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Inside Baseball — Midterm Election Results and Health Care Politics and Policy in Washington

November 22, 2022 John Williams Practical Solutions in Health Care 00:26:44 Comments Off on Inside Baseball — Midterm Election Results and Health Care Politics and Policy in Washington

Inside Baseball: Midterm Election Results and Health Care Politics and Policy in Washington

On this episode, John and Andrew discuss the results of the recent mid-term congressional elections.

Podcast Participants

John Williams

Hall Render
jwilliams@hallrender.com 

Andrew Coats

Hall Render
acoats@hallrender.com 

John Williams: Hello again, everybody. Welcome to another episode of Inside Baseball — A Look at Health Care Politics and Policy in Washington, part of Hall Render’s Practical Solutions Podcast series. I’m John Williams, managing partner of Hall Render’s Washington, DC office. And as always, I’m joined by my colleague and DC cohort, Andrew Coats. Andrew, how are you today?

Andrew Coats: Doing good. We got Monday, but it’s a short week Monday. So all things are good.

John Williams: Yeah. Probably doing better than our picks for the election the other week, right?

Andrew Coats: Yeah, that was a rough night.

John Williams: Yeah. As you all can tell, this is our post-election podcast where we’re going to look at the results of the midterms and quite frankly, just how wrong we were in our predictions during our last podcast. In our defense, I will say that just about everyone appears to have been wrong in their predictions. House Republicans had, I think it was two election night parties scheduled or hosted in Washington, DC on election night and the House Democrats had none planned. So I think it’s safe to say that both sides really got it wrong. I think what we’ll do is, Andrew, I’ll kick it off with a look at the House results and let you take the Senator. That work?

Andrew Coats: Sounds great.

John Williams: All right. Well, as a refresher on the last podcast, we recommended that folks look to the House races in Upstate New York, the Rio Grande Valley of Texas, and the 2nd, 7th and 10th districts of Virginia, for indicators on how the night might go. I think while both Democrats held their own in the Rio Grande Valley and Republicans won pretty big in Upstate New York, the three House races that we identified in Virginia were really the best predictors of how things ended up. For those who listened to the last podcast, you’ll recall that we said Republicans winning the second district of Virginia would mean that they are meeting expectations that evening because that is what is known as an R+2 district. The Cook Political Report does what they call a Partisan Voter Index, and they rank things by Republicans +2, Democrats +2, D+2, R+2, as we refer to it, to show how a certain district leans one way or the other.

So winning Virginia seven meant that they were exceeding expectations. That’s a D+1 district. And then winning Virginia 10 would’ve meant that there really was a red wave going on because it is a D+6 district. In the end, they met expectations by winning Virginia 2. They barely lost Virginia 7. That was a long night on Virginia 7. And they really didn’t come that close in Virginia 10. So while the Republicans did end up winning the House of Representative, that’s beneficially called, they have reached the mark of 218 seats, which is what’s necessary in order to control the process in the House of Representatives.

It certainly wasn’t anywhere close to the 12 to 25 seat margin that most people expected, and it was nowhere near the 30 to 60 seat margin that some members of the Republican House leadership in Washington were predicting a few days before the election. So they were way off on that.

Again, if you pay attention to this stuff in the news, you know that Republicans have reached that 218 number. There’s still a number of races left to call officially. So we don’t know what kind of margin Republicans are necessarily going to have in the House of Representatives, but I do think it’s safe to say that we’ll almost certainly be either at or below the margin that House Democrats have had for almost the last two years, which is right at six seats. So going to be a very narrow majority for Republicans. It’s going to make it very difficult for the Republican leadership to control the members of their caucus, which is what always happens. Nancy Pelosi had a difficult time keeping either moderate Democrats on board or the progressive wing on board at times, although she did a phenomenal job of navigating that.

And Kevin McCarthy’s going to have that same problem between the very conservative members of his caucus and the moderate members of his caucus who are both going to have incredible amounts of leverage come January when the new session of Congress kicks off. Andrew, you want to walk us through the Senate?

Andrew Coats: Yeah, absolutely. But I’ll just quickly add, I think McCarthy’s inheriting basically the same margin that Pelosi did. And to Pelosi’s credit, when there was a big vote there, she got her party in line. And it will be very interesting to see if McCarthy has that same touch and is able to keep the party in line on the big votes when he really needs all of his caucus to come in for them to fulfill.

John Williams: Yeah, and before you jump into the senate real quick, I think it’s probably worth hitting right now just because again, if you pay attention to this stuff in the news, you’ll know that Nancy Pelosi announced last week that she will not be running for the speakership again. And the same with Steny Hoyer, who was the number two Democrat in the House, and Jim Clyburn, who was the number three, is going to stick around in a leadership position. But it will not be as the number three Democrat in the House. So yeah, to your point, Pelosi was very adept at her job, but we are going to have new Democratic leadership.

Andrew Coats: That’s a lot of experience. That’s over 100 years of experience that they are losing with Pelosi and Clyburn.

John Williams: What was the statistic that I saw that if you add up the age of Pelosi, Hoyer and Clyburn, you come out with a number that’s actually higher than the age of the country itself.

Andrew Coats: Right.

John Williams: Yeah, that is institutional knowledge right there. But I know from talking to a lot of Democratic members of the House, some of whom are anxious to get into a leadership position, that this is something that the Democratic caucus has wanted for quite some time. But I know what will not be changing is over on the Senate side, so I’ll let you take us into that.

Andrew Coats: Yeah. The Senate, I think I had predicted a one to three Republican pickup in the Senate. And if you looked at polling, that was kind of in line with what the polls were saying, a lot of the polls were saying. But it turns out it’s going to be at best, a zero gain and we’re still waiting on Georgia, obviously. They have the runoff between Warnock and Walker the first Tuesday in December. So we’ll see if Republicans win that, then it would be back to a 50/50 split, with Democrats getting the tiebreaker from the White House. This was built up, this kind of election cycle, to be Republican route, and it wasn’t even close. I think Republicans, where they really got hammered was on the expectations game. You looked at where the GDP was, you looked at the inflation, you looked at the stock market, all those were trending in the wrong direction for the party in power.

And people thinking what we saw in Florida where Republicans had a lot of stuff would be nearer than the rest of the country. It just wasn’t. And I think, you can look at the Dobbs decision, I think obviously in the Western states that played a much bigger role than was anticipated. I think initially, when the Supreme Court’s decision came down, people were thinking this would really hurt Republicans. And that kind of thought process died out as we got close to an election day. But once election day came, it was clear that Colorado, Washington, Nevada, Arizona, you saw a lot of voters come out as a protest against the Supreme Court decision. And I think you just saw some polling firms massively whiff on some of their predictions, which obviously, it’s a tricky business. But there’ll be less credibility there next election cycle for some of these firms that we’re predicting are plus large margins.

But at the end of the day, the senate’s going to be very tight. It’s like the rest of the country, it’s like the House. Razor thin margin for the Democrats. It’s even like the governor’s races, which I think now are 26-24 in favor of Republicans. So across the country, you see these really thin margins. In looking at the elections, the red state stayed red and basically, the blue states stayed blue. Of the 28 incumbents on the ballot, all of them stayed… So for red, if the red state went for Trump in ’20, Republicans were 17 for 17 in those states. If the state went for Biden in ’20, Democrats in the Senate were 15 out of 16. The only outlier being Wisconsin, where Senator Johnson won in a very close margin.

So historically speaking, this is something I saw somewhere, and it was one of those stats I wish I picked up before the election, and it made a lot of sense after. For whatever reason, the Senate has a trend of staying under control of the party in the White House in the first president’s midterm. Out of the last nine midterms for the first midterm of the president’s term, the party in power has held the Senate.

So Biden’s going to do so in ’22. Trump did this in ’18, where they picked up two to hold the Senate. Obama lost seats in ’10, but still held the Senate. Democrats still held the Senate. W. Bush picked up four seats in 2002, held onto the Senate. Reagan in ’82 held onto the Senate. Carter lost seats in ’78, but Democrats still held the Senate. Johnson lost three seats in ’66, Democrats still held the Senate. Kennedy picked up seats in ’62, Democrats still held the Senate. The one outlier was ’94. And Clinton, that was a huge red Republican year. Democrats lost eight seats and they lost the Senate. So eight of the last nine elections, the Senate has stayed in whoever’s in White House’s party in their control.

John Williams: Yeah, you’re right. And to that point, the other thing was, this was a bad map for Republicans to get to start off with. They were having to defend way more seats than Democrats had to in this cycle, in the Senate. And so, you heard me a year and a half ago saying that I didn’t think that the Republicans were going to win the Senate because I didn’t think that they had a map that was in their favor. Now, I also bought into the momentum argument in the last month and I was predicting, yeah, Republicans going to pick up two, one, whatever. I bought into that as well because it was the same thing that everybody was saying. But yeah, the Republicans had a bad map and history, to your point, actually played out the way that history was expected.

Andrew Coats: Republicans did themselves probably no favors by kind of electing in the primaries, a lot of untested candidates who had never run for office before. And when you’re running for Senate in a statewide race and you’ve never run for political office before, that’s a very large mountain climb. You are making thousands of decisions in that process. And when you have no experience to fall back on, that’s a very tough go. And I think, you look at the Trump factor, for President Trump, he remains a fourth and primaries. And a lot of his decisions kind of kept a Trump favored candidate allowed them to win the primary. But thus far, we’ve seen Trump’s candidates really struggle in general elections. And that came true last Tuesday.

John Williams: Yeah. A couple things. One, on the election side of it, one of the interesting things that I’ve been watching is this issue with the congressional generic ballot versus the popular vote. The generic congressional ballot basically looks at just sort of an overall number of, would you prefer a Republican Congress or a Democratic Congress? And it sort of tracks with the popular vote. And I think that the final generic congressional ballot was right at about four to four and a half percent in favor of Republicans. It’s fascinating that the popular vote, Republicans are winning the popular vote in the midterms and they’re doing it by about four to four and a half percent. So actually, the results will end up actually tracking the congressional ballot, I think pretty much spot on, which is kind of interesting in itself.

To go back to a point that you made about the split and the issue with the Warnock/Walker race and whether it means a 50/50 split or a 51 49 split, it’s important, and this is serious Inside Baseball stuff, this is the title of our podcast. One of the impacts that that’s going to have, whether it’s 50/50 or 51/49, is just beyond Vice President Harris breaking ties in a 50/50 Senate. In a 50/50 Senate, you have equal representation on committees and that plays into a lot of inside baseball stuff with discharge petitions and a whole host of other procedural moves that if it’s a 51/49 split, then you don’t have the power sharing dynamics that go along with a 50/50 Senate.

And so you will have more Democrats on committees than you will, than Republicans. And this also plays into things like how many people you need to have a quorum, how many in order to hold votes and how many absences do you have? And if a senator gets sick. And what that does is you’ve got a one vote safety cushion now if you get 51/49 versus whether you have 50/50. So there is some importance to what’s going to happen with the outcome of that Georgia runoff that goes just beyond who’s going to control the Senate.

Andrew Coats: That’s why the people of Georgia are going to continue to see Senate ads for the next month leading up to election just about every cycle.

John Williams: Well, Congress’s business is not completely finished. Yeah, we’ve had the election now and there’s some things left to play out in terms of margins in Georgia. But from a legislative perspective, Congress does have unfinished business to deal with before the end of the year. Law makers returned last week to kick off what is known as the lame-duck session of Congress, which is that period that runs between the election and when Congress officially ends its work for the year. And in this case, would be the complete end of the 117th Congress. I know that the most pressing issue right now on Congress’s plate is funding the federal government for the rest of fiscal year 2023. And I say for the rest, because the government has been funded and operating under what we call a continuing resolution, or a CR, that runs from the end of fiscal year 2022, so September 30th of this year, until December the 16th of this year.

So Congress is going to address all of the outstanding issues that it intends, and I use that word intentionally, to address through an omnibus bill, which is one of these massive 2,000 plus page bills that covers a whole variety of different issues including healthcare. So the first thing that they’re going to put into this omnibus bill is going to be how they’re going to fund the federal government for the remainder of FY 2023. And we expect it to last that long. I don’t think they’re going to come up with anything shorter than a full fiscal year’s worth of funding in that bill.

We had heard rumors that they were going to possibly put the debt ceiling in the omnibus in order to take that off the table so it can’t become a political hot potato next year. But it looks like that’s not going to make it into the omnibus. But there are a lot of healthcare issues that need to still be addressed. And the omnibus is going to be the vehicle as we call it, by which their Congress is going to try to address that at the end of the year. There’s a whole bunch of stuff flying around. Andrew, jump in here. What are you hearing as far as healthcare issues that might make it into the omnibus?

Andrew Coats: Yeah, well, as you noted, first off, time is running short. Today is the Monday before Thanksgiving. Congress will be out this week and they return next week and that will give them three weeks to come up with a end of the year omnibus before they turn the lights out for this Congress. And three weeks moves very quickly. So you’re going to see measures they get past and eventually signed into the law are going to be measures that have full bipartisan support and there’s not a lot of disagreement on. And some of the items that need to get done from a healthcare perspective during lame-duck include extension of the statutory 4% sequester cut that would impact Medicare starting on January 1, 2023. We’re going to see extension of the Medicare Dependent Hospital program, the low volume hospital adjustment and ground ambulance add on payment. Another item likely to be added is language to avert a fourth round of Medicare cuts to lab services that’s also set to take effect on January 1st, 2023.

And last on a list, if you’re making it, that’s likely to be included is reauthorization of the user fees for the FDA programs. But without the policy riders, if you recall, the House has passed its own FDA user fee agreement. The Senate has passed an agreement through the help committee. There are a number of policy riders that need to be cleared. We’ll see which ones make it and which ones do not.

There’s also a number of items that could go, that could be included in omnibus package. I’d say the first on that list, it’s provision to avert the looming 4.5% pay cut to Medicare physicians that kick in January 1, 2023. You look at telehealth, extension of the pandemic related telehealth waivers from 151 days to two years after the PhD ends could also be included, as well as the provision that extends a high deductible health plan’s ability to pay for telehealth services. And then, there’s a number of other provisions that could get included. John, I know one that you’ve been working on deals with the Stark Law. Do you want to touch on that?

John Williams: Yeah, so just to jump back real quick, I know that Larry Bucshon, Republican from Indiana and Ami Bera from California, Democrat, have introduced legislation to deal with that four and a half percent physician pay cut. They introduced that in the last month or so, and I know they were working really hard to get that included into the omnibus as well. It’d be interesting to see whether or not the 4% overall PAYGO cut makes it or they both make it. Not everything’s going to make it, right? So they’re going to have to pick and choose because all this stuff is going to have to be paid for somehow and we’ll have to see how that plays out. But yeah, to your point, the other thing that we’re hearing could make it into the omnibus is mental health legislation. There is a House passed bill, called Restoring Hope for Mental Health and Wellbeing Act of 2022. That did pass the House, as I said, with bipartisan support. That could end up going in to the omnibus bill.

There’s a number of bills introduced in the Senate to deal with mental health. That also could be included in the omnibus. One of those is Protecting Our Physicians Act, which is something that Hall Render proposed to lawmakers that would create a new exception to the Stark Law for physician wellness programs. So that’s something that we’re monitoring pretty closely and hopeful that could be included. There’s a number of other things too, I think, that are… Look, the omnibus is what we refer to as a Christmas tree in Washington. Everybody wants to get their ornament hung on the Christmas tree before Christmas is over. And what you try to avoid is hanging too many ornaments on it such that the Christmas tree collapses. But a lot of folks are going to be trying to get their issue, their bill included, especially now that we’re going to have a situation where we’re going to have a change of power in the House.

So a lot of Democrats are going to be looking to use the lame-duck as a chance to get their bills through, knowing that they’re probably not going to have a very good chance come next year. So other things that we hear are being included in the negotiations, but we think stand a long shot of being included is Cures 2.0. That’s one that Diana DeGette and Fred Upton have been working on.

There is a provision that would correct the definition of Medicaid shortfall for purposes of calculating the limit on dish payments. That is important to a number of states around the country. Not quite certain that’s going to make it. There’s talk of including a cap on insulin that’s been discussed a lot over the last two years. Not sure that makes it. I know the administration is asking for more COVID-19 funding more money for Monkey Pox, that’s probably not going to make it. I know that some folks are calling for more money to go into the provider relief fund. I don’t see that happening.

Interestingly, there’s also a piece of legislation that would reform prior authorization in the Medicare Advantage space. There’s a bill that passed the House earlier this year with overwhelming bipartisan support. However, it did so before there was a cost estimate to the federal government for passing the bill or turning the bill into law. And it’s like 16 billion over 10 years. So don’t expect that to make the final cut now, now that there’s a price tag on it because the bipartisan support completely dropped off for that. Anything else I’m missing, Andrew? Anything else? Pretty comprehensive list there.

Andrew Coats: Yeah, it’s a pretty comprehensive list. I’m sure there are other things.

John Williams: There’s always stuff. There’s going to be stuff that we were thinking about that’s going to pop up. From a timing perspective, what do you think? I don’t think there’s going to be any appetite to get anything done until the runoff’s over in Georgia on the 6th. Considering this week’s Thanksgiving, they come back next week, you’re almost at the 6th anyway, right?

Andrew Coats: I think that’s right. I think, you see next week members come back in town and that’s where they’re going to be going to the chairman of the committees and leadership saying, “This is my priority and I want to see this moved.” Committees will take it from there and kind of build the pecking list.

John Williams: Yep. Well, hopefully our forecast on what gets included in the omni is better than our forecast for the elections. The elections were… But I think with that, we’ll wrap up this edition of Inside Baseball. Thank you for joining us. We’ll be back next month to do a rundown of what happened during the lame-duck session, talk a little bit about what to expect in the 118th Congress, which kicks off the first week of January. As always, if you’d like more information about what Andrew and I do, or how we provide federal advocacy services to our clients, please visit our website at hallrender.com. Or, you can reach out to me at JWilliams@hallrender.com, or Andrew at ACoats@hallrender.com. And as always, one last disclaimer, please remember the views expressed in this podcast are those of the participants only and certainly do not constitute legal advice. So long everybody.

Inside Baseball — A Look at Health Care Politics and Policy in Washington

November 2, 2022 John Williams Practical Solutions in Health Care 00:32:57 Comments Off on Inside Baseball — A Look at Health Care Politics and Policy in Washington

Inside Baseball: A Look at Health Care Politics and Policy in Washington

In this episode, John and Andrew discuss the upcoming mid-term congressional elections with analysis of potential outcomes and races to watch.

Podcast Participants

John Williams

Hall Render
jwilliams@hallrender.com 

Andrew Coats

Hall Render
acoats@hallrender.com 

John Williams: Hello again, everybody, and welcome to another episode of Inside Baseball, a look at healthcare politics and policy in Washington. Part of Hall Render’s Practical Solutions podcast here is I am John Williams, managing partner of Hall Render’s Washington, DC office. As always, I am joined by my colleague in DC cohort Andrew Coats. Andrew, how are you today?

Andrew Coats: Doing great, John, and looking forward to this podcast as we get to talk elections, and wild predictions.

John Williams: This is our second podcast and I think it’s probably the one we look forward to doing most because we get to talk about what you and I geek out on immensely, and that is on elections. I said in our last podcast, and I say this all the time, that President Obama famously said that you can’t separate policy from politics. And it’s one of the truest statements that I’ve ever heard.

Well, this pre-election podcast is going to be one of the more political podcasts that we do because there is nothing more political than a campaign, but the outcome of these campaigns are going to determine the future of healthcare policy on Capitol Hill. So, it’s important I think that we take a close look at how these campaigns might play out. Just as an agenda setter, I’m going to talk about how things might play out for elections in the House of Representatives. Andrew’s going to do the same thing for the Senate. Quick disclaimer, our analysis is not intended to be partisan in any way. It’s merely the results of the reality on the ground as we are now one week from election day. So, Andrew, you ready?

Andrew Coats: I’m ready. Let’s do it.

John Williams: All right. Well, unlike the Senate, members of the House of Representatives are up for reelection every two years. So, technically 435 members of the House of Representatives minus the vacancies, are going to go before the voters this coming Tuesday and, again, I say technically because we’ve got some open seats for folks who’ve either retired or resigned. And we’ve got some situations where you’ve got open seats, where you have people who are up for reelection, two people up for election that have never run for Congress before. Currently, Democrats hold a 222 to 212 majority over Republicans with one still a vacant seat that will be filled on Tuesday. So, Republicans in the house, they need a net gain of five seats to win the majority.

As of today, November 1st, 2022, one week before the election, I cannot find a reputable pollster or pundit that doesn’t have Republicans with a greater than 80% chance of winning in the house, and when I say reputable, I mean those that are not obviously playing for one team or the other. So, independent analysis right now, or if you even look at the betting platforms in Vegas, they’ve got Republicans winning the house by better than 80% chance. So, in fact, I think most folks who follow campaigns closely are at this point in the game trying to determine just how big of a majority Republicans are going to have come January and I think the range right now that I’m hearing most is somewhere between 12 in 25 seats. So, that would be, I think, if it’s 12 Republicans, it’s a bad night. If it’s 25 for Republicans, it’s a really good night-

Andrew Coats: And, John, I feel like it’s inching up even north of 25 depending on what articles you’re reading, even from independent analysis.

John Williams: Absolutely true. I mean, 25 seats, it could be north of 25. What’s interesting is that you in elections passed right in… Take for example, 2012 Obama’s first midterm or ’94 Clinton’s first midterm. In those elections, you had massive swings. I think Obama… That election Democrats lost 60 seats in the house, and I think the Gingrich won in ’94, there was more than 40. There’s just not that many seats that are considered to be in play anymore. So, you really aren’t going to see that kind of a swing but yeah, to your point, I think you’re right. I mean it could be north of 25 seats and I’ve heard a number of people say that. The source that I look to most these days at how these things break down or how they might break down on a race-by-race basis is real clear politics.

They make a forecast for the House and Senate, governor’s race. There’s a whole bunch of different races, but they do it using an average of the most reputable polls available. According to the most recent RCP numbers, out of the 435 seats in the House of Representatives, there are 113 seats in play. Everybody else is considered to be safe. Of that 113 number, 33 are considered to be complete toss-ups that could go either way. However, when you look at the rest of the races that are broken down by what are referred to as leans and likely, so this race leans Republican or that race is likely democratic. If you look at the leans and likelies, there are 50 seats that RCP has as either leans Republican or likely Republican. By contrast, there are 12 liens Democratic, 18 likely democratic. So, Republicans have a 50 to 30 or 20 seat advantage in the liens and likelies, and that is incredibly significant.

I think what’s really fascinating for political nerds like me is to see where parties have been putting their resources in the final two weeks of the election. I mean, there’s an old saying in campaign politics that if you want to figure out which party is more bullish on its prospects, you simply follow the money. In other words, on which races are the parties spending money in the final days? Republicans just bought $23 million worth of television ads in eight Democratic districts that President Biden won by double digits, and that includes a significant race that I’ll talk about in a minute. Look, you only do that if you’re competent, you’re going to win everywhere else that you’re already expected to win.

Andrew Coats: What states are we talking about here? Where is that money going?

John Williams: Mostly New York and Sean Patrick Maloney, and I’ll get to him in a minute, but that’s an area where they’re really getting pretty bullish-

Andrew Coats:  And not just the rural areas in New York, this is more suburban.

John Williams: Oh, absolutely. Yeah. I mean, Republicans are feeling bullish that they can play in places that they haven’t considered playing in 10 years or more. By contrast, Democrats are starting to take money away from vulnerable incumbents in Republican leaning districts or districts where Trump won and they’re spending that to shore up other incumbents who are in districts that President Biden actually won handily. And to your point, you’re seeing that, again, in the New York, New Jersey area where you’ve got an incumbent democratic incumbent in New Jersey, in a suburban district, where they’ve totally pulled all the money out of that race and send it elsewhere to show up another incumbent because they think that person has a better chance at winning. I could sit here all day and analyze the 113 races that RCP has that are in play and we don’t have enough time for that. I’m sure it would be incredibly boring.

Andrew Coats: You don’t think people would want to listen to us.

John Williams: Yeah. Other than you and me, and a few others campaign geeks. I don’t think. As much as I’d love to ramble on for the next hour about all 113 races, I just wanted to give folks a couple of regions and a couple of races to watch on election night because it’s really hard to monitor a whole bunch of them and we just talked about it. First, look at the results coming out of upstate New York. There are currently four Democratic incumbent seats in the RCP tossup category. There’s even one in the liens Republican category with RCP and if you want to talk about following the money. One of the races that Democrats have had to put money into that they never expected to is that of incumbent Sean Patrick Maloney, and Maloney is the chairman of the Democratic Congressional Campaign Committee, which we refer to as the D-trip.

That is the entity that is responsible for getting Democrats reelected in the House of Representatives. Republicans have the NRCC, National Republican Campaign Committee, Democrats have the DCCC. If Sean Patrick Maloney loses, it will be the first time that a chairman of a campaign arm in either party has lost a reelection campaign since 1980 and they are having to reallocate significant monies to try to shore up Sean Patrick Maloney. So, that is a region to watch and a race to watch. Another region, excuse me, to watch I think is Southwest Texas, which is long been a democratic stronghold. Polling nationwide has shown Republicans making inroads with Hispanic voters. They aren’t right to a majority yet, but they’re making very significant inroads much more so than they have in previous elections. Nowhere does that appear to be more evident than in the Rio Grande Valley of Texas.

And I think the race to watch there is in Texas District 28 between the Democratic incumbent Henry Cuellar and the Republican challenger, Cassy Garcia. Cuellar is one of the longest serving members of the House of Representatives. Henry is viewed as the most conservative Democrat, is pro-life, not many of those left in the Democratic party in the house. If he loses that race, it’s going to signal to, at least to me, that Republicans are not just going to have a good night, but that they are also continuing to make in route with Hispanic voters, which is something to look at for future races as well. Also, so the polls in New York don’t close until 9:00 PM Eastern time. The polls in Texas close at 7:00 PM Central time. So, we’re going to know the outcome of those races probably much sooner than what we would know in New York. New York still wants to watch and important to watch, but I think that Rio Grande Valley of Texas, we’re going to know sooner and also ones that I think are going to be bellwethers.

Lastly, a race that I’ve been telling folks to watch for months and months and months now is the first district of Indiana, where first term democratic incumbent, Frank Mrvan is facing off against the Republican challenger, Jennifer-Ruth Green, who is a Black female former Air Force pilot. Republicans have not won the first district of Indiana in almost 100 years. If Republicans win that race, or even if Frank just ekes out a narrow win, that’s a bellwether. Either one of those results means that Republicans are going to have a good night nationwide and if Jennifer-Ruth Green wins that race, then I think it’s going to be an exceptionally good night for Republicans.

Andrew Coats: Yeah, it’s crazy to think that Indiana won is even on in play for years. That was Republican senate candidates wouldn’t even go up to the first district because it was such a strong democratic held. So, for that to be in play for house Republican candidate speaks to sort of the tie up here.

John Williams: Absolutely, I mean we’re talking about Gary, we’re talking about Maryville, we’re talking about Crown Point. We’re talking about areas that have been heavily union for decades and decades and decades, but many of those districts are transitioning. You look at Ohio and what a lot of the former union strongholds and what’s happened there and how they’ve become Republican over the years and I mean, just talk about the first.

Lastly, the majority of this district is on Central time because of its proximity to Chicago. So, Gary Merrillville, Crown Point, I think those areas are all central time, but I think there are parts of that district which are on Eastern time with the rest of Indiana. So, we may see results start to trickle out of those precincts and those areas of the district before the polls close and the rest at seven o’clock. And you always got to be careful about looking at stuff really early on when there’s 2% reporting, or somebody’s winning by a thousand votes, but it’s only 2% reporting. So, you got to be careful with that, but I do think that the first district of Indiana is a significant bellwether to watch on election night. So, that’s-

Andrew Coats: You’re on your couch next Tuesday. You’re following on Twitter. You have cable news on watching election results. Are there any races you see coming in thinking, “All right, this will be a big night for Republicans,” or “Oh, maybe this isn’t as big a night as we thought.” Are there any races you’re watching?

John Williams: Well, I’ll ask you that question. I mean, as a Virginia resident. You’re familiar with Virginia politics and I know that there’s some democratic incumbents in Virginia-

Andrew Coats: Yeah. Virginia’s another state, Indiana polls close early. The two seats you keep hearing about are the second and the seventh district in Virginia. So, yeah, two seats you want to watch in Virginia are the second and seventh districts. These are seats that Democrats won by 52% and 51% in 2020, a better year for Democrats and the second district. This is the Virginia Beach area, so you have a strong military presence. This is Luria’s seat, she won by 52% in ’20, that’s going to be a really difficult seat for Democrats to hang onto.

And then, the seventh district is Spanberger’s seat. She represents the area, the wealthy suburbs west of Richmond, all the way up about a hundred miles north, almost to the border of Southern Fairfax County. This one, Spanberger won barely by 51% in ’20. Keep an eye on these two seats and keep an eye on the margins. If it’s really close, again, Democrats may do okay, but if Republicans winning by 53%, 54%, 55%. It could be a really difficult night for Democrats nationwide.

John Williams: Yeah. And I think you talk about margins, I think that’s really important. One, you’re absolutely right, you got to look at polls that close early, states that have polls that close early, so you can start getting those numbers, but I think you’re right about margins too. And what a lot of people don’t understand about campaign results is you look at a race and you say, “Okay, that was 52-48 results.” Well, in campaign politics, that’s thousands and thousands and thousands of votes. So, you can look at it and say, “Oh, well, I mean it was 4%, it was a 3% margin. That wasn’t that big.” But in raw vote numbers it was huge, and it’s considered to be a significant victory, especially the way that the electorate is divided these days. So, yeah, no really good ones to watch in Virginia with early returns. You want to lead us off into the Senate, Andrew?

Andrew Coats: I will but before we get to that, do you have any prediction or are you steering clear predictions for the house?

John Williams: No, I mean, I’m making predictions. I think it’s going to be closer to the 25 number. I’m not sure I’m buying that it’s going over 25 in terms of pickups for Republicans. But I do think, again, if you follow the money and that shows you who has the momentum, and if Republicans are not spending any money to shore up their incumbents. Then they’re free to go on offense and it’s clear that Republicans are playing offense here and Republicans are playing defense. And when you see that, to me, it means that you’re going to end up at the higher end of that 12 to 25 range.

Andrew Coats: And then, if it’s north of 25 and it’s just a bloodbath for Democrats. Could you see a change in Democrat leadership coming?

John Williams: Oh, man, I’m not sure we got enough time for that one, that’s a whole separate podcast. Conventional wisdom would say yes, conventional wisdom would say that if you lose a majority by that kind of a margin, that the leadership should be changed. However, Democrats in Washington have had… Let’s just call it what it is. I mean leadership issues. I personally know many younger members of the Democratic caucus in the house in Washington who very much want to move up the leadership ladder and they’ve not been able to do so because the current leadership structure of Nancy Pelosi, and Clyburn, and Steny Hoyer continue to run.

It’s fascinating because one of the things I admire most about Nancy Pelosi is her ability to wield power because power is just about everything in Washington and there’s few people in the history of the speakership that has wheeled power more significantly than she has. She also comes from a school of thought that you just don’t give up power, you make somebody take it from you. And so, it’s going to be fascinating to watch to see, even if it’s a bloodbath, whether or not she still says, “You got to come take it from me.” So, yeah, we’ll have a whole separate podcast on that one after the election.

Andrew Coats: Right. Absolutely. So, let’s dig into the Senate here. One of the most well-worn election phrases that gets trotted out every two years. This is the most important election of our lifetime. Now, not to throw cold water on our preview here, but if you live outside the Beltway. This is really as far as the Senate goes, just another midterm election. Assuming that the Republicans flipped the house, and as Sean mentioned, I think they’re going to. Senate leadership’s going to remain the same. You’re going to still have Schumer, and Durbin, and Republican leadership’s going to remain the same in Senate as well. You’re going to have McConnell on there and neither going to be close to getting 60 seats in the Senate. So, again, given the house flips Republicans, you’re not going to see inflation reduction acts, appeal of ACA, massive types of legislative packages getting moved next Congress.

Now, for folks inside the Beltway. Next Tuesday means everything, jobs depend on it and it that’s how Washington operates for the next two years. So, right now the Senate is currently split at 50/50 with Democrats having the tie break and therefore the majority. And Republicans have a brutal map to defend this year. I go to former Senator Fred Thompson, he was senator from Tennessee. He was the district attorney in law and order. I think he was captain on one of the subs in hunt for red October. He had a saying that said, everyone in the Senate has one of two things going for him. He either had a rich daddy or they had great timing and Senate Republicans in this cycle have had great timing.

If you go back six years prior to now, it was 2016, that was a big year for Republicans. The Trump wave that came in, six years prior to that was 2010, that was the tea party wave, and even six years prior to that was 2004, and that was when Bush won reelection. So, because of that, Republicans are defending a lot of seats and conversely, there just aren’t a lot of seats where they have a chance to realistically flip from Democrats. The best three chances states are, I think if you look at the polls, Nevada is probably the best chance for Republicans to flip a state, polling and I go to real clear politics as well is consistently shown Adam Laxalt ahead of the incumbent there, Catherine Cortez Masto and I think a lot of people have considered that it’s going to be a Republican flip.

The second best state would probably be Georgia, just because it’s such a red state and this is presumably going to be a good year for Republicans. You have Herschel Walker, obviously, the Georgia football star who’s popular there amongst Republicans and folks see that probably as a good pickup opportunity.

John Williams: Well, the other thing I think too, just to jump in real quick on Georgia is to watch is the governor’s race between Kemp and Stacey Abrams and just what kind of coattails Kemp has. If you look at those numbers right now, Kemp has stretched it out to a double-digit lead over Abrams. And so, the question become there, and I don’t want to jump ahead too far on Pennsylvania with you, but I think or other states, you got to look at what kind of coattails some of these people at the top of the ticket. Because what people may not understand is that the governor runs at the top of the ticket. So, when you go to vote and you look at it from the top to the bottom of the ballot, the governor’s at the top.

And so, they talk about what kind of coattails do you have for down ballot races? And so, yeah, that’ll be fascinating to watch, to see whether or not Kemp is able to give Walker a little push across the finish line on his own coattails or drag, I guess, across the finish line.

Andrew Coats: Another top of the ticket type of deal is Arizona and for a long time Kelly was presumably ahead in the polls and it been written off as Democrats are going to hold onto that fairly easily but that has really tightened.

John Williams: Well, and it’s really tightened and the other thing that we’re down to the last week where things happen is this morning the Libertarian candidate in that Arizona Senate race dropped out and endorsed Blake Masters, the Republican. And in a race where the margin is so narrow right now, and any swing like that, any development that has such an impact, because the impact only has to be very small. So, that could push Masters across the finish line with that development.

Andrew Coats: So, Nevada, Georgia, Arizona are the three states where Republicans are seen to have a realistic chance of flipping. There’s three other races that are worth watching on next Tuesday, Colorado, New Hampshire, and Washington. Now, they’ve been more reliable blue states the last couple of cycles, and you have fairly strong incumbents there, but I think if you see a wave type of election. One of these states could get swept up in the wave and turn red. I know in Washington, which is about as deep blue as state as you get. You have a very strong candidate there, Tiffany Smiley, who’s done a great job raising money and really forced Democrats to put money into that state and defend it. Colorado, Michael Bennet’s there and you have another strong Republican candidate running and then New Hampshire polls content.

John Williams: Yeah. New Hampshire, that’s a fascinating one to watch because you’ve got a situation where I think Republicans pulled money out of that because their candidate is a little too on the fringes. Let’s just say, but that’s closed in recent days, in New Hampshire.

Andrew Coats: So, you have those three and those are three potential flip opportunities and then you get into the states where Republicans are defending seats. And a year ago at this time, there was a lot of hand-wringing amongst Republicans over. How much they had to defend, and these seats could all go Democrat, and Democrats could have a big number in the Senate, but it’s really gone down to just a couple states now where it looks like Republicans could potentially lose. The biggest state is going to be Pennsylvania and Steven Law, who heads up the SLF, Senate Leadership Fund. This is the biggest role against Super PAC, who controls all the purse strings and where money goes. He has said if Republicans win Pennsylvania, they’re going to win the majority. And listen, there was the debate last week, there’s the old cliche that you cannot win a Senate seat based on the debate, although you sometimes can lose it and that was [inaudible 00:27:15].

John Williams: And that’s happened to Republicans before. Absolutely.

Andrew Coats: At 2012 in Indiana.

John Williams: Right. Missouri, Indiana, yeah. Republicans have a history of losing because of debates.

Andrew Coats: So, we’ll see what happens there In Pennsylvania. In Wisconsin, you have Ron Johnson, it looks like he’s going to hold on there and if not starting to pull away a little bit. In Ohio, you have J.D. Vance looks like he’s going to be able to hold on there. I know a lot of folks were nervous when Portman announced he’s retiring, but I think Vance should win there. Similar situation in North Carolina where he had Richard Burr announced his retirement, and Budd got the Republican nomination and seems like he’s going to be able to win, although that might be closer than some other states.

And then, in Florida, Missouri, you have Rubio in Florida, which I think is closer than some people realize, but Rubio should be able to win there. And then Missouri, that’s just become such a red state that I don’t think there’s any chance, Republicans don’t take that state. John, before we get into predictions, do you have any takes on those states that we just discussed or backing up into the states where Democrats are holding power?

John Williams: Yeah. I think you mentioned the three states of New Hampshire, Colorado, and Washington. I think we’re going to see a surprise. There’s going to be surprised somewhere in the Senate races on election night and not just the close ones that we’re talking about, like Arizona, or Pennsylvania, Georgia. There’s going to be a surprise somewhere. For whatever reason, Republicans are typically, or they’ve been under poll in the last several election cycles, whether Republicans voters are not answering polls or whatever it happens to be. You talk about Trump in ’16. You talk about Trump in ’20, and how off so many of the polls were. I think that Republicans, for whatever reason it is, get undercounted.

And so, I think that in one of those three races, you’re going to see a surprise. I know from talking to people who do what we do, who are employed by a large corporation that’s based in the state of Washington, that works routinely with Patty Murray, the incumbent senator in Washington state, that she’s in trouble and she knows she’s in trouble and she’s running very, very scared right now. And this person thinks that she’s going to lose and this is somebody who’s very familiar with Patty Murray and very familiar with Washington State politics.

Yeah. I mean, my prediction is I do think that the Republicans were going to take the majority back in the Senate. I didn’t think that 28 days ago. I do think it now, and I do think there’s going to be a surprise somewhere along the way with an incumbent that’s going to get beat that we thought might be possible but ends up being a reality.

Andrew Coats: So, I agree. I think Republicans are going to pick up two to three seats and my guess is Nevada and then either Georgia, Arizona, and then I think you could see a shocker in either Colorado or Washington and that would put Senate control with Republicans at either 53-47 or 52-48. That’s my prediction. We’ll know a lot more, obviously, next Tuesday that we’ll probably bleed into Wednesday Thursday, I’d imagine.

John Williams: Yeah. We’re going to have some recounts. I mean, I guess, and could be in a number of states, so I don’t want to say it, but we may not know the results. We’re going to do the results in the control of the house on election night but we’re not going to know it. There’s a chance we’re not going to know it in the Senate. Let’s hope we do. But it’ll give us something to come back and talk about in the next podcast.

Well, Andrew, thank you for that and thank everybody who has joined us today. If you’d like more information about what Andrew and I do, even though we really didn’t even talk at all about that today, which is how we provide federal advocacy service to our clients. Please visit our website at hallrender.com or feel free to reach out to me at jwilliams@hallrender.com, Andrew at acoats@hallrender.com.

One last disclaimer, please remember that views expressed in this podcast are the participants only and do not constitute legal advice. Surprise considering, we gave no legal advice on this one today. We hope you’ll join us for our next podcast, which we will be out sometime after next Tuesday when we will look at how the results will impact the future of healthcare policy on Capitol Hill. So, so long, everybody.

Analytics to Action: Revolutionizing Health Care Real Estate Strategy – Matthew A. Coursen, Executive Managing Director, Mid-Atlantic Healthcare Lead at JLL

October 31, 2022 Andrew Dick Health Care Real Estate Advisor 00:23:02 Comments Off on Analytics to Action: Revolutionizing Health Care Real Estate Strategy – Matthew A. Coursen, Executive Managing Director, Mid-Atlantic Healthcare Lead at JLL

Analytics to Action: Revolutionizing Healthcare Real Estate Strategy

In this episode, Andrew Dick sits down with Matt Coursen, Executive Managing Director, Mid-Atlantic Healthcare Lead, to talk about his role at JLL and trends in the health care real estate industry.

Podcast Participants

Andrew Dick

Attorney, Hall Render

Matthew A. Coursen

Executive Managing Director, Mid-Atlantic Healthcare Lead, JLL

Andrew Dick: Hello, and welcome to the Healthcare Real Estate Advisor podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today we’ll be speaking with Matt Coursen, the Mid-Atlantic Healthcare lead at Jones Lang LaSalle, JLL. JLL is a Fortune 200 commercial real estate advisory firm with a robust healthcare real estate practice group with over 2800 professionals across the country. We’re going to be talking about Matt’s background in the industry and the group that he leads within JLL. Matt, thanks for joining me today.

Matthew Coursen: Thanks, Andrew. Happy to be here.

Andrew Dick: Matt, before we talk about your role at JLL, let’s talk about your background. Tell us where you’re from, where you went to college, and what you aspired to be.

Matthew Coursen: Sure. I was born and raised here in the suburbs, just outside Washington, DC, actually about less than a mile from where I sit right now. Early in my life, I think I had an indication I would be in sales in some form. But after graduating from Washington and Lee University in Lexington, Virginia with a degree in journalism, I went to work for USA Football, which is a JV between the NFL and the NFL Players Association. I thought I wanted to be in the sports industry and work in that sports marketing world and use my communications degree. But after a couple years, I realized I wasn’t using all of my skill sets to my advantage. So I had some friends in real estate and they suggested I take a look at that industry, and I did win an interview with a small real estate firm called Swallowing and Fly, and very shortly thereafter we were acquired by JLL, and I’ve been there ever since. That was about 17 or 18 years ago.

Andrew Dick: So Matt, how did you end up in the healthcare real estate business. When you joined that smaller firm, were you thrown into healthcare real estate assignments, or did your work evolve?

Matthew Coursen: No, it evolved over time. Most commercial real estate brokers get into the business as generalists. You’re really trying to close any deal you can, and so you’re learning quickly about different industries. It wasn’t until about six years into the business when I started working in the healthcare side, I started out doing technology companies and some government contractors and cybersecurity was hot back then. So really became a generalist. And in 2011, I led the team that pursued and ultimately won the Children’s National Hospital business. And we were hired to help them with strategy and lease administration and transaction management and project management, and really a whole host of real estate services because they didn’t really have a real estate department.

So for a number of years I was their defacto real estate director, which was a trial by fire. I got my 10,000 hours in healthcare real estate over that five or six year period, helping them with over 70 transactions and helping them deal with property management issues and things that just popped up as being their go-to person in real estate. So that really gave me the background, the subject matter expertise in healthcare real estate that I needed, and that’s what propelled me into the business I have today.

Andrew Dick: Got it. And Children’s National, talk a little bit about that organization and their footprint just briefly.

Matthew Coursen: Yeah, they’re the 25th largest employer in the region. In their campus, they’ve got their main hospital campus, downtown DC. Then they’ve got a research and innovation campus further up into DC at the Old Walter Reed Army Medical Center. They’ve got about in total there about three million square feet, and then they have about a million square feet of ambulatory real estate out in the community. Pediatric offices, specialty offices, primary care, and those are about 70 or 75 of those locations. So they’ve got a fairly large footprint for a small nonprofit hospital.

Andrew Dick: Got it. So talk about your role today at JLL, because I know you used to be the boots on the ground, now you’re leading a team. Talk about that. What does the team look like and talk about your role.

Matthew Coursen: Yeah. Back in 2017, after working with Children’s for a number of years, I realized that this industry is massive. We consider the healthcare real estate industry to be a trillion dollar market. And so I realized that we had really strong market share locally with working with hospitals and health systems, but there was a lot of unplowed ground when it comes to other healthcare organizations we could be working with. So I went to the leadership regionally and put together a business plan to really put some emphasis behind the healthcare business that we have here, put some leadership behind it, some resources, recruit some folks to join the team and really expand the business.

So in the last four or five years, we’ve more than doubled the business, and we’re working with more hospitals and health systems and private equity and venture backed healthcare groups like US Radiology, US Dermatology, Carbon Health, and it’s been a great expansion of our business over the last five years or so.

So I lead that team and I’m responsible for growing that revenue across all of our businesses, not just brokerage, but also property management and project management and capital markets work that we do. So that’s my leadership role, but I still do run multiple national accounts for the firm of clients that I’ve sourced over the years. And so that’s what we do, and we’re trying to grow it all over the country. We’ve got a healthcare practice that’s national, but it’s not in every single market. So we’re trying to expand and make sure we’re covering as many markets as we can.

Usually if you go into any town or a city, one of the largest employers is the hospitals. So it’s 20% of our economy and it’s growing every year, and it’s only going to get bigger. So at JLL, we’re very bullish on industry specialization in general, but especially with healthcare and life sciences, we’re very, very bullish on the growth of those businesses.

Andrew Dick: Got it. So talk about some of the venture capital or private equity backed healthcare providers that you’re working with. Because I know Matt, we’ve talked about that before, the growing area of interest for private equity and venture capitals healthcare, that takes a lot of different shapes and sizes. Talk about what you’re seeing and the type of work you’re doing in that niche area.

Matthew Coursen: Yeah, it’s a great topic because it is growing like crazy. There’s a big, almost a gold rush to try to harness the opportunity that’s in front of us to take technology and a lot of money that’s out there in the economy right now that’s waiting for deployment and trying to put some horsepower behind healthcare because a lot of people believe healthcare is fundamentally broken. It’s more sick care than well care. And there are a lot of organizations out there trying to do a couple things.

One, they’re trying to use technology to solve a lot of the challenges we have in healthcare business. And the other is they’re trying to reach the consumer in a more direct way. They’re either trying to solve the value-based care challenges that are out there, or they’re trying to win the consumer facing healthcare game that’s out there.

So we work with a lot of private equity groups. So not just the firms themselves, which we do a lot, we’ll help advise them on any acquisition they’re looking to make, any investments they’re looking to make, and we evaluate the real estate footprint of that healthcare company for them. But we’ll also help post acquisition and we’ll go actually work with the individual company like a US Dermatology for instance, and help them build a real estate strategy using data analytics.

So we at JLL have also responded to our industry and said, “We need to level up for our clients, and the best way to do that is to get data.” Is to go get big data, harness that, it’s expensive, and then put it into a software that’s really user friendly and that can enable a really thoughtful data driven real estate strategy.

So what we found is that our private equity backed, venture backed healthcare clients are really compelled by that software, by that analytics that we’ve built, because number one, it helps with business case formation. So whether they’re looking to acquire another business or roll up another healthcare business, a lot of the maps and the images and the visualizations we create can be used for building that business case for creating decks and leadership presentations and things.

But also, we’re able to use the platform to help the actual business scale and grow and improve their EBITDA margins, which is what those private equity groups care about. And so it’s a really powerful predictive model, and we’ve been building it for the last 10 years or so.

The key is the data that you put into it. At its core, it’s just the RGIS platform, the Microsoft platform, it’s something that we’ve taken and we’ve really added a lot of horsepower to through data and the data’s expensive. We’re talking about claims data, we’re talking about procedure codes, and ID nine and ID 10 codes that we can layer in. We have a latitude and longitude for every healthcare provider in the country. We’ve got payer mixed data, we’ve got all the demographics and psychographic data. We’ve got of course, real estate data. So we know where all the real estate options are, and we put it together in something that’s really, really powerful.

And the two main things we do with our clients, not the private equity firms themselves, but the actual healthcare providers, is we’re helping them, one, really diagnose the portfolio they have and make sure that we are optimized there and that there’s no waste in the healthcare real estate part of the business.

And then we’re also helping them future, forward looking and thinking about growth, because growth is the name of the game, and they either want to enter new markets or they want to potentially acquire another group in another market to enter the market that way. And so we use our analytics platform to do that for them, and it’s a great partnership. And ultimately, when it comes time to do the real estate deal, we’ve done all this great strategy work and all this analytics work, and it really makes the site selection process very, very straightforward, very simple, and at least the better outcomes for them and their patients. So we’re excited about it and it’s something that I think that sets us apart.

Andrew Dick: Got it. So talk about some of the concerns that providers are raising when they’re looking at selling their real estate. Things like continuity of ownership, some other trends you and I have talked about before. Let’s dive into that a little bit because it seems like there is quite a bit of interest in sale lease backs over the past few years. What’s your take on those type of opportunities?

Matthew Coursen: That’s probably not a whole lot unlike what you’re seeing with your clients. Whether they want to sell or buy or lease or refinance their real estate, our advice is pretty straightforward. We want to first build a strategy, figure out with them what exactly it is they’re trying to achieve. Different organizations have different goals. We’ve seen hospitals buy back real estate that they had previously leased or done a ground lease with the developer on. So we’re seeing a little bit of everything these days when it comes to buying and selling and leasing.

We were just talking to a big healthcare about advising them on selling a large portfolio they have in this region, and they ended up deciding to put that project on hold despite they’ve got a pending loan maturity here coming up and they still aren’t ready to sell because the capital markets are in a major upheaval at the moment, and things are pretty frothy. So they’re not going to end up pulling the trigger on that sale yet.

So everyone’s got different challenges, but the first thing we want to do is help them think about the strategy and then build that plan for the tactical moves that help them think about control, compliance and succession planning. Those are the three big issues at the table most of the time.

What we see is that the control of the real estate is something that either the organization doesn’t care about at all, they’re fine being a tenant, they don’t have to own the real estate, and other organizations really care about ownership. They don’t want to be a tenant, they want to control it. They want to get the value of the appreciation of the land or the building or both. And so that’s a big thing. We just have to align with what their goals are.

Another thing they care about is compliance. You got a lot of healthcare provider owned real estate. So a private equity back group will come in and buy a practice. Well, oftentimes the doctors will own their real estate and whether it’s a condo or it’s a standalone building, and so the PE firm has a choice. They can either buy the business and the real estate or they can just buy the business. Oftentimes what we see, they’re just buying the business. So the real estate then is still in the hands of the provider, but they no longer own their business. And so now you have a potential start compliance issue here. You got to make sure that your clients have arm’s length transactions, their fair market values are in line. And so that’s something that’s a big concern. So we’re careful to advise them there.

And I think those are the biggest ones, the biggest issues that are at the table. But succession planning goes into that as well. Sometimes you’ll have providers that want to retire. They want to monetize the real estate to fund their retirement, but the private equity backing or the organization that’s invested in that business doesn’t want to buy the real estate. So then we can come in and try to help them in that way, which is another party there. So there’s a lot of nuance to it, but that’s what we’re seeing out there right now.

Andrew Dick: Great. Thanks for the insights, Matt. So let’s move to the state of the industry in general. Give us an idea of where you see the healthcare industry at large going in the healthcare real estate industry. How will that be impacted in the future?

Matthew Coursen: I think the consolidation of hospitals and health systems will continue. I don’t think that’s a novel idea, but I think that’s going to continue. More than half of the hospitals out there reported negative margins over the last couple of quarters. So I think we’re going to see a lot of consolidation, and that’s going to lead to a lot of real estate opportunities in the healthcare of real estate space because there’s just so much opportunity there and a lot of facilities that are going to need to be repurposed or sold or bought or leased or what have you. So a lot of opportunity there because of consolidation.

I think number two, we’re going to continue seeing PE and VC investment in these digital health companies. They’re only getting bigger and trying to solve bigger challenges. And so I think that’s going to continue. And it may not have a big impact on the real estate side, but it just depends on how much virtual care, telehealth, reimbursement rates change. But I think brick and mortar healthcare is here to stay for sure, but I think the VC and the PE investments is going to keep churning and that’ll create some opportunities.

And then the third is big corporations are going to attempt to solve the value-based care challenge as it relates to a direct to consumer model. So think about Amazon potentially acquiring One Medical, which is a primary care platform. Or think about Walmart partnering with UHG. Whether it’s through M and A or genovo growth, I think there’s going to be a lot of real estate opportunities as a result of those types of partnerships and mergers. So that’s going to be exciting from a healthcare real estate perspective.

Andrew Dick: Yeah, I think you’re exactly right, Matt. I was looking at some of the trends this morning and Walmart recently announced they’re going to open 16 more clinics in Florida, some of the major metro areas like Tampa and Jacksonville. And these big companies are all trying different models, trying to drive down cost. I think we’re going to see more competition from some of the nontraditional providers, which is really interesting.

Matthew Coursen: I totally agree.

Andrew Dick: So where do you see the opportunities right now? We talked about digital health, venture capital, private equity, and what they’re doing. Where do you see the big opportunities in terms of healthcare real estate right now and in a pretty unique market, I would say?

Matthew Coursen: Look, the return to office movement is still really early days. Cap rates for office buildings are not where they need to be. So that is not an asset class people are excited about at the moment, but MOBs are still attractive. Cap rates aren’t where they were a year ago of course, but the MOBs are a much safer bet right now when it comes to sales and recapitalization. So I think that’s going to continue being something to look at.

So I like the MOB side of things right now. Hopefully the capital markets will open back up next year and it’ll get even better. But it’s certainly a safer place to be right now than office.

On the leasing side, I think the retail push, the consumer facing push for medical is going to continue. And so hopefully the healthcare world will continue to buoy the retail world. It’s not going to absorb all of it. Not every big box store is going to turn into a hospital, but I do think we’re going to see a lot of that happen, especially in some of those secondary tertiary markets where you don’t have a lot of great strong national anchor tenants everywhere.

And then the third is really the project management side of things. The building out of healthcare facilities is so expensive and it’s so specialized that I think that’s going to continue growing. It’s a big part of our business at JLL. Our project management side in healthcare is really, really strong. We’ve got great specialists in that area, and it seems we can’t hire these people fast enough.

I just saw a budget a few minutes ago come in through from a hospital client of mine that you wouldn’t believe, Andrew. $580 a square foot to build out a primary care clinic. And now that includes furniture and fixtures and equipment and things, but that’s an all in number, but that’s a very, very big number. And a few years ago, you could have built a whole building for $500 a foot.

So I think with costs on the rise, it’s going to be important that these healthcare groups work with firms that can help them manage these projects, manage these costs, take advantage of economies of scale, and buying power that firms like JLL have. So I think that’s another trend we’re going to keep seeing.

Andrew Dick: Interesting. That cost per square foot, that’s a huge number.

Matthew Coursen: Huge number.

Andrew Dick: Really interesting. I’m hoping at some point we’ll see construction costs go down, but it just seems like they keep going up or those costs keep going up.

So at the end of each interview, Matt, I typically ask my guest what advice you would give to a young professional who wants to enter the healthcare real estate business. What would you say?

Matthew Coursen: I would say now is a great time to get into the business because it is the bottom of the market. It’s a trough. It’s a challenging time. And if you’re young and hungry and you’re able to get in there and really roll up your sleeves and learn, this could be an excellent start to a career in commercial real estate. But I think it’s a lifestyle choice to do what we do. You have to really make sure that it’s something you personally want to do with your lifestyle, that it suits that level of effort and that level of commitment.

So I really advise people a lot, younger people, find something that’s personally rewarding to you about your skill sets, something that you feel good about excelling in, and then find some interest. Whether it’s real estate or it’s healthcare or it’s anything else, try to marry those two things up. I think a lot of people use the word passion a lot, but I don’t think passion’s something that’s there day one. I think passion is there after you’ve had some success, you’ve had some failures, you’ve had some learnings over time. So I think it’s really just focus on where you’ve got a skill set and interest and try to pair those. Real estate could be one of those things, but it’s foundational to understand self-awareness and understand who you are and what makes you happy, and then what you’re interested in first.

Andrew Dick: That’s great advice, Matt. I heard Mark Cuban recently, someone asked him a question about where should you focus your efforts as a young professional? And he said something very similar to what you said. Not follow your passion necessarily, but follow your effort is what he often says, which goes to your interest and what you’re willing to put your time and energy into. So I think that’s great advice. Matt, tell us where the audience can learn more about you and JLL.

Matthew Coursen: Yeah, we have a pretty healthy presence on LinkedIn and also on JLL.com. We have an industry section where we can dive into the healthcare side of our business and find people, professionals you can contact, learn about our services and some of our clients and case studies are on there. So I would drive people to JLL.com and my LinkedIn page.

Andrew Dick: Got it. This was great, Matt. Thank you for doing this.

Matthew Coursen: Andrew, thank you for having me. love doing it. And let me know if I can help you with in the future.

Andrew Dick: You bet. Well, thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave us feedback. We also publish a weekly update on healthcare real estate matters. To be added to that list, please go to my LinkedIn page and you can subscribe to that. Thank you.

 

Health Care’s Shifting Financial and Regulatory Impacts on Real Estate – Part 2 of 2

October 7, 2022 Andrew Dick Health Care Real Estate Advisor 00:36:29 Comments Off on Health Care’s Shifting Financial and Regulatory Impacts on Real Estate – Part 2 of 2

Health Care’s Shifting Financial and Regulatory Impacts on Real Estate , Part 2 of 2

Andrew Dick sits down with Michelle Mader and Mark Furgeson from Ankura Consulting for the second of a two part series to review hospital and health system financial performance to date and staffing challenges and the impact on the physical footprint of hospitals.

Podcast Participants

Andrew Dick

Attorney, Hall Render
adick@hallrender.com

Michelle Mader

Managing Director, Strategic Advisory Services at Ankura Consulting
michelle.mader@ankura.com

Mark Furgeson

Senior Managing Director Healthcare Real Estate at Ankura Consulting
mark.furgeson@ankura.com

Coming Soon.

Inside Baseball — Health Care Politics and Policy in Washington, DC

September 26, 2022 John Williams Practical Solutions in Health Care 00:30:51 Comments Off on Inside Baseball — Health Care Politics and Policy in Washington, DC

Inside Baseball: Health Care Politics and Policy in Washington, DC

In this special episode, Hall Render’s John Williams and Andrew Coats provide an update on health care policy developments in Washington, DC, with an inside look at the politics of health care on Capitol Hill, at the White House and within federal agencies like CMS. Williams and Coats not only tell you what is happening, but also give you a look at why it’s happening and where things could be going.

Podcast Participants

John Williams

Hall Render
jwilliams@hallrender.com 

Andrew Coats

Hall Render
acoats@hallrender.com 

John Williams: Hello and welcome to Inside Baseball, a look at healthcare politics and policy in Washington, part of Hall Render’s Practical Solutions Podcast series. I’m John Williams. I’m a shareholder with Hall Render and managing partner of its Washington, DC office. Today I’m joined by my colleague Andrew Coats for the inaugural edition of our podcast. Since this is our first podcast, we’d like to take a little more time to introduce ourselves. Between the two of us we have over 40 years of experience working in Washington, DC. In my case, I first came to Washington in 1996 where I served as Press Secretary for what was then called the House Committee on Government Reform and Oversight. While there, I also served as policy advisor to the chairman on issues such as Medicare, Medicaid and Social Security. Andrew, you want to tell the folks a little bit about yourself?

Andrew Coats: Yeah, thanks John. Wow, the fact that we have over 40 years of DC experience now, but time marches on. I came to the Hill after, in 2000 after college, worked in the Bush administration as a legislative liaison before working on Capitol Hill for a member of Congress handling healthcare issues. After law school, I went to the private side. So I’ve experienced both from administrative congressional standpoint and now in private practice where we’ve been working together with healthcare clients for over a decade now.

John Williams: Thanks, Andrew. So the goal this podcast is to not only provide an update on healthcare policy developments in Washington, but also to give you, our listeners an inside look at the politics of healthcare on Capitol Hill, at the White House and within federal agencies like CMS, FDA or HHS. We plan to keep this at about 15 minutes in the future. However, given that this is our first podcast, we’re probably going to go a little bit further than that.

As President Obama once said, “You can’t separate policy from politics.” So, our goal is to not only tell you what is happening, but to also give you a look at why it’s happening and where things could be going. That last item is really the crystal ball political prediction stuff that we learned from our day in and day out work with lawmakers, congressional staff, and regulators at federal agencies.

Since we are lawyers, I’m obligated to tell you that our predictions are based on the best information we have at the time that we get it, but it’s also based on what happens traditionally on Capitol Hill and in federal agencies year in and year out. So, like the price of gasoline, things in Washington can change very quickly. So, please forgive us if our predictions are wrong from time to time. The general format of this podcast will be to look at healthcare policy developments from a legislative and regulatory perspective. In each edition, one of us will give a legislative update on Capitol Hill and the other will give an update on regulations coming out of or pending before federal agencies, usually with an update on regulations under review by the Office of Management and Budget at the White House. So with that, I will turn it over to Andrew to give you an update on Capitol Hill.

Andrew Coats: Thanks, John. And before we get rolling on the Hill update, I think it’s worth noting that if you’ve been on Capitol Hill in September, Congress has now entered phase three of its reopening plan. And being on the hill this week and last, it felt like we were back in 2019. You had relaxed entry requirements into the House and Senate buildings. Your tours at the Capitol have resumed, so you see tour groups and school groups up there. It felt normal again.

John Williams: And the traffic’s back to being the way it always is, right?

Andrew Coats: The traffic was horrendous this week. Pandemic commutes, which was not enjoyable. But at the same time, things are starting to feel normal again. And with that return to normalcy, there’s a buzz that’s returned that’s been really missing from Congress and in DC since February of 2020. So it’s nice to be back. And we’re now deep into September of a midterm election year and that traditionally means that Congress has one major must pass item on their to-do list and that’s passing the coming year’s spending bill. So for this year, it’s the FY-23 appropriations bill and they need to do that by the end of the fiscal year, September 30th. Now, Congress won’t be able to do that before the November midterms, they almost never do, especially in election year. So my most likely, they will extend current funding FY-22 to mid-December. There’s a framework in place for the CR, which would extend funding to December 16th, that’s a Friday and that’s kind of the target end date right now for Congress.

John Williams: Andrew, let me jump in there real quick because, tell a little bit about what a continuing resolution is, you referenced a CR. What is a CR in general?

Andrew Coats: Yeah, CR just keeps the current years funding going. It keeps it rolling, so you don’t have government agencies shutting down or furloughing employees and essentially shutting down the federal government. So you have a CR, which they’ll assign a certain timeframe and in this instance, they want to get through the November midterms so they can go back to their state and district in October and campaign. And then after the election, sometime, usually around mid-November, they come back and then there’s a three to four week sprint at the end of the year. It’s kind of the end of the year craziness that Congress has, especially at the end of a Congress and that’s to finish up business.

John Williams: And that’s what they traditionally have referred to as a laying duck session, right?

Andrew Coats: Of course. Yep. So with that we have the immediate focus right now of Congress is what policies get attached to the CR [inaudible 00:06:24] resolution framework. And two, the longer term focus is, what gets included in an end of the year Omnibus Bill, which is, that funds the entire government, all the federal agencies and it includes a lot of policy riders, because that’s the last train out of town and it will be for the 117th Congress.

So let’s talk about a short term CR. One of the big items that’s getting a lot of buzz right now is the FDA user fee bill. This comes up every five years. It needs to be passed by Congress by September 30th otherwise FDA has to begin the process of furloughing employees. Now the FDA bill, it’s a time eater for Congress. It takes over a year of negotiation between congress, FDA, industry stakeholders, but it almost always passes before September 30th. And when it does pass, it passes with Republicans and Democrats in lockstep. This year could be different.

Senator Burr, he’s a retiring member from North Carolina. He’s the ranking member on the Senate Hall Committee. He voted against the FDA Bill at the end of the Senate mark up back, during the summer, which is an unusual move. So what we’re looking at because of that is some sort of extension or just passing a clean FDA user fee bill without the policy writers that were added in by the House and Senate in the spring and summer.

Now, today is September 22nd. The Senate Health Committee has been negotiating this since last fall. At some point, the committee’s lack of action is, I like to say, is going to make dad pull the car over on vacation. So someone… And what I mean by that is, someone working under the dome in the Capitol says someone for leadership with either Schumer, McConnell, maybe both, their staff, they’re going to have to come down and override the committee and tell them, “If you’re not going to do this, we’re going to do it.” And that is something committee chairman do not like and committee staff do not like but we’re getting dangerously close to that point if we’re not there already. So, look for the FDA user fee, some sort of extension or clean user fee bill to be included in the CR.

Another item would be additional COVID funding. The administration made a supplemental funding request for 22.4 billion for COVID and Monkeypox funding in early September. This is really high, this becoming a really high bar to reach consensus on in an election year, given President Biden’s comments on 60 Minutes on Sunday that COVID was over. He said, “The pandemic is over.” If you’re the administration, you’re congressional liaisons and administration, it’s hard now to make that case that our country’s not going to function without the billions of dollars in supplemental funding, which is the case they have to make to Congress when they’re asking for this increase in funding.

John Williams: Yeah, I mean, you mentioned that… You’re right. Republicans on the Hill have been hesitant all along to add more money to COVID given the amount of money, in their view that was spent previously. And yeah, you’re right. To your point, I’m not sure that the president’s comments on 60 Minutes that the pandemic is over helped much and I think you quickly saw the Secretary of HHS, the CMS administrator, the CDC administrator walking those comments back pretty quickly. But yeah.

Andrew Coats: Right.

John Williams: It just makes it a heavier lift, right? A much heavier one.

Andrew Coats: No doubt. Now, bigger picture, Biden was at a car show where people were without mask. I think it was fair to say the intent was to show and demonstrate life is returning to normal.

John Williams: Right. Right.

Andrew Coats: But I know providers certainly know, they’re still treating COVID cases, people are still dying from COVID every day. So at the end of the day, the supplemental COVID funding is the potential for the CR or, and/or end of the year omnibus. Another item that could be included into CR is mental and behavioral health care. During the summer, the talks surrounding mental health and behavioral health was all the buzz. It has bipartisan support. Our country was in the wake of a number of high profile shootings. And when you hear members discuss healthcare issues, they’re hearing about, in their district or state, almost everyone mentions behavioral health. Now yesterday, the House Ways and Means committee had a markup, they advanced a package of six bills designed to improve Medicare coverage for mental health services. These bills included amending Medicare…

Andrew Coats: These bills included amending Medicare PPS for psychiatric hospitals and psychiatric units. It included a bill that would bolster coverage of the Medicare outpatient mental health services. It included a bill that would allow coverage of marriage and family therapist services and mental health counselor services under Medicare. It included a bill that would direct HHS to provide outreach and reporting on certain behavioral health integration services offered through Medicare. Another bill would direct the HHS secretary to provide outreach and reporting on opioid use, disorder treatment services furnished by programs under Medicare. And the sixth bill would’ve meant the Social Security Act and establish exceptions for certain physician wellness programs. This package of six bills will most likely presumably get through the House, but the buzz around mental health package in the Senate, they seem to cool a little bit. Regardless, look for these provisions to potentially be included in end of the year omnibus package.

Another big area is telehealth. At some point, the Biden administration’s going to have to declare that public health emergency is over. The administration has said now for quite some time, that they’re going to provide hospital associations 60 days notice before they announce the PHE ends. There’s a line of thinking that sometime around mid-November, after the midterm election, they’re going to announce the PHE will come to an end in January. And with that, when once the PHE ends, a number of different telehealth waivers that have been in place since 2020, will it also come to an end. Congress is going to need to either extend these telehealth waivers or make them permanent, and at end of the year omnibus, it would be the obvious place to do that. John, do you have any thoughts on when they-

John Williams: Yeah, yeah. The telehealth stuff, so Congress addressed the telehealth waiver thing in the last omnibus they did. And what they did was they granted a 151 day extension from the end of the public health emergency. And Andrew noted that we did not get 60 days notice that we were promised from HHS that the PHE was going to expire in October when it is currently set to expire. Everyone is operating under the assumption that it will be renewed in January. Given the President’s comments on 60 Minutes, it’s going to be tough for them to say that we need to continue the public health emergency come January. If it ends in January, then that’s going to trigger the 150 day time period for them to address which waivers they want to make permanent. There is a piece of legislation that passed the House that was sponsored by Liz Cheney that would increase that 150 day window to two years.

I haven’t heard from a lot of people in the Senate, especially Republicans, that they’re too keen on taking that bill up. A lot of that has to do with the politics. There are a lot of Republicans these days who aren’t big fans of Liz Cheney’s. That may be one of the reasons that we end up staying with just the 150 day window for them to figure out what they’re going to do. And as Andrew and I say all the time, Congress operates under the mantra of why do today what you can put off until tomorrow? And so I would expect that whenever the PHE ends Congress is going to take most of the 151 days to figure out which waivers, like permanently eliminating the geographic and originating site restrictions to telehealth, which is really the big one. They’re going to take all that time to figure that out.

Andrew Coats: One of the other items that tend to move in either a CR or omnibus package, it’s called Medicare extenders. And this is a package of Medicare related extenders that tend to be a lot of rural health or behavioral health related provisions that usually enjoy strong bipartisan support. These are bills that can move either on the suspension calendar in the House or on UC in the Senate really without opposition. John, do you want to talk about some of the Medicare extenders that we may see that Congress is currently trying to move and make it thrown into the package next week or at the end of the year?

John Williams: Yeah, absolutely. These extenders are essentially different programs or different payment adjustments that Congress was responsible for renewing so many years and they expire at different times. Those that are set to expire in about eight days at the end of this fiscal year include the Medicare Dependent Hospital program, the low volume hospital adjustment payment, and the rural ambulance add-on payment. Those are three very important rural healthcare programs. And from the folks that we’ve all talked to on The Hill, those will be included in the continuing resolution. We still haven’t seen the language for the continuing resolution yet. As of this morning, we understand that it’s the goal to pass it next week before Congress breaks for the midterm election. We understand that those healthcare policy writers are going to ride with CR, but probably none of the others. And Andrew mentioned a package of healthcare bills that came out of Ways and Means yesterday.

And one of those that Andrew referenced deals with the physician self-referral law, also known the Stark Law. This is something that we at Hall Render had been working on for many, many years. And that bill was actually something that we worked with to have drafted by Congressman Raul Ruiz of California, Larry Bucshon of Indiana, Greg Murphy of North Carolina, and Don Beyer of Virginia. Basically, what it’s intended to do is to create a new exception under the Stark Law for physician wellness programs. Physician burnout has becoming an enormous issue. Healthcare workforce burnout is an enormous issue, and that’s something that we’ve really tried to help address with this. And one of the things that happened earlier was that Congress passed something called the Lorna Breen Act, and what the Lorna Breen Act did, well, let me back up. Lorna Breen was an emergency medicine physician in New York City who unfortunately committed suicide because of stress and burnout. Congress passed this legislation that part of which creates a grant program where hospitals can apply to the government for grants to run wellness programs.

Well, one of the problems there is that the Stark Law doesn’t permit hospitals to spend money remuneration on non-employed physicians unless it meets one of the Stark Law exceptions. And there was no provision in Lorna Breen that addressed the Stark Law. Since 53% of physicians in the country are not employed by a hospital, a hospital couldn’t spend Lorna Breen money on wellness programs for those physicians without violating Stark. We worked with members of Congress to draft this bill to not only correct the issue with Lorna Breen and the Stark Law, but to also create a whole new exception that will allow hospitals to provide wellness program to non-employed physicians without violating Stark. One of the things that we haven’t talked about yet, Andrew, is this idea of a yearend catchall healthcare bill. Andrew’s mentioned the continuing resolution, which is what they’re going to do next week, it looks like, to keep the government running through at least the middle of December.

At which point, they’re going to have to figure out whether or not they’re going to do an omnibus appropriations bill for fiscal year ’23, or they’re going to do another continuing resolution into 2023. From all practical purposes, from everything that we’ve heard, we think it’s likely they will do an omnibus in December. But there are things that won’t be included in the omnibus that lawmakers hope to include in a catchall healthcare bill. What usually happens at the end of a two year session of Congress is that you have all of these bills that members have introduced that haven’t passed, and where you have a dynamic like we do now, where it appears likely that Republicans are going to take control of the House in January, you have a whole bunch of Democrats who really want their pet projects to be passed before they lose control of the process. You very well may see this catchall bill where a whole bunch of different things get included. And that is someplace where you could see all of the bills that Andrew just referenced coming out of Ways and Means yesterday, including that Stark bill. One of the things to add is that just because the House wants to do a year-end catchall bill doesn’t mean that the Senate is going to do a year-end catchall bill too, or even with past it. In fact, I’ve had conversations with Senate staffers over the last couple of weeks where I’ve referenced year-end catchall healthcare bills, and they just essentially rolled their eyes and said that’s all healthcare bills. And they just essentially rolled their eyes and said, “Yeah, the House may do that, but I’m not really sure we’re going to do that over here.” So, that really leaves us… That doesn’t happen. And there’s a lot of pieces of legislation out there.

For example, the SAVE Act, which is a bill sponsored by Larry Bucshon of Indiana, that would essentially mirror the current law, where it’s a felony to attack an airline flight crew member. We would apply that to healthcare workers in the healthcare setting. That’s a policy thing that could be included in some sort of your catch-all bill. Our Stark Law bill would go on something like that.

There are other avenues as well. So you really come down to this year-end thing of a year-end catch-all policy bill. But Andrew mentioned, you got to fund the government. And the interesting thing here is that policy bills like a year-end catch-all, if they have provisions in them that require money from the federal government, then lawmakers are going to have to find offsets to pay for those.

And so, that’s where it really becomes difficult, is if you got to bill that costs anything… And for example, our Stark Law bill doesn’t cost anything, the SAVE Act doesn’t cost anything. But one of the other issues that we haven’t really talked about yet that Congress has to address before the end of the year is the 4% Medicare sequester cut.

And this is something that providers are facing because the American Rescue Plan wasn’t fully paid for, and the statutory pay as you go rules require subsequent cuts if a piece of legislation like that isn’t fully paid for. So we’re looking at a 4% sequester cut in January. And so, that just provides added pressure for lawmakers to do an omnibus instead of a continuing resolution come December. And from everybody that we’ve talked to on the hill, they’re well aware of it and know that they have to address it.

Andrew Coats: So, that’s a big picture of some of the items that Congress is going to be dealing with next couple months. It’s not an exhaustive list. There may be others. But from a healthcare perspective, it’s a pretty good snapshot of what they’re focusing on. John, do you have any thoughts on the regulatory front, some of the big bright letter… Stop that. John, do you have any… Let me start again. John, do you have any thoughts on the regulatory front, some of the things that may be coming down the pipeline?

John Williams: Yeah, absolutely. Things have been somewhat quiet from a regulatory perspective over the last several weeks. As many of you listen to this know, CMS must issue payment rules each year, which either cover a fiscal year or a calendar year. The fiscal year payment rules, like IPPS, LTAC, inpatient rehabilitation facility and inpatient psychiatric facility payment rules, those have all been finalized already, so I’m not going to spend any time discussing those, other than to note that there really wasn’t too much controversy surrounding those.

As for the calendar year 2023 payment rules, so the OPPS, Ambulatory Surgery Center rule, the physician fee schedule, those rules have not been finalized yet. The comment period for those ended earlier this month, so we’re expecting those to be finalized and released sometime in late October or early November. From a content perspective, CMS is proposing to increase payment rates under the OPPS and ASC by 2.7%, which is about a $7.2 billion increase for OPPS and $130 million increase for ASC over what was in ’22.

What many folks are watching for in the OPPS is how CMS intends to deal with the fact that the Supreme Court overturned the almost 30% cut to 340B discounts done under the Trump administration. CMS has to figure out what they’re referring to as unscrambling that egg. The OPPS proposed rule said that they didn’t have the time to address that in the proposed rule, but that the final rule would have some sort of formula by which 340B entities that were subject to those cuts are going to get that money back, whether it’s a one time payment or prospectively an increase in discount down the road, which I think is what’s more likely to happen because it would be really too hard to figure it out any other way. So, that’s something to keep an eye on.

As for the physician fee schedule, CMS is proposing at 4.42% reduction in that, and that reduction is driven really by the expiration of many of the increases that Congress made during the pandemic, the most recent one being in the last appropriations package that passed in December of last year, which had they not acted, would’ve been around 9.75%. While we love Larry Bucshon, and we’re not just… This isn’t the plug Larry Bucshon show, Larry and Congressman Ami Bera have introduced the Supporting Medicare Providers Act of 2022, which would reverse this 4.42% reduction.

And here’s something that they’re either trying to get into the omnibus or most likely going to try to get into the omnibus, because if they put it in catch-all bill, they’re going to have to figure out how to pay for that. And by putting it in the omnibus, what they do is they just bury it in there with all this other spending in a great big package. So lawmakers have different reasons for voting for a great big bill like that, and while they may not like certain provisions in it, they end up voting for it anyway because they like most of the other provisions in it. So, that’s tactically how they’re going to try to position that bill.

Lastly, the White House Office of Management and Budget is responsible for reviewing all rules and regulations before they’re made public. So we’re always checking the OMB dashboard to see which rules have arrived for review. The dashboard doesn’t provide too much information on a substance of many of these rules, but we are able to get an idea of what they’re about from either their title, their history, or things that we pick up around town.

A couple of those worth mentioning include a HRSA proposed rule on 340B alternative dispute resolution process. This is something that’s been in the works for a long, long time. It’s been pending at OMB for well over a year. We really don’t have any idea when it’s going to be released, but it’s one that we’re tracking really closely. Another is titled Rescission of the Regulation entitled Protecting Statutory Conscience Rights in Healthcare Delegations of Authority. Quite a mouthful.

That was the Trump era regulation that was intended to, I’m going to get this right here, quote, “Provide protections in healthcare for individuals and entities on the basis of religious beliefs or moral convictions.” So this is the Biden administration reversing the Trump era regulation that deals with religious beliefs and moral convictions, which was quite controversial at the time that was passed anyway.

Lastly, the DEA has a regulation pending that’s titled Special Registration to Engage in the Practice of Telemedicine, which we expect will deal with the electronic prescription of drugs via telemedicine. Not too much more on that one, but one we are also tracking. And that’s been pending for a while too, and really no idea when that’s going to be coming out. So that is the regulatory overview, the Capitol Hill overview. Andrew, anything you want to add as we wrap this one up?

Andrew Coats: No, although I’d give us a shameless plug for our next podcast, which will take place sometime in October, and we’ll have a lot of good hot takes on the upcoming election, maybe some predictions, and what that may mean for Congress when they come back in November and December.

John Williams: Exactly. That’s always the fun one to do right? Where we get to talk about campaign politics and how that will shake out on Capitol Hill. Because if we go too far down that road and ruin the content, but there are going to be a lot of changes, especially in the House as to who is in charge of the committees with jurisdiction over healthcare. So it’s always fun to take a look at how that works. So thank you Andrew. And thank you to everyone who has joined us today on Inside Baseball, a look at healthcare, politics, and policy in Washington.

If you’d like more information about what Andrew and I do, or how we provide federal advocacy services to our clients, please visit our website at hallrender.com, or you can reach out to me at jwilliams@hallrender.com, or Andrew at acoats@hallrender.com. One last disclaimer, please remember that the views expressed in this podcast are those of the participants only and do not constitute legal advice. Thanks for joining us, everybody. Have a great rest of your day.

Health Care’s Shifting Financial and Regulatory Impacts on Real Estate – Part 1 of 2

August 18, 2022 Andrew Dick Health Care Real Estate Advisor 00:38:14 Comments Off on Health Care’s Shifting Financial and Regulatory Impacts on Real Estate – Part 1 of 2

Health Care’s Shifting Financial and Regulatory Impacts on Real Estate , Part 1 of 2

In part one of a two-part discussion, Andrew Dick sits down with Michelle Mader and Mark Furgeson from Ankura Consulting to talk about the current financial performance of health care providers and the implications of the shifting regulatory environment on real estate decision-making. Stay tuned for part two of the discussion where Michelle, Andrew and Mark will cover the effects of financial micro-variables, such as staffing, on the future of health care real estate.

Podcast Participants

Andrew Dick

Attorney, Hall Render
adick@hallrender.com

Michelle Mader

Managing Director, Strategic Advisory Services at Ankura Consulting
michelle.mader@ankura.com

Mark Furgeson

Senior Managing Director Healthcare Real Estate at Ankura Consulting
mark.furgeson@ankura.com

Andrew Dick: Well, hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today I’m joined by Michelle Mader and Mark Furgeson from Ankura Consulting. I’ve had the opportunity to work with Michelle and Mark offline on a couple of discussion points. I’ve read some of their thought leadership pieces and thought it would be great if we would have a short discussion about what they’re seeing in the healthcare real estate industry and the capital planning industry. They also do a fair amount of strategy work for hospitals and healthcare systems. And so I thought today would be a perfect time to catch up with them, see what they’re working on. So, Michelle, Mark, thanks for joining me. And why don’t you take just a minute to introduce yourselves?

Michelle Mader: Sure. Thanks, Andrew. So my name’s Michelle Mader. I’ve been a healthcare strategist for the last 25 years. I’ve worked with a number of healthcare providers, both nationally and a little bit internationally as well. Really I focus on service line optimization and distribution and really how we generate revenue and how we control costs. And the other thing that I really have been focusing on lately is looking at and evaluating new and innovative care delivery models for healthcare providers as we’re seeing shifts between the outpatient and inpatient world significantly increase post COVID.

Mark Furgeson: I’m Mark Ferguson. I lead the healthcare real estate team at Ankura. I’m an architect by training and my 30 year career is focused on strategy for healthcare’s physical footprint, the future of care and how policy impacts healthcare buildings.

Andrew Dick: Terrific. Michelle, Mark, thanks for joining me. Really looking forward to the discussion today. I thought we would focus our discussion on two points today, financial trends in the healthcare and hospital industry, and then regulatory trends, because I’ve had discussions with both of you on both of these points. You’ve also written at least one, maybe two articles on some of these points and thought it would be good to catch up. So this will be part one for our audience of a two part discussion that we’re planning with Michelle and Mark.

Andrew Dick: So let’s tackle the first topic, financial trends in the hospital and healthcare industry. The pandemic had a significant impact on hospitals in particular. Let’s talk a little bit about the data. So Michelle, Mark, what are you seeing in the industry? How are hospitals and health systems performing? What type of impact has the pandemic had on their financial performance?

Michelle Mader: Yeah, Andrew, thanks. So it’s been an interesting couple of years as most of ours listeners have probably understand or know, right? The healthcare industry’s been on the front lines of the COVID pandemic and working through that since early 2020. And so as we look at what has happened over the last three to four years, it’s been an interesting ride, mostly because it’s been a combination of what economically has been challenging with COVID as well as the federal government foreign CARES Act money into the industry, right? To buoy it to make sure that we continue to provide access, that we continue to provide services, particularly emergency services and ICU services to the general population.

Michelle Mader: But if you look at sort of this year, which is what I want to concentrate on, Kaufman Hall does an annual report, their National Flash Report. And their June report, which looked at May of 2023 numbers, was very interesting. Basically it’s showing that volumes, which is how the industry essentially gets paid, they’re increasing, but on a slow, steady pace. In other words, what happened was when the pandemic pretty much cascaded out of the, and it’s not all gone, but has cascaded out a majority of the hospitals, you would expect this backlog and people rushing for care, right? All this [inaudible 00:04:22] care. And what we’ve seen is that’s really not happened. It’s been a slow elevation back to 2019 levels, particularly on the ED. And so as we look at those rising numbers, they’re not like an avalanche. It’s not like a tidal wave. They’re just slowly coming up, which means that revenue for hospitals isn’t just coming back in floods, right? They’re just not regaining what they lost during the COVID years. They’re having to try to keep the steady space.

Mark Furgeson: Yeah. And ED volume is especially interesting because so much of inpatient volume is driven through the emergency department. So we still see those volumes down, but of course, behavioral health volumes are significantly up to complexity of those cases. The general complexity and the ED has still kept the ED full.

Michelle Mader: Yeah, I know. Absolutely. And to make things more interesting, length of stay, which is basically how long a patient stays in the hospital from the time they enter the door until the time they’re discharged, the healthcare industry kind of gets paid on a DRG basis or one lump sum for that length of stay. So the shorter our patient stays in a hospital, the more essentially money hospitals make in theory. And what we’ve seen is that the length of stay or the acuity, how sick patients are, is increasing. And it’s actually up five and a half percent from last year, right? So we’re seeing actually sicker patients in the hospital than we were even last year. And last year wasn’t at the height of COVID.

Michelle Mader: On the surgery front, which we always find interesting because it’s the economic engine for healthcare providers, their minutes are not really fluctuating. In other words, the number of surgeries and how long the surgeries are going on is only a 0.1% since last year, which means that this backlog of people not having surgery because they didn’t want to come into the hospital, we’re really not seeing that come back and/or that’s already passed us and we’re kind of leveling out. But that’s the economic engine for most healthcare providers. It produces the most revenue on that front.

Michelle Mader: Now on the flip side of that, right, we’ve been talking about hospitals, is that outpatient revenue is up significantly year over year. Almost 10%, 9.4%. So we’re seeing this shift, right? You heard me talk a little bit about what’s happening at innovative care deliveries in my introduction of this shift from inpatient care going to a hospital, to going to your neighborhood, urgent cares to your neighborhood providers, to your neighborhood CVSs for care. And so we’re really starting to see that as well.

Mark Furgeson: Yeah. And this increase in length of stay in the inpatient side has really added to the complexity of planning for healthcare facilities. We’ve got a client in the Midwest that finished a new hospital in 2019, used all the benchmarks that we have been using to project bed numbers. And they have significant capacity issues because their length of stay is up by almost 50%. And the real trick here as we plan now is trying to project what post COVID two years out, three years out may look like related to length of stay. So we’ll continue to track those things.

Michelle Mader: Yeah. And there’s some other metrics. Revenue is a big deal, right? Top line revenue is what a lot of people look at even in their commercial businesses or in general economic terms. But the thing that everyone, even us who are parents and family members and just general community members, is the rising inflation, escalation and expenses we’re seeing across the country. And the healthcare industry isn’t immune to that. And so they’re really seeing expenses rise which is putting a lot of pressure on operating margins, particularly around labor. They’re over month over month. And there’s been a lot of news and press releases around travel nurses and we’re paying all this money for people to travel around the country to substitute for staffing who aren’t coming back to the hospitals. And that’s generally true, but most providers have gotten a handle on those contracts and are trying to push those labor expenses down.

Michelle Mader: But just to kind of give you an idea, the surge year to date, and this is from January to May, so you’re talking essentially five months or so, labor is up 13.5% and it’s just tremendous in those five months. So when you hear about services closing or access or waiting lists or things like that, a lot of it has to do with staffing and not necessarily their ability to provide services long term. When you look at all of these, so kind of slightly slowly coming back volumes. When you look at the rising expenses that we’re all feeling on a day to day basis, from gas to groceries, the operating margins of the healthcare industry isn’t great right now. And it hasn’t been great and it’s been buoyed by the CARES Act for a number of years.

Michelle Mader: And so we’re starting to see that downturn unfortunately. But year to date, we’re down. From last year of May of 2021, the operating margins are down 45.6%. That’s like almost half. What? They were a year ago? Now again, we’re seeing the slowing and trickling in of CARES Act money, but providers are just… Between the expenses and the slowly rising revenue, they’re just not making it up. And so the operating EBITDA margin from last May is also down 36.1%. Those are double digit huge numbers for the industry. So we’re watching this very, very closely as it relates to what sort of we think is going to happen in the next couple of years.

Andrew Dick: So I want to touch on two points that both of you made. So Mark, you said you were working with the health system in the Midwest, worked on a project, currently used the metrics at the time that were appropriate. Fast forward to today, the hospital doesn’t have enough capacity. What is the advice to that health system? Do you look for expansion options or do you wait and see how things shake out over the next 12 to 24 months, given that we’re still living through a very unique time coming out of a pandemic?

Mark Furgeson: Yeah, we are living through a unique time. And the risk is higher than it was in this last planning cycle because we’re routinely seeing $800 a square foot for construction cost in healthcare. So we will continue to look first towards decanting services to purifying inpatient facilities to inpatient volumes as best we can being conscious of the efficiencies of equipment and things like that. But we will have to look at an option to expand that hospital. And it’ll just come after we’ve looked at ambulatory options.

Michelle Mader: Yeah. And the trick of that is really on the sort of the staffing side, right? Because we’ve got clients who have opened up buildings, who have opened up additional floors not to be able to put patients in there on day one because they just don’t have the staff. So yes, the capacity is at some level in some markets, particularly urban growing markets like Florida and Texas, those capacity issues are what we call beds in a head, right? Or heads in a bed. And so that is very true. But the issue is if we can’t staff them, it doesn’t matter how many beds we build. They’re just going to sit empty. And that’s a capital cost sitting on the books with no revenue generation to support it. And that’s risky. So this balance between the expenses and the staffing and meeting the capacity and purifying the hospital is going to be tremendously important in the years to come.

Andrew Dick: That’s right, Michelle. I mean, I’ve worked on a couple projects on the east coast recently. At least one was put on hold because the health system said, “Even though we’re in a growth market, we can’t find the staff to provide the services in this new to be constructed building.” So I think you’re spot on. It’s a huge challenge.

Andrew Dick: Michelle, I want to hit on another point you brought up as well when you talked about some of the financial data. You talked about the growth in outpatient services. What type of advice are you giving to health systems that are seeing that growth and profitability in outpatient services? Do they continue to double down on those services whether it be urgent care or ASC type services?

Michelle Mader: Yeah. So planning outpatient environments is kind of a little tricky business and mostly because as you would… Most common people or most of the general community thinks that every physician makes a ton of money, right? I mean, everybody wanted to grow up and be a lawyer or a doctor when they were in school, right? Because those are the professions back in the day that made a lot of money. And the reality today is, given the current reimbursement and the current expense structure, a lot of healthcare providers lose money every time they employ a physician practice in primary care. Now that is not the case in specialty. So your orthopod, your neuro, all of some of those subspecialty, they still make what we consider a tremendous amount of money in the industry. And so they’re very profitable. So yes, the healthcare providers are looking at doubling down in some of those key services in order to fuel and to back fill some of what they’re losing on primary care.

Michelle Mader: But what we’re really seeing to shift to outpatient is not only from the hospital to an ambulatory or neighborhood environment, but also from the neighborhood environment into telehealth, right? And those payment structures, the federal government hasn’t… They’re starting to look at them coming out of the pandemic. They’ve solidified them and they’re going to keep them rolling, but we’re not getting anywhere near paid if you go in to see your physician versus if you call them on the video, right? I mean, it’s a delta of almost 3X difference between the two. So we’re still incentivizing providers at some level to continue to push in-person visits to their practices financially. And to some metrics, it’s needed from an outcome and from a patient service standpoint because telehealth financially hasn’t caught up with the rest of the industry to make it more profitable.

Andrew Dick: Interesting. Those are great metrics. Let’s switch gears and talk about private equity and how private equity firms are moving into healthcare and the impact that its had on different markets that you all are working in. Michelle, Mark, what are your thoughts at just a macro level?

Mark Furgeson: Yeah. And we’ll only touch briefly on this today, because let’s face it, this could be a whole podcast in itself. But part of the reason that we’re tracking private equity investment is that we’re concerned at some level that the types of companies and the changes that these companies are making in healthcare could disrupt the pathways by which many of our legacy clients are generating volumes, tracking volumes, projecting volumes. And those are the tools by which these companies balance their for-profit services with the things that are more mission focused. So what we’re seeing, it’s of course I think everybody knows that we’re seeing a tremendous increase in investment by private equity in healthcare. From 2015 to 2019, almost a 300% increase investment. Every year since then double digit increase.

Mark Furgeson: But what’s really interesting to us is the types of companies that private equity is investing in. Initially, these were hospitals under the theory that we had an aging population in America. And then it was on kind high margin, unregulated services, somewhat argue that almost single handedly created the No Surprise Billing Act. But what we’re seeing now is a recognition by private equity that their investment focused on capitated care, healthcare advantage, value based reimbursement. Reimbursement has long term valuation gain. So that started with buying up primary care physicians. We’re now seeing private equity play in the consumer enabling space. And again, all those kinds of things can impact these relationships with physicians and with consumers that legacy healthcare providers have depended on for years to generate volumes, to control volumes, again, to balance the financial side of what they’re doing.

Mark Furgeson: So we’re tracking companies like Babylon that is in the consumer enabling space. It has some really interesting technology that they’re playing in. DispatchHealth has been a fascinating company to watch, a little bitty company in Denver that started in 2013, operating in two or three markets, some private equity backing that came in 2018, 2019. Within a year or two, DispatchHealth was in 19 markets in 12 states. I checked last night and they’re now in 41 markets in 25 states. It’s extraordinary the accelerant that private equity dollars can push to scalability like we’ve seen doing in so many places. So we’ll continue to watch this, Andrew. Again, we want to make sure that we can guide our traditional and legacy clients in a way that will help position them best for success going forward.

Andrew Dick: Yeah, those are great data points, Mark. And I agree that private equity has had a significant impact on healthcare services. Just a few years ago, we saw private equity heavily invest in home healthcare. And just as those companies are looking to exit, it looks like the big healthcare insurers are buying up those companies, really going all in on home healthcare services. Really fascinating to watch.

Andrew Dick: Let’s switch gears again and let’s talk about the regulatory landscape. Both of you co-authored an article titled How To Claim Healthcare Market Share on the Verge of Certificate of Need Irrelevancy. A really, really good article. A timely article. It was published at the end of May, caught my attention because I’ve been tracking the regulatory landscape and changes in the CON laws. Let’s talk about at a high level the regulatory landscape and the certificate of need laws in states and how it’s changing. In your article, you talk a lot about the landscape across the country. Mark or Michelle, just give me your thoughts at a high level. Is COM relevant today? What’s going on across the country as these laws evolve?

Michelle Mader: Yeah. Thanks, Andrew. So this is an area that I’d like to just… CON is certificate of need. And just for our listeners who may be not understanding exactly what we’re talking about, it is a state based law or subtle laws that basically govern healthcare providers, people who provide healthcare services with their ability to expand their ability to provide better access to services or put new services in new markets, et cetera. So originally, historically CONs were put in place to enhance access, making sure that everybody had true healthcare, that they could access services in their local communities. It was really to reduce duplication, right? Let’s not have two MRIs sitting five miles from each other in the same market increasing cost. And then historically, your state legislatures have been looking at making sure that your role, those areas that we don’t have, a lot of infrastructure and your local providers continue to be viable, right? That they weren’t essentially putting each other out of business.

Michelle Mader: And so that’s essentially what CON at a state level. And so right now there are 35 states plus Washington, DC who have some type of CON law, but they very really dramatically across each of the states. And during COVID, about 24 of those states either suspended or permitted emergency exceptions to their CON process, meaning that they said, “Okay, we’re in a pandemic, right? We want to make sure that everybody has everything they need when they need it. And we don’t want them to have to jump through regulatory hoops in order to access the needed infrastructure.” And so they really significantly reduce those.

Mark Furgeson: Yeah. This has been… Excuse me. This has been an interesting thing to watch. This discussion has been bubbling around on the value of not-for-profit healthcare in America for years. COVID was kind of an accelerant to this discussion. We had a lot of the CON legislation, the hurdles were brought down so that we could access care, look at alternative care sites and the things that went with that. And what immediately came out of that really before we had a chance to analyze the data was a discussion as to whether we needed CON at all. And that’s kind of fascinating when you think about it and not all that assuring to me personally, but that’s the situation we’re in.

Michelle Mader: Yeah. And so a lot of policy makers are considering CON reform or elimination in at least 18 states in this past year. So we had 24 that suspended. Out of the 24 that’s suspended, 18 of them have gone, “Well, do we need these at all?” Right? They worked just… The healthcare industry was able to move forward just fine during the pandemic. We removed barriers that were there historically. We’ve not seen us… And to Mark’s point, we haven’t had a chance really to analyze the data on the long-term effects. But they’re looking at this.

Michelle Mader: And so in the last year or two, there have been 10 states such as North and South Carolina that have looked at bills that are either fully or nearly fully repealing their previous laws. In other words, they’re looking at complete elimination or almost complete elimination. But some states are saying, “Oh, hold on one minute. First of all, the jury’s out. We don’t know the long term effects of some of these reductions or these exceptions. And so let’s carve out some sections of the CON that we know that are maybe not applicable in today’s world.”

Michelle Mader: And so for instance, like for cardiology procedure, so a cath procedure or something like that, they’re moving to the outpatient setting in a hurry, right? Just technology and medications are allowing patients to have these procedures in true outpatient settings and not have to go into the hospital to have their heart looked at or to look at a stent or a balloon put in from a vascular standpoint. But some certificate of need in some states have prevent a cardiologist from going out to ASCs. And so we’ve got this momentum that says, “Hey, we can do it in a better care, better outcomes in a cheaper setting. And it’s much more convenient for the patient.” But the state’s going, “Well, wait a minute, you can’t do that.” And everybody’s going, “Okay, what’s going on?” So there are some parts and pieces of the CON law that they are releasing or eliminating that makes sense based on where the healthcare industry is headed, but it’s been fascinating to sort of watch what has been accelerated in the last two years.

Mark Furgeson: Yeah. One of the things we focused on in the article is kind of the levers to partial CON repeal. And I think that might be the most likely scenario that will get states that will focus on health equity or will get states that will focus on the cost side and the cost metrics or creating better pathways to healthcare for rural environments. And that’s something we’ll continue to study because I think again we’re going to see that in an individual state basis.

Michelle Mader: Yeah. And just, everybody is looking at, “Okay, what’s the data going to tell us?” And so, where everybody right now is watching Florida. So back when Florida removed their CON in July, I think, or the summer of 2019. So before the pandemic, a good six, nine months before the pandemic, we’ve seen this huge flood of service development in the state. The number of zoning and building permits have increased dramatically in the last three years and general construction in that state. Now, this is not healthcare specific, but general construction in the state of Florida due to the economy, the COVID backlogs, tremendous demographic growth, I mean, people are pouring into Florida from a state based population, it’s up 31% in the first half of this year, of 2022. So tremendous amount of growth in a state that released their CON. And a lot of that is healthcare to be honest. People are opening new hospitals, new ASCs, new urgent cares, but you have the prime demographic for healthcare, right? And aging retiring population moving there in mass because of the weather and because of their state laws regarding income and things like that.

Michelle Mader: So we are watching. We saw this in Texas several years ago. Texas has had very little regulatory overview in the past decades. We’ve seen them really explode in services. And then capitalistic markets doing what they do, which is regulating demand eventually. But that’s in eventually a couple of years. And I think we’re still several years out from seeing that in Florida.

Mark Furgeson: Yeah. And we’re seeing some interesting things on the real estate side too. I think in both Texas and Florida, we’ve seen things like land banking. I think we bring tools to this as well, but systems know in growth areas where they should be and where their competitors are. So buying up that intersection, looking for opportunities from a regulatory perspective to kind of carve out opportunity to build in places. That’s part of the reason we’ve seen a rise in freestanding Eds, which when you think about it, you couldn’t think of a more operationally expensive model, but it is our flag in the ground to a lot of these fast growth areas.

Michelle Mader: But what we’re saying, the CON is extending into other markets. And so when you look at the overall regulatory mindset right now of the Biden administration and of our current CMS and at the attorney general and at the state level, everybody is looking at healthcare. And the reason is, one, it’s been in the news nonstop, right? Since the pandemic. So it’s on first of everybody’s agenda. Two, it’s a very personal issue, which we all know from an individualistic perspective. But then also it’s one of the highest growth areas of cost for employers, right? They have been seeing for decades that their premiums just increase over and over again. So everybody is focused on healthcare and the cost reduction in healthcare. So we’re seeing a lot of M&A scrutiny as we look kind of moving forward.

Andrew Dick: So let’s talk about that, Michelle. Lots of M&A activity over the past few years. When I’ve had discussions with you and mark about this in the past, it seems like there’s not only been a lot of regulatory oversight, but the results of the M&A activity have been mixed depending on how you look at these larger transactions, in particular big health systems emerging with other big health systems. The question always comes up, is it really good for the patient or consumer in those markets? What are your thoughts?

Mark Furgeson: Well, I think the data would say… In fact, if we asked the justice department, I don’t know that they would quantify it as mixed. They would say consistently, “We have not expanded care. We’ve not lowered cost.” The original idea of certificate of public advantage, those metrics haven’t necessarily played out the way we hope they would. And I think that’s part of the reason we’re seeing a kind of a competition forward administration putting tools in place to limit competitions at least in a horizontal way.

Michelle Mader: Yeah. And they’re being very bullish about it, right? They’re not even trying to hide sort of what they’re doing behind the scenes. They’re just kind of straight out there front. And so as of June of this year, so we’re sitting here the 1st of August, but as of June of this year, nine healthcare systems deals have been called off this year alone based on the FTC, right? Based on the DOJ or the FTC coming and going, “Guys, we don’t really like this look. You’re going to become a monopoly in a market. We haven’t seen the data that says you’re going to be able to pull off what you are promising to the communities. And so we are going to either fight it directly, which they’ve had in some instances, or we’re going to disprove of it so strongly that it’s not worth the expense for you to fight it.”

Michelle Mader: And so we’ve seen this with the for-profits and the not-for-profit. There is no favoritism in this perspective as it relates to the healthcare system. And so it was interesting. I was reading an overview of this in a journal not too long ago. The FTC said this in a statement when they put to bed essentially the Steward Health Care, which was in Utah was going to sell five of its hospitals to HCA. And then RWJBarnabas Health dropped its plan to purchase the New Jersey based St. Peter’s Healthcare System. So when all of this was happening and these examples, the FTC came out and said this, “These deals should have never been proposed in the first place. And the FTC will not hesitate to take action to enforce the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation.”

Michelle Mader: So they’re calling it straight out, right? “These deals shouldn’t be put together to begin with. We don’t want hospital consolidation. We are out here to protect the consumers and the patients, and we want lower costs.” And so we are seeing this everywhere. And it’s not just at the federal level, right? That’s the FTC at the federal level sitting in DC. But also at the state level. So our hometown is Charlotte, North Carolina. And just this last week, our eternal general asked our own in the North Carolina Department of Health and Human Resources to deny HCA Healthcare owned Mission Hospital’s application to expand in Buncombe County based on the lack of competition. So it’s the attorney general in our own state here in North Carolina even in the last week had said, “No. Mission is already in Buncombe. They’re the only player there. We don’t want them adding 67 beds. We want other competition in that area.”

Michelle Mader: And for those of you who don’t know where Buncombe County is, it’s out there by Asheville and it’s in rural North Carolina. We’re not talking about a metropolitan city. We’re not talking about a dense area. It’s rural healthcare, but they want competition even in rural healthcare, which kind of flies in the face of what CON in North Carolina has tried to ensure for years, which is that those rural healthcare providers are viable long term.

Michelle Mader: So when you look across this, they really are scrutinizing and trying to ensure lower cost access for healthcare on a horizontal basis. So anything or of a hospital system, acquiring or merging or doing it with another health service system in the same market, everybody’s coming out and going, “No, if you’re going to create a monopoly, if you’re the only player in town, we really want to discourage those practices.” But that’s not necessarily the case when you look at vertical integration.

Mark Furgeson: Yeah. I think we’re encouraging our clients to look at vertical integration, both because we think it’s good business taking a page from what private equity’s doing. But if they are focused on horizontal mergers, we think it really takes a special focus on the data, a special focus on how they’re going to improve healthcare in the market. Why are they specifically the best player to do it and how are they going to improve equity? How are they going to improve the lives of people in many rural environments who don’t have access to care, have transportation issues? What are they going to bring to that will speak to the FTC and address the issues and concerns they have?

Andrew Dick: Yeah. You’ve all hit on a number of hot topics that we’ve been tracking. Really if I had a headline, it would be the rise of the state attorney general around the country where they’ve taken a more active role in regulating healthcare. Couple points on the east coast. We know that in states like Rhode Island, there seems to be more oversight of nonprofit healthcare systems selling to for-profits for fear that the for-profit health system may sell assets in connection with the sale lease back and then somehow the community may lose control of valuable healthcare assets. And then I know that I had a discussion with both of you about Mass General in the news. Maybe one of you could talk about that. They had very grand plans to expand in their markets. It sounds like the state AG stepped in and started asking some questions. Maybe you could hit on that just briefly.

Michelle Mader: Yeah. And that’s been in the national headlines for… I think we’ve been tracking this almost a year now. It was the first big… And this wasn’t a merger. So for those of you who are listening, this isn’t a consolidation of healthcare systems or a vertical horizontal. This is just them expanding their own system. So they basically proposed… Mass General proposed, which by the way is the largest healthcare provider in the state of Massachusetts, they proposed a $2.2 plus billion expansion plan. It really consisted of about four major projects, four or five major projects depending on how you want to break them down. And then when they proposed this, the state came back and said, “Well, well, wait a minute.” It wasn’t the AG office out of the get-go.

Michelle Mader: It was really Massachusetts health policy commission that they got set up, that they came back and said, “Wait a minute. We want to know a performance plan. We want to see from your performance plan on how you spending all of this money in the state is actually going to decrease healthcare costs that give people more access, and more importantly, make yourself more efficient, right? We are funding through Medicaid and Medicare the portions of your revenue all the time. So we need you to prove to us through a performance plan that you’re going to be able to improve healthcare overall for the state.” So months went by and they put together a plan. Essentially what happened is, ultimately they greenlighted two of those four to five projects that were huge expansions. They’re going to be a billion plus dollar expansion towers essentially that are going to be created. And then the health system took off the plate some of their ambulatory environment or ambulatory for projects. They were going to do two or three ASCs out in the community.

Michelle Mader: So what happened is this health commission essentially cut their proposed expansion by half by saying, “You can’t prove that what you’re proposing is ultimately going to be in the best interest of the Commonwealth. And so therefore we don’t want you to do it, and we’re going to discourage you to do it.” But the amount of expense, the amount of due diligence, the amount of political PR that went into this for months has been tremendous. But it was the first one that we saw where really the state stepped in heavily and said, “No, it’s not just M&A. No, it’s not just monopolies and markets. We don’t want you spending our precious public dollars that you get by being a not-for-profit in in profitable or only focusing on certain aspects of access. So that was really something different.

Michelle Mader: And I think other states are going to do the same thing. I think we’re going to continue to see that these large traditional healthcare providers who have billions of dollars and who control state-based healthcare are going to find more and more scrutiny at the federal level, at the state level, but also at the local level. So I was reading an article not too long ago where Saratoga Hospital in New York, they wanted to rezone 16 acres, right? This isn’t small. This isn’t a $2 billion project, wanted to spend $14 million on expanding the hospital and rezone 16 acres and the local community and the local government came back and said no. Right? “Our healthcare’s already expensive. You can’t prove to us that this is going to make our access and our outcomes any better. It’s just going to be passed along to the consumer and into our employer/payer based and increased premiums, et cetera. So, no, we don’t want it.”

Michelle Mader: And I thought, whoa, that’s taking it to the local community level. So there is enhanced scrutiny and attention at this, for this in the healthcare providers across all levels of oversight.

Mark Furgeson: And I think that as there are healthcare pundits that would say, “Well, that’s just Massachusetts or that’s just New York,” but we see a fairly good consistency with priorities on both sides of the aisle on this issue. This intention to lower the cost of care to prove that not for-profit care is an advantage to Americans, I think it’s something that is not just an administrative specific thing.

Andrew Dick: Yep. Michelle, you hit on something that we’ve talked about in the past. Local planning and zoning authorities stepping in based on feedback from the community. I was talking with one of the major health systems in Florida. They don’t have a certificate of need law to deal with anymore, but what they found is they’ve received quite a bit of resistance in certain communities at the planning and zoning level. So that’s a new hurdle that these health systems historically haven’t had to address in the past. It was always there, but not so much. These planning and zoning bodies are taking a more active role in shaping healthcare, so to speak.

Mark Furgeson: That’s frightening.

Michelle Mader: And it tells us that we aren’t… I’ve been doing this for 25 plus years. And for a long time, there was a subset of the population who really understood healthcare, right? Who at the consumer level who understood their costs, who could decipher an EOB when you get it from your payer and from your insurance. And I think COVID has accelerated the general consumer’s attention on this issue. It has highlighted wellness and behavioral health and mental health sustainability and has also taught people to access lower cost of care. And all of a sudden they said, “Well, I’ve got a sore throat. Instead of going into the ED where it’s going to cost me $2,000 or $3,000 for store throat, I’m going to call telehealth. Or I’m going to go to my urgent care because I don’t want to go to the ED because I don’t want to catch COVID,” right?

Michelle Mader: It wasn’t because of cost to begin with. It was because they were scared. And now that they’ve seen the benefits of that, we’re starting to teach huge population bases on how to navigate the healthcare system because they were forced to do it during COVID. They were forced to look at alternative sites of care and now they’re realizing the financial benefit. And I don’t think that tide’s going to swing back anytime soon if ever. And so COVID really accelerated the teaching of both at a state level, at local levels, at your local community and even within your families on how to navigate healthcare in our system. And I think that’s a benefit to everybody, but it’s changing how we plan. It’s changing how we look at strategy and it’s changing how we’re going to move forward as an industry for sure.

Mark Furgeson: Yeah. And that might be kind of the big takeaway. I think you combine some of the consumer choice changes that we’ve seen that technology’s been an accelerant to. And put that with the double digit impacts of some of those financial metrics we talked about and hopefully we’ll be moving towards new pathways for care, more efficient ways to do healthcare and get the better advocacy.

Michelle Mader: Absolutely.

Andrew Dick: Terrific. Michelle, Mark, this was a great discussion. Thank you for being on the podcast today.

Andrew Dick: Just to remind our audience, this is part one of a two part discussion. Our second part will be focused more on staffing and labor related issues for hospitals and healthcare systems that will be released soon. I want to thank everyone for listening today on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called The Healthcare Real Estate Advisor. To be added to the list, please email me at adick@hallrender.com. Thank you.

Mark Furgeson: Yeah, our pleasure. Thank you.

A Look at the New Markets Tax Credits Program

July 7, 2022 Danielle Bergner Health Care Real Estate Advisor 00:30:06 Comments Off on A Look at the New Markets Tax Credits Program

A Look at the New Markets Tax Credits Program

The New Markets Tax Credits (“NMTC”) program is available to non-profit hospitals and Federally Qualified Health Centers (“FQHCs”) to assist in the financing of facilities located in qualified low-income areas.  This podcast explains how the NMTC program works, how hospitals and FQHCs can access the program, and how the program benefits the advancement of health care initiatives in low-income communities.

Podcast Participants

Danielle Bergner

Attorney, Hall Render

Carrie Vanderford Sanders

CEO, Hope Community Capital

 

 

Danielle Bergner: Hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Danielle Bergner, a real estate attorney with Hall Render. And today we will be speaking with Carrie Vanderford Sanders, CEO of Hope Community Capital, on the topic of New Markets tax credits for hospitals and federally qualified health centers, or FQHCs. Good morning, Carrie.

Carrie Vanderford Sanders: Good morning, Danielle.

Danielle Bergner: Carrie, maybe for those not familiar with Hope Community Capital, could you maybe just start by telling us a little bit about your organization and what you do?

 

Carrie Vanderford Sanders: Yes. Thanks Danielle. My name is Carrie Vanderford Sanders, as Danielle identified, and I am the CEO and founder of Hope Community Capital. We are a national community development finance consultancy. We work with projects across the nation that need to access interesting tax credits, other public subsidies, also impact capital to develop and operate high impact community facilities.

Danielle Bergner: Wonderful. Before we dive into the application of the New Markets Tax Credit Program to hospitals and FQHCs, I thought it might be helpful if we just talk a little bit more broadly about the New Markets program, it’s underlying policies and objectives and just basically how it works. I think that would be a good foundation for our listeners today. Maybe Carrie, from your perspective, just explain a little bit, how does the New Markets Tax Credit Program work? A lot of people have heard of it, they’re familiar with the term. But what I find is a lot of our healthcare clients aren’t intimately familiar with the program and what it’s really intended to accomplish.

Carrie Vanderford Sanders: So Danielle, the New Markets Tax Credit Program is section 47d of the IRS code. And it was originally envisioned in 2001 and is currently administered through the US Department of Treasury through the Community Development Financial Institutions office. The point of the program then and still today is to provide a federal tax credit to investors for investing in a qualified project in a qualified census tract, through an entity called a community development entity that has been granted or awarded rather allocation authority for new market tax credits. So what this would look like is a again, often it is our bigger banks or often will have tax credit syndicators that are out to, or have an interest in a mission and a financial focus on investing in the new market tax credit. And what they will do is they will work with the community development entities that have applied for an award of new market tax credit authority.

Carrie Vanderford Sanders: I should mention that these community development entities are qualified by the US Department of Treasury through the Community Development Financial Institutions office annually apply for an allocation of the five billion in new market tax credits that is appropriated for this program annually. So we have five billion that these community development entities apply to the US Department of Treasury annually. The average allocation of authority to these community development entities in the past year was around 50, $51 million. So back to what does the investor do? The investor works with a community development entity that has been awarded the new market tax credit and the community development entity says, “Hey, I’ve got, in this case, let’s use a federally qualified health center located in a qualified census tract.” Meaning it is qualified on the basis of poverty, median, household income and unemployment. One or all of those three, as well as some other secondary criteria may come into play.

Carrie Vanderford Sanders: But nonetheless, the CDE in my scenario has a federally qualified health center that is in a qualified census tract and the federally qualified health center is engaging in activities, which we all know, I hope on this audience, what a federally qualified health center does, that qualify as an active business for new market tax credits. And the investor says, “Great.” So the CDE says, “I am allocating 10 million of our allocation to this wonderful FQHC project.” And the investor says, “Great. I would like to buy those credits.” So the investor receives 39% of that $10 million investment as a federal tax credit, taken over seven years. So that is the summary, Danielle. I can certainly go into much more nuance, but that it is an incentive for investors to invest in qualified projects in qualified census tracks.

Danielle Bergner: Which are generally low income communities or communities experiencing high rates of unemployment or poverty type conditions. Is that accurate?

Carrie Vanderford Sanders: Yes. And exactly you called it, a low income community. And that is exactly the designation that the US Department of Treasury and the CDFI fund calls it a low income community based on poverty, unemployment, and median household income. Right? And so there are certain benchmarks within those that help it to understand if this is a qualified census track from a geographic perspective.

Danielle Bergner: I think that’s really important policy issue to understand at the outset of the conversation, because we get phone calls frequently from healthcare clients that hear of this program and they hear it’s really great and a great way to help finance facility improvements and capital projects. But a lot of our clients who call don’t understand at the outset that the program is not intended to create subsidy or incentive in every community around the country. It really is the policy underlying this program is to direct investment, to incentivize investment in fundamentally low income communities. And so I think that’s an important thing to understand. And Carrie, you and I have worked over the years on many New Markets projects and one of the things I like about the New Markets program is it’s not an urban program, it’s not a rural program. It is a program that incentivizes and helps with facilitating capital projects in urban and rural areas around the country, so long as they meet the qualified low income standards for that community.

Carrie Vanderford Sanders: Absolutely. And often I say, it’s a geography program, right? That is the first conversation I have of once I say, “I’m intrigued with the impact of this project and I can see what you’re doing for the community here, let me get that address.” And immediately, I map it and that’s where we start in terms of whether or not it will have access to this New Markets Tax Credit program.

Danielle Bergner: So one of the things you just said piqued my interest, and it’s one of the things I really enjoy about working with you when you said you when you’re talking to somebody about a project and it piques your interest in terms of it’s fit for the program, you act as somewhat of an intermediary between the CDEs and the parties that are ultimately looking to secure the investment for their project. And so what are the things that you look for as a consultant when you’re evaluating, is this project a good fit or not a good fit for the New Markets program?

Carrie Vanderford Sanders: So I will say for our firm, our specialty truly is on community facilities. So that does include, I believe what your audience is very focused on as well, which again, is the hospitals, the health clinics, the federally qualified health centers, and on. So what I am looking for in terms of impact really mirrors what those community development entities that have a allocation authority. What they have said to the US Department of Treasury that they will do, and the impact they will create with the allocation, if they win it. Right? So these community development entities have a business strategy, they have a community impact focus. And my job between, as you said, the community development entities and the actual project themselves seeking the tax credits, my job is to understand the business strategy and the impact strategy of these community development entities and see if there is alignment in what is happening at the project.

Carrie Vanderford Sanders: So for health related facilities, let’s call it, we are looking for number of patient visits. We are really looking at that. We are really looking at payer mix. So why we are looking at payer mix? We are trying to understand how many low income patients are being served. So those are two main things. We are looking for expansion of, let’s just say behavioral health. There’s no behavioral health, we want to use New Markets Tax Credits to do behavioral health at this particular hospital. Let’s say we want to do reproductive care. That is another expansion. It’s what can we, if we had access to this New Markets, what sort of impact could we make? Could we serve more patients? Could we offer more services? Could we bring in more healthcare providers? These are the impacts that are really important to the community development entities to understand.

Carrie Vanderford Sanders: And so, as I mentioned I believe earlier, these community development entities, when they apply for an allocation of this tax credit authority, it is highly competitive. It is subscribed, I believe four times more than what the five billion is available to allocate from the federal government. So when they go in, these CDEs, for these allocations, they want to have the most competitive projects and most high impact projects. So they’re saying, “We can do this.”

Carrie Vanderford Sanders: And so when they win that allocation, they are going to be very, very impeccable and meticulous with regard to alignment in terms of, are you putting the allocation into this FQHC over here in a rural community that is medically underserved? Is that, in my example, is that aligned with what they told the CDFI fund they would do with their allocation? And I will say, in my experience, and I’ve been doing this I think 17 years now Danielle, projects that are serving low income communities that are providing greater access to healthcare, do very well on the impact. And I don’t need to tell your audience about the impact, but I will say that this is a very strong alignment for the program.

Danielle Bergner: Yeah. That’s great. That impact piece, I think, is really important to understand, because it does guide which projects these CDEs ultimately choose. It’s a competitive process, right?

Carrie Vanderford Sanders: Correct.

Danielle Bergner: Let me ask this question. At a federal policy level, it seems to me, the federal policy has swung back and forth a little bit over the years in terms of the types of projects that CDEs have been successful, or I should say the types of strategies that CDEs have been successful securing credits with. For a number of years, the New Markets allocations were heavily skewed towards CDEs that we’re focusing on more pure economic development job creation, going to CDEs that had missions that were very focused on job creation and economic development. But it does seem to me like that pendulum has swung back a bit more towards community development, healthcare, social determinants of health type of issues. Is that perception correct, on my part?

Carrie Vanderford Sanders: Yes. And something that I find just amazing pretty much on a daily basis getting to do this work is the diversity of projects that get done using New Markets Tax Credits. So yes, is there a focus on jobs? Absolutely. I cannot tell you, there must be at least five or six CDEs that are very focused on one thing and one thing only, and that is rural manufacturing. And that is jobs. That is what we are talking about there, is quality jobs. But there are also a handful of CDEs that are 100% focused on health, education and other social determinants of health. In fact, there is at least one CDE that is solely focused on investing their tax credits into FQHCs.

Carrie Vanderford Sanders: Yes, Danielle, I believe that there’s less of a focus on jobs for some CDEs. But what I am really excited about and what I have noticed is just the diversity of projects that can get done, because think about it, the criteria is, as far as the IRS code goes, they don’t talk about community impact in the IRS code. Section 47d does not say anything about community impact. That’s what the industry has created, which is a good thing in my opinion. But the code says you’re in a qualified census track and you’re a qualified active, low income community business. That’s what it says. But I agree, I think we’ve gotten very sophisticated. I’ve seen social determinants of health. The UN development goals as well are things that tend to come into impact as well.

Danielle Bergner: Can you help us to understand how the subsidy associated with the New Markets Tax Credit program works?

Carrie Vanderford Sanders: I have worked on the several FQHCs throughout the country, and I’m not going to name names. But in each of those cases, what they have come to me with is that our operations will… We’ve done our community health planning. We know we need to add dental, let’s say. Dental is big here in Wisconsin, big time need. I’m sure that’s not unlikely in other places as well. So we need to add dental. We need to add a rural dental clinic to our FQHC. We have very thin operating margins. We are not able to take out a lot of debt. We’ve also raised some capital, some private capital, but we’re missing about 20% of our capital stack to finish this dental clinic project. And the need is so desperate, but we have exhausted our resources, financially, to get this done. We need 20 more percent.

Carrie Vanderford Sanders: And that is where I say, okay, where is this thing located? Let me understand if it’s a low income community and let’s see what your total project cost is. So it’s a 10 million dental clinic expansion. They have figured out how to bring eight million to the table, we’re missing two. And I’m saying, let’s go find 10 million in allocation, which will generate $2 million in low cost equity to the project. What happens at the New Market Tax Credits in very broad strokes. It is a seven year compliance program. And so when you close on the financing on day one of the closing of the financing of the 10 million in financing, which is financed through the New Market Tax Credits, you have access to that full 10 million of financing. The investor pays in advance for that credit that they’re receiving, right? They’re receiving a credit, that’s the whole point of this program. They pay in advance for it. You get to access to that money to build out your dental clinic.

Carrie Vanderford Sanders: And at the end of the seven year compliance period, the investor says, “Well, thank you so much. I’ve received the tax credit that you said I would. And I paid $2 million for that tax credit.” So I’ve got my tax credit. You’ve got your $2 million that you’ve used to build this thriving dental clinic. So I’m going to leave that $2 million… I mean, there’s a whole lot of legal documents. It’s not just to leave the two million. But Danielle can help you with those legal documents.

Carrie Vanderford Sanders: But they’re going to leave that two million in the project and exit the transaction. So what you have done then, as the FQHC, is because of the New Market Tax Credit financing, you have financed a 10 million project, but really have only had to repay and, or raise capital for eight million of that 10 because of this wonderful New Market structure. And the thing is with my dental clinic expansion scenario there, the idea is that, yeah, maybe the clinic would’ve raised that $2 million eventually, but the critical need for serving those patients with dental services was so great that they can’t wait. They can’t wait to raise another $2 million. Who knows when or if that will come. So the New Markets accelerate that last piece of capital and makes the project happen when the community really needs it. Hope that makes sense.

Danielle Bergner: It does. It does. So in a nutshell, for people who have that question, the answer is it’s really a way to access a low cost equity investment, and a way to realize at the end of seven years, this subsidy value to the project, which is roughly equivalent, to your point, there’s a lot of legal details and calculations that are necessary. But rough numbers at the end of seven years, the project, and in this case, the FQHC or the nonprofit hospital realizes the value of that new market’s tax credit equity investment. When the investor exits the project, exits the investment and leaves their $2 million in the project.

Carrie Vanderford Sanders: Correct. And I would just add one detail to that, which is that just to reiterate, you have access to the full 10 million on the day of closing, to fund those construction costs and such. That funds on the day of closing. So what you’re really doing is you’re not repaying your investor at the end of the seven years. That money is in the project and it doesn’t come out, thanks to New Markets.

Danielle Bergner: Carrie, are there opportunities to payer New Markets Tax Credit equity investment with philanthropic commitments? Because I work with a number of clinics that have a really strong donor base from various sources, but they aren’t always sure how to… But maybe those philanthropic commitments, they’re not enough. They’re not enough. To your point, they would get there in three to five years. Right? In the meantime, there’s a need. The community has a need for dental services, for behavioral health services. Is there an opportunity for either nonprofit hospitals or FQHCs to couple philanthropic commitments with the New Markets Tax Credits equity structure?

Carrie Vanderford Sanders: Absolutely. So I mentioned in my $10 million example there, that you could count on two million after all is said and done, two million coming from your new market tax credit subsidy. But where’s the rest of the eight million? Often, I see cash at closing. So maybe you have capital campaign or donor receipts that you actually have as cash on day of closing. We’ll put that in to kind of fill our $8 million bucket. And then you’ll have some that may come in over three to five years, in which case the project would probably seek a bridge loan, from a financing institution. And the repayment source for that bridge loan of course, is your pledges receivable. And so that comes in. And then the other source that I see, I do actually think I’ve seen HRSA grants also as part of that $8 million bucket of sources.

Carrie Vanderford Sanders: So other sorts of grants that maybe public grants can be part of that bucket as well. And then permanent debt can also be part of it. And then also, I will just see sometimes just the cash of the organization. Maybe they’ll put in a half a million in our $8 million bucket that is their net assets that they have been reserving for some time. And it’s like, well, this was for an expansion and here we go. So we can fill that eight million of the 10, many different ways. And that’s another part of New Markets that’s so exciting to me is because it’s so diverse in how you can do that. But you do need to figure out the eight million and it all has to be there. I should say this, the whole 10 million has to be counted for on closing day. Just note that the two million of that 10 is derived from the New Market Tax Credit equity.

Danielle Bergner: Right, understood. Carrie, one question I have for you. It’s a very relevant and timely topic, which is behavioral health specifically. We’re actually preparing to issue an article within the next week or so regarding the status of behavioral health and in particular, the lack of facilities currently existing to meet demand in the community. And I’m wondering from your perspective, because you are on the front lines of so many, you’re seeing so many projects, some of which will go, and some of which will not. I’m curious if you’ve seen an uptick in behavioral health related projects in particular?

Carrie Vanderford Sanders: I have. And to add a little nuance to that, what I am seeing is telehealth. So I’m seeing maybe there is a hospital system or an FQHC system that maybe is based in, let’s just say, Madison, Wisconsin, since that’s where I’m calling in from today and that they may have rural affiliates that are medically underserved, lack of medical professionals in those communities and on. And so I am seeing an uptick in, and I’m sure this is no surprise to any of your listeners here, an uptick in telehealth as it relates to behavioral health. And can we use New Markets for that? Absolutely. That’s what I’m talking about with how diverse and exciting the New Markets funding can be. At least it’s exciting to me, Danielle, I don’t know.

Carrie Vanderford Sanders: I’m seeing more telehealth and especially to reach our rural communities.

Danielle Bergner: Give me an example of how New Markets is being used in the context of telehealth.

Carrie Vanderford Sanders: Okay. So I have a current project right now, which again, will remain nameless, but it is in Wisconsin and there are going to be five small offices in rural communities in a five county area. So five offices, five counties. One of the major health systems in Wisconsin is going to be the main collaborator here providing the telehealth. So they will have an office there, they will have the technology in each of these communities, but they will not see patients face to face. They will still be seeing patients from a telehealth perspective. So there is the need to finance the cost of this space. There are other collaborators within this space, including other social service organizations, and I’ll just leave it at that. But they’re coming together in probably about a 5,000 square foot space in five communities, in five rural counties.

Carrie Vanderford Sanders: And this hospital system is kind of setting up and organizing the financing structure, because there really needs to be a lead to organize the financing structure on all of these New Markets to build the space, execute the collaboration agreements with the other partners in the 5,000 square feet and to market and build, I guess you can say, the telehealth business or outreach, I suppose is the better way of saying that. And that is in those five communities, 5,000 square feet, that is a 13 million New Market Tax Credit project. And it’s very interesting because we’ve got lots of different partners and five different communities. So that’s an example of how that would look like.

Danielle Bergner: That is really exciting. And it reminds me of an article I read recently in the Modern Healthcare magazine, which had a really catchy subheading, which was clicks and mortar is the future of behavioral health. And it caught my attention because the type of project you are describing right now is exactly the type of project that this label, clicks and mortar, is talking about. That it’s not one or the other, the solution is a mix of the two types of delivery facilities, both telehealth and a bricks and mortar location for people to access those telehealth services. Right?

Carrie Vanderford Sanders: Yeah.

Danielle Bergner: The collaboration aspect that you talk about is really interesting too.

Carrie Vanderford Sanders: I like that, clicks and mortar.

Danielle Bergner: I know, I liked it too. I thought it was catchy. Well, Carrie, this has been really enlightening, really interesting. I’m sure that our audience will find it of great interest. Before we close out, let me ask you, if a nonprofit hospital or an FQHC is starting to think about a project or they have a need in a low income community that likely qualifies for the program, what would you suggest as a good starting point for them?

Carrie Vanderford Sanders: Yeah, first off let’s understand if it is actually in a low income community. Secondly, let us understand the entire project cost, so really understanding the uses of the financing. What are we trying to do here? And it can be in broad strokes, of course. But understanding what are we doing here, from a financing perspective. And then we also of course, want to understand what are we doing from an impact perspective here? And that gets back to again, patient visits, on and on the things I mentioned earlier about impact. So we want to understand again, location, what are we financing and what are the impacts of this project.

Carrie Vanderford Sanders: From there, you call Danielle and you say, “Danielle, I have something. Is this a Mew Markets deal?” And Danielle can resource you to her partners. Feel free to give me a call, Danielle. And we can see if it’s a fit. The other thing, as part of our business philosophy is that we are not going to engage a project just because it is in a low income community and there’s a way to use the 10 million. We have to make sure that there is actually a community development entity out there that has alignment with their business and impact strategy to what is being presented by the project sponsor, as we call them. Because it is complex. That word has not come up yet, Danielle, about New Markets on this call. But it is not the easiest or right way, in my opinion, to raise 20% of your capital stack. It is not. However, it is a very powerful way to raise a part of your capital stack when you have exhausted other less complex options. And so it works very, very well though for hospitals health clinics and on.

Danielle Bergner: Carrie, thank you so much for joining us today. Thank you to our audience for joining us. If you would like to learn more about any of the topics you heard in today’s episode, please visit our website at hallrender.com, or reach out to me at my email address DBergner@hallrender.com. Thank you.

Carrie Vanderford Sanders: Thank you.

 

Real Estate in Health Care: A 15-Minute Discussion of Key Health Care Real Estate Trends

June 2, 2022 Joe Wolfe Practical Solutions in Health Care 00:19:49 Comments Off on Real Estate in Health Care: A 15-Minute Discussion of Key Health Care Real Estate Trends

Real Estate in Health Care: Discussion of Key Fraud and Compliance Considerations, Changing Market Conditions and Opportunities

In this most recent episode of Hall Render’s  “Health Regulatory Update,” Joe Wolfe discusses health care real estate trends and compliance issues with Libby Park and Addison Bradford from Hall Render’s real estate service line.

Podcast Participants

Joe Wolfe

Attorney, Hall Render
Health Regulatory Practice Group Leader

Addison Bradford

Attorney, Hall Render

Libby Park

Attorney, Hall Render

Joe Wolfe: Hello, and welcome to Hall Render’s Practical Solutions Podcast and Health care Regulatory Update. I’m your host Joe Wolfe, and I’m a shareholder with Hall Render. We’re the largest health care focused law firm in the country. And today we’re here to discuss fraud and compliance issues tied to health care real estate. And I have with me my colleagues Libby Park and Addison Bradford from Hall Render’s health care real estate service line. Before we dig into the content, Libby and Addison, can you introduce yourselves?

Libby Park: I’m happy to be here with you and Addison today. My name is Libby Park and I’m an attorney practicing in Hall Render’s Denver office. I’m a member of our health transactions team, and I work primarily on transactional matters relating to real estate and land use for our health care clients across the United States. Thanks so much, Joe.

Addison Bradford: Yeah, thanks for having us, Joe. My name is Addison Bradford and I’m here in our Indianapolis office. And most of what Libby said applies to me, I am within our health transactions group, specifically within our real estate service line. And Libby and I, and the rest of the folks on our team, help work on a wide variety of real estate arrangements, most of which involve at least some level of a compliance aspect.

Joe Wolfe: Great. Thanks, Libby, and thanks, Addison. And then I’ll just add, in my practice, I focus on fraud and abuse, Stark and anti-kickback compliance and physician arrangements. And my practice delves into real estate as well. And I think as we start to frame up this discussion, we all can agree that health care real estate is already a complex area in health law. And then when we layer on top of that other issues and more complexity like licensure and reimbursement and tax exemption, bond financing, and then Stark and Kickback on top of that, it gets even more complex.

And as all of us that are working in this space and working with clients nationwide know, it’s there has been even more complexity over the last few years as we’ve seen the pandemic and real estate issues unfold related to that. Obviously, many health care organizations had leasing arrangements in place with physicians. Space challenges have played out over the last few years. And now we’re having a discussion here today to talk about some of that complexity, but we’re going to do that in hopefully a very straightforward way in just 15 minutes. So I’m going to pose a few questions to Libby and Addison. And we’ll start off with Libby. Libby, first, when we talk about real estate in health care, what do we mean? What are the types of entities and players we’re talking about? And why does real estate matter in the health care space from your perspective?

Libby Park: Thanks, Joe. That’s a great question. And I think your initial introduction to health care real estate more broadly was right on point and a great intro for what we’re kicking off here today. Generally speaking, health care real estate encompasses any real property and land use issue that a health care entity may be dealing with.  Substantively, this can mean a lot of things, like commercial leasing, purchasing and selling real property, medical development of health care campuses and medical office buildings. We also deal with things like tax exemption for real property, zoning compliance, negotiating easements and land use agreements, performing environmental inspections and remediations, and also compliance and licensure issues that are tied to real property.

In terms of the entities that health care real estate affects, this is also very broad. We work with hospitals and health care systems nationwide, as well as individual providers, physicians, dentists, and physical therapists, for example, who are looking to start practices or secure space where they can provide care to patients. Health care entities range from large urban providers to small rural hospitals and health care systems. It really runs the gamut. And even with the increase in telehealth and transition to virtual care that we’ve seen over the past two years during the COVID pandemic, we’re still seeing that there is a need for real property space, and health care providers need these brick and mortar locations to provide care to patients and for administrative uses. That’s a broad overview.

Addison Bradford: If I can add to that, I think one of the challenges when it comes to health care real estate is a lot of the players are not health care entities, especially when it comes to commercial landlords that they might be leasing from, or even developers who don’t have experience within the health care space. One of the challenges we face is educating a lot of those non-health care parties about the regulatory environment in which hospitals, health care providers sit in and how that dictates the terms of the agreements that those parties enter into.

Joe Wolfe: That’s a good thought and great thoughts from both of you. Addison, that’s been my experience as well. You’re asking a landlord, a commercial property developer to step into our health care world with all of these additional levels of regulations and make sure that we’re helping them mitigate risk under this framework that is very different from any other industry. So I appreciate those comments.

I think that’s a good segue to the regulatory piece a bit. And my next question is for Addison. For us who work in this space, we understand that there are some special rules, notably the Stark law and the Anti-Kickback statute that create a framework that we need to follow when we’re contracting, especially with physicians, but in the health care space, especially with an entity or a provider that makes referrals. And in that context, sometimes there’s a need to self-disclose compliance issues as well. So I know Addison, you’ve been close to some recent judgment data and self-disclosure data related to real estate. What, if anything, does that data available related to Stark and Kickback tell us about lease provisions and more generally about other real estate arrangements that may trip parties up in this health care space?

Addison Bradford: Yeah, so we track settlement data that OIG and CMS put out as to the Anti-Kickback Statute and the Stark Law respectively, as well as monitor the settlement and judgment data that the DOJ puts out. And although there are gaps in some of that data, we can see from those settlements and judgments general trends and maybe what the government’s most concerned about and just generally the types of arrangements that are tripping parties up.

I’ll tell you the one trend we generally see is that the real estate compliance issues can often be a sign of bigger compliance issues within the organization outside of real estate. Not too many of the settlements and judgments we see are just related to real estate. It might be physician comp and real estate. It’s a number of other items. So I think it’s interesting is that it could be a sign of something bigger going on with an organization.

But in terms of the real estate specific OIG settlements and judgments we see, a lot of what we see is so called sham real estate arrangements, where it’s a physician or a hospital or some other provider that is leasing space that they don’t intend to use so that the owner of the building is getting that rental revenue, but ultimately they’re not using that space. In other cases, it’s way below fair market value rent. One of the essential elements of fitting within the rental of office space exception under Stark and within the space rental safe harbor is that the rental rate be fair market value. And there are a number of settlements and judgments where that isn’t the case.

And that makes sense to a certain extent. Not everyone that has been subject to these settlements and judgments is presumably acting nefariously, but fair market value isn’t readily known, necessarily. It’s why parties engage appraisers and even brokers to opine on what the fair market value is. So they may say, “Oh, I think this is market,” but especially with the commercial landlord, who’s not dealing with health care might say, “Well, this rate is market, it’s not a big deal.” Then they sell the building to a different provider and the relationship becomes subject to Stark and Anti-Kickback, and they realize, “Oh, it actually wasn’t fair market value.” So given the lease specific nature in that context of Stark and Anti-Kickback, it makes sense that a lot of those settlement and judgments stem from fair market value issues.

Joe Wolfe: Great. Thanks, Addison. And staying in line with the compliance discussion, Libby, I know you assist health care entities with their commercial leasing arrangements. What are the types of lease terms and compliance considerations that they should be considering?

Libby Park: Thanks so much for that question, Joe. You’re exactly right. And a lot of the points that Addison touched on in his response are relevant to commercial leasing arrangements as well, both from compliance language perspective, and also documentation that we need to ensure is included in the file for each leasing arrangement. A commercial lease has both business terms and legal terms. And I’ll touch on both of these sort of buckets of what we want to consider in a commercial leasing arrangement.

First, we’ll touch on business terms, which can vary significantly depending on the negotiating power of the health care client as well as the physical location of the property. Things that health care clients consider when entering into these types of arrangements are the length of the term of the lease. So for example, how many years will the initial term be? Do we want to be in the space for five years or 10 years? Are we going to negotiate subsequent renewal options for this arrangement to lock down the security of this space for additional years? Rent, this is of course a big one, and health care providers want to be able to lock in favorable financial terms for cost savings on rent and also potentially secure tenant improvement allowance to help build out their space.

Other considerations are expansion rights, considering do we want to lease adjacent space in the building if that becomes available, or potentially purchase the space? Assignment provisions, that’s another business term where a health care entity may want to build in the flexibility to assign or transfer the lease without having to obtain landlord consent down the line. The last business term I’ll touch on is an exclusive use provision. And this type of provision in a lease prohibits a landlord from leasing space to a competing entity or another health care entity that’s providing the same type of health care services in the building.

Let’s transition to compliance considerations. Each health care client should assess and flush out if their lease agreement is implicated by Stark and AKS. There are a couple ways that we advise clients to do this. One of these is requesting that the landlord complete a compliance questionnaire or certification. And this essentially is a landlord self-disclosure and agreement documenting if there is physician ownership in the landlord entity. And if the landlord’s an individual, is this individual a physician or an immediate family member of a physician? If the landlord is an entity like a limited liability company, we ask that entity to certify if there’s any physician ownership in the interest of the landlord entity. And depending on what we see in this certification, we can tailor the language of the lease to ensure that the necessary compliance language is included in the lease agreement itself.

I want to touch a little bit on how we document the fair market value of rent in commercial leasing arrangements. As Addison pointed out, this can really be an important piece of ensuring that the lease is compliant. And what we do here is generally connect with a broker or an appraiser, and have a broker opinion of value document that rental rate, as well as any incentives like tenant improvement allowance, are in fact commercially reasonable and consistent with fair market value for the specific location of the premises in the country. And so having that documentation and ensuring that the rental rate is within what is considered commercially reasonable is very important.

Two other items that we ensure are in commercial leasing arrangements are a floor plan that documents with specificity exactly the space that the health care tenant will be using. And then the compliance language that we include are things like representations and warranties from both landlord and tenant that neither is an excluded provider under any of the federal health care programs. We also include specific HIPAA, Stark, and AKS written language that both parties agree to in the commercial lease agreement.

Joe Wolfe: Great. Thanks, Libby. I’ll give a wrap up question in a second, but just as question for Addison. We previewed earlier that the challenges around COVID, now we know there are market challenges out there as well, I think particularly related to inflation. Inflation right now is at its highest in the past 40 years. Addison, how do you anticipate and draft around changing market conditions like this when you’re working on health care real estate arrangements in order to reduce the likelihood of compliance issues in the future years? How do you tackle that?

Addison Bradford: Yeah, the first step is just anticipating what those might be, based off of the particular relationship you’re looking at. So we’ve talked about leasing a lot thus far. So an example, if you have a 20-year lease agreement, well, you need to anticipate that the markets may change a lot more during that time such that the rental rate may… You may need some mechanism to adjust that rental rate to make sure it’s fair market value. It’s like one of the things we’re seeing right now, especially with inflation being what it, is the consumer price index is… I think it is somewhere around 8%. It can vary slightly, but it’s at significantly higher than maybe the one to two percent we’re used to. And many leases escalate the base or the annual rent based on that CPI index. So, in some cases you’re having an 8% increase in the rent.

And that’s really significant, and it can, not to say in every case it’s going to push the rental rate outside of fair market value, but certainly in some cases it will. So it’s anticipating those kinds of items and potentially setting, for example, every five years, redetermined what that fair market value rental rate, building in those provisions to make sure that, yeah, it may be fair market value today, it may be commercially reasonable today, or the relationship more generally may be okay, but in 10 years, some mechanism to address any of those issues.

And then I think that the second thing I’ll note on this is reimbursement costs are, from what I understand, are continuing to go down in some cases. And hospital operating margins are getting slimmer. So I think there will likely be some folks that are looking to cut costs. But I think just from approaching a health care real estate standpoint and predicting the future is to remain and to stay vigilant in negotiating health care real estate arrangements to make sure that they are consistent with the different health care regulatory laws and regulations that apply to them, even in the midst of a difficult market in which many of our clients are operating in.

Joe Wolfe: Great. Thanks, Addison. Just a final question wrapping up, do the two of you have a final thought for those listening in to today’s podcast? Libby, why don’t you go first?

Libby Park: Sure, Joe. I would just like to say, thanks everyone for tuning in. If I can ever help you with any health care real estate-related issues, particularly in this changing environment as we transition from the COVID pandemic, please feel free to reach out to me directly.

Joe Wolfe: Great. And Addison?

Addison Bradford: Yeah. The last piece of advice is I know [inaudible] it seems like we’re always… Or especially in the health care real estate realm when we’re working with a lot of developers, the health care real estate attorneys can seem like impediments to getting the deal done and slow down that process. But I think just the challenge with thinking about the role that attorneys and counsel play in this is realizing that they’re an asset on these deals, because ultimately, if there’s a compliance action that arises out of one of these deals, that might be way more expensive than the X number of dollars it took longer to negotiate or that you’re paying in rent. So I think my caution or challenge folks was to just have that mindset when reaching out to us or in-house folks.

Joe Wolfe: Those are some good thoughts. Again, we are the largest health care focused law firm in the country. And all day we are answering questions in this specific health care space. So to your point, Addison, some of my favorite calls are where a new client says, “Oh, I didn’t know you could just answer these kind of questions on the phone.” We have many situations where we’ve had the question you are asking over and over again in our niche and are able to add value immediately. So those are some good thoughts. Appreciate that.

And I appreciate everyone for listening in. Thanks for joining us today. If you’d like to learn more about fraud and compliance issues in health care real estate, please visit our website at hallrender.com, or reach out to Libby at lpark@hallrender.com, Addison at abradford@hallrender.com, or your regular Hall Render attorney. Please remember the views expressed in this podcast are those of the participants only and do not constitute legal advice. Thanks, and have a great day.

Private Equity in Health Care: A 15-Minute Discussion of Key Compliance and Fraud & Abuse Issues

May 25, 2022 Joe Wolfe Practical Solutions in Health Care 00:15:00 Comments Off on Private Equity in Health Care: A 15-Minute Discussion of Key Compliance and Fraud & Abuse Issues

Private Equity in Health Care: A 15-Minute Discussion of Key Compliance and Fraud & Abuse Issues

In this episode of Hall Render’s “Health Regulatory Update,” Joe Wolfe discusses compliance and fraud and abuse issues related to private equity investments with his colleagues Scott Taebel and Erin Drummy. Areas covered include the uptick in activity in the health care private equity landscape, potential compliance and enforcement risk for private equity firms, the importance of focusing on compliance/regulatory due diligence and the importance of going into any new transaction with eyes wide open.

Podcast Participants

Joe Wolfe

Attorney, Hall Render
Health Regulatory Practice Group Leader

Erin Drummy

Attorney, Hall Render

Scott Taebel

Attorney, Hall Render

Joe Wolfe: Hello, and welcome to Hall Render’s Practical Solutions, podcast and healthcare regulatory update. I’m your host Joe Wolfe. I’m an attorney with Hall Render.  We are the largest healthcare focused law firm in the country. And today we’re discussing compliance and fraud and abuse issues related to private equity investments. Today’s podcast comes from Hall Render’s healthcare regulatory practice group, which covers our advocacy compliance fraud and abuse and litigation service lines. I have Scott Taebel and Erin Drummy from our fraud and abuse and compliance service line with me. Scott and Erin can you introduce yourselves?

Scott Taebel: Yeah. Hi Joe. This is Scott and I work in the healthcare regulatory compliance space as you indicated, in particular defending providers who are subject to government enforcement actions and also those who are fortunate enough to discover compliance issues on their own, working with them to internally investigate those questions. And then self-report, if that is necessary.

Erin Drummy: And I’m Erin Drummy, I am also a shareholder in Hall Render’s healthcare regulatory practice group. My practice is focused exclusively in the healthcare space with a particular focus on regulatory matters, the Stark law and fraud and abuse issues. I rejoined the firm about a year ago after spending three years in house with a large global private equity backed physician group.

Joe Wolfe: Great. Thanks. Thanks Scott and Erin. And thanks for being on today. Obviously private equity in healthcare is a huge topic that many not only that are starting to invest in the healthcare space are focusing on, but also those healthcare organizations and physicians that are making investments into models backed by private equity. And so this is a topic that is getting a lot of attention in the industry and I’m really happy that you’re on and allowing our listeners to hear about this. I’m going to go through a few questions for Scott and Erin and get their reactions. First Erin, I have a question for you and it’s sort of a level set here when we’re talking about private equity and healthcare in that landscape. What do we mean and what are the types of entities and players we’re talking about and why are they getting into the healthcare space?

Erin Drummy: Sure. No, it’s a good question. And we’ve certainly seen significant uptick in activity with respect to private equity investment in healthcare in the last few years, compared with the same period in 2020 healthcare deal volumes grew by about 56% in 2021 for private equity investment. And there were nearly 2000 PE healthcare deals that closed in the first nine months of 2021. So we are certainly seeing significant volume and interest here by private equity investors in the healthcare industry. Studies have attributed the growth in private equity interest and investment to reliable revenue streams that are stemming from an aging population. There’s also increased per capita spend on healthcare in the US, which is again attractive to these private equity investors. We’ve seen a lot of interest in eyecare, pain management and dental practices in the past. And those areas do continue to have activity.

Erin Drummy: We’ve also seen interest in orthopedics and oncology, I think in part due to the sizable ancillary revenue streams that are embedded in those practices. Despite some downturn early in the pandemic COVID  has really not slowed things down much here. And we’ve actually seen the evolution of some new opportunities and areas of interest for private equity investment, namely telehealth, behavioral health, home health, and other sorts of support services. I think PE firms have been able to take advantage of what is a very fragmented healthcare system in the United States. And they’re coming in and using this roll up strategy to aggregate small individual provider groups into larger providers, creating economies of scale, operating efficiencies, leverage payers, increasing earnings. And we’re also seeing more recently a huge focus on data. These PE firms are very data driven and with the shift to value based care capitation, and other novel payer arrangements providers really need this data and need to be able to leverage this data and data analytics to manage their patient base and to do well under these payer models.

Erin Drummy: While some have predicted that we may see a decrease or a slowdown in 2022, I think it’s reasonable to expect there to be a continued interest in healthcare for private equity, investment and as such, I think it’s important for providers, whether you’re looking to sell or be purchased or as a private equity investor to have a good understanding of the healthcare regulatory framework and the risks that are out there for these investors and the portfolio companies.

Joe Wolfe: Okay. Thanks. Thanks Erin. And thanks for that overview of the PE landscape. I think the next question is for Scott. Scott, Erin just described what that PE landscape looks like. I know you have extensive experience in the healthcare compliance space, especially related to self-disclosures. And I think at last count you’ve worked on maybe over 150 CMS and OIG self-disclosures. Are there compliance and enforcement risks that come in this PE activity? And are we seeing enforcement or do you anticipate seeing it in the future, for example, around the False Claims Act?

Scott Taebel: Yeah, thanks Joe. We are seeing that trend and we do think there’s considerable potential risk here for PE firms as Erin described, based on the myriad of enforcement authorities that the government has at its disposal. Both from the standpoint of PE firms that may be getting into the healthcare space without full appreciation of what those risks can be. And also with those firms who become more entangled with the healthcare operation, such that they become targets themselves, the FCA case is really abound where the whistle blowers and the government are seeking to try to get at the perceived deep pockets of the PE firm based on their understanding as to what the PE firm knew or how it may have been involved, or even incentivized the behavior at question.

Joe Wolfe: Thanks, Scott. I think I have a question now for both Erin and Scott and Erin, you can take it first. So drawing on both of your experiences, what are some of the key considerations that you think PE and maybe healthcare organizations and physicians that are doing business with PE should be thinking about?

Erin Drummy: Sure. Piggybacking off of what Scott said, we’ve seen this evolution in case law and we’re seeing the private equity investors held accountable for conduct that violates the False Claims Act. I think it’s important for private equity investors and providers to be aware of this and to recognize that this series of cases holding private equity accountable will serve as a roadmap for future cases. I think we can expect there to be additional enforcement in this area and folks that are new to healthcare, or with varying degrees of sophistication in this area, need to recognize this as a particular area of risk. As Scott said, the whistle blowers are looking for a source of funds to secure a settlement or a judgment. And we’ve seen the courts signal a willingness to find the investors liable when they’re deemed to have a sufficient connection to the activity that violates the false claims act.

Erin Drummy: In my experience, private equity firms seek to have an active role in management. They want to bring these efficiencies and expertise to the portfolio companies, as opposed to, kind of sitting back as a passive investor. And therefore with that active role with board seats with involvement in the day to day management, I think it’s important to ensure that there’s a focus on compliance, that there’s a strong compliance program in place at both the portfolio company level, as well as with the private equity investment firm.

Scott Taebel: Yeah. And Joe, I would not only echo what Erin alluded to, but I would also encourage PE firms who are interested in getting into the healthcare industry to do a robust due diligence effort before doing so, making sure that the compliance concerns that we have been discussing here are identified pre-closing. And if after doing that due diligence, the PE firm wants to proceed. We do think that a good way of doing that is to make sure to self-report any activity that comes out through the due diligence is being non-compliant. It would be important. We think in that context to start with a clean slate, keep that activity with the prior ownership and make sure that any self-reports that may be necessary are done before the closing occurs.

Joe Wolfe: Great, Erin and Scott. And as we look to wrap up here do either of you have final thoughts for those listening today’s podcast. Maybe Erin, you could go first.

Erin Drummy: I would just echo Scott’s comments around due diligence. I think this is an important issue. We’ve seen issues that have been identified during diligence, but not addressed and not remediated come up later as the source of liability from a false claims act perspective. So this is really important. It can lead to both the destruction of the business of the portfolio company. The penalties here are significant as well as fines for the investment company. So in order to preserve your investment, I think it’s important for folks to really focus on due diligence and ensure that there’s strong regulatory counsel involved in reviewing documents and agreements, etc., in the due diligence process.

Joe Wolfe: Great. Scott, any final thoughts from you?

Scott Taebel: Yeah, just real quickly, Joe, as we’ve been talking about, I would make sure to go into the activity with both eyes open and while revenue generation is going to be critical and the infusion of capital can be very helpful in these contexts. I think that going forward, the PE firms should not lose sight of the importance of having the compliance function be very active going forward, even if it wasn’t previously. So any of these risks that we’ve identified can be addressed before they escalate into something more significant like a government investigation.

Joe Wolfe: Great. Thanks. And thanks, Scott and thanks, Erin. And thanks to all of you for joining us today. If you’d like to learn more about compliance and fraud and abuse issues related to private equity investment in healthcare, please visit our website at hallrender.com or reach out to Scott at staeble@hallrender.com or Erin at edrummy@hallrender.com or your regular Hall Render attorney. Please remember the views expressed in this podcast are those of the participants only and do not constitute legal advice.

Health Regulatory Update: Provider Compensation Trends

April 4, 2022 Joe Wolfe Practical Solutions in Health Care 00:20:26 Comments Off on Health Regulatory Update: Provider Compensation Trends

Health Regulatory Update: Provider Compensation Trends

An Interview with Alex Krause and Autumn Warden from the American Association of Provider Compensation Professionals (AAPCP)

In this episode of Hall Render’s  “Health Regulatory Update,” Joe Wolfe interviewed two key leaders of the AAPCP about the organization and trends in provider compensation.  The AAPCP is a nonprofit organization that brings together professional engaged in the administration, alignment, regulatory and strategy processes for organizations managing financial relationships with providers.  AAPCP’s members advise and lead organizations across the country on provider compensation, contracting, planning, recruitment, retention, strategy, and valuation.  The Association is open to individuals in health systems, medical groups, and other health care organizations who work in these areas.  If you are a professional looking for more information about the AAPCP and its upcoming conference in Indianapolis on May 5-6, please check out their website at providercompensation.org.

Podcast Participants

Joe Wolfe

Attorney, Hall Render
Health Regulatory Practice Group Leader

Email Joe

Alexander Krouse

Legal Counsel, Parkview Health
Board Member, American Association of Provider Compensation Professionals (AAPCP) 

Email Alex

Autumn Warden

Director of Business Development, Memorial Health System
Board Member, American Association of Provider Compensation Professionals (AAPCP) 

Email Autumn

Joe Wolfe: Hello, and welcome to Hall Render’s Practical Solutions Podcast and healthcare regulatory update. I’m Joe Wolfe, an attorney with Hall Render. We are the largest healthcare focused law firm in the country, and today we’re discussing physician compensation hot topics, and the American Association of Provider Compensation Professionals, or the AAPCP as we’ll use that term throughout the podcast. That’s a new industry trade association that has been very active over the last couple of years. I lead Hall Render’s healthcare regulatory practice group, and that covers our advocacy, compliance, fraud and abuse and litigation service lines. Today with me, I have Alexander Krouse, the Associate General Counsel for Provider Arrangements for Parkview Health in Fort Wayne, Indiana. And also Autumn Warden, the Director of Business Operations & Physician Compensation for Memorial Health System in Marietta, Ohio. Both are physician contracting and compensation experts, and both are heavily involved in the AAPCP. Alex and Autumn, can you please introduce yourselves.

Autumn Warden: My name is Autumn Warden, Director of Business Operations & Physician Compensation here in Marietta, Ohio. I have been in the provider compensation industry for almost six years now. I actually started in provider recruitment for about a year, and at the time there wasn’t significant focus or resources for provider compensation and contracting oversight. I essentially just became a self-starter and learned as much as I could about the industry on my own. Tapped into as many resources as I could, although at the time there was very few, but have really just grown the department within my own organization. I’ve been fortunate to have a lot of support there and have also been able to really grow as an industry expert for my organization internally and have also been able to keep up.

Alexander Krouse: Absolutely. Thanks, Autumn. I’m Alex Krouse, and I work for Parkview Health. I’ve been in charge of provider contracting and compensation for the past six years. For me it was a similar story, at least when I first started here, I was the legal counterpart to our finance team for provider compensation services and that VP of finance left.They said, “Hey, Alex, you’re the only one that knows about this.” So I’ve been doing it for about six years, prior to that, I was in private practice, primarily focused on Stark Law, physician compensation.  That’s the area where I’ve spent my career.

Joe Wolfe: Great. Thanks for those intros. I’m excited about this podcast, not only to get a chance to talk to Alex and Autumn again, but because this is a unique space where the AAPCP sits. It brings together individuals involved in the strategic valuation, legal operational, and financial aspects of provider compensation. For the first time, I think it’s creating a community around those issues to allow for education and skill development and resources that are really necessary for provider professionals in the compensation space to become successful. As I work with healthcare organizations all across the country on provider arrangements and provider compensation strategies, not only on the model side, but also on processes for implementation and documentation of fair market value, I often ask the question, where could our people go to get this training to learn about different approaches to valuation and compensation?

Joe Wolfe: The AAPCP is one place that I look to right away and often recommend. We’re going to learn a bit about the organization and also some trends in compensation. So I have a few questions for Alex and Autumn, and I think I’ll start with you, Alex. Could you give some background on the history of the AAPCP and where the organization is today?

Alexander Krouse: Yeah. Happy to. There’s a long story to it, but knowing this is the podcast I’ll give the abbreviated version. Many of us, Autumn and myself, we’ve known each other probably for three years now or close to it. Others within the association that have been more involved, we’ve been creating this network over the past few years and even some before that. I remember talking with others and we sat there and said, “We’re all in these different associations. It’d be nice if there was a space for the work that we do.” We’ve got accountants, we’ve got operation leaders, we’ve got attorneys like myself, we’ve got those that have worked in HR, worked in recruitment. And so from a skill set and a department standpoint, there’s a lot of variability.

Alexander Krouse: I think after enough people asked that question, we sat down and said, “Hey, let’s start this association that’s more focused on an area, a body of work and a body of knowledge, as opposed to a profession specific.” And so that’s really where it started, very just people like Autumn and myself coming together saying, “Hey, we’ll put in the time to be able to grow this.” We were really actually hoping to more formally launch in early 2020 by getting a group of us together, but because of COVID, we had to cancel that. And then we just slowly grew from there. Most of us have certainly met via video. I’ve not met Autumn in person, but we will at the conference in May here in Indianapolis.

Alexander Krouse: So that’s how it started and it’s continued to build. Where we are today, we have individuals, Joe, such as yourself, myself, and others that are in this association as members, a few hundred individuals. So we’ve grown to that level. There are individuals that work in private practice medical groups, that are in health systems, private equity, law firms, consulting firms, accounting firms, you name it. If you work in provider compensation, we welcome you as a member, that’s the community. As for just healthcare organizations, we have about 110 now at this point, healthcare organizations across the country that are really represented.

Alexander Krouse: Some are in individual county hospitals where that person that’s involved is doing 20 different things. Some of them are organizations with a 100 plus hospitals, about our average healthcare organization, probably about Parkview’s size, probably around two billion with around eight or nine hospitals and 1,000 providers. So a lot of variability in there, but it’s great to have that group together.

Joe Wolfe: Great. Thanks, Alex. Autumn, I’ll direct the second question to you. How has the AAPCP helped you in the work you do for your health system?

Autumn Warden: That’s a great question. To put it briefly, it’s provided resources that are so needed in this environment. Talking about the community that we’ve established, like Alex was saying, it’s not just resources as in getting access to a policy or some guidance around your policy or when you’re doing your commercial reasonableness document and what that should generally look like, it goes beyond that is so needed and just is almost invaluable. It’s being able to call someone like Alex that works at another organization that you’ve established a relationship with through the AAPCP. And you can ask, this is my situation and most of the time they’re going to say, “Oh yeah, I’ve dealt with that before and this is how we handled it. This is what worked, this was what our barriers were.”

Autumn Warden: What’s been so common in the provider compensation industry is, we work with third parties and they’re great.  We have great relationships with them, but most of the time, they’re not within the four walls of your hospital. They’re not sitting in the meetings with these physicians, they’re not managing relationships and managing your provider engagement initiatives as most health systems are really focused on right now. And they’re not toe to toe with your physician leadership and your operations team and your in house counsel. So when you have the community that is involved in operations, or worked closely with finance and physician leaders, and you have that community outside of your health system to help guide you, it really helps this industry propel to the next level.

Autumn Warden: That’s what’s been missing. It’s why we’ve worked so hard and why we will continue to work so hard to grow this association. We have the external experts and resources and will always need them,ut it’s the internal work and all the things that go into doing this job and doing it well, that we are really honing in on. It’s your internal experts and how we can support them.

Joe Wolfe: Well, thanks, Autumn. Alex, you’ve mentioned events, I know you have an upcoming conference in Indianapolis. Could you provide us some information on that?

Alexander Krouse: Yeah. We do have a broad education platform that we’re building. We really are looking at virtual accessibility to training new employees that are working in this area and creating modules. For, if you’ve got somebody that’s new to your staff. We all know that for most of us that are working right now, we’ve all been self-taught pretty much. We’re really trying to create that platform where there’s more formality of, “Hey, if you’re new to this area, here’s the introductory materials that you need to be able to speak the lingo, to think about things, to understand things.” That’ll be certainly taught by faculty across the country. I know Joe, you’re going to be helping out with that as well. We’re looking into developing a credential, certainly people that want to build a career where they have expertise in this area, and even if you’re not directly managing this area.

Alexander Krouse: Let’s say you do move further up in operations or in finance, and you’re the COO of a medical group, quite frankly, you need an in depth understanding of these issues, because really at the end of the day, it’s all about alignment. How do we do that? How do we appropriately do that? What works best? So that’s the broader platform, but a part of that is certainly in person conferences, which is just going to be invaluable to our members. So on May 5th and May 6th, the conference is going to be in downtown Indianapolis. We’re at a hotel venue, a historic venue there, right in the heart of Indy. I used to live there myself, so it’s in a great spot. We have a full first day of not only lecture style, coursework or events, but also opportunities where we’re going to be doing live polling of the audience.

Alexander Krouse: We’re going to be breaking into groups, so we can have more discussions, network and get to know one another. We will have an evening event with a cocktail hour and all of that. And then the next day, we’re going to have a morning where we’re talking about some cutting edge issues and then more group discussion. The one thing that I think is unique about our conference is that for all of our sessions, we have an in-house person that works in a healthcare organization, as well as some external experts. These are individuals from across all sorts of healthcare organizations, consulting firms, law firms. So there’s a lot of diversity of, I think, viewpoint there, which is something that you really don’t see in other conferences that work in this space. So we’re really excited about it and certainly if anybody is interested, you can go to our website, providercompensation.org and get more information.

Joe Wolfe: Thank, Alex. I think this is a question for both Autumn and Alex. What do you think will be the biggest issues in provider compensation in the near future?

Autumn Warden: I believe that the biggest issues in provider compensation in the near future will be the delicate balance between earnings based on fee for service compensation arrangements, and value based arrangements. I say it’s a delicate balance because it really is a balance of what your payer contracts look like and how you are aligning those to your compensation plans. And with the majority of health systems, payer contracts are still primarily fee for service, although there are significant initiatives around value-based initiatives. When your hospital’s reimbursement is dependent upon fee for service, you still have to make that a significant proponent of your compensation design.

Autumn Warden: For my organization specifically, we’re really trying to introduce value-based initiatives, while also maintaining the historical fee for service arrangements. That way if a significant shift starts to become more obvious, then we have the capability to shift the comp model as we need to. But all health systems are doing it differently right now. It’s just going to be interesting to see when and if the shift happens, how far we’ll have to make significant adjustments to our compensation plans.

Joe Wolfe: Great. Thanks Autumn. Alex, your thoughts?

Alexander Krouse: I 100% agree with Autumn, that’s going to be a major change management issue that I think is going to take us longer than a decade. That is going to be a major issue. I think one of the more pressing issues, is I think we’ve come from this historic practice of an overreliance on survey data. I think a lot of organizations have gotten into that. I think with the recent Stark final rule, some of the commentary and that not that surveys are bad, but it’s clearly not, Hey, surveys are everything. So I think organizations have to really rethink how they’re valuing physician services. I think in part that’s because of some of that commentary, I also think in part, because the surveys due to COVID, the physician fee schedule changes, the surveys aren’t going to be very helpful.

Alexander Krouse: I could see somebody making the argument, is it even commercially reasonable to use these surveys to set income levels given some of the anomalies within the data? So I’ll say this, over the next three to five years, organizations are really going to have to think about the way that they’re establishing compensation within their groups, because I think post 2020 for a lot of reasons, not just COVID.

Joe Wolfe: I would echo your thoughts there and I appreciate your answers to my questions. Looking at this year and the near future, we’ve experienced several years of reform now.  We’ve had some technical updates to the Stark and Kickback rules, new guidance and clarifications to fair market value and commercial reasonableness and to the volume and value standard. We have these new value-based exceptions and safe harbors that drive change, but all this reform has been coupled with other market challenges and disruptors, just like the two of you just talked about. The COVID-19 productivity compensation model and staffing disruptions, the Medicare fee schedule issues, disruptions to the market survey data, and I do think we’ll see continued enforcement. It’s a disruptive period of time, but there’s a lot of opportunity to revisit compensation in my mind, like you the two of you are pointing to.

Joe Wolfe: I think healthcare organizations are going to have to engage their key stakeholders, get them to the table, including legal compliance, finance, their contracting personnel, and they really need to look at these changes, where their organization sits and where they want to go looking forward. Are they going to innovate their models? How are they going to operationalize these changes? And compensation is right at the heart of all of it. And so what you’re doing there at the AAPCP and bringing together people in this disruptive period and allowing them to collaborate and to use your platform to pose questions to each other on your website, if they’re members. I applaud you for what you’re doing. So it’s going to be a very interesting, I think Alex, you said we have a decade of this in front of us.

Joe Wolfe: I agree that it’s going to be a long haul, but there’s a lot of work to do and opportunities to engage. So I appreciate the answers to your questions. For our listeners, if you would like to learn more about the AAPCP please reach out to Alex or Autumn. Again, Alex mentioned their website is providercompensation.org. We’ll also make their information available on the podcast platform, so you can email them directly. Thank you for joining us today. We hope that you tune in for future podcasts. Please remember that the views expressed in this podcast are those of the participants only, and do not constitute legal advice. Take care.