Outpatient Ancillary Services: Creative Structures for Competing Into the Future March 1, 2015 Michael R. Callahan, Partner W. Kenneth Davis, Jr., Partner Katten Muchin Rosenman LLP Introduction  Why ancillary services transactions are being done.  The “Creative Structures”: • Conversion to provider-based or under arrangement. • Broader market-wide roll-up joint ventures for ancillary services. • Outright acquisitions of ancillary services centers or of joint venture ownership. • Co-management and other relationships between hospitals and physicians involving ancillary services.  Approach that will not be discussed: hospitals doing ancillary services on their own, through de novo expansion/development.  “Think like an investment banker.” 2 Why Ancillary Services Transactions Are Being Done  Perhaps at no other time in history has health care, particularly ancillary services, experienced the recent volume and velocity of change.  The drivers: • Health care "reform.” • Federal scrutiny of various areas of ancillary services. • Reimbursement pressure from all governmental and non-governmental payors. • More and more (expensive) technology. • Heightened tension as hospitals acquire physician practices. • Accountable care organizations, as well as other integrative efforts. 3 Conversion to Provider-Based or Under Arrangement 4 An Illustration  The following is just one example of how hospitals and physicians are changing how they provide and bill for ancillary services. • HOWEVER: it’s one of the most common examples of how conversion to provider-based or under arrangement is utilized. • It works well with non-referring physicians (like diagnostic radiologists). • AND, diagnostic imaging is an area in which everyone is looking for ways to compete more effectively and survive downward reimbursement pressures. 5 An Illustration (cont’d)  On the other hand, when these transactions involve referring physicians, they usually are more limited in what they can accomplish because of Stark Law considerations. • In particular, direct or indirect ownership by referring physicians in a venture often limits what that venture can do and how it can be paid. • The venture might be limited to acting as an “asset company.” • And payments may need to be structured as fixed versus per service. 6 Some Medicare Vernacular  Physician groups and independent diagnostic testing facilities (“IDTFs”) are considered to be “suppliers” by Medicare.  Hospitals are considered to be “providers” by Medicare. 7 Why Convert?  DRA 2005 reduced technical component (“TC”) reimbursement for suppliers.  Multiple procedure discounts under Medicare has also reduced reimbursement for suppliers.  Non-governmental payor reimbursement to suppliers has followed Medicare down, either automatically (through fee provisions) or by negotiation. 8 Why Convert? (cont’d)  By contrast, providers very often receive reimbursement from non-governmental payors that is significantly higher than what suppliers receive. • Note that conversions generally are not being driven by Medicare: DRA 2005 moved to somewhat equalize outpatient reimbursement for suppliers and providers (although providers sometimes still see higher reimbursement). • Rather, it’s the advantages for providers on the nongovernmental side that’s the big driving force.  QUERY: how long lived is the arbitrage opportunity? 9 Why Convert? (cont’d)  Everyone is looking for ways to squeeze out additional revenue and profit/margin.  A conversion to provider-based or under arrangement can make this happen. 10