ABA Health eSource
 September 2007 Volume 4 Number 1

ABA Health Law Section’s Summit On Healthcare And Spring Council Meeting, May 24- 27, 2007, Berlin, Germany

During late May 2007, a number of the ABA Health Law Section's Officers, Governing Council members and staff traveled to Berlin, Germany to participate in the "Summit on Healthcare in Germany" that was the product of considerable efforts by Chair Paul DeMuro and his colleagues at Latham & Watkins. The meeting's success validated Paul's goal of expanding our Section's interests (and influence) into concerns shared by health lawyers in other nations. The meeting addressed topics ranging from international public health regulations recently promulgated to arrest the global spread of disease to reforms underway within the German healthcare system to address many issues with which we are very familiar in the United States—such as the spiraling costs of providing healthcare services, insufficiently responsive healthcare delivery systems and inadequate infrastructure to deliver services.

Afterwards, several of us remarked that we gained a greater understanding of the relevance of public health issues to both international and domestic healthcare legal practice. In addition, we found Germany's healthcare reforms eerily reminiscent of experience in the the United States during the 1980's and 1990's, when this country reshaped its healthcare reimbursement systems so dramatically to "reform" the systemic problems of overutilization of services, provision of unnecessary services, and escalating cost.

We hope that the Germans can accomplish their reforms without having to experience some of the same problems we have seen—such as the increased complexity of medical coding and billing regimes; the heightened emphasis on categorizing certain conduct as "fraud" or "abuse" punishable by administrative, civil, or even criminal sanctions; and, the dissatisfaction of healthcare professionals and others with the impersonalized business of healthcare delivery. Perhaps the Germans—who have looked to the United States as a model for their healthcare reforms— can profit from lessons learned in the United States and avoid repeating our mistakes. Paul's vision for the conference—to invite a beneficial sharing of experience, was realized, but the all too brief sessions underscored the need for continued dialogue. In the company of healthcare law colleagues from Germany as well as Canada and the U.K., we relished a rare opportunity to compare selected features of our various healthcare systems with an eye to identifying "best practices" from each. The following paragraphs are summaries by the session reporters—Shelley K. Hubner, Michael E. Clark, and Bill Horton—of the presentations by:

(1) Dr. Paul Gully, Senior Advisor to the Assistant Director – General Communicable Diseases, World Health Organization, Geneva, Switzerland --provided the opening address on the topic of International Health Regulations.

(2) Dr. Henning C. Schneider, a Partner with Latham & Watkins, in its Hamburg, Germany office, who—assisted by Christoph Engeler, LLM, also of the firm's Hamburg office—explained the Privatization of German Hospitals and Nursing Homes; and

(3) Dr. Alexander Kirstein, the CFO of the University Hospital Hamburg, in Hamburg, Germany, who—with Stephan Mertens, Director, GE Healthcare Financial Services, Frankfurt, Germany, and Dr. Jan-Frederik Belling, Director and Head of Healthcare Investments at M.M. Warburg, in Hamburg, Germany—spoke about Foreign Investments in Health Care in Germany.

Shelley K. HubnerInternational Health Regulations:
Report by Shelley K. Hubner, Sedgwick, Detert, Moran & Arnold LLP, San Francisco, CA

Dr. Paul Gully of the World Health Organization initiated our Berlin health law exchange with a rousing keynote address, in which he outlined the principal provisions of the 2005 International Health Regulations ("IHR 2005" or "the Regulations") and their practical application to the health law bar's diverse clients. Dr. Gully was uniquely positioned to offer insight into this evolving area of health law. A physician trained in the U.K. and a former Canadian Deputy Health Care Minister, Dr. Gully presently serves as Senior Advisor to the World Health Organization's Assistant Director-General Communicable Diseases, and is based in Geneva, Switzerland. As a JD/MPH who attempts to keep apprised of emerging public health concerns, I found myself awestruck by Dr. Gully's longstanding commitment to these exceedingly complex issues which undergo continual change. All present were visibly affected by Dr. Gully's reminder that, over the past several decades, threats to international public health security have included nuclear plant disasters, HIV/AIDS, anthrax, SARS, meningitis, cholera, Ebola, chemical spills, and avian influenza.

In explaining the pivotal role of IHR 2005 in responding to these and other threats to international public health, Dr. Gully noted that such regulations have been in the background of all of the events referenced above, as well as others, since their initial adoption by the World Health Assembly in 1969. Such regulations initially focused on six diseases for which quarantine was appropriate, and, following the eradication of smallpox, were amended from 1973 through 1981 to address yellow fever, plague, and cholera. Thereafter, likely fueled by the SARS and anthrax outbreaks (and previously by plague in India), we witnessed a heightened awareness that cataclysmic events are both inevitable and unpredictable and that, with increased "globalization," the risk that an event of public health significance arising in one country will spread elsewhere, magnifies many-fold. Dr. Gully opined that with a "paradigm shift" – "[f]rom control of border to containment at source[,] [f]rom list of diseases to all public health threats[, and] from preset measures to adapted responses" – came greater appreciation of the need for countries throughout the world to work together to ensure international health security.

The stated purpose of the Regulations is "[t]o prevent, protect against, control and provide a public health response to the international spread of disease in ways that are commensurate with and restricted to public health risks, and which avoid unnecessary interference with international traffic and trade." (IHR 2005, art. 2) Significantly broader in scope than their predecessors, they establish a legally-binding global agreement among some 193 countries to safeguard the public health. The Regulations specify rights, responsibilities and protocols for the World Health Organization ("WHO") and United Nations member states. They are founded on an international agreement to share responsibility and collectively defend against the spread of disease and feature specific consultation, notification, verification and assessment requirements and "national core capacity requirements," e.g., the ability to identify diseases and events of public health significance.

As Dr. Gully summarized, IHR 2005 sets forth principal approaches to continuous risks (e.g., routine measures at borders (for travelers, goods, etc.) and specific measures for certain known risks (e.g., vector control and vaccination), but, most importantly, establishes detection and assessment techniques to identify new risks. The Regulations require participants, within 24 hours of assessment of any event that may constitute a "public health emergency of international concern ("PHEIC"), to consolidate input from relevant sectors and agencies, to notify WHO by the most efficient means of communication, and to continue to forward detailed information concerning the PHEIC to WHO. In assessing the potential impact of any reported event, WHO may rely upon unofficial sources, seek verification from the notifying state, and/or conduct an on-site assessment. It came as no surprise that WHO trolls the Internet for reports of international outbreaks, and, moreover, that the majority of information WHO receives has its genesis there. Previous constraints on WHO to act only following receipt of official country reports have been lifted.

Dr. Gully reported that the Regulations target designated airports, ports, and ground crossings as intervention points to strengthen public health security. To achieve this goal, the Regulations require 24/7 access to medical care, transport of ill travelers, conveyance inspection, and vector/reservoir control, as well as response to events via an emergency contingency plan, isolation, interview and quarantine, and specific control measures. Such efforts implicate cutting-edge legal issues, from human rights (e.g., how long individuals can be kept in quarantine), to fundamental freedoms, to confidentiality (e.g., disclosure of personal health information and other data.)

Effective implementation of the Regulations is pivotal to rapid containment of pandemic flu and other diseases at their source. Dr. Gully noted that reservations among member states regarding the importance of virus sharing threaten to restrict public access to critical vaccines. For example, Indonesia recently asserted an intellectual property violation when a developed country used samples of a virus to develop a vaccine without first obtaining consent from Indonesia, where the virus first occurred. Gazing into the proverbial crystal ball, he suggested that we should anticipate legal challenges involving both patent and international law, requiring a balance of intellectual property rights with IHR 2005 duties of countries to share such material with others. Further, since the United States accepted the Regulations with reservations as to whether they would be applied consistent with the principles of federalism, risk exists that the federal government will not obtain the information required from the various states to comply with IHR 2005.

The significant issues with which Dr. Gully and WHO grapple on a daily basis affect many of our healthcare clients, including hospitals, clinics, and healthcare professionals (as first responders) and government and other agencies (whose data WHO must tap to verify the existence of a PHEIC.) Those among us who may not define ourselves as "public health" attorneys nevertheless may meet this description for IHR 2005 purposes.

MIchael E. ClarkPrivatization of German Hospitals and Nursing Homes:
Report by Michael E. Clark, Hamel Bowers & Clark LLP, Houston, TX

Dr. Henning C. Schneider and Christoph W. G. Engeler, LL.M., of Latham & Watkin's Hamburg, Germany office presented a thought-provoking session entitled "Privatization of German Hospitals and Nursing Homes." Their presentation began by focusing on trends in the German hospital market, most notably the dramatic shift from a system of predominantly public hospitals to a mixed system with an increasing number of privately-owned hospitals.. Then, Dr. Schneider and Mr. Engeler covered the various challenges facing Germany in privatizing the hospital market, including the problems of addressing large pension liabilities; the transfer of unionized employees; the transfer of hospital subsidies; the investment obligations required of buyers, such as maintaining a hospital or nursing home in a certain location in order to obtain governmental permission to acquire the business; and other difficult problems, including antitrust prohibitions on clustering (market power considerations), and determining the right purchase price in light of the various conditions imposed by the local and federal governments on the buyers.

In addressing the German hospital market, Dr. Schneider and Mr. Engeler noted the following major market trends: (a) fewer hospitals than in the past, (b) fewer hospital beds, (c) shorter hospital stays, and (d) lower occupancy rates in existing hospitals. In addition, the German government faces increased pressures from escalating costs of healthcare delivery and the enormous costs from reunification with the former East Germany. Consequently, state subsidies provided to German hospitals have been decreasing, which has put pressure on existing hospitals to get by with fewer resources or to privatize

They estimated that another 300 hospitals will close within the next ten years (especially non-specialized hospitals that have fewer than 200 beds) and predicted that hospitals will increasingly specialize. This change, they observed, is largely due to Germany's switch to a DRG (Diagnosis-Related Group) system—the convergence phase of which ends in 2009. In the past, hospitals had relied on state subsidies for their capital investments, which have decreased by 26 % since 1991. On the other hand, they noted that c onstruction costs for new hospitals have risen sharply, on the order of 260% per bed since 1973). As a result of these factors, there is reportedly an investment backlog of about $40 billion for the German healthcare market that is unfinanced.

In explaining some of the other pressures faced by the hospital segment of Germany's healthcare market, Dr. Schneider and Mr. Engeler noted that, in 2007 the German VAT (value-added tax – a tax on the consumption of goods and services) increased from 16% to 19%, while standard wages for workers increased as a result of tariff strikes in 2006, and that the collective bargaining agreement for public employees provides for higher salaries than other collective bargaining agreements applied in the industry. Moreover, oftentimes due to political reasons, dismissal of unproductive and overpaid workers is not a practical option. Making profitable operation even more difficult, the purchasers of these formerly public hospitals have had to take on huge pension liabilities, for which inadequate reserves typically have been set aside . The pension liabilites involved can exceed the purchase price, which means that, if the newly privatized entity is going to succeed, there is a great need for the German government to grant a guarantee regarding the pension claims that were accumulated for these entities while they were under public ownership. To illustrate the various intricate problems, Dr. Schneider and Mr. Engeler provided several case studies, including a case study about the privatization of nursing homes in the city of Hamburg during 2006-2007, which is reported below.

Case Study of Privatizing Nursing Homes in the City of Hamburg

The privatization transaction involved ,12 nursing homes situated on about 48 hectares of real estate owned by the city of Hamburg. (A hectare is a unit of area equal to 10,000 square meters.) These institutions represented a 20% market share of Hamburg's nursing home sector and provided an all-encompassing range of nursing care services, including inpatient dementia care. These nursing homes collectively had a 98% mean capacity utilization rate, operating with approximately 3,100 beds and 1,650 employees, and they had aggregate revenues of about $130 million during 2004-2005.

The objectives of the local government in privatizing the nursing homes were to: (1) preserve and extend the 12 locations by means of purchaser investments in the nursing homes, (2) secure and optimize the quality of services being provided through innovative nursing care planning; (3) obtain complete and permanent withdrawal by the city of Hamburg from managing inpatient care operations; (4) transfer the current employees while securing their jobs; (5) obtain a reasonable purchase price for the facilities; and (6) strengthen the Hamburg marketplace by obtaining the purchasers' financial commitment.

To accomplish these goals, a two-step plan was developed: spin off the nursing care business to a Nursing Care Institution under public law, and transform the institution into a Nursing Care GmbH (a German entity that is similar to a U.S. corporation). A State Act was required for both steps—known in LBK Hamburg privatization as an "Auftrennungsmodell." This two-step scheme involved a high transactional expense for the purchaser. To accomplish this required substantial transactional and privatization planning.

As this example and others presented by Dr. Schneider and Mr. Engeler illustrated, there are substantial financial opportunities available in Germany for transactional healthcare attorneys to assist in helping this nation reform its healthcare delivery systems. This case study also illustrates the importance of working with local counsel familiar with the various local customs, laws, and major players in a foreign venue if such work is to be successful.

William W. HortonForeign Investments in Health Care in Germany:
Report by William W. Horton, Haskell Slaughter Young & Rediker LLC, Birmingham, AL

Dr. Alexander Kirstein, Stephan Mertens and Dr. Jan-Fredrik Belling provided a multifaceted discussion of the growing impact of, and new opportunities for, foreign investment in the German healthcare industry in light of the increasing wave of privatization. Dr. Kirstein led off this portion of the presentation with a detailed description of the strategic realignment of University Hospital Hamburg ("UKE"), a 1,500-bed academic medical center in one of Germany's leading economic centers, using that institution's experience to illustrate the opportunities available to foreign investors in light of the evolving dynamics of the German healthcare system.

Dr. Kirstein described how, for many of the reasons alluded to above, UKE had found itself in a financially perilous situation despite its position as the only academic medical center in Hamburg. At the beginning of the process, UKE was losing €36 million annually on revenues of €430 million, with debt of €120 million. Its available capacity exceeded demand by 30%, and it had high maintenance and operating costs with a substantial capital investment backlog.

UKE's leadership determined to meet these challenges by refocusing its emphasis on competencies that it, as an academic medical center, could do best (e.g., teaching, research and treatment of high-acuity/rare disease cases), accompanied by a "Miracle on 34th Street" strategy of steering patients whose needs fell outside of those core competencies to other institutions who "did it best". At the same time, UKE strove to change its governance and its institutional culture to promote teamwork, and acquired other institutions in Hamburg and developed partnerships in other markets to broaden its patient base. In perhaps its most unusual strategy, UKE joined in the development and management of a new hospital in Kuwait, allowing it to participate in a new market not constrained by prevailing economic and cultural factors in Germany.

In sum, Dr. Kirstein suggested that the UKE experience showed how an institution committed to change could significantly improve its operating performance and growth platform by adopting strategies familiar in other markets, while still providing key services to its historic constituencies in Germany.

Dr. Belling then took the floor, discussing M.M. Warburg's perspectives on privatization of healthcare services in Germany, which he characterized as the other side of the coin from investment. Dr. Belling noted that historic and cultural factors, as well as legal constraints, made privatization a slow process in Germany. However, he observed that the opportunities presented by the large public ownership of hospitals in Germany – the largest hospital market in the European Union – and the diminishing public funds available for hospitals made privatization opportunities increasingly attractive to foreign investors.

According to Dr. Belling, the implementation of the DRG system in 2004 created greater transparency in the hospital market. With this transparency came an increase in single-facility acquisition/privatization transactions as a way for foreign private investors to enter the market. While Dr. Belling believed that the need for private capital would drive an increase in foreign investment in/ownership of German hospitals, he noted that the high degree of regulation in Germany still made deals complicated and slow.

Mr. Mertens next described the financing activities of GE Healthcare in Germany in the areas of equipment finance, real estate finance and corporate financial services. According to Mr. Mertens, GE believes that the separation of healthcare facilities into real property companies and operating companies provides greater financing activities, by allowing for investment and lending activities tailored to particular risks. He also observed that the long-term care sector potentially provided greater opportunities for foreign investment than the hospital sector because of its relatively lower complexity.

Mr. Mertens stressed that foreign investors needed to educate themselves on the peculiar nature of the German healthcare market before entering it and that to be successful, foreign investors should expect to make a long-term commitment to the market. He noted that the market was highly fragmented and localized in all sectors, so that there were few "big ticket" investment opportunities to be had.

In a lively question-and-answer session, the panelists reviewed a number of the key dynamics that made the investment environment complex, including

  • Governmental preference for dealing with familiar names and domestic enterprises as opposed to new players or those from outside Germany
  • The strong regulatory and cultural requirements for protecting existing employment levels and employee benefits, and the strength of labor unions in the German market
  • The lack of integration between the acute and ambulatory sectors
  • The lack of cultural familiarity with competition in light of historic central planning
  • Poor alignment of incentives between hospitals and physicians
  • The role played by government subsidies, and the requirement of government consent to private financing structures

Again, this panel made observed that the characteristics of the German healthcare system should look very familiar to those who lived through the many changes in the U.S. system in the 1980s. As a result, there are undoubtedly opportunities for well-heeled foreign investors to tap into emerging competition and innovation in the German market. However, outside investors who fail to understand both the German regulatory environment and the unique cultural characteristics of a nation that is still very conscious of the socialist influence on its history and still grappling with the enormous pricetag from reunification may find the market to be a challenging venue.