Thursday, June 02, 2011

Some of my best friends are in private equity

Like moths to a flame, private equity investors are quick to pounce on those sectors of the economy that have the potential for higher than average returns. Such investors also have an appetite for the higher risk that accompanies those sectors. In this manner, private equity can serve a useful role in capital formation for the economy. It also helps money managers who want a portion of their portfolio to be in that part of the risk-reward spectrum.

Health care is a fertile field for private equity. You might not think so because of concern about rising costs, but as someone once said, "One person's costs are another person's income." Let's look at it this way. First, more people will have access to insurance to pay for diagnosis and treatment because they will be newly eligible for private insurance under the national health care reform law. Second, demographic changes in society are producing an ever-increasing demand for health care services. Longer lifespans and the aging population offer a growing number of people with cancer and the other diseases that are more likely to occur with age. The number of Medicare beneficiaries is projected to rise from 46.6 million today to 78 million in 2030. (It was 40 million in the year 2000.)

It is with this background that we should consider the growing interest by private equity in proton beam facilities. You have heard before about my real concern about the cost impact of rapid expansion of the number of such facilities.

I want to expand on that today and give you a sense of how the dollars work in this kind of investment. I have pointed out how the Medicare rate-setting process contributes to its profitability. Let's look at this in very rough form.

First, the revenues. Let's assume we have a facility that can serve about 1500 patients per year, with an average reimbursement of $50,000. We generate annual revenue of $75 million.

On the cost side, let's say a new facility costs $125 million and is financed with 60% debt; is depreciated over 20 years; is in leased space; and has personnel and other expenses. Total expenses will be in the range of $30 million.

Net profit (pre-tax) is about $45 million per year. The private equity investors have put in about $50 million in cash. This starts to look pretty good.

That's just one projection, and I am not privy to real pro forma's so I might be a bit off track. This article has a more conservative view of the numbers. For now, ignore the variability in the assumptions. Instead, note this all-important introductory line from the article:

Proton beam therapy gets a 9% reimbursement increase for 2011. . . .With the new CMS payment level, reimbursement for simple treatments is now $1,031 (APC 664), up from $942 in 2010. More complex treatments are reimbursed at a rate of $1,349 (APC 667), up from $1,232 in 2010. Depending on the cancer, a protocol of 10 to 15 treatments may be required per patient.

You can understand why the moths are flocking! In an era of flat Medicare payments to hospitals and doctors, these payments are going up at three times the rate of inflation.

But now, compare these actions by CMS and the resultant private equity gold rush with important scientific and public policy concerns, set forth in a 2008 US News and World Report article:

But certain doctors—not to mention the occasional patient who has experienced side effects from proton therapy—wonder whether the high-tech allure of protons hasn't outpaced the science. "Because of Internet buzz, the morbidity associated with proton beam therapy is underappreciated," says Anthony Zietman, a radiation oncologist at Mass General who specializes in prostate cancer. Many of his patients, he says, are surprised to learn that proton beam therapy exposes the bladder and rectum to high doses of radiation and does, in fact, carry a significant risk of causing impotence. Although preliminary research has suggested protons may be superior to conventional radiation for prostate cancer, there's a lack of randomized studies (the type doctors consider most rigorous) comparing the two—and standard radiation techniques are improving all the time.

...The lingering questions about prostate cancer are helping to fuel a debate over the location of new proton beam centers and the pace of expansion. Experts who believe prostate cancer should be widely treated estimate there could be a need for scores of new centers. Others contend that five to 10 evenly distributed academic research centers could better serve the rare patients who most need protons—and help determine whether the therapy should be extensively used to treat prostate and other common tumors.

We never learn when it comes to health care. Old patterns repeat. A new technology is invented. Sure, it has some good therapeutic effects for some patients; but it really takes off when marketeers or investors prey on people's fear of disease to suggest that it should be available to everybody in their backyard. A new bolus of costs is then added to the system without proper evaluation.

It feels like the last line from The Great Gatsby:

So we beat on, boats against the current, borne back ceaselessly into the past.

Here's the deal, though. If you believe that there is some overall, sustainable level of health care expenditures for a country, every dollar that goes into expanding the number of facilities like these proton beam machines is one less dollar for primary care, cognitive specialists, palliative care, and the like. If we permit the "rule of rescue" to drive our health care expenditures, we will never focus on the most cost-effective and compassionate aspects of the care delivery system.

Some of my best friends work in private equity. But I don't trust them to make the right decisions for our health care system. I would like to think I could trust CMS, but it appears to have become complicit in the medical arms race. Other parts of government remain silent as this occurs.

In 1961, President Eisenhower said:

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.

Change a few words and see if this doesn't describe many aspects of our health care system, fifty years later.


Barry Carol said...

I don’t blame the investors here, private equity or otherwise. I blame the payers, particularly CMS. If we either didn’t pay for proton beam therapy at all or, at the very least, required pre-certification verifying that the particular patient recommended for it is among the small subset for whom it is actually better than other less expensive treatments, we wouldn’t have as much upward pressure on healthcare costs. If limiting proton beam therapy to only that small subset of potential patients at taxpayer expense destroyed its economics, so be it.

Anonymous said...

Your contribution is very important - and perfect succession from a transparency post. Mapping full resource flows - including external and opportunity costs, which is rarely done - should be a critical part of CMS responsibility before reimbursements are determined. Especially for high cost procedures that few will have access to. There is an ocean of evidence on public health determinants of the most prevalent and costly diseases, but when the industry reps start talking, eyes twinkle, hope for easy answers blooms and irrational and dangerous decisions are stampeded like lemmings. How easily subverted is the wisdom of the crowd, or the cautious hard work of the many.

Where are the analyses, especially compelling and simple visuals, to make publicly transparent the costs of alternative healthcare investments? Where are public discussions of tradeoffs? The refusal of economics to engage other currencies (e.g. quality of life) or costs (e.g. social or environmental) undermines its relevance to human health.

Anonymous said...

Recently a friend said to me;

"What’s worse, a nationalized health care system that is influenced by politics, or a private system that is influenced by greed? We have a lovely combination of the two."

In this case, Medicare and private equity appear to have created a negative synergy, resulting in a combination of nationalized and private care which is worse than either taken alone.
In an era when everyone agrees Medicare costs need to be cut, why on earth is there going to be a 9% INCREASE in reimbursement for an unproven technology?

Truly, we are our own worst enemies.

nonlocal MD

Anonymous said...

Hi Paul. I am a huge fan and read your blog often but I wholeheartedly disagree with you on the comments you made regarding proton beam therapy. Some of what you say regarding cost and lack of evidence of efficacy in certain disease types is true but please consider a few other facts. In the interest of transparency, I work at a facility that is currently in the development stage of a proton facility.
1. Proton beam therapy was previously so cost-prohibitive that very few centers were involved. In fact, there are only 9 in the US right now with another 15 either under construction or in development. By 2015 there will still be fewer than 30 centers nationwide.
2. Because of the historical lack of access to proton therapy in the US and the abundance of prostate cancer, many centers focused on a group which was easy to treat, easy to diagnose, had means and willingness to travel for treatment. Proton centers had very little additional capacity with which to accept patients with diseases other than prostate cancer. Because of this lack of experience with other disease types there is little in the way of clinical trials with which to base any assumption that proton beam therapy is not superior. Proton therapy is clearly indicated in pediatric cases, cancers in the base of the skull, near the optic nerve or spinal cord, or other health tissue such as the lung. Medicare should continue to pay well for this therapy until enough centers can be brought on line to provide the evidence necessary fully understand the value of the technology. Then they can cut the funding to the degree necessary to allow the current centers to remain viable, while stifling growth in that service if needed.
3. You mentioned the 9% increase in reimbursement for 2011. What you left out was that proton therapy took almost a 40% cut several years ago. The increases over the past two years have only now brought the reimbursement back in line with where it was in 2008. While the reimbursement has gone up a lot in the past two years, nobody in the field expects that to continue.
4. The article you reference was written in 2007 and is not a good indicator of the actual capital or operating costs. All the current projects are between $150 and $250 million. Because of the capital dollars required to build a proton therapy center, it is only natural that institutions will look to private equity firms to provide some of the funds. Some institutions could provide all of the capital and operating costs but it could prohibit growth in other areas.
5. During our research, and in spending time at various facilities, we were talking with the head of the cancer center at a large academic medical center that has proton therapy. One of the things he told us was that the money that Medicare paid for chemotherapy to his single institution in 2010 was more than what Medicare paid for all of proton therapy nationwide in 2010. While this seems like a stretch (we were unable to verify), and while proton therapy centers are expensive, the overall dollars spent on proton therapy are so much smaller than other areas (even traditional radiation therapy).
6. There are companies who have developed technology to make proton therapy less expensive and more readily available to smaller centers. As these come on line in the next couple of years their costs will begin to be added to the Medicare cost reports which will eventually show the costs of proton therapy decreasing and reimbursements will ultimately decrease as well.
7. It has been debated within the radiation oncology community as to whether or not it is even ethical to perform randomized trials with protons versus traditional radiation therapy. Even if patients had access to these trials, how many of them would want to participate knowing what we know about the potential of proton therapy.
I don’t expect this to change your mind but a lot of influential people read your blog. They should know all the facts before racing in and cutting proton reimbursement.

Have a great day!

Keith said...

The underlying problem is the fact that the FDA approves these new treatments and devices, and is mandated to with no consideration of cost. Once approved, then Medicare is obligated to cover the cost of the device or procedure, regardless of whether there is an equally effective and much less expensive procedure that will do the same job. It does not matter whether the old procedure is of the same effectiveness as the new procedure. This is why comparitive effectiveness data is supposed to be collected under the new health care law looking at various treaments to find those that provide the best value. Of course this wil take years for these studies to be conducted.

I have watched in wonderment as examples where equally effective tests will constantly result in the most expensive being used. The best example is stress testing where Medicare has priced nuclear stress testing at a higher profit margin than stress echocardiography. Despite administrering a dose of radiation and requiring much more time to do, cardiologists will order gobs of nuclear stress tests, especially when they own the equipment!

The only fault I find here with Medicares role is that they should make the profit margin the same for both regular rdiation treatment and proton beam unless the producers of proton beam facilities can show a clear advantage. This would seem to cool some of this gold rush mentality if the easy and high profit did not look so appealing.

Anonymous said...

But what are the costs and benefits? If proton beam therapy is worth investment, it is worth study. Clinical trials are not the only way to collect data, and sites that are currently up should be serving as test sites for the whole. A few years of collaboration would provide the appropriate case-mix to compare to 'traditional' therapies (Chemotherapy and radiation can be medieval, so better therapy IS welcome). But collaboration is what the CMS should be facilitating, not competitive exclusion.

Evidence-based progress is not how this medical investment is moving. If my neighbor gets the PBT, I need one, too. And the $150-250 million price tag may not sound expensive in private equity, but that is a huge amount in cancer prevention funding.

Anonymous said...


Fact: Ike's speech was days before his young replacement took over. Who got elected by claiming a "missile gap" that the ex-Navy LTJG blamed on retired Gen. of the Army Eisenhower. And who sent 50,000 "advisors" to Viet Nam.

So it is with OweBama and his "I love theory" gang. Who, of course, are classmates of OweBama and work in private equity (PE).

I don't believe the PE crowd and I don't believe OweBama. There will be a reckoning.