Hospitals Launch a 5th Amendment Constitutional Takings Challenge against the New Jersey Medicaid and Charity Care Programs

Fourteen acute care hospitals have filed a lawsuit suit, the first of its kind in New Jersey, alleging that the State has “taken” the hospitals’ property without just compensation. The hospitals claim that N.J.S.A. 26:2H-18.64 (the “Take All Comers Statute”), which requires New Jersey hospitals to provide medical treatment to all patients who enter their doors, regardless of the patients’ ability to pay, results in an unconstitutional “taking” of the hospitals’ property in violation of the Takings Clauses of the United States and New Jersey Constitutions.

To comply with the Take All Comers Statute, hospitals must permit continuing access to hospital real property and treatment facilities by all patients, including Medicaid and charity care patients, for the duration of their hospital stay and to the exclusion of other patients.  While physically on the hospitals’ property, these patients also use and consume the hospitals’ personal property in the form of medications, equipment, food, linens, treatment staff time and other services, depriving use of these resources for the benefit of the paying public.

The hospitals argue that the scope of all their property taken through the mandate of the Take All Comers Statute constitutes a “physical invasion and appropriation of property” resulting in what SCOTUS has called a per se unconstitutional Taking.  Several SCOTUS cases support the hospitals’ claims. The first is Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982), which found that a per se taking occurs when there is a permanent physical invasion of property no matter how minor. In that case, the permanent physical invasion was New York’s requirement that landlords install a cable box on landlords’ apartment roof tops.  In a second case, Nollan v. California Coastal Comm., 483 U.S. 825 (1987), SCOTUS focused on the limitation placed on a property owner’s ability to exclude others from physically being on his property (there, the inability of the property owner to exclude the public from using an easement over his property to access a nearby beach).  In such a case, the property owner is not permitted to use his property as he sees fit — a right, SCOTUS found, that “has traditionally been considered one of the most treasured strands in an owner’s bundle of property rights.” In the third and most recent case, Horne v. Dept. of Agriculture, 135 S. Ct. 2419 (2015), SCOTUS made clear that the government’s obligation to pay just compensation not only applies to the “taking” of real property, but also includes the “taking” of personal property. Therefore, the government’s requirement that California raisin growers set aside a portion of their crop in order to stabilize crop prices constitutes a per se taking, requiring the government to pay fair market value for the portion of the raisin crop that they were required to set aside.

In the same way the government’s actions in the Loretto, Nollan, and Horne cases appropriated property from one private party to either the government itself or another private party, so too does the Take All Comers Statute’s requirement that a hospitals’ beds, medications, equipment, supplies and services are to be used to treat Medicaid and charity care patients constitute an affirmative appropriation of that property for a public purpose, entitling the hospitals to receive just compensation from the State. Stay tuned…

Health Care Industry Continues to Provide Opportunities for Private Equity Investors

In 2015, health care will remain an important area of for private equity investors who capture targeted opportunities. Merger and acquisition activity (M&A) peaked in 2014, though opportunities for strategic partnerships between investors and healthcare firms still do exist.

M&A: In 2014, the health care industry experienced unprecedented M&A activity, as corporate health care firms recognized that the high, non-cyclical growth rates they had enjoyed in the past were unlikely to continue.  The firms that merged attempted to populate their portfolios with growth assets, rid themselves of low-growth assets, and take advantage of financial opportunities such as tax inversions.  This level of M&A activity seems to have peaked in 2014.

Private Equity: In 2015, investors will still face hurdles to generate high returns on their investments, due to high valuations persisting from 2014, a small number of large-scale assets, and keen competition from strategic buyers and investors.

Current opportunities for investment include carve-out assets that continue to hit the market, as strategic firms keep repositioning their portfolios for growth.[1] Recent strategic partnerships that have taken advantage of carve-out assets include 1- Water Street Healthcare Partners, LLC, a strategic investor who specializes in growing, middle-market healthcare companies, partnering with Walgreens in a deal that merged Walgreens’ Take Care Employer Solutions worksite health business with Water Street’s CHS Health Services worksite health business, and 2-Madison Dearborn Partners’ (MDP), a private equity firm, partnering with Walgreens on the carve-out of Walgreens’ home infusion business, whereby Walgreens sold fifty one percent (51%) of its infusion services business[2] to MDP.

Funds are expected to continue to invest across a wide variety of segments, including:

  1. Population health management, driven by the changing health care landscape in the US;
  2. Next-generation behavioral health, where behavioral health clinics in the US take more of a role in managing the overall health of their populations;
  3. Dermatology, as growth in the aesthetics product portfolio enable clinics to further insulate themselves from reimbursement risk;
  4. Physical therapy, where consolidation by chains will likely accelerate;
  5. Retail health (e.g., dental and veterinary clinics), which continues to offer insulation from reimbursement risk as well as consolidation opportunities;
  6. Contract Research Organizations (CROs), where fragmentation persists despite the level of private equity activity over the past few years; and
  7. Over-the-counter (OTC) manufacturers, including vitamins, minerals and supplements, where there remains significant opportunity to “pre-consolidate” assets to bring them to sizes that are attractive to large strategic buyers.[3]The opportunity for healthcare investors is still large, and the potential for strong returns remains. Funds should focus on sourcing assets that best fit with their investment strategies, and essay to bring those assets to full potential in order to earn high returns on their investments.

[1] Carve out assets are assets generated from a parent company selling a minority share of a child company, usually in an initial public offering (IPO), while retaining the rest. The child company has its own board of directors and financial statements, but benefits from the parent company’s resources and strategic support.  The parent company may eventually sell the rest of the child company in the open market, also called a partial spinoff.

[2] Infusion therapy is the practice of administering specialty drugs to patients intravenously, either via injection or catheters, in a variety of settings.

[3] Source: Global Healthcare Private Equity Report 2015, Bain & Company.

Amarin Sues FDA Because It Cannot Promote Off-Label Use of Vascepa

A small pharmaceutical company called Amarin — based out of Dublin, Ireland –recently filed a Complaint for declaratory relief against the FDA in the United States District Court for the Southern District of New York. Amarin along with four physicians that prescribe its drug, Vascepa (omega-3 fatty acid derived from fish), allege constitutional violations of the First (freedom of speech) and Fifth (restriction against vague laws) Amendments of the United States Constitution. An Answer has not yet been filed.

The promotion of off-label drugs is the heart of this case. Amarin would like to share with potential prescribers the results of its 2011 clinical study that Vascepa lowers triglycerides, a kind of fat in the blood associated with heart disease, in patients with “persistently high” levels. However, the FDA currently only approves the drug for use in patients with extremely high levels of triglycerides.

Amarin seeks to provide the off-label information to prescribers and not the general public. Physicians, who are permitted to prescribe off-label, are already prescribing the drug in line with the clinical study and Amarin takes the position that these physicians are currently inadequately informed. Further, Amarin seeks to disclose information that is truthful and not misleading.

Opponents have said that Amarin seeks to sidestep the FDA.  If drug companies were permitted to share the results of clinical studies with physicians, there would be no motivation to obtain FDA approval. The FDA has declined to comment other than to state that more comprehensive guidance is on the way. The resolution of the lawsuit as well as the FDAs anticipating guidance may have far-reaching implications for off-label promotion of drugs.