From: Becker Scott <>
Subject: [Becker's ASC E-Newsletter] 5 Observations for 2008: Will the Economy Harm Healthcare?; Winners and Losers; Payors Tighten the Screws; Transactions and Sectors; Will There Be Increases in Regulation and Investigation?


January 22, 2008
In This Issue
Five Observations for 2008
News and Notes
Companies to Watch
March/April 2008 issue
Five Observations for 2008

2007 was an incredibly interesting year in healthcare. The market for healthcare transactions was extremely strong, reimbursements did not fall precipitously, and new laws and regulations did not destroy any healthcare sectors.

1. Will the economy harm healthcare? For a long time, many people viewed the healthcare economy as somewhat immune to federal economic problems. Certainly, a percentage of the healthcare industry is not impacted directly by changes in the federal economy. For example, to the extent that a provider is reliant in part on Medicare and Medicaid, and these programs do not change their rates in the short term due to a federal economic slow down, this is a part of a provider's revenue that is unimpacted by changes in the federal economy.

However, to the extent one relies upon private pay, co-payments, and commercial payors for payment, these reimbursements can easily be impacted by the national economy. Further, as payors receive more pressure from employers to cut healthcare costs, this also negatively impacts reimbursements. Thus, it may be fair to assert that 30 percent to 40 percent of a typical provider's revenues should be unimpacted in the short run by changes in the federal economy. However, over time, a significant percentage of the healthcare economy will likely move with the federal economy. Further, to the extent that a sector or provider is still receiving outsized profits in specific areas, we would expect these outsized profits to be reined in sooner rather than later.

A true sign that the economy is struggling is the large increase in medical school applications. In 2007, it reached its highest mark in 11 years, as medical schools saw more than 42,000 applications. College graduates tend to move toward professional careers such as law and medicine (viewed as secure choices) as opposed to more lucrative but speculative choices such as investment banking, private equity and hedge funds whenever an economic downturn occurs.

2. Payors tighten the screws. Toward the end of 2007, we saw the impact of payor consolidation start to impact providers. Payors got tougher on managed care contracting and payors got tougher with out-of-network payments. We expect that, in 2008, the consolidation that has occurred with payors over the last several years will lead to more aggressive exercise of this authority than ever before. This will translate into making it more difficult to get paid at good rates, making it more difficult to get paid well on an out-of-network basis, and getting paid more slowly, as well as a variety of other actions that are consistent with the increased power of managed care payors.

3. Winners and losers. As we look at the numbers for 2007 and we look at more recent MedPAC recommendations, it seems to be a repeat of past actions. In short, MedPAC has just recently recommended increased reimbursement rates for hospitals. Hospitals, while not earning the profits of prescription drug manufacturers or medical device companies, still tend to do much better than ancillary providers. Further, when you look at hospitals versus ancillary providers and physicians, hospitals enjoy a much greater level of market power and political power than any other provider type. This political power translates into direct action. For example, on Jan. 10, MedPAC recommended a pay increase for hospitals and a pay freeze for several other types of providers.

Modern HealthCare reported that, in 2006, the latest year for which numbers were available, that hospitals had overall profits of $35 billion -- a record and hospitals' highest overall profit margins since 1997.

4. Transactions and sectors. There was last year a range of large hospital and health system transactions, including in the for profit sector involving companies like HCA and Community Health Systems, as well as a number of transactions in the not-for-profit sector. Within the ASC and dialysis sectors, it was also a lively year. We witnessed both large private equity-driven transactions including industry leaders such as United Surgical Partners and Symbion, as well as creative financing transactions involving companies like NovaMed. In addition, there were a large number of one-off independent facilities being bought and sold.

We also saw in the ASC and hospital sectors, the further evolution of the turnaround transaction -- with both large companies divesting unprofitable centers and hospitals, and smaller companies attempting to buy in and help turn around hospitals and surgery centers. The year also included a couple of very large dialysis facility transactions, including transactions involving the development of a company called DSI, and an end-of-year sale of Innovative Dialysis, a chain of dialysis centers.

While the economy started to struggle in 2007, financing for healthcare transactions and challenges in the healthcare sector were generally put off for another year. That is, transactions continued to close, and companies that had taken on tremendous debt continued to service that debt. 2008 is likely to be a much more challenging year in the healthcare sector. The debt market will be tighter and interest rates to cover this debt have not decreased in any meaningful way.

5. Will there be an uptick in federal regulation and investigations of providers? In 2007, we generally saw an uptick in the number of federal prosecutions for healthcare fraud and investigations of healthcare relationships. The Bush Administration and the Federal Department of Justice have not been over zealous in prosecuting healthcare activities over the last six to eight years. However, at both the state and federal levels, we saw increased investigative activity in 2007. Typically, as different parts of the economy soften, and healthcare remains relatively strong, (and the healthcare budget remains such a huge part of the economy), it is natural that more resources will be allocated to reviewing healthcare activities than other areas. Last year was active, and we expect that this year will be even more active in terms of investigative activity.

ASC Society
News and Notes

FDA warns Stryker over hip implants. The FDA has sent Stryker Corp. a warning letter, citing the company's failure to properly identify and correct recurring problems with some of its hip implants. The agency cited "continual complaints from January of 2005 through May of 2007" for certain implants that have failed to function, and complaints received "between January 2005 through June of 2007 concerning improper seating of hip implants in broached bones resulting in bone fractures." The problems were originally uncovered at the manufacturer's Mahway, N.J., plant last summer; the FDA deemed Stryker's August, September and November responses to the situation "inadequate."

Thank you, Symbion. We are delighted that Symbion, one of the best operators and acquirers of ASCs, has agreed to sponsor the Friday Night Cocktail Party at the June Orthopedics-, Pain Management- and Spine-Driven Conference. For more information on what Symbion can do for your ASC, e-mail Mike Weaver or George Goodwin.

For a complete June conference brochure or an exhibitor prospectus, please visit

Thank you, Facility Development and Management. We are delighted to welcome Facility Development and Management, a for-profit firm that provides consultative, developmental and managerial services for ASCs nationwide, as the sponsor for the Friday AM Networking Break at the Orthopedics-, Pain Management- and Spine-Driven ASC Conference. For more information, call (845) 770-1883.

June conf ad w Emily
Companies to Watch

We are delighted to highlight the following companies in this week's E-Weekly.

Blue Chip Surgical Center Partners. Blue Chip Surgical was founded by ASC veteran Jeff Leland. It also has great leadership in Jay Rom, Beth Ann Johnston, RN, BS, Richard Roski, MD, FACS, and several others. With several highly profitable, physician-led centers in operation around the company and a number of projects in the works, it has been remarkably successful. The company has a reputation for delivering on its commitments and forging strong physician relationships. Blue Chip is focused on spine, ENT, sleep, radiosurgery and multi-specialty ASCs. It holds an equity stake in its projects and also serves as a managing partner. For more information, visit Blue Chip online.

Surgical Notes. A preeminent nationwide provider of medical transcription, coding and other related value-added information technology services for the ASC market, Surgical Notes provides transcription, coding and practice management solutions to over 420 surgery centers and 6,300 physicians in over 40 states. Surgical Notes will be introducing two new products and services in 2008, the VMR Express, an electronic medical forms generator and document imaging solution and, an online, secure, interactive, personal health record portal for the general public to compile and organize all healthcare-related data. The VMR Express is designed for the ASC market. This proprietary application, interfaces with the existing practice management system (SIS, Advantx, Vision, etc.) to extract the patient label information (patient ID, last name, first name, date of birth, SSN, sex, age, physician name, date of service and case/encounter/account number). These generated documents print patient demographics on the facility's customized forms, allowing patient forms to be generated per operating physician's profile or according to specific procedures. Using the barcode from the forms version on each document, it will index the chart back into the patient record. Have old charts, or other loose documents, without a barcode? No problem, you can use the index fields to associate the paper work to a patient. This application will allow the user to perform advance searches for documents by account code, patient ID, type of document, or name. The VMR Express cost as little as $16 a day. For more, visit Surgical Notes online.

VMG Health. VMG Health is recognized by leading healthcare providers as one of the most trusted valuation and transaction advisors in the United States. VMG's experience is unparalleled and their credentials are unmatched. Whether circumstances call for a comprehensive valuation, the sale or acquisition of a facility, or joint-venture development assistance, VMG Health offers a unique and in-depth understanding of the relationships, requirements and business issues that surround today's healthcare facilities. Along with performing hundreds of ASC valuations each year, VMG maintains the most comprehensive database on ASC financial benchmarking statistics. VMG's annual benchmarking study, the Intellimarker, provides decision makers with real information to measure and improve the value of their centers. For healthcare organizations seeking to grow, maximize profitability or form new relationships, having a partnership with financial experts who thoroughly understand the value drivers in today's healthcare industry is absolutely essential. For more information, visit VMG's Web site or e-mail Jon O'Sullivan.

*           *           *

If you have any questions on any of the items listed in this letter, please contact me at (312) 750-6016 or by email at

Very truly yours,
Scott Becker

Scott Becker, JD, CPA
(312) 750-6016

Becker's ASC Review
is a publication of
ASC Communications, Inc.
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