What Outsource Healthcare Lenders and Investors Can Learn from the Proton Therapy Experiment

October 1, 2019
| Articles

By Jette Campbell

This piece originally published in the print issue of The Secured Lender, October 2019

When a ProCure proton therapy center opened with fanfare in Oklahoma City to treat prostate cancer patients, it was seen as a milestone in the growing city’s downtown. Standing in front of the $120 million facility that was poised to treat 1,500 patients annually and employ 100 full-time staff, the center’s founder remarked, “from a medical perspective, it really puts Oklahoma City on the map.”

Ten difficult years later, the facility has been sold in a bankruptcy auction, joining many other proton therapy centers that have gone through financial restructuring.

Proton cancer treatment centers attracted financing and investment by promising to treat cancer with greater effectiveness and with fewer side effects. Despite outcomes like that of Oklahoma City, immense financial investments continue to be made in the construction of new therapy centers.

This isn’t the only growing area within outsource care. Today we have over eight thousand urgent care establishments nationwide – double the number we had just a decade ago. As we look at the proliferations of freestanding healthcare facilities — surgery centers, mental health clinics or emergency treatment centers, to name a few — here are five questions lenders and investors should consider during diligence based on the failed proton therapy experiment.

How is the Reimbursement Model Changing?
When standalone facilities are created without formal links to a hospital system, they have a number of challenges.
The first is to build a patient base, which often requires luring patients from well-known medical centers. Established hospital and healthcare networks have an incentive to keep patients in their networks rather than referring them to independent providers, so it is essential that there is a strategic plan to build a referral and patient base in short order after the facility opens for business.

Facilities also need to negotiate reimbursement contracts with payors. Independent facilities have few, and in the case of proton facilities just one, service to offer. This means they don’t represent significant business for an insurance company. And while you might be ready to make the leap to believing that the science underlying a new treatment will be quickly accepted, insurance companies are not likely to share your appetite for risk. It may take a long time before payors are willing to cover a new treatment modality, and even when they do, they may choose initially to reimburse at a level that is not sustainable for the facility.

Is this Venture Capital or Project Finance?

Like many of today’s outsourced services, proton treatment has historically been incorporated into holistic options for patients at large, academic medical centers. This means that, as a standalone enterprise, these facilities were start-ups, often with no pre-agreed, contractual revenue streams. They should have been treated as venture, not finance, opportunities.
It’s easy to see why people may have misjudged this issue in diligence. This wasn’t an untested technology. In fact, proton therapy had seen success in treating some of the most challenging cancers. However, in the medical community, a treatment for Cancer Type A requires years of clinical trials before it can become a treatment for another type of cancer. Weighed down by the upfront investment, these facilities couldn’t stay afloat long enough to survive the trials and gain reimbursement support from payors.
Like many new ventures, the technology improved. Today, many of the proton therapy centers being built are smaller and cost a small fraction of what was spent 5-10 years ago. With less debt and lower patient referral volume required, they can be successful.
For those underwriting healthcare facility investments, it’s critical to understand where the business is in the cycle of cost and technology evolution.

What is the Structure?

The legal and financial structure of healthcare service facilities is critical to the risk profile. Localized operating assets, centralized shared services, silent equity partners, physician / hospital partners and liability risk can all contribute to a complex legal and financial structure, which is what many of the pioneer proton treatment facilities implemented. This type of structure leverages shared services to gain efficiencies while creating entities that participate in ownership between the services entity and the operating center.
However, the layering of legal entities means moving cash from solvent operating centers to insolvent cost centers is challenging. As a result, many lenders were caught with less flexibility and security than they initially expected.
To fully understand the financial structure, question who has priority on free cash flow and determine if the structure will allow for additional capital or debt if the need arises.

Is There Concentration Risk?

A one service offering places great pressure on the executive team to negotiate coverage and reimbursement rates. The risk is exacerbated by the selection of a partner that doesn’t bring a strong referral base that includes multiple hospital referral networks. You further multiply the risk if it is an independent standalone center, or even one affiliated with only one hospital system for referrals. You multiply it again if the facility is dependent upon a single provider.
The selected equipment vendor is a constant presence at the facility, and once the equipment is installed, the maintenance and operating costs can be significant. In most cases, it is impossible to switch vendors, so leverage with suppliers is extremely limited.

What is the Market?

Many proton therapy lenders made the mistake of focusing on the potential market rather than the actual patient market. Simultaneously, they seemingly ignored regional preferences in healthcare delivery and services, which, in turn, unraveled growth assumptions from Day 1.
These dynamics are far from unique – lenders across the healthcare spectrum make decisions daily about how to assess the risks and opportunities in a business. For those evaluating healthcare facility assets, it is critical that you focus on how the established revenue level will work in a particular market, and underwrite a loan or investment based on that level of risk.

Jette Campbell is a Partner at Carl Marks Advisors, a leading investment bank advising healthcare lenders, investors, entrepreneurs and facility owners. He can be reached at jcampbell@carlmark.com.

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