Health Care Current: August 19, 2014
An M&A roadmap to enhance the chances of success
This weekly series explores breaking news and developments in the U.S. health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.
- My Take
- Implementation & Adoption
- On the Hill & In the Courts
- Around the Country
- Breaking Boundaries
An M&A roadmap to enhance the chances of success
It’s in the news nearly every week: another major acquisition, key divesture, large joint venture or significant licensing agreement. The competitive landscape for life sciences companies seems to be changing rapidly. As I recently stated in a Forbes article, life sciences companies have many different strategies for the future: some want to be more focused on pure plays in a given segment or therapeutic area, while others want to maintain a broad portfolio of businesses to manage different business cycles. Changes in the health care ecosystem such as expiring patents, shorter product life cycles, formulary coverage challenges, changing commercial models, growth in new markets and value-based reimbursements are all driving the need for companies to reassess their strategies and business models and explore potential M&A opportunities.
At $400 billion, the global value of life sciences sector deals was eight times higher this year than it was last year at the same time. This uptick is expected to continue.1 Some of the recently publicized deals in the sector have involved U.S. firms buying foreign companies, which may allow them to relocate their headquarters overseas and benefit from lower tax rates. This approach is commonly referred to as an “inversion.”
As someone who has personally experienced a cross-ocean move (born and raised in India and then moved to the U.S. for my graduate education) followed by a west coast to east coast transition (driven by a transfer to lead one of our practices)–I can relate. Business opportunities, family, jobs, friends, lifestyle—for many, they’re all factors in the decision to make a big move. And as I think back on the moves I’ve made, I can vividly remember the bumps we experienced along the way. Between coordinating the sale and purchase of homes, enrolling children in schools in an unfamiliar area, transferring my spouse’s professional licensing requirements, moving personal property, and of course, relocating the family dog, a comprehensive roadmap could probably have saved us some time (and money).
As life sciences companies take steps to transform their business strategies through acquisitions, divestitures, or joint ventures, they could also benefit from a roadmap—a framework that allows them to prepare for the potentially bumpy road ahead while focusing on becoming more competitive in areas that will lead to business growth and sustainability. What are some key questions that should be mapped out before this monumental move?
- Capabilities: What does the target firm offer that might enable us to strengthen our core capabilities, diversify our portfolio and expand product lines in our areas of priority?
- Future growth: To what degree might we be able to increase our research and development (R&D) pipeline and accelerate our potential for future innovation? What potential does the target firm offer for tapping new markets and strengthening relationships with governments, providers and patients in those new markets? What product or therapeutic area synergies exist to promote further growth?
- Reputation: How is the target firm viewed by customers and investors? To what extent might teaming with the target firm strengthen our brand recognition in markets that are important to our business? Will we expose ourselves to any risks given the target’s relationships? What potential impact could relocating our operations have on our reputation?
- Governance: What are the change-of-control, board approval and leadership structure considerations?
- Geographic location and physical environment: Does the target firm offer locations, facilities and resources that are well-suited for expanding our business? Is there political scrutiny where the target firm is located?
- Culture: How easily and effectively might the organizational cultures of the target firm and our firm come together? What change management is needed to integrate the cultures?
- Costs, financing and savings: How do the total costs of this option (due diligence, purchase price, reincorporation and integration costs, moving expenses, including those related to relocating governance and operations, etc.) compare to the costs of other potential deals? What financing alternatives are available? What tax rates, credits and deductions will apply? What potential does this option offer for increasing revenue (e.g., cross-selling the expanded portfolio and reaching new markets) and decreasing costs (e.g., operating synergies achieved by combining capabilities and resources)?
- Selection process and acceptance: What specific negotiating steps, regulatory requirements and timelines would we need to follow? What are the chances our offer will be accepted?
Another looming question is, “What will Congress do?” Lawmakers are considering legislation to make these kinds of inversion deals less attractive, hoping to encourage firms to stay in the U.S. (see the July 25, 2014 and July 18, 2014 Tax News and Views newsletters). Proposed restrictions would require foreign shareholders to own significantly more of the new entity (50 percent or more) than they are required to now (at least 20 percent). If enacted the new rule would apply for the next two years, potentially making U.S. companies targets for large foreign acquirers. The possibility of such restrictions should be another significant consideration for firms.
More than ever, gaining a competitive edge depends on enhancing–not necessarily maximizing–capabilities. Enhanced capabilities require focusing on areas in which you excel, improving in areas that are important to achieving your goals and letting go of elements that might be holding you back.
For life sciences companies specifically, enhanced capabilities might mean getting more products into their pipelines, becoming more innovative, reaching new markets and expanding portfolios in ways that meet the needs of consumers who are becoming more value-conscious. If properly prepared ahead of time, through roadmaps and frameworks, and if done for the right strategic reasons, partnering or merging with another organization may be an effective option for business growth and sustainability.
1 Beth Kutscher, “Tax reform fears driving Big Pharma mergers.” Modern Healthcare, July 19, 2014
By Homi Kapadia, Vice Chairman, U.S. Life Sciences Leader, Deloitte LLP
Implementation & Adoption
Survey: One-in-six employers to offer coverage that doesn’t meet ACA standards
The National Business Group on Health surveyed large employers on their health insurance coverage strategies for 2015; 16 percent expect to offer plans that do and plans that do not meet the Affordable Care Act (ACA) standards for value and affordability. In addition, the survey found:
- Health insurance costs: Large employers’ benefits costs are expected to increase 6.5 percent in 2015, which is lower than this year’s increase. However, with changes they are making to their plan designs, employers expect to keep their increases to 5 percent.
- Consumer-directed health plans (CDHP): 57 percent of the employers surveyed expect to implement or expand their use of CDHPs for their employee population. The results showed a 50 percent increase in the number of employers that plan to offer one as their only plan option for 2015.
- Private exchanges: 3 percent of employers plan to offer active employees health insurance through a private exchange and 14 percent will offer their retirees health insurance through one. For more information on private exchanges, see the August 12, 2014 Health Care Current.
- Specialty pharmacy benefits: 33 percent of employers will use a specialty pharmacy to help control their costs for specialty medications.
White House Administration launches U.S. Digital Service
Earlier last week the White House announced the launch of U.S. Digital Service, a team of digital experts that will work together to improve information technology (IT) infrastructure and remove barriers to delivering online services across agencies. The Administration named Mikey Dickerson as the first Administrator and Deputy Federal Chief Information Officer of the U.S. Digital Service; Dickerson was on the team that overhauled HealthCare.gov last fall. The team includes private-public talent with expertise in technology, procurement, human resources and finance. The White House also requested comments on two components of the “IT toolkit” that will help the Digital Service:
- Digital Services Playbook: The first version of this guide includes 13 “plays” that are used in the public and private sector as best practices for building effective web and mobile application services. Example “plays” include automating testing and deployment and managing security and privacy through reusable processes.
- TechFAR Handbook: This guide explains how agencies can implement strategies in the Digital Services Playbook while still following the Federal Acquisition Regulation (FAR). TechFAR focuses on helping agencies use contractors to support software development.
Background: Following the technical issues faced by the launch of HealthCare.gov, the Administration brought together digital and technology experts from the private sector to fix the web portal. According to the announcement, the quick turnaround and success of the small group of experts was the impetus to forming this group. The Digital Service will also start collaborating with 18F, a new unit of the U.S. General Services Administration that houses developers and digital professionals that design and build online platforms across the government.
Studies: The state of EHR adoption among hospitals and office-based physicians
Researchers examined the state of electronic health record (EHR) adoption among hospitals and office-based physicians in two reports released this week by Health Affairs. EHR adoption for both groups has been rapidly increasing since financial incentive programs were put in place. Key findings are summarized in the table below:
*A basic EHR has full implementation of ten computerized functions in at least one of the hospital units. A comprehensive EHR has the basic functionality and 14 additional functions in all major hospital units.
The hospital data were analyzed from the 2013 AHA Annual Survey–IT Supplement and the physician data were from the 2009 National Ambulatory Medical Care Survey and 2009-13 Electronic Health Records Survey. Both analyses found continued increase in adoption after the Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009. Hospital adoption of EHRs grew 10-15 percent in the four years after HITECH was passed, compared with 3 percent in 2010 before the incentive programs began. The percentage of office-based physicians with EHRs has nearly doubled since 2010. Beginning in fiscal year 2015, hospitals that do not meet Meaningful Use criteria will be financially penalized.
(Sources: Furukawa, Michael, et al. Health Affairs, “Despite Substantial Progress in EHR Adoption, Health Information Exchange and Patient Engagement Remain Low in Office Settings,” August 2014; Alder-Milstein, Julia, et al. Health Affairs, “More Than Half of US Hospitals Have At Least A Basic EHR, But Stage 2 Criteria Remain Challenging for Most,” August 2014)
Study: Hospital Value-Based Purchasing Program has not affected hospital quality performance
The Health Services Research journal features a study that evaluated the Hospital Value-Based Purchasing (HVBP) program on hospital quality of care and patient experience during its first three quarters. The researchers analyzed changes among participating and non-participating hospitals on quality performance measures reported on Hospital Compare, the public quality reporting initiative from Medicare.
- Improvements during implementation of HVBP program: The researchers did not find that clinical process or patient experience performance improved in the hospitals that participated in the program compared with those that did not.
- Improvements prior to implementation of HVBP program: The researchers found that HVBP hospitals improved their clinical process performance during the three years before the program started. The researchers were unable to determine whether this was because hospitals began preparing for the program once it was established in law but not yet implemented.
These results are consistent with those of other pay-for-performance studies, which found that hospital quality did not improve. The authors concluded that the financial incentives could be too weak to produce meaningful results or that hospitals may be focusing more on other programs such as the Hospital Readmission Reduction Program.
Background: The Hospital Value-Based Purchasing program was created by the ACA to reward acute-care hospitals for both attaining and improving quality of care using incentive payments and payment adjustments. Beginning in October 2012, participating acute-care hospitals received bonuses or penalties depending on their performance on 12 clinical process and eight patient experience measures during July 1, 2011 through March 31, 2012. The HVBP program will continue indefinitely, and financial incentives and penalties will increase.
Reaction: Premier Inc. medical director, Richard Bankowitz noted in HealthLeaders Media that the comparison group used in the study is not a valid control group because they chose to report hospital performance data voluntarily. Hospitals that choose to publicly report their performance data (and are not required to do so) could be more confident of their results and more motivated to enhance their quality performance, Bankowitz concluded. Premier Inc. was one of the early innovators in the pay-for-performance area for hospitals.
(Source: Ryan, Andrew, et al. Health Services Research, “The Early Effects of Medicare’s Mandatory Hospital Pay-for-Performance Program,” July 2014.)
Report: 75 million physician visits will occur electronically this year
New research conducted by Deloitte predicts that 75 million out of the average 600 million general practitioner appointments will occur through electronic visits (eVisits) in the U.S. and Canada in 2014. The report also projects that global eVisits will grow 400 percent from 2012 levels. The savings from these eVisits could be large, at a projected $5 billion for 2014. The primary drivers of this growth are the changes in technology and telecommunications infrastructure and the continued focus on reducing medical costs and improving care. In addition, more people have personal computers and internet capability and older adults have been showing increased comfort with using technology for their health care. The report concluded that the eVisit market could reach $50 to $60 million in developed countries even if only 30-40 percent of consults are handled through eVisits.
Background: eVisits include video conferences between a patient and his or her physician or clinician. eVisits can also include electronic document exchanges, consultations via phone, email or texting and videoconferencing. The report projects that many of the eVisits for this year will consist of receiving patient information through online forms or questionnaires.
RAND outlines key policy considerations for 340B program
A report released by the RAND Corporation analyzes changes to the 340B Drug Pricing Program following the ACA expansion of eligibility for the program, to include free-standing cancer hospitals and critical access hospitals, among other providers. Since 2010 the number of contract pharmacy agreements has accelerated. RAND outlined several policy considerations that will be key issues for the program moving forward:
- Overarching goal of the program: 340B eligibility is applied to facilities, not individuals or health plans. The eligibility legislation is interpreted differently by pharmaceutical manufacturers, providers, and elected officials, with some arguing that the discounts are being used inappropriately, while others argue that the program helps safety-net providers give invaluable health services to low-income and vulnerable patient populations.
- Access to drugs for low-income people: Providers often offer discounted self-pay and sliding scale programs in order to help the low-income patients they serve pay for hospital services, including drugs. However, the 340B program does not offer greater help to patients with lower incomes.
- Split billing and compliance: 340B allows entities to receive discounts only on drugs administered in an outpatient setting. This requires that covered entities have split-billing processes to differentiate between billing for inpatient and outpatient services if a patient received services in both settings so they can maintain records and justify when they bill under 340B. Providers must pay for the technology needed to comply with this requirement.
- Lack of transparency on 340B discounts: Discounts given through the 340B program are based on the average manufacturer’s price (AMP). The AMP is proprietary so providers do not always know whether their 340B prices properly reflect the discounts. Although many manufacturers participate in the Prime Vendor Program (which adds transparency to pricing) to report their AMPs to covered entities, this program is voluntary and therefore not complete.
Background: The 340B program allows some safety-net providers to pay discounted prices for prescription drugs. The program offset higher prices charged to the Department of Veteran’s Affairs and safety-net providers that resulted from the 1990 Medicaid prescription drug rebate program. 340B discounts 13 percent off the average manufacturer price for generic and prescribed over-the-counter drugs and 23.1 percent for brand name drugs. There are 7,898 covered providers at 16,869 sites. These providers account for 48 percent of all outpatient hospital visits in the U.S.
(Source: Mulcahy, Andrew, Armstrong, Courtney, Lewis, Jeffrey, Mattke, Soeren. Rand Corporation, “The 340B Prescription Drug Discount Program: Origins, Implementation, and Post-Reform Future” 2014.)
On the Hill & In the Courts
FDA receives second application for biosimilar product from Celltrion
On August 8, Celltrion, a biopharmaceutical company based out of South Korea, filed an application with the U.S. Food and Drug Administration (FDA) for approval of Remsima, a biosimilar version of a biologic drug that is used to treat arthritis. Celltrion conducted clinical trials beginning in 2013 to establish the bioequivalence of the biosimilar to the biologic it mimics. Celltrion is the second pharmaceutical company that has applied for biosimilar approval from the FDA in the last month through the 351(k) biosimilar pathway. While this is considered by many drug industry experts to be an exciting first step, the industry is waiting to learn more from the FDA on how biosimilar products will be defined and approved. In May the FDA said it will categorize biosimilarity into four levels: not similar, similar, highly similar and highly similar with a fingerprint-like similarity.
Background: The Biologics Price Competition and Innovation Act of 2009 was enacted as part of the ACA to establish an expedited pathway for FDA licensure of biological products that are biosimilar to products already approved on the market. According to the guidance, biosimilarity is defined as “highly similar to the reference product notwithstanding minor differences in clinically inactive components; and there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product.”
CMS issues FAQ on Medicare and the health insurance marketplace
Earlier this month CMS issued answers to frequently asked questions regarding the overlap in Medicare and the health insurance marketplace. The bottom line from CMS: Individuals who get their insurance coverage fully through Medicare do not need to worry about the marketplace coverage options. The Social Security Act prohibits health plans from selling or issuing health insurance coverage to Medicare beneficiaries enrolled in Part A and Part B, and these individuals are typically in compliance with the individual mandate. However, CMS outlined key exceptions that may allow beneficiaries to enroll in a qualified health plan (QHP) outside of the Medicare program. These include:
- Employer coverage: Medicare beneficiaries whose employers use the Small Business Health Options Program (SHOP) Marketplace may obtain coverage through their employer. Employer-sponsored coverage is exempt from the Social Security Act prohibition mentioned above. However, the Medicare Secondary Payer rule still applies as it would with other employer-sponsored coverage for employers with 20 or more employees.
- Premium cost: If a QHP offers cheaper premiums than what the individual would pay under Medicare Parts A and B, beneficiaries may drop their Medicare coverage or choose not to enroll. They may enroll in a QHP under the individual marketplace.
- Marketplace coverage prior to Medicare: Individuals enrolled in a QHP who later become eligible for Medicare are not required to drop their coverage. However, premium tax credits and reduced cost-sharing through the marketplace will be discontinued once they become eligible for Medicare except for those who only enroll in Premium Part B because it does not fulfill the minimum essential coverage requirement.
The guidance document also calls for health plans discussing coverage options with Medicare beneficiaries to inform them of Medigap policies, Medicare Advantage plans and Medicare Part D drug plans if they ask about marketplace options.
Ways and Means Health Subcommittee Chair introduces draft Medicare fraud, waste and abuse bill
On August 7, the House Ways & Means Health Subcommittee Chair, Kevin Brady, released a preliminary draft of the Protecting Integrity in Medicare Act of 2014, a bill that aims to reduce fraud, waste and abuse in the Medicare program. The draft includes the anti-fraud measures listed below:
- Replacing Social Security numbers with identification numbers would phase out the use of Social Security numbers (or derivatives of them) on Medicare ID cards and use a new system for supplying numbers to beneficiaries.
- Implementing a payment outreach and education program would require Medicare Administrative Contractors (MAC) to provide education and outreach services to health care providers and suppliers on improper payments.
- Expanding the face-to-face requirement would allow an expanded group of health care providers (e.g., physician assistant) to sign off on face-to-face encounters.
- Extending MAC contracts would allow MAC contractors to operate for ten years, 5 years longer than the current period.
- Implementing programs to prevent prescription drug abuse in Medicare Part D would reduce high-risk beneficiaries’ ability to “doctor shop” and abuse prescription drugs. High-risk beneficiaries would be “locked” to one pharmacy.
- Expanding ambulance prior authorization demonstration would expand CMS’s ambulance prior authorization demonstration program to Delaware, Washington, D.C., Maryland, North Carolina, West Virginia and Virginia in 2015. In 2017 the program would be expanded nationally.
Related: GAO recently reviewed CMS’s process for reviewing claims after they are paid in Medicare to find that the four types of CMS contractors duplicate efforts. MACs, Zone Program Integrity Contractors, Recovery Auditors and the Comprehensive Error Rate Testing contractor all review providers’ claims to make sure payments are proper. GAO found that the contractors were not always consistent and vary in their compliance with requirements. GAO recommends that CMS monitor the recovery audit database to make sure contractors are submitting complete data and make efforts to improve contractors’ efficiency and effectiveness. The American Hospital Association agreed with GAO’s assessment of the contractors, arguing that hospitals have more administrative costs because many of these programs’ efforts are duplicative.
Around the Country
Survey: Americans are more positive about personal health but view average American’s health as poor
The Pharmaceutical Research and Manufacturers Association (PhRMA) released survey findings last week that found that 66 percent of Americans believe that they personally had good or great health this year. This is up from 61 percent in 2013. However, only 20 percent believed that, on the whole, the country had good or great health this year. Additional findings include:
- Personal health: 58 percent of respondents said they are paying more attention to their health; this number did not change from last year. The biggest concern in personal health remained weight or weight problems (25 percent listed this as their greatest concern), followed by eating habits, diet and paying more attention to what they eat.
- Health information: 77 percent of respondents said it was very or somewhat easy to get complete information about their health. More than half of Americans (57 percent) use the internet to find health information; the internet is used more than friends and/or family, pharmacists and alternative medicine practitioners.
- Health among minorities: A larger percentage of Hispanics (25 percent) report concerns about diabetes than African Americans (17 percent) and Whites (11 percent). Hispanics are also more concerned about health insurance coverage and costs than African Americans and Whites.
(Source: PhRMA, "From Hope To Cures: PhRMA’s Second Annual National Health Survey," 2014)
New technology shows promise for spinal cord injuries
In the summer blockbuster Lucy, a young woman accidently absorbs a drug that allows her to acquire powerful mental and physical abilities, including telekinesis (the ability to influence a physical system without physical interaction). In real life, a young man named Ian Burkhart, who was paralyzed from the elbows down in a diving accident four years ago, is using a new technology to move his fingers and hands with his own thoughts. Burkhart is the first patient to use Neurobridge, an electronic neural bypass system for spinal cord injuries that reconnects the brain directly to muscles, allowing voluntary and functional control of a paralyzed limb. Burkhart is the first of five potential participants in a clinical trial for the technology at Ohio State’s Wexner Medical Center.
Neurobridge uses a high-definition muscle stimulation sleeve that translates neural impulses from the brain and transmits new signals to a paralyzed limb through combined algorithms that learn and decode the user’s brain activity. The technology has been in development for several years by Batelle, a nonprofit research and development organization. Batelle scientists first recorded neural impulses from an electrode array implanted in the brain of a person with paralysis. They used that data to illustrate the device’s effect on the patient and prove the concept before collaborating with Ohio State’s neuroscience team to design the clinical trials. As part of the study, Burkhart had a tiny chip surgically implanted onto the motor cortex of his brain. The chip interprets brain signals and sends them to a computer, which records and sends them to the high-definition electrode stimulation sleeve that stimulates the proper muscles to execute the movements. This entire process takes one-tenth of a second.
The Ohio State and Battelle teams collaborated to figure out the correct sequence of electrodes that needed stimulation to enable Burkhart to move his fingers and hand. Because various brain signals and muscles work together in different ways to rotate the hand, make a fist or pinch fingers together to grasp an object, Burkhart practiced for months to learn to use the electrode sleeve to stimulate his forearm and rebuild atrophied muscles to be more responsive to the electric stimulation. Battelle also developed a non-invasive neurostimulation technology in the form of a wearable sleeve that allows for precise activation of small muscle segments in the arm to enable individual finger movement, along with software that forms a ‘virtual spinal cord’ to allow for coordination of dynamic hand and wrist movements. As this technology develops it could have great potential to help patients affected by various brain and spinal cord injuries such as strokes and traumatic brain injury.
Analysis: The technological advances being developed and refined by companies and researchers might enhance quality of life for people affected by spinal cord injuries and amputations. However, the high cost of these technologies will likely require new strategies and models for reimbursement. Medical advancements such as this one may not always demonstrate short-term direct savings to the health care system, although their societal value could be great. Disability often leads to reduced productivity as well as depression, which can lead to poor health outcomes. Technology that leads to improved functions that many take for granted can help reduce depression and increase productivity and quality of life. As this technology evolves, researchers might be able to apply it to benefit a broader population of patients who have nerve damage and more common musculoskeletal injuries. Evolving payment models could require innovative medical technologies to demonstrate clear value, and make the case for replacing these advancements with older and less effective treatments. Harnessing innovative advancements will mean collaboration across multiple stakeholders to work together to develop acceptable quality of life and productivity measures.