EHI with respect to exporting complete information sets and in transitioning between health IT systems; or
    • likely to lead to fraud, waste and abuse, or impede innovation and advancements in health information access, exchange or use.

These track closely to the types of practices ONC identified as raising information blocking concerns in the 2015 Report, which also provided a few illustrative examples, including: Continue Reading ONC Expected to Release Proposed Information Blocking Rule Soon

For physician practice management (PPM) organizations going through an acquisition processes – whether by a physician group or a private equity firm – one idea should remain top-of-mind: integration must start before the closing.

The Harvard Business Review states that 70 to 90 percent of acquisitions fail because of integration issues, noting that “companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.”

Working toward a smooth transition for employees from day one will not only help boost morale, but also contribute to the value-add of your PPM. With that in mind, below are four key considerations to help implement an efficient and effective integration strategy, ensuring a seamless transition before, during and after the deal is done:

  1. Put Your People First – As we explored during our annual PPM/ASC Symposium back in March, the first step and greatest challenge in practice integration is ensuring cultural compatibility. For practices with workers that have different working styles and expectations, merging could cause friction points and potential turnover for those dissatisfied with the new conditions. Ensuring systems are in place for immediate employee inclusion is critical. This can begin with something as simple as including them in all-staff communications and keeping them up to date of what’s happening at the company. Feedback systems where merging workforces can share their insights and recommendations can also help employees feel heard and appreciated.
  2. Ensure Revenue Systems Are in Place – Financial processing is a complex but necessary step that absolutely needs to be in place before merging. For provider compensation, those involved in these transitions should work to achieve consistency of models, parity, visibility and accuracy from day one. There should also be a clear and consistent model for revenue recognition, with the revenue cycle maintaining performance during the transition process. Consistent pre- and post-close reporting, as well as management of financial performance and KPIs, are also necessary boxes to check in advance of the merger.
  3. Infrastructure is Critical – Protocols need to be in place on a systemic level for structural/contractual integration. That includes addressing IT connectivity and network interface requirements, vendor contracts and procurement, and real estate leases and facilities. These make up the workplace framework, and while they can be easy to overlook, ensuring infrastructure is sound and ready to go will allow employees to begin work as soon as possible.
  4. Don’t Overlook HR Systems – Another crucial aspect is to ensure that Human Resources capabilities are also integrated. Payroll and benefits systems should be up and running by the time an employee merger takes place. In order to ensure things go as smoothly as possible, it’s important to keep in mind potential speedbumps and address them well in advance. For example, section 409A of the Internal Revenue Code can impact equity structuring in certain situations, so it’s important to reference it when making key equity decisions for executives.

To stay up to speed on all of the regulatory challenges and growth opportunities in the PPM space, as well as the health and life sciences industries overall, bookmark our “Health & Life Sciences News” blog and connect with us on LinkedIn.

McDermott recently launched the second episode of its special edition podcast providing an in-depth discussion of the interplay between State Attorneys General enforcement authority and nonprofit Board of Directors responsibility in the governance and operation of health systems. This special edition of the Governing Health podcast series welcomed four prominent State Attorneys General (AGs) to discuss the transformation of the nonprofit health care sector.

In episode two, our panelists discussed how the evolution of nonprofit health care affects business activities, including M&A, Board of Directors obligations, and state nonprofit law across the health care landscape. Here are four key takeaways:

  • Beware the dangers of “mission drift.” Mission drift occurs when a change in corporate purpose conflicts with donor intent. As large health care organizations increasingly take on all aspects of health care, they often acquire nonprofit facilities endowed with gift assets. Health systems must consider how the original donor intended for those assets to be used in the community, said Karen Gano, President of the National Association of State Charity Officials and Assistant Attorney General of Connecticut, Special Litigation Unit.
  • Keep beneficiary interests front-and-center when considering a sale or a conversion to a for-profit business model. In New York, there is a statutory requirement that any sale of charitable assets must be for fair consideration and in the best interests of charitable beneficiaries, said Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau. Even if a transaction makes good business sense for the organization, Boards must ask themselves, what provisions are we making for the community served, and how does this transaction serve the nonprofit’s underlying mission? “We don’t have the authority to substitute our judgment for that of the Board, but we are obliged to ensure that the board has exercised its fiduciary duties of both loyalty and care in arriving at the decision to sell or convert,” said Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section.
  • Retain control when engaging in a joint venture with a for-profit entity. The state AG office will examine joint ventures—whether they involve new programs or services, or the construction of a new facility—to ensure there is actual control with an emphasis on care and no excess benefits to any individual or to the for-profit partner, said Bob Carlson, Assistant Attorney General of Missouri.
  • Ensure that investment in innovative activities is objective. If the investor is the entity itself or its executives, the investment process can become politicized. “One the expectations we have is that there be a very rigorous process for assessing both initial investments and whether additional money is put in the same way [as it would be in] any other investment,” Jim said.

Click here to listen to the full podcast.

Coming Soon: Episode Three

In the final episode of this special three-part podcast series, our guests will discuss how operating activities, fiduciary duties and the class of beneficiaries are affected by the transformation of nonprofit health care.

In partnerships, the key to success lies in communication, understanding, and involvement. This certainly applies to PPMs, which learned in the 1990s that an “us versus them” mentality between physicians and the management companies can lead to economic turmoil.

To avoid a similar fate, those in charge of managing a PPM must understand the needs and desires of those leading the boots-on-the-ground patient operations. Working closely with physicians and establishing what they need is crucial to aligning incentives, which leads to happier employees and a better return on investment. It is incumbent upon the PPMs of today to learn from the mistakes of 20 years ago and foster healthy, receptive relationships with physicians. It is also important to truly integrate acquired practices, so that the physicians really feel part of a single integrated system and not part of an independent affiliate of the PPM.

All of this can be done using the following five strategies:

Ensure Integration: Immediately, post-closing, ensure that the PPM’s integration team takes real steps to integrate the acquired practice’s business into the PPM. Consolidate systems and processes, so that the practices and PPM are deeply intertwined and not loosely affiliated. Proper integration up front is key to ultimate success.

Enlist Input: As PPM owners understand, physician input is traditionally tied to physician ownership. However, this type of ownership is becoming rarer. In 2017, the proportion of patient care physicians with an ownership stake in their medical practice dropped below 50 percent for the first time. In light of this shifting landscape, it’s important for PPM owners to remember that diminishing physician ownership should not also foster diminishing physician input.

Build Trust: When acquiring a practice, listening to physician concerns is critical, as lack of trust or understanding can often be the greatest hurdle when finalizing a deal. Addressing the needs of the physicians, whether through linking compensation to practice profitability or divvying up equity, shows you’re invested in their well-being. This can, in turn, help reduce physician resentment and drive post-transaction performance.

Keep Open Communication: Once an acquisition takes place, it’s necessary to maintain a regular line of communication with physicians. Some PPMs employ a physician leadership board, where feedback and discussion takes place in a more formalized setting. However, physician input can (and should) also be gathered on an ongoing, informal basis. Regardless of the method, maintaining an open dialogue and responding to physician ideas will improve alignment and strengthen the relationship between management and physicians in the immediate term.

Set Joint Goals: Looking ahead for ongoing, post-deal success, it’s important to set a clear vision for future goals and implement an achievable growth strategy. Goals should be oriented toward improving conditions for physicians, as well as doing what works best for the practice overall. The vision should go beyond what will bring the most equity and return, and also include what will most benefit those who keep operations running every day.

To stay up to speed on all of the regulatory challenges and growth opportunities in the PPM space, as well as the health and life sciences industries overall, bookmark our “Health & Life Sciences News” blog and connect with us on LinkedIn.

Infographic: How Do State Attorneys General Track Nonprofit Health Care?

McDermott recently launched a special edition podcast providing an in-depth discussion of the interplay between State Attorneys General enforcement authority and nonprofit Board of Directors responsibility in the governance and operation of health systems. This special edition of the Governing Health podcast series welcomed four prominent State Attorneys General (AG) to discuss the transformation of the nonprofit health care sector.

Episode one focuses on the jurisdiction of the State Attorneys General, the types of data commonly flagged for review, and the importance of an actively engaged Board of Directors. Here are five key takeaways:

  • An actively engaged board is critical to avoid pitfalls. The board of directors must provide strategic oversight and organizational direction to help a nonprofit avoid pitfalls. When a board becomes complacent or overly deferential to executive management, problems almost always arise, said Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section. Given the sheer size of the nonprofit sector, state AGs cannot monitor every entity for early warning signs, such as diversions of assets or conflicts of interest. Therefore, “[directors] have to be actively engaged, they have to put themselves in a position to be aware of a nonprofit’s activities, to be aware of the risks,” said Bob Carlson, Assistant Attorney General of Missouri.
  • The AG has broad jurisdiction over nonprofit health care matters. In Pennsylvania, for example, court rules of procedure require that the AG’s office be notified of Orphan’s Court proceedings and civil matters that implicate a charitable interest, giving the AG the opportunity to intervene. Investigators also follow up on developments published in the news media, and complaints from whistleblowers or competitors.
  • Red flags in a Form 990 can lead to an investigation. State AGs are moving from a complaint-driven enforcement system to a system driven by data and analytics. With the automation of the 990 process, for example, the New York AG office can proactively identify warning signs in a nonprofit health care entity’s financial activities, including negative net worth, loans to officers (which are illegal in New York), and indicators of asset or cash flow problems. This data-driven system allows investigators to make more sophisticated decisions not just about enforcement, but about outreach. “The goal is not to make [these organizations] miserable,” said Jim Sheehan, Chief of the New York Attorney General Charities Bureau. “The goal is to say, ‘OK, looks like you have a difficulty, let’s talk with the agency that pays you and with the charities about what you can do to address it.”
  • In an investigation, the AG can and will subpoena directors and officers.The AG’s formal investigation tools include subpoena power and civil investigation demands, which often involve interviewing insiders such as board members, Carlson said.
  • State registration for charities that solicit public funds is about to get much easier. The National Association of State Charity Officials (NASCO) is developing a single-registration portal, said Karen Gano, President of NASCO and Assistant Attorney General of Connecticut, Special Litigation Unit. Currently, 40 states require registration of charities that solicit funds from the public. The NASCO portal will eliminate duplication and onerous data entry by allowing organizations to register online once, rather than filing registrations under 40 different state regimes, Gano said. The portal will be introduced in phases starting in fall 2018.

Our guests include:

  • Bob Carlson, Assistant Attorney General of Missouri
  • Karen Gano, President of the National Association of State Charity Officials and Assistant Attorney General of Connecticut, Special Litigation Unit
  • Mark Pacella, Chief Deputy Attorney General of Pennsylvania, Charitable Trusts and Organizations Section
  • Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau

Click here to listen to the full episode, and stay tuned for episodes two and three of this special series, which will cover topics such as the consequences of “mission drift,” considerations in M&A transactions, collaboration between state and federal regulators, guidance for operating across state lines, and much more.

WHAT HAPPENED

On July 18, 2018, US Food and Drug Administration (FDA) Commissioner Scott Gottlieb delivered a speech at The Brookings Institution in Washington, DC, discussing how to bolster competition from biosimilars while maintaining innovation.

The Commissioner noted the absence of true competition among biologics from biosimilar products in the United States, similarly to what the country experienced 30 years ago with respect to generics. The Commissioner said that this situation is caused, in part, by what he views as anticompetitive practices implemented by branded manufacturers, such as:

  • Rebating schemes in which drug manufacturers bundle discounts to health insurers and employers across different pharmaceutical products;
  • Multi-year contracts granting important rebates to payors, often entered into right before the entry of a biosimilar on the market;
  • Volume-based rebates;
  • Tying rebates, i.e., when rebates are offered if a product is bought together with a biologic;
  • Patent thickets, i.e., when branded manufacturers’ own dense portfolios of overlapping intellectual property rights cover biologics; and
  • Bundling biologics with other products, i.e., when a product is sold together with a biologic.

The Commissioner then introduced a plan (Biosimilars Action Plan) intended to apply some of the lessons learned by the FDA with respect to generic drugs to accelerate competition from biosimilars. He presented the four core action items of the Plan:

  • Improve the efficiency of biosimilars and of the approval process;
  • Maximize scientific and regulatory clarity for companies developing biosimilars;
  • Develop communications to improve understanding of biosimilars among patients, providers and payors; and
  • Reduce tactics implemented by branded manufacturers to unfairly delay market competition.

With respect to this last action item, the Commissioner said that the FDA would work hand in hand with the US Federal Trade Commission (FTC) in order to address perceived anticompetitive behavior. 

WHAT THIS MEANS

Pharmaceutical companies and biotechs should bear in mind that the FTC could start looking more closely at competition among biologics and take action against branded manufacturers who are implementing strategies to delay the entry of biosimilars on the market.

These companies should thus assess their current contracting, discounting and patent protection strategies to ensure that they manage their exposure to antitrust risk.

The PPM industry is by no means immune to the ebbs and flows of a traditional marketplace. Since the consolidation bubble burst in the 1990s, PPMs have gone from practically extinct to a once-again substantial component of the health care delivery system. But with greater influence comes more pressure to respond, and adapting to today’s complex operating environment requires those in the PPM industry to ensure they are building the foundational structure needed to help practices adapt to external factors and achieve long-term success.

Here are three defining aspects of today’s complex PPM environment, as well as several important considerations to help navigate environmental uncertainties and create a better patient experience.

  1. Physician satisfaction and expectations are changing: As millennial doctors enter the workforce, they’re driving a sea change in terms of job expectations. With better work-life balance as a top priority, many young physicians are looking to be employees rather than employers, joining an existing practice instead of starting their own. Therefore, communicating what a PPM has to offer in terms of long-term incentives, rather than short-term profit margins, will be crucial to drawing in younger doctors and building a foundation that will last into the future.
  2. Reimbursement strategies are evolving: Payer models and expectations continue to shift. Patients are being folded into a system that’s evolving from fee-for-service to value-based reimbursement models. As of now, the federal government is the biggest source of health care reimbursements in the country, but how legislative changes to reimbursement frameworks will impact a PPM largely depends on the type of PPM in question. For example, dermatology providers will see a different impact on their billing, coverage, and procedure coding and documentation than medical oncology providers. PPMs are also increasingly being asked to consider the value they add to a practice, and having a solid reimbursement strategy can enhance that value.
  3. Legislative and regulatory restrictions may continue to shift: Recent surveys suggest that health care is top-of-mind for midterm election voters, regardless of political affiliation. Under the current administration, we’ve seen legislative focus on the Affordable Care Act, as well as access to generic and experimental medication, but have seen little legislative attention paid to PPMs. While the Affordable Care Act predicted the shift from fee-for-service to value-based care, it did not provide concrete regulations. Thus far, shifts to value-based care have been mostly voluntary among health care payers and providers. Whether that changes will be worth keeping an eye on.                                                                                                                                              It will also be worth keeping an eye on antitrust action, particularly with consolidation and collaboration happening at every corner of the health care space. In years past, most physician practice transactions have not been large enough to garner attention from federal antitrust authorities, like the Federal Trade Commission (FTC), as one Health Affairs paper cites. But as the trend towards consolidation continues and collaboration becomes key to transformation, expect to see more federal oversight.

While there are no concrete predictions in this industry (or else we could have safely avoided the pitfalls of the ‘90s), we expect that the factors above will influence future PPMs in some capacity. Just how much is the million-dollar question.

To stay up to speed on all of the regulatory challenges and growth opportunities in the PPM space, as well as the health and life sciences industries overall, bookmark our “Health & Life Sciences News” blog and connect with us on LinkedIn.

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