ALDA & Associates International, Inc. Newsletter
2022 FALL EDITION
Features & Articles in this issue
- The Incursion of Private Equity into healthcare continues and is increasing--Is it a blessing or a curse? The jury may still be out even as the dollars continue to flow in.
- Have we reached the point where it is now time to protect the patients?
- ALDA Representative Engagements
- The ALDA Team
Breaking News
In this issue we look at the continuing inflow of private equity funds into various sectors of healthcare and the resulting consolidation and concentration of power amongst fewer participants. In our second article we look at the impact that these investments may have on patient care and whether it has finally reached a point where the patient needs to be protected.
A reminder about our Newsletter. Since we specialize in Healthcare, the feature article will always deal with healthcare. Its content will benefit all constituents-providers, insurers and patients so even though you may not work in healthcare you will benefit in knowing what is emerging which may affect your patient experience. The second article may also feature healthcare but may also focus on an aspect of business that will be of interest to all of our readers. Additionally, earlier editions of the Newsletter are archived on the website. Readers can find them by scrolling down to the bottom of the newsletter.
ALDA continues to add client engagements in the industry and is now working with a new drug development company to assist in refining their strategy, capital raising, getting their drug candidates through clinical trials and thus adding to their product pipeline and navigating the Food and Drug Administration. We have also been retained to provide financing assistance to two companies that are providing patient care, one of which is developing a paradigm shift in how stroke patients are treated. We have been retained by a company that builds and delivers highly usable websites, mobile applications, and social media experiences providing enterprise content management, data analytics, business intelligence, information management, and essential security services to government agencies and commercial customers.Our engagement is to assist management in their strategic planning that will permit the founders to monetize all or a portion of their equity investment. We continue to provide due diligence assistance to a healthcare institution as it evaluates additional alternate investment opportunities. Our new clients continue because we performed successful engagements for them in the past or are former colleagues looking for our significant expertise and experience.
Book News
- Essentials of Corporate and Capital Formation published by Wiley & Sons and authored by ALDA's Chief Executive Officer, David H. Fater, is available online and in bookstores as well as in a Kindle version.
Essentials of Corporate and Capital Formation
by David H. Fater
ISBN (13): 978-0-470-49656-5
ISBN (10): 0-470-49656-8
Cost: $39.95
Paperback: 224 pages
Brief Description: A simple and effective guide to the mechanics of finance and corporate structure.
- Explains ways to form a business and finance it
- Reveals how to avoid securities laws pitfalls
- Practical terms and examples of the necessary mechanics of finance and corporate structure
- Helps analyze the decision to "go public" and provides pointers on operating a public company
About ALDA:
ALDA & Associates International, Inc. is a business and financial consulting firm committed to assisting companies with:
- Management
- Capital Acquisition and Allocation
- Profit Maximization
We help physicians, scientists, entrepreneurs and managements change the world. Our experienced professionals are dedicated to helping clients unlock inherent value and create new value. The real-world experience of the ALDA team is leveraged for each client's unique circumstances, challenges, and people.
Among ALDA's hallmark services:
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EOM (Executive Outsourcing Model)
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ARS (ALDA Rapid Solutions)
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Financing Assistance
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Mergers and Acquisitions / Due Diligence / Post Merger
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Intellectual Property and Regulatory Affairs (FDA)
Our experienced professionals can show you all the right steps. For additional information on how we can help, please contact us by email at dfater@alda-associates.com or rcohen@alda-associates.com.
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The Incursion of Private Equity into healthcare continues and is increasing--Is it a blessing or a curse? The jury may still be out even as the dollars continue to flow in.
Over the past several years we have authored several articles concerning the increasing inflow of private equity funds into healthcare and raised questions as to whether that was a good thing or a bad thing. That debate still rages. In the first of two articles this quarter we will focus on the concentration of physician practices and in the second we will focus more on hospitals, Skilled Nursing Facilities and systems.
In the past, we observed that the preferred investments favored healthcare that had an element of “retail” associated with it such as dental, ophthalmology and urgent care centers. Amazon and CVS are stalking primary care clinics. Recently, the trend seems to be migrating to specialty areas such as orthopedics.
Private equity investment is currently an evolving force in orthopedics and can provide practices an advantage in the market, according to several physicians who recently were involved in the merger of several orthopedic management services organizations. Physicians involved in these transactions had definite opinions about private equity and their outlook for orthopedics. While private equity has successful roots in healthcare, private equity in orthopedics is currently in an early stage [again], and it will certainly continue to evolve and mature. (It had a failed beginning in the 1997-1999 timeframe with BMJ Medical Management, Specialty Care Networks and Omna Healthcare all imploding and Resurgens in Atlanta surviving with the author having personal experience with all those groups).
Resurgens may be a special case since in December 2021 Welsh, Carson, Anderson & Stowe (“WCAS”), a leading private equity firm announced the formation of a new venture focused on building the premier physician-owned orthopaedic platform in the country. Since its founding over 35 years ago, Resurgens Orthopaedics has grown into the largest orthopaedic group in Georgia, providing comprehensive specialty care and ancillary services addressing all musculoskeletal needs. Today, Resurgens Orthopaedics has nearly 100 physicians and approximately 50 advanced practice providers across 24 clinic locations serving nearly 800,000 patients annually in Atlanta, the Southeast and beyond. Resurgens Orthopaedics provides comprehensive operative and non-operative musculoskeletal care in a single location, from injury diagnosis and treatment to rehabilitation and imaging services. With its 100 physicians, Resurgens Orthopaedics provides specialized expertise and broad experience in the areas of sports medicine, joint replacement, neck and back surgery, foot and ankle surgery, shoulder and elbow surgery, non-operative spine care, hand surgery, arthroscopic surgery, epidural steroid injection, general orthopaedics and trauma care.
Recognizing that Resurgens may be a special case (and WCAS has had a successful track record at building national physician platforms), as these markets continue to consolidate amongst hospitals, healthcare systems and managed care organizations, it is essential that patients seeking high-quality, cost-effective care, and physicians striving to practice medicine in an independent, private practice setting, have choices. Some of these physicians believe private equity is good for the specialty because it allows physicians to really focus on what's important — practicing medicine and giving patients the best care possible. Private equity provides the theoretical advantage of having access to the capital that is needed to expand and having people with business training take care of managing the groups efficiently and growing the business. However, the core principles of physicians maintaining leadership, decision authority and equity ownership are sound only if they can be maintained which is not often the case as we have already seen with several instances.
Several physicians who have participated in smaller transactions believe that private equity is a great opportunity for orthopedics to really solidify its future. The practices compete against health systems and in some cases, managed care companies that are coming in and have deep pockets. They believe private equity is the way to solidify their future in the market and be able to grow with the capital that is needed. Healthcare is a business, and it becomes complicated when physicians try to practice medicine and also focus on growing the business in order to compete in the market. Private equity provides expertise and experience in the business side, which to the physicians may be a huge plus. BUT if the private equity group does not follow through with their promised expansion and provide for physician leadership, chaos will ensue and the group(s) will splinter and collapse, especially since in order to receive that upfront money from the private equity group the physicians in the practice had to reduce their total compensation. That is a real sore point amongst physicians.
Establishing value-based care is also very important but is a very expensive thing to try to do. It involves a large number of physicians and a larger geographical area to accomplish that which is where consolidation comes in and has been around for a long time. There are orthopedic groups around the country that maintain their individual autonomy but practice under one Taxpayer Identification Number to achieve certain benefits of size. They are just a “merger” of smaller groups and probably not as integrated as these larger groups plan on becoming. Consequently, these participating physicians see private equity continuing to grow in an effort to add strategic mass in order for them to take on risk and value-based contracts.
Other significant physician acquisitions this year included three by United Healthcare’s subsidiary Optum as they continue to aggregate physicians in their quest to become a one-stop shop. They have currently 63,000 physicians, which is roughly 6.7 percent of all U.S. physicians:
- Atrius Health, which employs 645 physicians and primary care providers, was acquired for $236 million in March. Although the acquisition came under scrutiny by the Massachusetts attorney general, the deal was confirmed in 2022.
- Kelsey-Seybold Clinic and its 500 physicians in April 2022 for $2 billion.
- Healthcare Associates of Texas from Webster Equity Partners for $300 million in June 2022.
The Private Equity investment will continue. On the cautionary side, the author has also been involved in recent valuations and transactions fueled by private equity groups that have already imploded underscoring the importance of preserving those core principles of physicians maintaining leadership, decision authority and equity ownership. As said at the beginning, the jury is still out.
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To explore ways in which we can provide assistance with your strategy or evaluate a potential investment from a private equity group or perform due diligence, please contact David H. Fater at dfater@alda-associates.com or Richard M. Cohen at rcohen@alda-associates.com
Have we reached the point where it is now time to protect the patients?
Our previous article focused on the private equity activity involving physicians and physician practices. Another whole sector in which private equity has played a major role is the facility part of healthcare-hospitals and nursing homes along with travel nurse companies and behavioral health programs. In addition to physician management, the author has also been involved as an operator with these activities as well.Earlier this year in his State of the Union address, President Biden expressed concern with the growing and troubling — trend of private equity ownership and operation of nursing homes and the inherent risk it presents to care of their residents. Between 2010 and 2019, such equity deals in health care nearly tripled in value, from $42 billion to $120 billion, totaling $750 billion over the last decade. That staggering number represents thousands of hospitals, nursing homes, travel nurse companies, behavioral health programs, and other health care settings in every state. As we well know the profit-making goals of private equity are, in many ways, at odds with the needs of patients and the rules of government-financed health care programs. In fact, since 2013, private equity-owned health care companies have paid more than $500 million to settle claims of overcharging government health care programs. Additionally, in an earlier edition of our newsletter we highlighted the fact that many private equity firms were requiring patients of acquired practices to agree to binding arbitration before they can receive care which is depriving those patients of a fundamental right.
Though there is always a profit motive when private investors acquire a company, private equity firms in the realm of health care should be viewed with perhaps a certain degree of skepticism. In this industry, the “product” at issue is a person’s health, not a computer or a bicycle pump. The business model of these companies— its goals, structure, and the operation of portfolio companies —combine to incentivize short-term profits at the expense of all other considerations. The result is that patients, communities, and the entire health care system can suffer.
Fortunately, the government, aided by whistleblowers, has an invaluable tool in the False Claims Act, which allows it to prosecute fraud and protect the interests of patients and taxpayers.
Private equity firms are asset managers that raise capital from institutional and accredited investors and use that capital to obtain significant, often controlling, equity interests in private operating companies. Using the influence granted by their equity interest to direct the major decisions of these companies, these firms seek to improve their financial condition and business prospects with the ultimate goal of selling the companies to the public through an IPO or to a strategic buyer at a profit that generates above-market returns to the firm and its investors.
A fundamental aspect of private equity is that, unlike traditional asset managers, they play active roles in the governance of their portfolio companies, a feature reflected in the considerable fees that private equity firms obtain from their investors. While equity-focused mutual funds have management fees that generally hover around 1% of assets under management, private equity funds commonly charge “2 and 20,” referring to a 2% management fee and 20% of profits above an agreed upon threshold. Investors pay these high fees because these firms do not merely identify companies in which to invest, but also “manage” the operations of those companies for their own financial benefit.
At least three additional attributes of the private equity business model are relevant to understanding the incentives that tilt these firms toward emphasizing short term profits:
- Private equity firms do not acquire portfolio companies for the long haul. The funds formed by private equity firms generally have a life span of five to seven years, meaning that from the time a private equity firm makes a new investment it is “on the clock” to improve the financial results of that company to make it attractive to a new buyer.
- Individuals employed by private equity firms are typically appointed to sit on the boards of portfolio companies and to fill in as, or hand pick, the CEO and other senior executives, giving the equity firm multiple means of directing key business strategies.
- Private equity investments often involve raising substantial amounts of debt financing to obtain a controlling interest in a company, secured by that company’s assets, which can leave the operating company with a significant debt burden on its cash flow that increases the risk of a future bankruptcy.
The combination of leveraged investments in companies with the one-sided performance fee that rewards private equity firms for profitable investments but does not necessarily penalize them (except through their performance statistics) for unprofitable ones creates a distorted structure that may result in selecting risky investments and to operate them in a risky fashion. Not all private equity firms operate in this manner and they do tend to be generally risk-averse. (There are always those “Vulture Funds” who take it to the extreme- but there are bad actors in any field).
When private equity buys a health care company, patients often pay the price. A 2021 study concluded that private equity ownership increases the short-term mortality of nursing home residents by 10%, which represents more than 20,000 lives lost during a 12-year period, likely due to lowered nursing-staff-to-resident ratios and the diversion of patient care funding to private equity owners. An investigation by USA Today and Newsy found that when private equity firms acquire an interest in dental practices treating Medicaid patients, often children, those practices tend to incentivize dentists to increase the volume of procedures, regardless of medical necessity.
Several effective strategies exist for deterring private equity from putting profits ahead of patients. First, the Securities and Exchange Commission can impose enhanced disclosure requirements on the investments and activities of private equity funds, a concept in which it has recently expressed interest. As Supreme Court Justice Louis Brandeis observed more than 100 years ago, “Sunlight is said to be the best of disinfectants.” Stronger disclosure requirements would increase transparency and bring more wrongdoing to light.
Second, the False Claims Act can be an effective tool in policing the actions of private equity firms that cause portfolio companies to submit false claims for payment to Medicare and Medicaid. It is increasingly being successfully used by the government and whistleblowers, who are often company insiders. This trend reflects the reality that private equity can both control and be complicit in fraudulent conduct.
Third, during the investigation phase of a false claims matter in which the health care company being targeted is owned by private equity, discovery directed at the private equity firm — and not just the health care company— should be encouraged. Due diligence memos and files, monthly
portfolio updates disseminated to investors, and business plans revealing the firm’s strategies and timeline for enhancing the value of the portfolio company, for example, could all be immensely useful to understanding the nature and scope of the fraud alleged and the private equity firm’s role in perpetuating and profiting from that fraud.
As private equity firms further encroach upon the health care industry, it is essential that their activity is closely monitored for fraud and patients’ best interests are protected and prioritized. But this holds true for anyone who operates a health care entity. The achievement of the Triple Aims of (a) improving the individual experience of care; (b) improving the health of populations; and (c) reducing the per capita costs of care for populations should remain first and foremost of any company’s mission with profitability sure to follow.
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To explore ways in which we can provide assistance with your strategy and organization, please contact David H. Fater at dfater@alda-associates.com or Richard M. Cohen at rcohen@alda-associates.com
Representative Engagements
- Advisor to three drug development companies for raising capital, designing and implementing clinical trials and interfacing with the FDA.
- Initiated and developed a de novo Accountable Care Organization to participate in the Medicare Shared Savings Program which grew to over 250 physicians over three years which successfully generated savings.
- Financial advisor to large physician practice in connection with a potential acquisition transaction where engagement includes determination of strategic and fair value and assisting in negotiations for closing the acquisition and in post acquisition integration.
- Review and in-depth analysis of new Medicare Reimbursement rules for subsidiary of Fortune 50 insurance company and assistance in developing a business model enabling the capture of a new revenue stream for both physician practices and affiliated providers.
- Acquisition due diligence and integration assistance for a public healthcare staffing company involved in numerous acquisitions. Retained by parent company to manage acquired company for 22 weeks through ALDA developed integration plan.
- Turnaround assistance for a near bankrupt client company, including tax and financial restructuring, and ultimate sale at a significant cash price.
- Leadership of development of client company's strategic plan for the next decade and assistance in repositioning the company.
- Determination of strategic value of a client company, packaging for sale and assisting in negotiations.
- Providing the entire management team for several life science and healthcare companies from early stage through obtaining additional patent protection, guiding clinical development plans, navigating the pathway through the FDA, establishing the manufacturing processes, initiating commercial sales and eventually transforming the Company into a publicly traded Company.
- Determination of strategic implications of a line of business with weak performance; development of strategies to maximize profitability contribution.
- Turnaround assistance for a troubled venture-backed company, including raising additional debt and equity capital.
- Acquisition and financing assistance for a public, international railroad in connection with a $300 million cross-border acquisition and refinancing.
Our experienced professionals are dedicated to helping clients unlock inherent value and create new value.
The ALDA Team includes, among others:
David H. Fater - Chief Executive Officer
Strategy, capital markets, restructuring, and mergers and acquisitions experience with public healthcare companies focused on physician management, rural healthcare, nursing homes, HMO's, diagnostic imaging and medical devices. Deeply involved in the implementation of the Affordable Care Act with Accountable Care Organizations, Independent Practice Associations and Management Services Organizations.
Richard M. Cohen - Senior Operations and Business Development Executive
Healthcare operations and worldwide sourcing experience. Skilled in healthcare (physician management, clinical trials, medical and patient process flow, diagnostic imaging and life science) operations as well as in issues dealing with importing, exporting and manufacturing operations in South America, Far East and Europe.
Thomas J. Bohannon - Senior Financial Executive
Accomplished, creative CPA, outstanding analytical and technical abilities. Has experience for over 40 years in public accounting and private industry including nursing homes, medical device companies, hospitals, not-for-profits, retail, manufacturing, import/export and natural resources.
R. Brent Miller, Ph.D. Senior Research Executive
Focused on advancing Chemistry, Manufacture, and Controls (CMC) activities of small molecules from discovery through development. with more than 30 years of drug development experience. working with start-ups, mid-size, and large pharma companies. Throughout this experience, he has led a wide variety of operational departments, including Technical Strategic Alliances & Due Diligence, Project Management Office, Pharmaceutical Sciences (Formulation Development/Analytical Development), Bioanalytical Development, Quality Control and Stability. .
A. Ronald Turner - Senior Healthcare Executive
Senior healthcare industry executive with strong entrepreneurial focus including CEO and COO positions with start-up hospital companies and a publicly-traded hospital company. Extensive and successful operations experience for more than 50 hospitals and 9 nursing homes, and senior reimbursement experience for a major publicly-traded hospital company and a national accounting firm. Experienced in mergers and acquisitions, led operational turnarounds and debt restructurings that created significant value.
Mark W. Caton – Senior Healthcare Executive
Senior hospital executive with over 30 years experience in operating not-for-profit and investor-owned rural/community hospitals as CEO or COO, and Regional COO with several national hospital companies. Skilled in strategic planning and business development, operations management, revenue cycle management, medical staff development, and quality/resource management.
Daniel N. Weiss, M.D., F.A.C.C. - Chief Medical Officer
Medical devices and healthcare practice experience, engaged in a private medical electrophysiology practice where he performs numerous invasive cardiac procedures and has served as a consultant for several Fortune 500 Medical Device Companies including Philips, Boston Scientific/Guidant, St. Jude and Medtronic, as well as for several medical device and drug start-up companies.
David Bott - Senior Information Technology Executive
Systems and network support solutions experience, proviedes analyis of strategic business needs and assessment of business models and their integration with technology.
Santiago Guzman - International Executive
Experienced in new project development for companies in a variety of industries from start-up to Fortune 500. Client relations management, fluent in English and Spanish. Skilled facilitator for introductions with influential leaders in South America including those in the health care industry.
With offices in:
- Delray Beach/Boca Raton, FL
- Atlanta
- New York
- Quito, Ecuador
For additional information, please contact:
David H. Fater, Chief Executive Officer
ALDA & Associates International, Inc.
4772 N Citation Drive Suite 103
Delray Beach, FL 33445
(877) 845-4657
dfater@alda-associates.com