By a 5-4 margin, the court upheld the 2010 Affordable Care Act that when fully enacted will subsidize insurance purchases for moderate-income individuals who aren't offered coverage through their employers, provide more generous Medicare benefits to seniors, prohibit insurance companies from denying coverage to people with pre-existing conditions and eliminate annual and lifetime caps on benefits.
The Supreme Court's opinion, penned by Chief Justice Roberts, is good news for M&A, industry experts said, because driving down costs through consolidation and coordination between providers will be one of the few avenues the industry has to offset the expense of covering and treating the influx of new people who will be insured. Key takeover targets are likely to be physician groups, specialty services such as radiology practices and emergency room managers, and community hospitals.
The court did create a question over how many new patients will be driven into the coverage because it struck down a provision that would have allowed the federal government to penalize states that refuse to expand their Medicaid rolls. The expansion was expected to make 15 million more people eligible for Medicaid, which currently covers only low-income families with children. The law aimed to open Medicaid to childless low-income adults but now it's unclear how many states will take that step.
M&A experts stressed that the impact on M&A should not be overstated. Many of the cost-saving initiatives authorized by the act, nearly all of which depend on some type of consolidation or coordination between healthcare providers, would continue even if the law were struck down.
"The general tendency on the provider side is toward consolidation as a way to control costs and the big trends would have happened regardless," said Robert Leibenluft, a partner in the healthcare practice at Hogan Lovells LLP. "Private plans are heading into things that help providers become more efficient, like accountable care organizations and vendors selling analytics. Supreme Court repeal might have stopped some things under the act that Medicare doesn't otherwise have authority to do, such as new ways of payment and that might have had a ripple effect on trends encouraging both vertical and horizontal integration. Those can now go full steam ahead."
"Healthcare M&A was going to continue on solid pace regardless of what the court's decision was going to be," added Paul Gomez, a senior associate at Paul Hastings LLP. "But this creates greater certainty in terms of the regulatory and statutory landscape. Because the upheld provisions guarantee that more people will have health insurance in this country, there will be some level of increased demand for services."
Gomez said the health insurance industry is already moving from the traditional fee-for-service model to ones encouraging and rewarding greater clinical coordination among various healthcare providers at different levels, but the court's ruling removes any doubt as to whether the regulatory apparatus the government is setting up to enable those methods will be implemented for Medicaid and Medicare patients.
Those payment models include accountable care organizations, which allow hospitals to merge or joint venture with other providers to coordinate better individual patient care; bundled payments, which call for providers to be reimbursed according to the expected costs of a patient's care; and value-based pricing, which calls for providers to be paid based on meeting metrics for quality of care, rather than simply the number of services they provide.
All of these new payment models will drive consolidation, Gomez said. "Providers have a better chance of hitting their numbers if they are integrated and part of the same system," he said.
Joel Greenberg, senior corporate partner at Kaye Scholer LLP, said provisions such as the prohibition on denying coverage for pre-existing conditions, the employer mandate and exchanges that allow individuals to buy coverage more affordable will be drivers of M&A or private equity investment, too. "More private money will be flowing into the system but that money comes with a lot of cost pressure because you have to assume the people coming will be looking for lower-cost options. People who can afford rich plans already have them," he said.
"We're going to see a lot of activity surrounding people who specialize in controlling the costs of medical care," Greenberg said. Businesses such as radiology providers can serve multiple hospitals much more cheaply than individual hospitals can on their own. Even emergency room services at community hospitals are targets for investment.
These kinds of businesses are perfect targets for PE firms. "They have the classic elements for private equity: identifiable opportunities with good management and cost structures that allow for expansion and can produce a lot of value."
Michael Loucks, a partner in the healthcare enforcement and litigation practice at Skadden, Arps, Slate, Meagher & Flom LLP, said the uncertainty over the number of new insureds and Medicaid patients coming into the system remains a question mark over the amount of dealmaking the law will create.
He predicted that many uninsured will look at the individual mandate just as Roberts did -- as a tax they can pay as the price for not obtaining insurance. Because the tax is much lower than obtaining coverage, many will choose to opt out. Also, because states have the option of forgoing Medicaid expansion, it's unlikely there will be as many new Medicaid patients as supporters of the law expected.
"We've shifted from the decision made in Congress to expand Medicaid to one where each of the 50 states gets to decide whether to expand Medicaid. This will play out over the next several years, so the number of extra people added to the insurance rolls is less certain," Loucks said.
Although GOP lawmakers have vowed to repeal the law if they take Congress and the White House in the November election, Leibenluft said there's little chance the law will be eliminated entirely even with a Republican takeover because Democrats in the Senate would still be able to stop repeal with a filibuster. "The law can't be easily repealed altogether," he said. "People in the industry will now begin to focus on implementation of the act."
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