Industry Expert: In Time of Change, Traditional Providers Need to Focus on Core Strengths and Partner to Extend Reach

Rick Zall is chair of the Health Care Group at Proskauer, a New York City-based international law firm with a presence in numerous industries, including healthcare. Zall advises healthcare companies, investors and lenders in their most challenging transactions, including mergers and acquisitions, joint ventures, financings and complex commercial agreements. Among other things, Zall advises clients on state and federal health care regulatory compliance matters, including the corporate practice of medicine, digital health, telemedicine, HIPAA, fraud and abuse, Medicare and Medicaid payment reimbursement, MACRA, and value based payment. He has served in government, is a co-founder of the New York Primary Care Development Corporation (PCDC), and earlier in his career was CEO of a private equity-backed medical management company. Rick has also directed two industry studies for the Robert Wood Johnson Foundation and serves as principal outside counsel and board secretary to the Clinton Health Access Initiative (CHAI).

Proskauer’s Health Care Group has made several predictions for 2020, including the following:

> Uncertainty around the Affordable Care Act (ACA): From a challenging reimbursement environment to the future of exchanges, pending legal judgements could rattle the best laid service expansion plans.

>  The tipping point of consolidation: Near-complete consolidation in many markets makes for tough competition, and higher and harder stakes. In some cases, payors and providers will look for partnership opportunities, as opposed to launching a new service themselves. 

>   An uptick in private equity investments: The providers and payers best poised to take on new services will need to have massive scale and the appropriate financial resources, leading many to enter into agreements with private equity firms to secure necessary capital.

Zall spoke recently with Healthcare Innovation Editor-in-Chief Mark Hagland regarding the current landscape around these issues. Below are excerpts from that interview.

Could you begin by sharing a bit about Proskauer, and its range and scope of services?

Yes, Proskauer is an international law firm with 750 lawyers in 12-13 cities across the United States, and also in London, Paris, Sao Paulo, Beijing, and Hong Kong. We’re an international firm that’s multidisciplinary; and we’ve had a healthcare industry focus and vertical for decades now, initially focused on the hospital marketplace, but expanding now to include both traditional players like hospitals and medical groups, as well as health plans, and private equity-backed ventures innovating in new types of arrangements. I’ve personally been at Proskauer for 12 years now, and have been in healthcare for that entire time. I’m an attorney, and I’ve also played other roles in the industry. I spent some time in government, and also have been on the business side.

We represent operating companies in the health services space, healthcare technology, and health plans, as well as lenders and asset managers looking to invest in the industry. So through our client work, we see a lot of what’s going on in the industry. Policy and payment issues, as well as transactions—mergers, acquisitions, joint ventures, financings.

What are the most important trends you’re seeing right now, overall?

We really are seeing the pressures for the industry operators to be more efficient in how they actually deliver care. The cost increases have continued to climb; they really are not sustainable without robbing the rest of the economy. We did a survey several months ago in which we asked a lot of healthcare executives what they were feeling in terms of pressures, and a large percentage realize they need to be more efficient. The price of HC keeps going up, and the purchasers don’t want to continue to pay. That has led to a lot of consolidation, both horizontally and vertically. Even within sectors, a lot of horizontal integration to achieve economies of scale and reduce duplication and costs. I was at a conference of health system CEOs recently, and they’re very focused on it, so there’s a lot going on, as they try to figure out how to be more sensitive to the rising costs of healthcare.

At the same time, we’re seeing this shift from a volume-based payment system to a value-based payment system. And that has led to some vertical integration, where it’s no longer enough to react and provide episodic care. The purchasers are saying that they expect providers to better manage care and costs. Historically, providers have been focused on providing great intervention at acute episodes of illness. But employers, who cover more than half of Americans, and government, are all saying, in order to really keep costs down, you can’t just be fantastic at saving lives when you intervene, but really give them primary and preventive care, and that’s a different skill set. If you’re a hospital, you need to know what happens before you come into the ER and when you discharge them. So that’s led to this attempt to integrate across the continuum of care, and since the purchasers are saying we’ll spend X in premium for every one of our employees, the providers are being asked to assume what is essentially insurance risk. And places like Geisinger, Ascension, and Intermountain, are creating their own plans, and others are entering into joint ventures, where a health plan and provider will say, let’s work together, we’ll provide our data, and make sure that the patients who need early intervention are brought in. So that whole move from volume to value is changing incentives and imperatives.

What are your insights on health insurers and their business plans in the next few years?

Obviously, each health plan has an individual strategy, but the themes are pretty consistent. The payers, in response to what we’ve been talking about on the provider side, are saying, we’re not just content with paying claims and designing benefits and assisting employers; we also want to be healthcare companies. And the providers are changing their names from “hospital” to “health system” and even just “health.” The payers are doing the same thing. With Aetna and CVS, you have a health plan and pharmacy company coming together around the drug spend, but also, they’re also getting into the provider business. CVS is going to offer at their minute clinics and now at CVS stores, actually primary care services. Optum, United HealthCare, and even Blue Cross in Florida now have a number of retail outlets to provide care. Humana has their health hubs, and even Walmart is getting into the business. Who can be the company to provide services, coordinate care, and take care of health benefits management? I see that as a focus.

Do you see the consolidation of the large health plans continuing forward?

As Cigna, Anthem, and Humana found out, there are antitrust limits; but look at what Centene just did with WellCare [the St. Louis-based Centene Corporation’s acquisition of the Tampa-based WellCare Health Plans in 2019]. And there are a lot of regional plans, including provider-sponsored plans that, with the right opportunity, will be interested in selling their plans to a bigger consolidator. The demands are increasing to the point that capital is needed, information technology capabilities will be increasingly important; and artificial intelligence will be increasingly important. And scale is important, and deep pockets are important. That will all be important.

Do you see non-traditional disruptors coming into the traditional provider space as well?

Yes, look at the Amazon acquisition of PillPack [the Seattle-based Amazon’s acquisition in 2018 of the Manchester, N.H.-based PillPack]. Amazon is very good at logistics, so online pharmacy, so why not? I think it’s going to be around the edges. I don’t think you’re going to see Apple, Amazon or Google opening up clinics across from a traditional doctor’s office, per se, but they’re definitely going to look at pieces. I’ve heard presentations from Amazon, Google, Apple, and Microsoft, and those are in the news. We’ll see more partnerships, and I think they’re enabling some of the legacy players to accomplish more and become stronger competitors in their own sectors.

What should traditional players—hospitals, medical groups and health systems—be looking out for?

I think they should be focusing on their core capabilities, and then looking at partners to extend their reach. You can’t be excellent at everything. Look to strengthen your core, and look for like-minded partners to accomplish everything else. I also think that figuring out your capital formation strategy will be important. In order to succeed, everyone will need access to capital to take advantage of these situations. There are partnership opportunities with private equity that can be helpful. Hospital systems have relied on philanthropy and tax-exempt bonds; I don’t think that’s going to be enough to be successful. We’re seeing hospital systems creating their own investment funds and with partners. And that could be helpful. If there’s something in the IT area, find an investment group to help you fund an initiative in that area.