Restrictions for financial investors in the German health care sector due to new regulations
Due to stable cash flows and the largely fragmented structure of the German healthcare sector, this sector has traditionally been very popular for private equity investors and the interest in it has steadily grown over the past few years. According to a recent study by global management firm Bain & Company, the deal volume for private investments in the European healthcare sector rose from USD 4,6 bill. to USD 12,8 bill. in 2017, whereby most of this growth falls on the German healthcare market. For private equity houses, so-called medical care centres (MCC) have been of particular interest, next to other sub-sectors like hospitals or care and elderly homes.
MCCs have been introduced by the German legislator as a new statutory form of permitted health care provider 16 years ago in 2003. Other than usual medical practices with one doctor and up to two employed professionals, MCCs allow the foundation and assembly of an unlimited number of branch practices with a potentially much larger number of professionals working in these practices under the roof of one MCC. Thus, MCCs offer an interesting opportunity for private equity investors looking for investments in the outpatient care sector and allow the pursuit of a buy and build strategy.
However, investments into MCCs are regulated and MCCs are only allowed to participate in the German statutory health insurance (SHI) system established under the Fifth Social Security Code (Sozialgesetzbuch V) under certain requirements. Most importantly, MCCs can only be founded by a limited number of so-called "eligible founders", which are SHI-admitted dentists or physicians, SHI-admitted hospitals, dialysis care providers, SHI-admitted non-profit organisations and municipalities. Thus, for non-medical investors to be able to participate in an MCC, they have to participate in one of these eligible founders, which is in practice done by acquisition of small SHI-admitted hospitals.
A further advantage for dental MCCs, which made investments particularly interesting, is that unlike for most other physical professions (like e.g. nephrologists) admittance to the SHI is not limited in planning areas, meaning that dentists – and thus also dental MCCs – could freely choose where to open a new practice. For this reason, dental MCCs became a popular target for private investors with several transactions which took place in this sub-sector in recent years.
However, the increasing number of dental MCCs and of private equity investments has been eyed critically by dentists working in single practices. These dentists, which are represented by the Federal Association of SHI-Admitted Dentists (Kassenzahnärztliche Bundesvereinigung), argue that MCCs mainly aim at maximising profits rather than at offering an optimal treatment to their patients. Therefore, the association already in the past started several attempts to limit the attractiveness of dental MCCs, e.g. in 2016 when the association lobbied for the introduction of a limitation of the permitted number of dentists in an MCC.
Federal Health Minister Jens Spahn (CDU) has now taken on the criticism of the dentists lobby and the Deutsche Bundestag, the German parliament, on March 14th approved in plenary his draft Act on Appointment Services and Healthcare (Terminservice- und Versorgungsgesetz, TSVG). The act aims at restricting opportunities of financial investors investing in dental MCCs by limiting the market shares a dental MCC may have in a planning area:
Based on a new quota system, the establishment of new dental MCCs by one SHI-admitted hospital is only permitted if the share of dental care supply by all MCCs held by this hospital in the respective planning area does not exceed 10 per cent. The permissible share increases to 20 per cent. in areas of an undersupply with dentists and is reduced to only 5 per cent. in planning areas with an oversupply of dentists. However, the understanding of a planning area is not yet clear, in fact the wording of the law states that the planning area applies to a particular hospital whereas the explanatory memorandum applies it to all hospitals within the planning area.
As most dental MCCs have been founded in cities, where a large number of patients can be accessed and where usually an oversupply exists, the 5 per cent. threshold will often apply. In fact, in 80 out of 205 planning areas an oversupply exists and only one planning area in Germany is statistically undersupplied according to the Federal Association of SHI-Admitted Dentists. The study also examined that the market share of dental MCCs held by financial investors is about 10-12 per cent. From mid-2020 on the actual supply level of a particular planning area needs to be published by the relevant Regional Association of SHI Admitted Dentists.
Thus, the new quota system, even though it falls short of more far-reaching demands of the dentists lobby, will inhibit buy-and-build strategies and will thus have a critical impact on investment possibilities in dental MCCs.
Fortunately, the initially discussed restrictions on MCCs specialized in non-medical dialysis care to only be allowed to found in this field specialized MCCs were not retained as such. Hence it is possible to combine non-medical dialysis care with other medical services such as general practise, internal medicine, urology, cardiology or radiology. This enables the legislators' intention to meet the requirements of the complex supply situation in the German health sector. However, the new rules apply only to the power of founding a new MCC and do not aim to limit services to specific patient groups. In addition so called practice networks (Praxisnetze) have also the authorization to establish a MCC. A practice network is a cooperation of practitioners, who work and/or only organize themselves together.
In order to retain admission it now will be possible to sell existing shares of an MCC to employed doctors if the doctor continues to work there.
The new act is going to be submitted to the Federal Council in April and is anticipated to enter into force in early May. The new regulation will then need to be discussed and examined closely.
Maximilian Uibeleisen, regulatory partner in our Frankfurt office, states: "Due to the new act investments in medical care centres will become more challenging, but we expect that investments will still remain an attractive option for profitable investments." "Key to a successful strategy is to discuss and examine all circumstances closely and with the necessary professional competence." adds Bernd Egbers, partner and head of the finance department. Ashurst looks back on a long experience in M&A and acquisition finance in the health care industry in Germany and has inter alia recently advised a private equity investor on its investment in a dental medical care centre. Our experts lead you successfully through the emergence of additional obstacles due to recent regulatory chances.
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