Companies and law enforcement agencies around the world have been left scrambling after the world’s most prolific ransomware attack hit over 500,000 computers in 150 countries over a span of only 4 days. The ransomware – called WannaCry, WCry, WannaCrypt, or WannaDecryptor – infects vulnerable computers and encrypts all of the data. The owner or user of the computer is then faced with an ominous screen, displaying a countdown timer and demand that a ransom of $300 be paid in bitcoin before the owner can regain access to the encrypted data. The price demanded increases over time until the end of the countdown, when the files are permanently destroyed. To date, the total amount of ransom paid by companies is reported to be less than $60,000, indicating that companies are opting to let their files be destroyed and to rely instead on backups rather than pay the attackers. Nevertheless, the total disruption costs to businesses is expected to range from the hundreds of millions to the billions of dollars.

Last fall, we warned our clients that ransomware – a newly popular form of cyberattack – would require a different approach to cybersecurity and to incident recovery. The urgency of that warning is now clear, as the WannaCry attack is unprecedented in its size and in the speed with which it spread. While entities in North America appear to have suffered minimal damage thus far, and while the particular ransomware variant involved in last week’s incidents has been largely neutralized, even small changes made to the malware code could reactivate it and rapidly deploy a new series of attacks. We are once again urging our clients to proactively prepare, consult with cybersecurity experts, and develop comprehensive cyber incident response plans which contemplate a variety of possible attacks

What is ransomware?

Ransomware is malware that disables systems or encrypts data, critical system files and applications and demands a payment to re-enable or unlock them. There are two kinds of ransomware: “Locker,” which leaves data untouched but keeps owners from accessing it on their devices; and “Crypto-Ransomware” which leaves users with access to their computers but encrypts their files and applications; once the ransom is paid, the hackers send a decryption key.

How does ransomware get onto companies’ systems?

Ransomware may be downloaded in a variety of ways: via “phishing” schemes, in which employees are induced to click on harmful links or download harmful files; by downloading infected apps; or through compromised ads (known as “malvertising”) on mainstream sites. Hackers are increasingly sophisticated and creative in using a wide variety of means to introduce ransomware onto computers and mobile devices.

Unlike typical ransomware, there is no evidence that WannaCry is being distributed via phishing schemes, a spam campaign, or through compromised ads. Instead, WannaCry propagates through a self-spreading worm, a form of attack popularized more than a decade ago but rarely seen since.

How did the WannaCry attack spread?

WannaCry ransomware exploits a flaw in the Windows operating system. Networks of computers, are particularly vulnerable because the ransomware is spread through standard file sharing technology used by PCs. While Microsoft issued a patch for the flaw in March for currently supported operating systems, unsupported Microsoft Windows operating systems, including Windows XP – widely found in in many of the foreign countries hardest-hit by the WannaCry attack – continued to be at risk. Microsoft has since released free patches for its unsupported systems.

How do I protect my company from a ransomware attack?

• Regardless of your operating system, you should install any and all available security updates and patches immediately.
• If you are running an unsupported operating system – STOP! Upgrade all computers to a supported system immediately.
• Never run unlicensed software on your system, as it will not receive the necessary patches or automatic updates.
• Back up all of your critical applications and data – and test the backup systems to be sure they can be restored and work properly before you have an attack. Ensure backups are not connected to the computers and networks they are backing up.
• Ensure anti-virus and anti-malware solutions are set to automatically conduct regular scans.
• Make sure your system includes robust firewalls and your Intrusion Detection/Prevention Systems that are up to date and able to receive updates and patches.
• Whenever possible, keep data encrypted, whether in transit or stationary. While encryption will not prevent a ransomware attack, it will protect your data if attackers choose to export it or attempt to use it for financial gain.
• Restrict access to sensitive files and ensure personnel only can access the data necessary to perform their jobs.
• Ensure all employees are aware of the threats and methods of attack and are following sound cybersecurity policies:
  • Train – and remind — your employees about the dangers of “phishing” attacks and how to report any attempted attacks
  • Ensure employees verify the identity of the sender of any links and attachments
• Keep a copy of your emergency response plan – including phone numbers of key contacts – somewhere other than on your company’s systems.

What should I do if my company suffers a ransomware attack?

Involve your outside counsel so that your decision-making process and the direction of any investigation can be protected by the attorney-client privilege. You then have several options:

1. Pay the ransom. The FBI does not support paying ransom to the adversary, especially as there is ultimately no guarantee that system access will be restored;
2. If you have backups and redundancies, you may be able to restore your systems without paying the ransom;
3. Call in a security/forensic company for assistance in freeing your systems;
4. Alert a local FBI field office to report the event and request assistance.

If I choose to pay the ransom, how and where do I get bitcoin? How long does it take?

Do not follow the links suggested by the ransomware without the assistance of your IT department as they may lead to software that will further compromise your computers and files. In most cases, the ransomware will require payment by bitcoin because a payment by bitcoin cannot be reversed, and because it will be very difficult if not impossible for anyone to identify the recipient. If your law firm has experience responding to ransomware, then your law firm can help you with the logistics of buying and sending bitcoin.

You will need to open an account with reputable bitcoin exchange and purchase sufficient bitcoin. The exchange company will need you to link your bank account with the bitcoin wallet provided to you so that you can make an ACH transfer of dollars to your account. The exchange company will need to identify you to comply with its AntiMoney Laundering and Know Your Customer (AML/KYC) compliance procedures. How much information the company will need and how long this will take depends on the amount of the bitcoin you need to purchase, and the speed of the exchange company’s intake process. The exchange company will often require two or three days to pass after the ACH payment is initiated before exchanging the dollars sent for bitcoin. Once the bitcoin is in the bitcoin wallet associated with your account, you will be able to send it to any other wallet, anywhere in the world, nearly instantaneously. If you accidently send it to an address other than the ransomware perpetrator’s, you will have no way to reverse or recover the bitcoin.

Will my cyber insurance cover a ransomware attack?

In general, the largest expenses associated with a ransomware attack arise out of loss of operations. Cyber-insurance may cover the business interruption, although ransom amounts to date have generally been below most policies’ retention threshold. Also, the vector by which the ransomware entered your system may affect how your cyber-insurance treats the attack. Before relying or counting on its cyber-insurance, a company should have a clear understanding what type of events are expressly covered or excluded.

Remember, the side effects of the WannaCry attack are likely far from over. Companies must be vigilant, keeping an eye out for social engineering schemes (i.e. where an individual calls a business claiming to be from Microsoft and offering support if given access to its servers) and variant ransomware created by other attackers and used to exploit the WannaCry attack separately and independently.

Helpful Links:
Microsoft Update Catalog
FBI Ransomware Handout
Fact Sheet: Ransomware and HIPPA

Genesis Healthcare – The largest U.S. skilled nursing facility (SNF) provider, which also is the largest provider of contracted rehabilitation services, had an interesting story to tell. It reminded me of the endless road trip, where you are trying to appropriately fill the time on the way to your destination, while the kids in the back seat keep asking “Are we there yet?”  For Genesis and, perhaps for the SNF sector, the rainbow at the end of the road is the U.S. demographic pot of golden age seniors.   With Genesis average SNF bed occupancy at approximately 88% over the last 3 years (higher according to Genesis than two large competitors Ensign and Kindred), we continue to see less utilization of SNFs then existing capacity, and beds continue to be taken out of operation. BUT, wait until 2025, when the Baby Boom has fully actualized and when according to Genesis predictions, demand for U.S. SNF beds will outstrip existing capacity.

Keep in mind that the average SNF facility in the U.S. now is 40 years old. And, given current Medicaid reimbursement being unable to return in a reasonable investment horizon the capital expenditure required to build new facilities that are code and regulatory compliant, the Genesis thesis is that, absent government intervention, additional SNF capacity will not be added.  So, as we get toward 2025, the supply/demand curve inverts and SNFs become a seller’s market for SNF operators.  Nice ending to the story for patient investors, but what fills the gap between now and 2025?

Other lines of ancillary business is Genesis’ answer.  They talked about their Genesis Physician Services (GPS) business, which is a SNFist business and also operates a SNF focused MSSP ACO. GPS in their ACO manages $800 million of Medicare spend for 15,000 Medicare beneficiaries. In Genesis’ view, an ACO is essentially HMO lite, without the risk based capital requirements and the higher regulatory burdens.  Plus, the attribution of ACO lives potentially allows for faster member build than in a Medicare Institutional Special Needs Plan (ISNP). So, in the question of ACO versus ISNP, ACO wins in their view.  ISNPs are an interesting segment, but there certainly are enough opportunities in the market for post-acute ACO’s and ISNPs both to be tested.

Genesis also touted their contracted rehabilitation services line, Genesis Rehab Services, which provides therapy services in the community, and their expansion into China with hospitals, rehabilitation facilities and other related offerings.  So, tighter operations, renegotiation of rent and pay down of debt, together with the upside on the ancillary business lines, may be able to cross the chasm until the roaring 20’s arrive (that’s 2020s, not the 1920s).

Finally, what would be a nice Christmas present for the SNF sector?  If CMS would allow concurrent or group therapy sessions, that could significantly reduce effective operating costs and generate more margin to tide them over. Will this happen – who knows? But the same effect can be emulated if enough patients are included into bundled payment programs where more freedom of methodology is allowed within the bundle.  So, look for innovative SNF operators to migrate more toward bundled payment programs where possible.

Surgery Partners – Put together with the 2011 Novamed acquisition and the 2014 Symbion acquisition, Surgery Partners now operates 99 ambulatory surgery centers (ASCs), 5 surgical hospitals, 53 physician practices and 8 urgent care centers.  On this last day of the conference, Surgery Partners still drew a good audience, possibly in part because of the focus this week on the ASC sector with the OptumCare acquisition of SCA.  72% of Surgery Partners’ centers are multi-specialty, with the majority of the centers having a controlling interest held by Surgery Partners.

Surgery Partners’ “secret recipe” is to build ancillary services surrounding their centers and have ancillary earnings retained by Surgery Partners. Currently, ancillary services are 14% of their business mix (27% before the Symbion deal), and they see a window to maximize revenue and profitability if they also control and provide for their centers anesthesia, imaging, lab, DME and specialty pharmacy.  In their Tampa Bay, Florida market where this strategy has been implemented, ancillary EBITDA as a percentage of total EBITDA is approximately 47% in 2016, up by 5 points from 2012.  And with this strategy being accomplished primarily through acquisitions in each local market of smaller providers, they report that their blended acquisition multiple across all transaction types (including ASC purchases) is less than 6X.  An interesting ancillary strategy that when more mature, and if replicating the Tampa results, could instead be called co-primary, rather than ancillary.

Quorum Health – Focused primarily on the rural markets, Quorum shared some interesting statistics and noted that in some markets they had a 42% market share.  This number in an urban market would be a cause for celebration and champagne popping, but in a rural market it indicates that patients are bypassing the local rural hospital to go to an urban hospital. Why would they do that?  First, if the local hospital has safety or quality issues, that will quickly drive patients to other alternatives.  Quorum has been copying the playbook for Lifepoint and Triad and is working to improve on safety and quality. But the second is more interesting – patients will move on if they cannot obtain the necessary services at the local hospital.  The lack of specialists in certain areas and the closure of intensive care units at certain Quorum hospitals was causing loss of patient volume across a broader range of service needs.  Quorum has reopened their ICUs and is filling in the gaps with physician recruiting, to good effect.  They also see a larger opportunity for behavioral health units, as many rural areas are heavily underserved for psychiatric services.

The Old:  Sitting in the Community Health Systems (CHS) presentation and listening to Wade Smith talk about the slimming down of CHS through the 20+ sales completed or in process, the audience could have heard this speech (with a few exceptions about the pending ACA changes) and not known if it was 2006 or 2016.  Very traditional hospital system presentation – admissions and revenue growth (or, as appropriate, losses), hospital market share, number of surgeries, physician recruiting, management of debt and expenses, etc.  All appropriate, but a marked contrast to many of the other hospital presentations this week with their emphasis on moving to risk, population health management, apps and patient engagement and brand.

One interesting valuation statistic from CHS – the average EBITDA multiple for their divested hospital transactions was 10x.  This is a high multiple for troubled hospital properties, but Mr. Smith noted that they had a surfeit of bidders for their hospital properties including other nonprofit hospital systems and private equity funds.

The New: Two very different presentations today focused more on the “new” aspects of healthcare – IBM Watson Health and Evolent Health.

• IBM Watson Health – I really, really wanted to enjoy the IBM Watson Health presentation, just like the other several hundred people in the most overcrowded room I saw all week (other than for Vice President Biden’s speech on new cancer initiatives).  We were all ready to be wowed – bring on the technology, the magic that will fix healthcare’s problems and give us all hope (Lord knows we need it this month).  And, seventeen minutes later when the presenter, Deborah DiSanzo, the General Manager of IBM Watson Health, concluded early on her supposedly thirty minute talk, we all were feeling a little shortchanged. Actually, no, a lot shortchanged. Not one single reveal, no magic tricks, not even anything sexy that we could lord over others who hadn’t made it into the room. Nothing actionable, nothing investable. Just a high level overview of the work that IBM Watson is doing in multiple spheres to grind out the necessary steps to get to the point where they really can fully transform medicine.

And yet, that’s ok. It has taken me several hours to analyze the presentation – and my emotional reaction – fully, but I now am at peace.  Here’s why.  Ms. DiSanzo correctly took the audience through the explosion of data that has started and will continue to grow in healthcare.  She also noted the existing shortage of clinicians, which we all know will continue absent policy, reimbursement and taxation changes by the new administration incentivizing the training of significantly more clinicians.  As an aside, I was talking a couple of weeks ago to one of the nation’s leading geriatricians, and he was bemoaning the fact that they can’t annually fill all of their training slots.  Students don’t want to become geriatricians even in the face of the Baby Boom demographic promising almost endless work throughout most of their upcoming career. It’s too hard and doesn’t pay enough, and that bottom line hasn’t changed for years, leaving this nation under-resourced and unprepared for dealing with the next twenty years of the Baby Boom.  But back to IBM Watson.  Ms. DiSanzo also correctly noted the impact of technology and consumerism through the proliferation of smartphones, apps and data focused initiatives.

Taken together, IBM Watson believes this presents a total addressable market (TAM) of approximately $360 billion.  To allude to our incoming President, that’s huge.  And IBM Watson has started the hard work of laying the groundwork and creating partnerships in multiple verticals. Their current initiatives can be segmented into: 1) value based care; 2) oncology and genomics; 3) life sciences; 4) imaging; and 5) government programs.  And IBM Watson has worked hard with acquisitions and other initiatives to amass data resources, with a database now that includes over 200 million claims, 30 billion images, 40 million research papers and abstracts, genomics data and data about the social determinants of health, among others.  Ms. DiSanzo said that IBM Watson already has analyzed data from 44% of all Medicare beneficiaries.

Here’s one example that was interesting.  Watson was working with Barrow Neurological Institute of Arizona on drug discovery for ALS (Lou Gehrig’s disease).  Over the course of some months, Watson analyzed all (that’s right, all) available data on ALS in an attempt to help the approximately 6,000 people per year diagnosed with ALS.  IBM Watson then ranked 1500 genes it studied in the descending order of probable association with ALS. Barrow looked at the top 10 identified by IBM Watson, of which 8 affected ALS and 5 never before had been identified as being related to ALS.   Clearly, drug discovery can be facilitated by machine learning of the type undertaken by IBM, as can the matching of specific cancers to appropriate drugs or clinical trials.  IBM Watson also is working to improve and provide analytics to healthcare providers, with emphasis areas on breast cancer and cardiovascular disease.

And why am I now at peace with the rather uninspiring and abbreviated presentation.  Because there is no such thing as an “overnight success.” We in healthcare understand it is about the details – all of them – and how the game of inches is won or lost every day in healthcare. It is clear that IBM Watson has rolled up their sleeves and started the hard and inglorious work of making a difference.  And if IBM Watson can bring machine learning and other skills to support the healthcare system in connecting the details and making sure that we all see both the little and the big picture at the same time, the healthcare system, including the patients, providers, payors and investors, all will benefit.  And we need more companies doing the same and similar initiatives to fully address the healthcare industry’s needs.

• Evolent Health: Evolent’s presentation sounded the same notes as my Day 1 and Day 2 blog posts.
  • The U.S. must move more toward risk if we are to avoid breaking the Medicare budget.
  • Provider margins cannot be maintained in the fee for service environment, but can be maintained or improved in a risk-based reimbursement environment.
  • Medicare Advantage is a large opportunity in the next five years.
  • Providers have a choice of moving to delegated risk (or a similar structure) or setting up and owning a health plan. Without either approach, it will be difficult for providers to remain financially sound and/or independent.

Evolent clearly has developed a pipeline for growth, with 2.5 million members currently involved in Evolent projects and double or triple digit new clients in the pipeline for the next two years or so.  This all fits well with our note from Day 1 about the opportunity in Medicare Advantage, but interestingly Evolent also is seeing their services and role being requested for both “direct to employer” self-insured opportunities and for managed Medicaid.  This same market need also is being seen by other healthcare organizations who are looking to partner with or vend services or products to newly formed or growing health plans. The next few years will likely see continuing maturation of such offerings, along with some successes and some crashes as we see the results of this next market cycle.

David Feinberg of Geisinger (approximately 2 years now at Geisinger after his earlier stint at UCLA and UC Health) shared with the conference attendees several interesting initiatives that provide a more holistic approach. First, as to genetics, Geisinger is starting to do full DNA sequencing on some of its patients, with about 150,000 patients (out of a one million target) completed.  Geisinger is finding about 3-4% of the sequenced patients with medically actionable results that can be addressed and benefit the patient.  Their protocol after the sequencing results are available is to send the results to the patient’s primary care physician (PCP) along with an asynchronous medical education opportunity for the PCP to refresh on the relevant condition.  Five days after the PCP is alerted, the patient is notified that there was a positive result and invited to meet with the PCP and a genetic counselor to begin to plan management and treatment as needed.  Interestingly, Geisinger is finding that for each positive result found, they are receiving approximately six new patients – people who have heard about the results of the genetic testing and want to be included in this approach.  A 3-4% actionable percentage can be significant in controlling healthcare costs, but is this realistic in a different market? Geisinger has both a health plan and healthcare delivery system, plus they are not subject to quite the same level of competition as we can find in other urban markets.  But, in evaluating this, keep in mind the July 2016 Department of Health and Human Services finding that approximately 5% of the U.S. population accounts for almost 50% of healthcare spending.  So, in that light, is an investment in genome sequencing an investment in the “public commons” of healthcare that will benefit everyone?

As to the “nurture” side of the health equation, Geisinger has launched Springboard Health to address the social determinants of health.  With an initial effort in the Scranton, Pennsylvania area, selected participants are provided with food to both address food insecurity and to use the approach of “food as medicine” through a fresh food pharmacy.  Participants receive healthy food for themselves and their family, such as vegetables and fruits for diabetic patients that were not purchasing such themselves.  Initial results are indicating that the food initiatives can be powerful, with diabetic level improvements potentially resulting in at least $8,000 per year healthcare cost reductions for health plan participants. Other aspects of the Springboard approach include genome sequencing (as noted above), informatics and big data initiatives, and the use of technology to better connect patients to social services offerings.  While the initial launch is small in sample size, it will be interesting to watch the results.

Of course, this type of initiative works best in an integrated healthcare environment, especially where there is an aligned health plan and healthcare delivery system, such as we find with Geisinger and Kaiser, but also what many hospital systems around the country are targeting as they launch or grow provider-sponsored health plans.

Medicare Advantage – Growth in Plans:  The Medicare Advantage field will become more crowded in the next two to three years.  In discussions at the conference, there is strong interest in commencing or expanding Medicare Advantage health plan business. A number of health systems and other healthcare organizations are looking to start or expand provider sponsored health plans.  Centene noted that they had made initial filings to commence Medicare Advantage health plans in eleven new states.  Molina’s purchase transaction with Aetna and Humana for Medicare Advantage contracts in 21 states is pending the outcome of the antitrust trial. We also note the increasing number of support organizations who can provide partial or more complete administrative services and support to Medicare Advantage plans, including the new launch by Blue Cross of Michigan and existing offerings from Lumeris, Evolent and Alignment, among others.  We expect to see much more activity in Medicare Advantage in the next three years, and it is welcome as we move toward almost doubling of the eligible senior population as the Baby Boomers continue to age in.

Physician Compensation: As part of the continuing move toward risk, shared savings and population health management, we are seeing reevaluation and adjustment of physician compensation models.  This is a topic by itself for further exploration, but many hospital systems with employed physician bases are now considering how best to align and incentivize physicians.  It is not an easy question (especially when connected to the question of operating faculty practice plans at academic medical centers or physician networks of independent community physicians), but it is critical to the success of the other initiatives under way.  Presence Health in Chicago noted their desire to double their medical group in the next three years while engaging fully their associates.  Geisinger has launched a new physician compensation model that pegs a base of 50^th percentile compensation for all of their employed physicians, which then can vary upward based upon productivity and patient satisfaction.  This effort in part was intended to address physician turnover issues. An interesting side note – Geisinger now is putting on their website their physician rankings and patient reviews, including the negative reviews.  Effectively, this puts the patient into a “secret shopper” role and hopefully results in a better patient experience.  Will this increase or decrease physician turnover, satisfaction and productivity?  It will be interesting to watch.

Branding:  A consistent theme with hospital systems was the importance of branding and brand investment. We heard over and over again the millions of dollars being invested into brand.  This obviously goes hand in hand with expansion, attempts to ultimately lower the cost of patient acquisition and increasing competition.  It’s a lot of dollars being spent – we would like to see whether there will be quantification of the results obtained. That said, healthcare is one of the most underbranded industries.  In almost any other industry, you can easily name 2-5 leading brands that are national and respected. That hasn’t happened yet at a national scale in healthcare, but we certainly are seeing the stage being set for that.

Off to Day 3!

As usual, the conference provides a keen opportunity to take the pulse of  the healthcare sectors, and we wanted to share with you some of the interesting points from Day One of the conference:

Medicare Advantage:  One of the main themes of the conference was Medicare Advantage as an important target line of business.  We heard that from hospital systems, from traditional Medicaid health plans (such as Centene and Molina) and from Blues plans. Blue Cross Blue Shield of Michigan announced their launch yesterday of an end-to-end administrative support solution for health plans looking to operate a Medicare Advantage plan. Everyone’s consensus in the hallways was that Medicare Advantage was the least likely to be changed or hurt by the new Congress and administration, and that population health management and coordinated care works in Medicare Advantage.

Going for Scale: In the face of uncertainty, healthcare companies are reaching for scale.  We saw growth as a key objective across sectors, with many acquisitions and joint ventures being featured in conference presentations. Expect accelerated consolidation to continue in 2017.  We also believe that we will continue to see sophisticated joint ventures to be completed in multiple lines of business and geographies, both for market share and to reduce integration risk.

Telehealth is Now:  Many hospital systems have started providing meaningful amounts of care through telehealth and other web-based modalities.  Kaiser’s presentation noted that, of the approximately 100 million annual primary care interactions, an astonishing 52% of them were virtual in the past year.  Kaiser reported 22 million e-visits with doctors.  And workflows are being improved with technology. Advocate now has one million patients in disease registries which are updated daily.  Registry changes trigger electronic alerts to providers and workflows to address patient needs.

The Effect of ACA Repeal:  Several institutions characterized ACA as providing “access to the front door” of American healthcare.  Surprisingly, multiple health systems announced that they were financially neutral on the possible repeal and replacement of the ACA, noting that the benefits of the uninsured now having coverage under the ACA has been to some significant degree reduced or counterbalanced by reimbursement cuts.  To prepare for ACA, health systems are primarily not focusing on possible change, but on improving current operations and reducing expenses. This approach works well not only in the event of political change, but it also positions systems better longer term for population health management and coordinated care.

Rounding Out the Ambulatory Care Network:  Conference attendees were buzzing about the acquisition of ambulatory surgery center operator Surgical Care Affiliates at a valuation of $2.3 billion by UnitedHealth’s OptumCare, complementing the Optum physician network and its earlier acquisition of urgent care center operator MedExpress.  Following the first wave of physician group acquisitions, many strategically minded companies are completing more robust ambulatory care networks to create access points and lower-cost solutions that will support risk and value-based contracts.  SCA also brings hospital partnerships with Texas Health Resources, Advocate Health and Indiana University Health.  This also can provide additional customers and distribution channels for Optum’s technology and service line offerings.  Similarly, in HCA’s conference presentation, they noted HCA’s recent acquisitions of urgent care centers and technology companies to drive efficiency.   Envision also noted AmSurg’s ambulatory surgery centers as a benefit of their transaction.

Mental Health:    Kaiser is working on predictive modeling for mental health, so as to create outreach when mental health crises in members is likely to occur.  They also are beginning an advertising campaign to help destigmatize mental health. All useful, but still no clear solutions for the mental health illness burden our country faces. Time for a moon shot on depression and anxiety?

We’re Not That Different:  Dr. Mario Molina of Molina Healthcare gave an excellent presentation about Molina’s Medicaid and Medicare business.  An interesting statistic he cited was that half of all Medicare beneficiaries in the U.S. have an annual income below $24,000. Both Dr. Molina and Michael Neidorff commented about the large number of U.S. citizens below 400% of the U.S. poverty level who are obtaining healthcare through Medicare, Medicaid and the exchanges.  The other interesting comment from Neidorff was that the potentially contemplated shift of Medicaid to state block grants could hurt states growing in population (and would likely be acceptable for states with stable or shrinking population).

Getting It Done for the Right Price:  Here’s a shout out for Shawn Leavitt of Comcast who has responsibility for the healthcare benefits and cost for Comcast’s approximately 150,000 employees. He and his team have recontracted, squeezed out waste and decreased total healthcare cost, even with an increasing workforce and a better benefit package.  They have increased primary care physician involvement and decreased unneeded emergency room, inpatient and specialty usage. As he put it, a health plan has to do 5 Things Right: provide the right care in the right setting provided by the right providers at the right time at the right price.   They are a good example for other employers as to what can now be done using technology and provider alignment strategies.

Getting Closer to Patients/Consumerism: Consumerism continued to be one of the top three trends discussed at the conference, but with some interesting twists.  Northwell Health developed their own customer relationship management software system to better manage their lifelong relationship with patients.  Many hospital systems have had great success in adoption by patients of apps to help with patient navigation/access, education and other workflows. Advocate was positive in their discussion of the Walgreens retail clinics now operated by Advocate.  Consumerism has moved from possibility to reality, and execution is now the key.

Maximizing Healthy Life: Moving from episodic care to life care was another theme shared by Kaiser, but we were fascinated by Geisinger’s announcement of Springboard Health (more on that tomorrow in my Day 2 Notes).

Importantly, the Federal Circuit did not go so far as to recognize a blanket “supplier exception” to what would otherwise constitute a commercial sale in MedCo.  The focus on the inquiry rests upon the character of the transaction, not the identity of the participants.  The court identified several “significant” factors to be evaluated by courts in determining whether a transaction is a commercial sale or offer for sale under § 102(b), including: (1) whether transaction is between a supplier and inventor; (2) whether the inventor has transferred titled to the supplier; (3) whether the transaction is confidential (e.g., whether the supplier has authority to market or release the product, or to disclose the process of manufacturing); and (4) whether the transaction is a sale of a product at full market value or a “pre-commercial investment.”[2]

In MedCo, the en banc Federal Circuit affirmed the district court’s determination that The Medicines Company’s (“MedCo”) use of contract manufacturing services did not invalidate U.S. Patent Nos. 7,582,727 and 7,598,343 (the “patents-in-suit”) under the on-sale bar.  In so holding, the court vacated a previous Federal Circuit panel’s decision that MedCo’s asserted claims were invalid under § 102(b) based on transactions between MedCo (the Patentee) and a third-party manufacturing company, Ben Venue Laboratories (“BVL”), hired to manufacture batches of MedCo’s blood thinner drug Angiomax (bivalirudin).  The case was ultimately remanded to the original panel for consideration of other issues not reached in light of its invalidity finding.

MedCo, a specialty pharmaceutical company, did not own or operate its own drug manufacturing facilities.  Rather, like many pharmaceutical companies, MedCo relied on CMOs such as BVL to produce commercial quantities of its drugs.  During development and testing of Angiomax, MedCo developed a new compounding process that it claimed in the patents-in-suit.  MedCo filed the patent applications directed to the compounding process on July 27, 2008—making July 27, 2007 the critical date for § 102(b) purposes.

In late 2006, MedCo contracted with BVL to produce three “validation batches” of its drug according to the new compounding process.  Each batch manufactured by BVL was commercially saleable per the terms of the parties’ manufacturing protocol and had a collective market value of well over $20 million.  After manufacture, the drugs were placed in quarantine pending FDA approval.  It was not until August 2007 that the drugs were approved and saleable.

The lawsuit arose when Hospira submitted two abbreviated new drug applications (ANDAs) that sought FDA approval for generic versions of MedCo’s Angiomax.   MedCo sued Hospira alleging that its ANDA filings infringed the product-by-process claims of the patents-in-suit, Hospira asserted that MedCo’s patents were invalid, in part because the on-sale bar was triggered when MedCo paid BVL to manufacture the drug prior to the July 27, 2007 critical date.  Hospira argued that BVL’s sale of batches of the manufactured drug to MedCo was sufficient to trigger § 102(b), and alternatively that the bar was triggered because the transaction provided MedCo a commercial benefit (i.e., a stockpile of the drug for future sale) to the inventor.

The district court disagreed.  After a bench trial, the court found that the transactions between MedCo and BVL did not constitute a commercial sale because the transactions were sales of manufacturing services only; title to the manufactured drugs always resided with MedCo.  The district court also concluded that the transaction did not implicate § 102(b) because MedCo derived no commercial profit prior to the critical date, since the batches were for “validation purposes,” characterizing the batches as experimental rather than commercial.

On appeal, a Federal Circuit panel held that the district court erred in concluding that the transactions were not commercial activity within the meaning of § 102(b).[3]  The panel concluded that any commercial exploitation prior to the critical date triggered the on-sale bar, even if the inventor did not transfer title to the commercial embodiment of the invention.  In so holding, the panel found no distinction between a commercial sale of products prepared by a patented method and sale of services that result in a patented product-by-process.

On rehearing en banc, the Federal Circuit vacated the panel’s determination and unanimously concluded that no invalidating commercial sale under § 102(b) occurred between MedCo and BVL.  Guided by the Supreme Court’s opinion in Pfaff,[4] the Federal Circuit concluded that “to be ‘on sale’ under § 102(b), a product must be the subject of a commercial sale or offer for sale, and that a commercial sale is one that bears the general hallmarks of a sale pursuant to Section 2-106 of the Uniform Commercial Code.”[5]

Citing Pfaff, the court focused on whether the parties’ transactions would be viewed by the “commercial community” as a sale or offer for sale in the commercial law sense.  To that end, the Federal Circuit relied on the Uniform Commercial Code (UCC) to define a commercial sale for § 102(b) purposes and concluded that the transaction with contract manufacturer BVL did not constitute a commercial sale of the invention.

 Writing for the court, Judge O’Malley outlined three broad reasons for the Federal Circuit’s conclusion that no invalidating sale took place.  First, only manufacturing services—rather than the invention—was sold to the inventors.  Second, the inventor maintained control of the invention. And third, commercial benefit, without anything more, does not trigger the on-sale bar.

First, the court rejected Hospira’s argument that BVL put the invention “on sale” by manufacturing embodiments of the patented product for MedCo.  Reviewing the plain language of 102(b), the court noted that the statute requires “the invention” be on sale for the bar to apply.  Thus, whether a commercial sale of “the invention” occurred necessitated review of (1) the subject matter of MedCo’s invention and (2) the subject matter of the MedCo-BVL transaction.

Reciting years of Federal Circuit precedent, the court explained that the “invention” of a product-by-process claim is the product itself, not the process by which that product is created.  Acknowledging that concept of a “sale” as applied to a product-by-process patent is ambiguous, the court nonetheless rejected Hospira’s argument that BVL’s manufacture of the patented product (Angiomax) put the invention “on sale.”  The court reasoned that where invention is a product, performing an unclaimed process to create the product, without an accompanying “commercial sale” of that product, cannot trigger the on-sale bar.[6]

The Federal Circuit rejected Hospira’s urging to characterize the MedCo-BVL transactions as the “sale of validation batches,” instead agreeing with the district court that BVL acted “as a pair of ‘laboratory hands’” under MedCo’s instructions to reduce its invention to practice.  The most natural conclusion, the court determined, was that BVL sold its contract manufacturing services—not the patented invention—to MedCo.  The “mere sale of manufacturing services by a contract manufacturer to an inventor to create embodiments of a patented product for the inventor,” the court clarified “does not constitute a ‘commercial sale’ of the invention.” [7]

Second, the Federal Circuit found that the absence of title transfer to BVL was significant evidence that the “sale” at issue was not of the invention but of manufacturing services.  The UCC’s definition of “sale” requires the passing of title from the seller to the buyer.  U.C.C. § 2-106(1).  The court clarified that this fact was not of dispositive, “talismanic” consequence, but counseled that absence of title transfer is a “significant” factor, in part because it generally indicates an absence of commercial marketing of the product. [8]

Also significant to the court’s analysis was the confidential nature of the MedCo-BVL transactions.  The court explained that while not disqualifying in all instances, the scope and nature of the confidentiality requirements imposed is relevant to whether the sale was intended for commercial marketing purposes.[9]  The court contrasted situations where the supplier receives “blanket” authority to market the patented product or disclose the process for manufacturing the product to other.  BVL’s lack of authority to do so weighed against a conclusion that the sale was for commercial marketing purposes.

Finally, the court rejected Hospira’s argument that commercial benefit is sufficient to trigger the on-sale bar.   The court found the argument foreclosed by both the plain language of the statute, which requires the invention be “on sale,” and the Pfaff test, which “does not look to broad policy rationales in assessing whether the on-sale bar applies.”[10]  The Federal Circuit concluded that stockpiling or inventory building is pre-commercial activity in preparation for future sale.  Because the on-sale bar is triggered by actual commercial marketing of the invention—not preparation for potential or eventual marketing—the court concluded bare commercial benefit cannot trigger the on-sale bar.[11]

The court further declined to find any distinction between stockpiling undertaken by inventor assisted by a contract manufacturer and an inventor in-house (which has never been held to trigger the on-sale bar).  The court refused to expand § 102(b) to encompass stockpiling by inventors who outsource manufacturing, finding that such an expansion would ignore the wording Congress chose when enacting the statute.

The MedCo opinion is heralded as win for smaller enterprises who lack in-house manufacturing capabilities and outsource at least some amount of production.  MedCo eliminates penalization of smaller companies that lack internal manufacturing capabilities or the funds to acquire a supplier prior to obtaining necessary supplies.  In view of these changes, Companies that rely on the confidential services of a CMO, by choice or necessity, should consult with counsel to ensure communications and transactions with contracted suppliers do not threaten patent protection.  Sheppard Mullin’s award-winning IP group provides comprehensive risk analysis to help our clients understand and minimize potential exposure and ensure strong patent protection.

[1] The patents at issue in this case involve pre-AIA law, but the AIA retains the identical language of its predecessor statute regarding on sale activity that occurs prior to the defined critical date.  Compare 35 U.S.C. § 102(a)(1) (post-AIA) with 35 U.S.C. § 102(b) (pre-AIA).

[2] Slip Op. at 31.

[3] Meds. Co. v. Hospira, Inc., 791 F.3d 1368 (Fed. Cir. 2015) (MedCo I).

[4] Pfaff clarified that the on-sale bar under 35 U.S.C. § 102(b) applies when, before the critical date, the claimed invention (1) was the subject of a commercial offer for sale; and (2) was ready for patenting.  Pfaff v. Wells Elecs., Inc., 525 U.S. 55, 67–68 (1998).

[5] [5] Meds. Co. v. Hospira, Inc., Case No. 14-1469 (Fed. Cir. July 6, 2016) (precedential).

[6] Slip Op. at 20.

[7] Id. at 19.

[8] Id. at 23–24.

[9] Id. at 24–25.

[10] Id. at 26 (characterizing the Pfaff test as a “straightforward two-step process—[] which permits an inventor to ‘both understand and control the first commercial marketing of his invention.’”) (citing Pfaff, 525 U.S. at 67).

[11] Id. at 26–27.

The MDR is the equivalent to the FDA’s CDRH regulations in the United States and essentially specifies the applicable rules when importing medical devices into Europe, which is the world’s second-largest device market. Rules relate, for example, to product classification; quality system standards; pre-market authorization; and reporting of adverse events.

The final version of the MDR – a hefty 352 pages – was published on June 27 and is now reviewed by the EU’s legal editor for drafting or law-technical errors. It then needs to be translated into all EU member languages, followed by formal publication. After publication, expected in late 2016 or early 2017, there will be a three-year transition period as the medical device industry will need time to comply with the new requirements.

Some of the key changes are:

• New obligations on companies

Unique Device Identifiers (UDI) will be introduced gradually, similar to the system in place for the US market, to increase traceability of devices through the supply chain, and to facilitate product recalls if needed (similarly, all economic operators will have a single registration number or SRN). This may lead to the manufacturer having to change the product label (barcoding). Manufacturer will also be required to engage a medical device expert responsible for regulatory compliance management. Manufacturers will be required to take out an insurance policy for possible liability claims for defective devices.

Other operators in the supply chain aside from the manufacturer face also new obligations. For example, importers and distributors will need to verify compliance of the device; inform competent authorities in case of non-compliance; etc. This is in line with the greater emphasis in the MDR on companies having to follow up on quality, performance and safety of devices after they are placed on the market. Even the so-called for-profit, private ‘notified bodies’ (empowered at national level to approve new devices) will have the right and duty to carry out unannounced on-site audits and to conduct physical or laboratory tests on medical devices to ensure continuous compliance.

Pre-market approval, however, remains critical as well, and will become more ‘frontloaded’ than under the current system. The essential conformity requirements – now called ‘general safety and performance requirements’ – have grown, so manufacturers will need to review and update their existing quality systems and technical files. They will also need to be more active in collecting data to support safety and efficacy. This is certainly the case for clinical evaluation of devices, especially high-risk devices such as implantable devices. Increased post-market surveillance is also relevant in this context as manufacturers will have to draft so-called PMCFs (Post-Market Clinical Follow-Up) and PSUs (Periodic Safety Update reports) to ensure safety and performance throughout the expected lifetime of the device.

Other regulatory requirements will come into place in relation to a variety of business practices, such as, relabeling/repackaging; reprocessing of single-use devices; hospital produced (“home brew”) devices.

• Extended product scope

Certain products currently not qualified as a medical device, will now fall under the definition of a medical device and thus within the scope of the MDR such as products used for cleaning, disinfecting or sterilizing other medical devices (e.g. endoscope washer/disinfector) or devices for purposes of control or support of conception (e.g. condom). Their accessories will also be covered by the MDR (e.g. devices used to position or remove invasive or implantable contraceptives).

Even products without intended medical purposes but rather aesthetic or cosmetic ones such as contact lenses, liposuction or laser equipment for skin treatment are considered a medical device. The European Commission can add other products to this category and has to adopt so-called common specifications detailing safety and performance requirements for these products.

Whilst general purpose software or lifestyle/wellbeing software is not considered a medical device, all software and mobile health apps designed for any of the purposes included in the definition of medical devices (e.g. forecasting or prognosis of diseases) will be regulated.

 In vitro diagnostics are not subject to the MDR but fall under the newly adopted stand-alone regulation.

• New classification rules

Medical devices are assigned to one of the four regulatory classes based on the intended purpose of the device and the risk the device poses to the patient and/or the user. Some devices will be “up-classified” according to new classification rules which in turn may lead to a new conformity assessment having to be carried out for the device concerned. This may be the case for nanotechnology and substance-based medical devices, specific orthopaedic implants, life-saving active medical devices, etc.

• Increased access and transparency of data

The European Database for Medical Devices (Eudamed) – the equivalent of the US’s MAUDE database – holds information on medical devices collected from the European Commission and national authorities. Under current rules, only these authorities can access Eudamed. However, Eudamed access will be expanded now (partially) to market participants, incl. notified bodies; manufacturers; patients; healthcare professionals and the public. The accessible medical device data will encompass UDI and SRN data; post-market surveillance data; conformity assessment applications; safety and clinical performance summaries.

Preparing for the new MDR

There is no grandfathering from CE marked medical devices under the current medical device directive to the new MDR. So a conformity assessment will be required for all existing and new devices. While medical device companies have 3 years to become compliant, they should begin implementation of the adjustments under the MDR as soon as possible. This transition plan includes:

• prepare a gap assessment to juxtapose existing obligations against new or changed obligations under the MDR, especially in case of a possible new status and risk class for the device;
• review business agreements and processes to take into account the different roles and responsibility of market operators and supply chain regulation;
• update technical documentation, systems and processes regarding safety and performance requirements including labelling requirements (e.g. SRN, UDI);
• keep track of new or revised guidance issued by the European Commission and regulatory acts which further implement the MDR (and also old law that remains applicable)

• aims to cut the time it takes to review patent applications in cancer therapy in half (final decisions in 12 months or less);
• is open to any applicant, including early stage bio-tech companies, universities, and large pharmaceutical firms;
• is open to entities who may have products already in FDA-approved clinical trials, allowing them to opt in, even if they have a patent application already filed; and
• moves new treatments from conception through regulatory approval swiftly to reach patients faster.[1]

For a non-provisional U.S. application or international application entering the U.S. national stage to qualify for fast track review under this program, the application “must contain at least one claim encompassing a method of ameliorating, treating, or preventing a malignancy in a human subject wherein the steps of the method assist or boost the immune system in eradicating cancerous cells.” Claims drawn to co-administration of biological adjuvants in combination with conventional therapies, administration of vaccines that activate the immune system to prevent or destroy cancer cell growth, and other immunotherapies will also be considered. The application also must not contain more than three independent claims, more than 20 total claims, or any multiple dependent claims.

The petition to make special under this Pilot Program must also include the following statements:

• the Applicant agrees that the application will not have more than three independent claims, more than 20 total claims, or any multiple dependent claims while the application is in special status under the Pilot Program;
• the special status is sought because the application contains a claim to a method of treating cancer using immunotherapy that meets the eligibility requirements;
• the Applicant will agree to make an election without traverse in a telephonic interview and elect an invention directed to a method of treating a cancer using immunotherapy that meets the eligibility requirements; and
• the application was not previously granted special status.

The petition to make special can generally be filed at least one day prior to the date of notice of a first Office Action or with a Request for Continued Examination. For applications with a pending Office Action, a response to the Office Action must be filed with the petition.

Additionally, if the claimed cancer immunotherapy is also the subject of an active Investigational New Drug (IND) application filed by the Applicant or their agent (e.g., a licensee or assignee of the Applicant) at the U.S. Food and Drug Administration (FDA) that has entered phase II or phase III clinical trials, the petition may be filed any time prior to an appeal or a final rejection.

For unpublished applications, the petition to make special must also include a request for early publication. For applications where nonpublication requests were previously submitted, the Applicant also must file a rescission of the nonpublication request no later than the filing date of the petition.

While the USPTO may extend or terminate the Cancer Immunotherapy Pilot Program, the program is currently expected to run until June 29, 2017, and thus petitions must be filed prior to this date.

Additional information on the Pilot Program can be found in the Federal Register:  https://www.gpo.gov/fdsys/pkg/FR-2016-06-29/pdf/2016-15533.pdf

Please contact us with any questions and if you would like to discuss taking advantage of this new Pilot Program for your pending applications.

[1] http://www.uspto.gov/about-us/national-cancer-moonshot

3D Printing Patents

3D printing technology is everywhere. The technology has become increasingly popular over the last few years as printer prices have dropped, making the technology accessible to the average consumer. One driver for this increase in accessibility has been the expiration of several core 3D printer technology patents that protected the technology. For example, U.S. Patent Nos. 5,569,349 owned by 3D Systems Inc. for “Thermal Stereolithography,” U.S. Patent No. 5,587,913 owned by Stratasys Inc. for a “Method Employing Sequential Two-Dimensional Geometry for Producing Shells for Fabrication by a Rapid Prototyping System,” and U.S. Patent No. 5,597,589 owned by the University of Texas System for an “Apparatus for Producing Parts by Selective Sintering,” have all expired within the last five years. Thus, 3D printing technology has become available in the general market.

The FDA Approves Spritam ®)

On August 3, 2015, the FDA approved Aprecia Pharmaceutical’s Spritam® (levetiracatam) “as the first 3D printed drug product.” Spritam® is a pill used to treat partial onset seizures, myoclonic seizures and primary generalized tonic-clonic seizures in adults and children with epilepsy. See Spritam® [package insert]. East Windsor, N.J. Aprecia Pharmaceuticals Company; 2015. According to Aprecia Pharmaceuticals, applying 3D printing technology to the formation of the Spritam pill improves patient experience and decrease overall costs by “enabling the delivery of a high drug load, up to 1,000 mg in a single dose.” Accordingly, patients are more likely to adhere to treatment plans. Specifically, 3D printing technology enables pharmaceutical companies to more precisely control key parameters of pill formation, such as surface area-to-volume ratios, which are important to controlling the kinetics of drug release. Thus, Aprecia can manufacture a pill with 1000 mg in a single does that dissolves in water in less than 5 seconds. The technology may similarly be applied to many other cutting-edge pharmaceutical applications, e.g.,  bioprinting of stem cells, or even entire human organs.

Extending the Patentable Life of 3D Printing Technology

Just as many pharmaceutical innovators have learned to extend patentable life of technology by innovating new applications or improvements for known pharmaceuticals, Aprecia has applied similar principles to innovate new patentable life into 3D printing technology. Specifically, on November 18, 2014, the U.S. Patent and Trademark Office granted US Patent No. 8,888,480, assigned to Aprecia Pharmaceuticals, for a “Three-Dimensional Printing System and Equipment Assembly” (the “’480 Patent”) designed to print pharmaceutical products. Specifically, claim 1 recites multiple build modules “adapted to form incremental powder layers,” and the specification explains that, in some embodiments, “the powder comprises one or more pharmaceutical excipients, one or more pharmaceutically active agents, or a combination thereof.” In some embodiments, the three-dimensionally printed article is a pharmaceutical dosage form, medical device, medical implant, or other such article as described.” (’480 Patent, Col. 28, Lines 55-62.)  According to the patent, previous attempts at leveraging 3D printing technology to produce pharmaceuticals had been overly complex because they “employ[ed] radial or polar coordinate-based-printing” which resulted in variances in product uniformity.  (Id., Col. 2, Lines 46-62.)  The claimed improvement in Aprecia’s ’480 patent incorporates a Cartesian-based printing system that creates uniform pills one layer at a time.  (See id. Col. 2, Lines 46-62, Claim 1.)

New Horizons in Bio-3D Printing

With its approval of Spritam®, the FDA has paved the way for new innovations in bio-pharmaceutical related 3D printing technology. Aprecia has already filed several patent applications in various jurisdictions, and we expect that other pharmaceutical companies will follow suit. Indeed, new innovations to old technologies can be patentable, lucrative, and important—in some cases, these innovations may even save lives.

Conclusion

Taking a lesson from Aprecia, and many other similarly positioned patent owners, innovations often times come in the form of small step improvements over existing technologies. Indeed, any one of these step improvements may be patentable, and could pave the way to a new market opportunity.  Talking to a good patent attorney is always a good first step.

Post-Acute Focus: With more and more focus on the need to rationalize and re-organize the post-acute sector, we have seen multiple industry leaders start to evolve their strategies.  I blogged yesterday about AccentCare’s interesting strategy in the home health/personal care space, and United, through its Optum subsidiary, has been focused for several years now on rationalizing the post-acute continuum of care.

Yesterday, I was interested and surprised by TeamHealth’s presentation. With their $1.6 billion completed acquisition of hospitalist company IPC, I expected to hear more about bundled solutions selling in the acute inpatient market as a result of the IPC capabilities. Instead, the focus of the majority of the TeamHealth presentation was on the post-acute sector. They believe that the most valuable asset in the IPC portfolio is the post-acute service base.  IPC currently provides SNFist and other services to approximately 2,400 of the current 15,000 post-acute facilities in the United States.  Management of the post-acute sector is seen by TeamHealth as being integral to the acute hospital solution set, so as to better be able to coordinate care both in and beyond the hospital, succeed with value-based reimbursement, reduce leakage, position for bundled payments and service the patient throughout an episode of care.  They are serious, noting that they generally would emphasizing post-acute acquisitions over hospitalist acquisitions in the near future.  This approach also starts to de-risk TeamHealth from its high emergency medicine customer concentration.  It also allows for value creation as the nation starts to move towards greater scale in bundled payment programs and allows TeamHealth to position better for sustaining margin with bundled payments (i.e., not just be a price-taker).  The approach also is a potential response to the continuing payor consolidation in the market – by being relevant across more facilities and more service lines, there is a better opportunity for positioning with payors both regionally and nationally.

Bundled Payments: Clearly, bundled payments was one of the themes of the conference. In addition to the above with TeamHealth, both Kindred and HealthSouth were asked questions about possible impact on their business and margins from the implementation of bundled payment programs. As publicly reported in Modern Healthcare today, both companies indicated that very little of their current business would be impacted negatively, if at all, by the bundled payment programs.

Ambulatory Surgery Center please with a side of Physician Services: It was interesting to hear the AmSurg presentation yesterday and their characterization of the Sheridan acquisition.  After relating how the growth in the number of ambulatory surgery centers (ASCs) was relatively flat currently, with about 1 ASC per acute hospital on average in the United States (about 5600 ASCs now, per AmSurg), AmSurg focused on the ability with Sheridan to capture revenue gaps and to provide more complete solution sets.  On the revenue gaps, AmSurg noted in its presentation that the AmSurg ASC portfolio generates approximately $250 million per year in anesthesia revenue, and 95% of the anesthesia services at its multi-specialty ASCs are outsourced to non-AmSurg anesthesia providers.  Clearly an in-fill ability to address.  The recent Arizona acquisitions by AmSurg of an emergency medicine group and an anesthesia group (at what is rumored to be a high multiple in the anesthesia market) provided an example of how AmSurg is looking to cluster around selected hospital facilities and to build or buy physician networks that allow it to vertically integrate and position itself for managing surgical episodes of care.  AmSurg puts itself as growing strongly behind TeamHealth and Envision in the emergency medicine sector and being roughly the same size as Mednax in the anesthesia sector.

Anesthesia Wakes Up: As noted in multiple recent articles, the anesthesia sector has become very active. Given the increased insurance coverage from Medicaid expansion and the exchanges and the increasing life expectancy of Medicare members, we expect to see more and more procedures over a person’s lifetime, which clearly makes anesthesia relevant. Given the above trend toward perioperative surgical homes and management of surgical episodes of care (whether through bundles or otherwise), one market thesis is that anesthesia companies can step into that coordination and management role and create value.  U.S. Anesthesia Partners (USAP), a Welsh Carson portfolio company, made its JP Morgan conference debut yesterday.  They have shown rapid growth with multiple acquisitions of larger, high-quality anesthesia groups in Texas, Florida and Colorado.  It’s an interesting model, with true alignment built in between the company and the physicians.  All physician partners have equity of the same exact type as Welsh Carson, and physicians proportionally share in the growth or problems of the company.  Additionally, physicians retain significant input and control in operations and governance, making it one of the most physician-centric private equity sponsored healthcare companies in the market today.  USAP is facing significant competitors (such as Mednax, North American Partners in Anesthesia (NAPA), AmSurg, and others), but the sector still is relatively fragmented and many smaller consolidators have not successfully scaled and will present second-wave acquisition opportunities.