Health-E Law Podcast Ep. 4
What to Watch for in ‘24: Costs, Consolidation and Tech with Eric Klein of Sheppard Mullin
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Listen to the podcast released January 18, 2024 here: https://www.sheppardmullin.com/multimedia-542
Welcome to Health-e Law, Sheppard Mullin's podcast exploring the fascinating health-tech topics and trends of the day. Our digital health legal team, alongside brilliant experts and thought leaders, share how innovations can solve some of healthcare’s (and maybe the world’s) biggest problems, if properly navigated. In this episode, Sheppard Mullin healthcare team leader Eric Klein joins us to discuss the future of health tech and what we can expect to see in 2024.
About Eric Klein
With over 35 years of practical legal and business experience, Eric Klein is widely acknowledged as one of the most experienced attorneys in population health management, physician alignment, and global risk transactions. As a partner in Sheppard Mullin’s Century City Office, he leads the firm’s distinguished national healthcare practice, which has been honored as a Law360 U.S. Health Care Practice Group of the Year three times in the past seven years.
Over the last decade, Eric has advised on over 85 hospital mergers, acquisitions, and joint ventures, more than 85 health plan mergers and acquisitions, and many of the country’s largest physician services transactions, establishing him as one of the nation’s most active physician group, health plan and hospital M&A and joint venture lawyers.
About Sara Shanti
A partner in the Corporate Practice Group in the Sheppard Mullin's Chicago office and co-chair of its Digital Health Team, Sara Shanti’s practice sits at the forefront of healthcare technology by providing practical counsel on novel innovation and complex data privacy matters. Using her medical research background and HHS experience, Sara advises providers, payors, start-ups, technology companies, and their investors and stakeholders on digital healthcare and regulatory compliance matters, including artificial intelligence (AI), augmented and virtual reality (AR/VR), gamification, implantable and wearable devices, and telehealth.
At the cutting edge of advising on "data as an asset" programming, Sara's practice supports investment in innovation and access to care initiatives, including mergers and acquisitions involving crucial, high-stakes and sensitive data, medical and wellness devices, and web-based applications and care.
About Phil Kim
A partner in the Corporate and Securities Practice Group in Sheppard Mullin's Dallas office and co-chair of its Digital Health Team, Phil Kim has a number of clients in digital health. He has assisted multinational technology companies entering the digital health space with various service and collaboration agreements for their wearable technology, along with global digital health companies bolstering their platform in the behavioral health space. He also assists public medical device, biotechnology, and pharmaceutical companies, as well as the investment banks that serve as underwriters in public securities offerings for those companies.
Phil also assists various healthcare companies on transactional and regulatory matters. He counsels healthcare systems, hospitals, ambulatory surgery centers, physician groups, home health providers, and other healthcare companies on the buy- and sell-side of mergers and acquisitions, joint ventures, and operational matters, which include regulatory, licensure, contractual, and administrative issues. Phil regularly advises clients on matters related to healthcare compliance, including liability exposure, the Stark law, anti-kickback statutes, and HIPAA/HITECH privacy issues. He also provides counsel on state and federal laws, business structuring formation, employment issues, and involving government agencies, including state and federal agencies.
Transcript:
Phil Kim:
In today's episode, we're looking ahead into 2024 and what we can expect from health tech and its impact in the year to come.
Sara Shanti:
Hi, I’m Sara.
Phil Kim:
And I’m Phil.
Sara Shanti:
And we’re your host and want to thank all of our listeners for joining us today.
Phil Kim:
We don’t have a crystal ball, but we do have Eric Klein here today. Eric is Sheppard Mullin’s national healthcare industry team leader. Under Eric’s leadership, Sheppard Mullin’s healthcare practice team has been awarded several accolades, including by Law 360 as the healthcare practice group of the year. We don’t have enough time to run through all of Eric’s accolades, but he is one of the most experienced and preeminent thought leaders among healthcare attorneys in the country, and he has focused on mergers and acquisitions, joint venture projects, as well as population health management, physician alignment, and global risk transactions. He is consistently recognized as a leading attorney by Chambers, American Lawyer, Law 360, and many other publications.
Thanks so much for joining us today, Eric.
Eric Klein:
Thanks, Phil. Appreciate being here today.
Phil Kim:
So as 2023 has drawn to a close, everyone is eager to see what opportunities and challenges the next year will bring. What do you see coming ahead in 2024 for our industry and where do you see us having the most disruption?
Eric Klein:
2024 is going to be one of the most interesting years we're going to see out there. We're going to see a combination of increasing costs both on the commercial side as well as in the government program side. We're going to see a real bifurcation of resources with some hospitals and health systems doing very well, many others being very financially pressured and a lot of consolidation and a lot of retrenchment going on in the hospital sector. We'll see more consolidation and more innovation on the health plan side as the big get bigger. And then on the physician group side, we're going to see more and more consolidation as groups have to deal with what's coming next. And part of that's going to be driven by the cost of technology. There's a lot of opportunity out there with technology, but at the same time, this cost involved, especially as we put that into the context of moving towards value-based and risk-based reimbursement systems, which are great because people get paid more and quality improves when you're trying to keep people healthy instead of getting paid when folks are sick.
But at the same time, it's an infrastructure cost that goes along with that and that's hard to bear by yourself. So when we think about what we're seeing out there for 2024, it's going to be an interesting time. One of the other things we're seeing as a theme is the target that's being painted on private equity's back. It's intriguing because we're seeing many of the states as well as the federal government focused on private equity as a concern and as a result, we're seeing processes and procedures being put in place. The FTC is looking at private equity firms and consolidation plays, but as importantly, we've got 10 states that recently have passed oralready are operating state merger control laws that are focused on private equity, but also capture a lot of the rest of the market as well. And they will slow down and they will burden the consolidation and the types of transactions that are undertaken not only by private equity, but also being undertaken by many folks in normal day-to-day business.
Sara Shanti:
What will digital health do to impact all those other layers of considerations and where do you really see that impact happening the most with regard to what digital health and healthcare technology can do to help us in 2024?
Eric Klein:
We're really seeing the coming to maturity in several areas of digital health and the birth, if you will, of new areas. So for example, a new area is generative AI, what ChatGPT can do for the healthcare industry. But while I think that's interesting, I think it's really down the road at this point. It's not a 2024 issue as much, so I think there's a role for it and we'll see that adopted on a relatively limited basis in early 2024. As we move into the latter stage of 2024, we'll start to see generative AI become more interesting, but it's going to be another two or three years before we see a significant broad adoption there as a piece of the overall pie.
I think where we're going to see a lot more impact is we're going to see a lot more process automation. So I think there's opportunities there to go ahead and to automate a lot of the data generation, a lot of data collection that has not been done. Scheduling, for example, connecting the dots, middleware between one company's data and another company's data. Interoperability, I think, will start to really shine in 2024, although that's multi-year project, and it'll take quite a while before we feel the beginning of being happy and comfortable with it.
But I also think there's other opportunities that are going to be very intriguing. So for example, I just was speaking with a client, a new client of ours, and they are looking at revenue cycle management and machine learning and deep learning put together.
Now there's differences as we know, machine learning is taking a look at the data that you have and then going ahead and applying algorithms to process it in a certain way and looking for outcomes. Deep learning, on the other hand, it's not just training an algorithm, if you will, or training a neural net, but rather it's trying to draw connections and conclusions at a much more significant level. So when you put the two of those together, what you find is an opportunity. So this client is going ahead and they're working with health systems, with hospitals, and before the hospital bill out to the payors, the bills are prepared by their staff, but then they are checked and if you will, verified by the AI systems, by the systems that are combining both deep learning and machine learning.
And what they found is that there's a lot of mistakes that are being made by people, which is not surprising, but there's also a lot of lost opportunity. So if we look at health systems, many of those health systems are finding that you can actually improve your revenue by over 38%, where you go ahead and you use this type of machine learning and deep learning combination to look at what codes are being billed, are those supported by the record or not.
And what that's doing is it's reducing the turns back and forth and when a claim gets sent out to the plans and then the plans that review it, perhaps deny it, ask for more information and send it back, it can be worked immediately same day using the AI versus being put in a queue and taking two to three weeks to be worked and sent back out. So a lot more velocity going on in the process and therefore a lot more cashflow for the hospitals. Lots of opportunities there.
Phil Kim:
Yeah, you alluded to cashflow, Eric, and whether we're talking about data automation or machine or deep learning in RCM or any other product when it comes to the digital health space, innovators are entering an immensely competitive market and gaining access to capital is more critical now than ever. Can you tell us how investors are behaving in the health tech space and how industry players can make themselves more appealing to those investors?
Eric Klein:
Sure, Phil. So if we look at the digital health space, it's been a darling for the investment sector for the last several years. A lot of investment has gone into the digital health sector throughout the last two, three years or so. And this year it's about a quarter of all venture capital investment is still digital health at this point. So with that, we're seeing a range of investors, both traditional venture capital funds. We're also seeing a lot of angel investing. We're seeing a lot of corporate investing including health plans and health systems as well. And that's generally speaking with regard to what we call low-hanging fruit, because there's a lot of issues out there that just need a simple solution and that can make delivery of healthcare easier. So it's gathering information that wasn't easily provided before. It's improving access. It's connecting the dots.
So things that are easy and don't require major behavior shifts, those are going to be very exciting for investors. If it requires a behavior shift, either on the physician side or on the consumer side, much harder to do. So there, I think there'll be a larger hill to climb to prove out your value proposition and to get your investors to write the check. That's one other thing that I think is important here, which is you've got to also think about what's the ramp to profitability, because it used to be that if you could tell the story and the possibility of revenue and that revenue could be large and increasing, that would be attractive. Well, that's harder to do these days just because the public markets are much more focused on profitability again, versus the revenue stories that we saw back in 2020 and 2021.
So you need to show that you're going to be able to turn a profit, not immediately, but sometime in a reasonable period of time, and that that profitability is going to be maintained at a reasonable level as you grow.
Sara Shanti:
And on the other side of the coin then, to that, what should providers, payers, industry stakeholders, really be looking for on tight budgets and with so many other demands on them when they look to make meaningful investment in technology?
Eric Klein:
When we think about where investors are going right now, there's a number of untapped areas that can be very exciting. So if we think about analytics, there's a lot of general work analytics going on right now, but when we think about the highest costs involved in healthcare, we haven't seen AI and digital health really be focused from an investment perspective on reducing the cost curve in those areas.
So to give an example. Some of the most expensive drugs out there right now are for certain conditions, like arthritis. And so in that situation, can you go ahead and can use digital health to get better compliance, to be able to do dose titrations, that you don't have to have the maximum dosage utilized at all times, which is obviously the highest cost. Can you go ahead and can you maintain somebody on a lesser medication with supportive approaches using digital health before they have to transition onto a much more expensive biologic or a biosimilar?
So these are areas that really will take engagement with the patients, but have not really been approached and utilized as much as possible. So I think that's one area. The second thing is that I think that anything that improves clinical workflows and reduces cost is going to be very hot. And we saw literally as much investment into nonclinical workflows as we did in digital health in the first portion of this year so far. So I think that's going to be an area of interest. And we're also going to see things like clinical trial participation get better and better because digital health for the first time in the last couple of years, has really started to focus on how do you recruit and qualify patients for clinical trials and make it into a win-win.
So there's the intersection of a number of areas with digital health and with the problems that are facing the healthcare industry today that will be very promising.
Phil Kim:
You've mentioned a couple of times, and we keep hearing that 2024 will usher in a wave of consolidation. Obviously the FTC is tuned in, but how else will this incoming consolidation impact the digital health space?
Eric Klein:
So digital health has a lot of companies that got funded in 2020, 2021, 2022, and those companies will need to raise more capital. And if you think about the timing where typically you raise capital for 12 to 18 months of operations, you don't want to dilute yourself and raise more capital than you're going to spend in that first 12 to 18 months. It means that we're going to see a lot of those digital health companies coming back to the market for financing in 2024. Will they have made enough progress at that point? Will they have enough revenue flow or enough customer base to be able to convince the investors that they deserve a good step up and that they should receive funding? It's an interesting question because there's a lot of single point solutions out there right now, and you have to think about customer fatigue. I work with a lot of folks who buy technology, who buy digital health applications, and they are overwhelmed with the number of single point solutions that they have and that they've got to integrate and managed in some way.
So to the extent that they can have one company that provides multiple solutions that are interconnected or otherwise interoperable, that's very exciting. So we think that between the need for more funding and the need for the market to consolidate a little bit, we're going to see a wave of consolidation, we're also going to see customers being very happy when certain market leaders start to emerge and they can look at multiple lines of business through the same distribution channel.
Sara Shanti:
We know that you're incredibly embedded in the industry and counsel on a lot of different facets of healthcare technology and looking for stakeholders to have enjoy long-term success. So if you could, will you leave us with some final words of wisdom?
Eric Klein:
We work with a lot of hospitals and health plans that have got innovation centers, that have got funds where they're willing to invest in solutions if those solutions can fix their problems. So what I suggest is that we need to see more in the digital health side of companies going ahead and reaching out either through folks like us, through consulting firms, through accounting firms, et cetera, and listening very carefully to their customer base as to what they need and what they don't need. There's so much out there in terms of technology that just doesn't get what the cash flows are like in healthcare, what it takes to actually get paid, who's responsible for the payment, what data is necessary, et cetera. And so you see a lot of backfilling going on and a lot of incomplete solutions.
If technology companies, digital health companies are to succeed, they need to get that information upfront before they go to market. And in getting that information, they may also gain initial customers as well as potentially investors. A lot of the hospital systems are looking at the opportunity to not only invest, but to solve their issues, and that presents a great opportunity for digital health companies. That's what I would suggest.
Phil Kim:
You can learn more about Eric Klein and the Sheppard Mullin Healthcare practice team in the episode description of the podcast. That is it for us here today. We will see you next time unless you need us in the meantime.
Contact Info:
Resources:
Sheppard Mullin’s Top 10 Takeaways from HLTH 2023 | Healthcare Law Blog
Healthcare Law Blog | Sheppard Mullin (sheppardhealthlaw.com)
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