Volume 15
The members of the 118th Congress on the House side of Capitol Hill finally have been sworn in after a marathon fight for the chamber’s speakership. The brutal battle Americans witnessed last week is only the beginning. With Republicans in charge of the House and Democrats at the helm in the Senate, federal legislative inertia will be the norm – especially when it comes to healthcare. Sen. Bernie Sanders (I-Vt.) sits atop that chamber’s healthcare panel. The likelihood he will see eye to eye with his GOP counterpart in the House? Small.
Which means most of the policymaking we will see in terms of healthcare will come from federal executive branch agencies, state legislatures, and the courts that are dealing with mergers and acquisitions (M&A). 2023 will certainly be interesting.
#1: Healthcare implications in the $1.7T omnibus bill
Big Synopsis: Right before the holiday, Congress approved an end-of-the year spending bill that not only kept the government from shutting down, but included several healthcare measures that will impact doctors, investors, and others in the ecosystem. President Biden promptly signed the legislation into law.
So What’s The Big Deal: The final bill approved by the 117th Congress in 2022 had numerous healthcare policy implications. For investors and hospital administrators, three key policy issues were addressed: COVID-era telehealth protections were extended for two years, adjustments were made to the Centers for Medicare and Medicaid Services (CMS) physician fee schedule cuts, and Medicaid redeterminations also were included. If not for the omnibus, ending the Covid public health emergency (PHE) could have meant a significant reduction in telehealth flexibilities and instability for state-based Medicaid programs. Those programs seem to be safe temporarily, or at least will exist with clarity for now (the telehealth a two year extension and Medicaid redeterminations can start in April), giving investors some stability and breathing room. For physicians, the result was far less than ideal. While CMS had proposed nearly 4.5% cuts in physician fees, the Omnibus bill makes 2% cuts in 2023 and 3.5% in 2024. Any cut is harmful.
So What’s Next: The 118th Congress is underway. Barely. After an historic, marathon fight for speaker of the House, new lawmakers have only just been sworn in. Leaders are now deciding who will sit on which committees. If the speaker fight is any sign, and it surely is, this session of Congress will be marked more by politics than policy.
#2: Are we at the beginning of a COVID winter surge?
Big Synopsis: The number of people hospitalized with Covid (roughly 40,000) at the beginning of January 2023 is far below previous winter waves, but with a new variant, numbers are rising, especially in the northeast, which has been a bellwether during previous waves. Hospitalization rates for Americans over 60 are especially concerning.
So What’s The Big Deal: The new COVID variant XBB.1.5 seems to be making a surge, with rising viral particles in wastewater in the northeast United States and rising COVID hospitalization rates of nearly 70%. While COVID cases continued to rise slowly in the late fall and early winter, hospitalization (at least initially) did not seem to follow. That may be changing now as this new variant appears to evade prior immunity and may cause worsened illness. Fortunately, we are seeing a decline in influenza and RSV cases and hospitalizations. This could improve hospital and clinic capacities.
So What’s Next: We will need to see if hospitalizations and cases continue to rise over the next few weeks or if there is a decoupling effect.. These data points will let us know how prior immunizations (pre-bivalent immunization) hold against the new variant. We will also know if the new bivalent COVID vaccine holds up against the new variant.
#3: Telehealth flexibilities continue: Will this increase investments in the space?
Big Synopsis: Yes, Covid-era telehealth flexibilities were extended for two years in Congress’ end-of-the-year spending bill, but is temporary policy really something to celebrate? investors are not often overly-frightened by uncertainty, but the fact that Congress did not make these policies permanent is problematic.
So What’s The Big Deal: A two year extension is welcome, but not ideal since it only makes the landscape more uncertain – especially in a politically contentious environment. Lawmakers and investors now have two years to assess the value of telehealth and what regulations or restrictions should be put in place permanently. What will they decide? Only time will tell.
So What’s Next: Right now, there are more questions than answers. Will telehealth be available and reimbursed at the levels seen over the past 3 years? Will telehealth utilization continue to decline despite regulatory flexibilities? Will telehealth be limited to psychiatric visits or follow up visits? Will state-based rules and regulations limit the available workforce? Each of the questions will need to be answered over the upcoming years to determine the potential benefit to investors.
#4: Is Britain's national healthcare system privatising? (British spelling intended)
Big Synopsis: The private company Operose Health, a Centene subsidiary, has taken over nearly three dozen medical practices in London in a deal worth tens of millions of dollars. With the deal, Operose became the largest private supplier of general practice services in the United Kingdom, with 67 practices accounting for 570,000 patients.
So What’s The Big Deal: Despite significant issues over the past few years with Britain’s National Health Service (NHS) due to funding and workforce shortages, the NHS has been proudly public. Incursions by Centene change that formula. (The private company now owns hospitals and physician groups in the U.K.) What began as a slow cultivation of relationships in 2011-2012, now has developed into hundreds of thousands of patients managed by a private company under the umbrella of the NHS. The move has been seen as a stealth privatization.
So What’s Next: Could the NHS start to make an even bigger private shift, inviting other U.S.-based healthcare companies to manage their public system? Would U.S. investors in private managed care entities see Europe as an upcoming opportunity? Both outcomes are possible.
#5: Speed bumps cleared for Amazon and One-Medical
Big Synopsis: The Oregon Health Authority's Health Care Market Oversight has approved Amazon’s proposed $3.9 billion deal to buy One Medical. While the announcement is a big deal,. acquisition is still subject to regulatory approval by the Federal Trade Commission.
So What’s The Big Deal: Two things here: First, state-based regulators are not seeing that mergers like Amazon and One-Medical are anti-competitive enough to prevent them and, second, they think these mergers are likely to bring value to consumers and patients. Regulators did believe there was a chance that Amazon/One-Medical could “siphon-off” higher reimbursement patients, an outcome that could harm other healthcare entities. Their solution was to reassess the situation in five years. What’s clear is state regulators, at least, are becoming less-and-less interested in regulating anti-competitive, antitrust activities.
So What’s Next: This outcome is a win for big industry. Mergers and acquisitions will likely continue since large entities want to control as many components of the continuum of care and the healthcare ecosystem as possible.
#6: Digital Health is ripe for M&A in 2023
Big Synopsis: Startups are in need of capital since venture capital is harder to come by. According to many analysts, this means the digital healthcare space is ripe for increased mergers and acquisitions activity.
So What’s The Big Deal: While 2021 and 2022 were big years for start-ups in the digital health space and over-valuations, 2023 will likely be a year of correction. Mergers and acquisitions seem to be one of the main mechanisms to facilitate these corrections especially while organic growth becomes more challenging.
So What’s Next: Same as in our #5 story above. The mergers and acquisitions trend will likely continue into 2023 especially as entities see value in consolidation and the overall market becomes more challenging for new start-ups.
#7: Will a lawsuit against Envision healthcare change the face of medicine?
Big Synopsis: A California lawsuit against Envision will start in January 2024 in federal court. In the case, American Academy of Emergency Medicine Physician Group, alleges Envision uses shell business structures to retain de facto ownership of ER staffing groups.
So What’s The Big Deal: The federal lawsuit, which concerns the corporate practice of medicine, could have major implications. More than 33 states have statutes that prohibit the “corporate practice of medicine,” but most are old and have not been tested in recent years. In the complaint, the plaintiffs allege companies like Envision and Teamhealth use physician owners as “straw men” to manage practices, skirting the law. In effect, the lawsuit alleges, corporations are controlling the independence of physician practices. The California Medical Association and other physician advocacy organizations support the lawsuit with the hope that a favorable ruling could make sweeping changes to medical practice management.
So What’s Next: We need to see how the court rules. Depending on the court’s ruling, regulators and legislatures in other states could take the law more seriously, forcing significant changes to physician practice structures.
#8: Regulating Medicare Advantage
Big Synopsis: Medicare Advantage is the private-sector alternative to Medicare. It is under scrutiny by federal officials after there have been significant complaints that marketing for plans is deceptive and that too many patients are having their medical claims denied.
So What’s The Big Deal: Medicare Advantage has been the darling public-private insurance program to support healthcare for seniors over the past few years. And growth of the programs does not seem to be slowing. That said, many observers are worried private managers (i.e. private insurance entities) are routinely denying coverage to beneficiaries or may not be offering adequate networks or the purported benefits as advertised on TV. Congress and regulators now want to step in.
So What’s Next: While Medicare Advantage plans will continue to grow, there will likely be more regulatory review of them. Companies are on notice that while many enjoy the benefits of MA plans and the cost, there must be adequate access and truth-in-advertising.
#9: Surprising medical bills
Big Synopsis: The No Surprises Act, which went into effect in early 2022, protects privately insured patients from paying a bill when there's a disagreement over the cost of out-of-network care. New CMS data shows Insurers and providers are overwhelming the arbitration system Congress set up to resolve the disputes.
So What’s The Big Deal: When the surprise medical billing (SMB) law went into effect, the federal government anticipated only around 18,000 claims. The number grew well beyond that within months, however. In fact, it’s expected there were more than 275,000 claims in 2022, resulting in significant backlogs and held accounts receivable for provider groups. Now, when providers file a claim for arbitration, they must wait months before an arbiter hears the case, meaning months before the provider group receives a payment.
So What’s Next: CMS says it will audit the payments from the insurance companies to provider groups, but that action may take some time. Multiple lawsuits suing the Biden administration continue to swirl which could overturn portions of CMS's SMB rule. While those cases move through the courts, provider groups will continue to wait.
#10: Recession in 2023
Big Synopsis: More than two-thirds of the economists at 23 large financial institutions that do business directly with the Federal Reserve believe the United States will fall into recession in 2023. The big question: will healthcare suffer with it?
So What’s The Big Deal: In the past healthcare has been relatively “recession proof,” but that doesn’t seem to be the case in 2023. With more than half of hospitals ending 2022 in the red and reimbursements for providers declining and expenses rising, the healthcare provider space is vulnerable. As a result, many organizations may focus on revenue and expense optimization, which may include increased M&A activity. Buckle up.
So What’s Next: We will need to see if the analysts are right and if broad economic trends translate to economic trends in healthcare. In 2022, analysts were partially right about the economic challenges. Growth slowed and inflation rose, but growth didn’t slow as much as expected, unemployment rates improved, and inflation wasn’t as transitory as expected.
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