Fluent Essays

For a successful case write up, you will need the following:Case papers should address the key issues that pertain to the financial strategy and then make clear recommendations with as much support as possible.Papers should be no more than three double-spaced pages (not including exhibits) and include a cover page with your name, the date, the course number, and the title of the assignment (case name).Papers should be organized into specific sections. For example, Background, Key Issues, Recommendations with support. Keep the Introduction short and dont be so quick to jump to the recommendation. If the issues are wrong, the recommendation cant be correct.Your grade will depend on how well you identify the issues and argue your recommendation.All Footnotes and References Must use the APA Format.The answer is not on the internet. You may use the internet for additional background and information, but I dont care what the company actually did. All that really matters is in the case.Remember that you only have three double-spaced pages for text. If you wish to use charts or financial analysis to support your recommendation, use an exhibit. Dont waste space and put it in the text. national_medical_care___nacra.doc Unformatted Attachment Preview National Medical Care In 1996, National Medical Care of Waltham, Massachusetts, a division of W.R. Grace and the largest dialysis service company in the United States, was put in play when the division President, Dr. Constantine Hampers, after a losing struggle to gain the role of W.R. Grace Chief Executive Office, made an offer to purchase the division for $4 billion. Immediately following his offer, several competitive offers followed from competing dialysis service providers and manufacturers of dialysis products. Dr. Hampers offer was immediately rejected. Background End Stage Renal Disease or ESRD is characterized by the irreversible loss of kidney function requiring treatment with a synthetic kidney or a transplant to continue life. ESRD currently impacts the lives of more than 305,000 patients in the United States.1 Incidence of kidney failure is increasing as a result of the aging population, diabetes, hypertension, glomerulonephritis, and cystic kidney disease. Nearly 80\% of all patients with ESRD acquire the disease as a complication of one or more of these primary 1 United States Renal Data System: USRDS 1999 Renal Data Report. National Institutes of Health, National Institutes of Diabetes and Digestive and Kidney Disease. Bethesda, MD 1999 pp. 26 1 conditions.2 Diabetes alone accounts for over 33\% or 100,892 of the total ESRD patients with hypertension representing 24\% or 72,961 patients. Obviously, any therapy advancements made in these disease areas could significantly slow the growth of this condition. Based on information published by the Health Care Financing Administration (HCFA) of the Department of Health and Human Services, the number of patients in the US who received chronic dialysis grew from approximately 66,000 in 1982 to approximately 214,103 by the end of 1996. This represents a compounded annual growth rate of 9\%.3 This annual growth rate may be attributed to a continuing growth of the general population, better treatment and survival of patients with hypertension, diabetes, and other illnesses which lead to ESRD. Moreover, improved technology has enabled older patients and those who could not tolerate dialysis due to other illnesses to benefit from this life sustaining treatment. The End Stage Renal Disease program, almost entirely funded through the Federal government, has been a policy success story. “It has achieved the overriding goal established by Congress 20 years ago of financing expensive, lifesaving medical care for a highly vulnerable, very sick population.”4 Until the arrival of managed care, a program supported by the government and employers, the End Stage Renal Disease Industry responded to Medicare budget cuts with efficiency, equipment technology, and expense adjustments. But managed care has changed the playing field.5 A steady reduction in 2 Ibid Ibid, pp. 39-56 4 Iglehart, J.K. “The American Health Care System. The End Stage Renal Disease Program.” The New England Journal of Medicine. Health Policy Report February 4, 1993., Vol. 328, No 5, p 366 5 Ibid 3 2 reimbursement from these third party payers combined with a Medicare program unwilling to increase rates, has made profitability for service providers a difficult task. In 1993, the federal government enacted the Omnibus Budget Reconciliation Act of 1993 (OBRA). Under OBRA, the federal government amended the statutory ESRD Medicare Secondary Payor provisions affecting the coordination of benefits between Medicare and commercial health plans in the case of ESRD patients from the age of 65 and over who are eligible for Medicare and also covered by an employer health plan. This amendment lengthened the waiting period by three months effectively shifting an increasingly amount of the cost to non governmental third party payers. A significant portion of dialysis service providers revenue are derived from reimbursement provided by non-governmental third party payers. A substantial portion of third party health insurance in the United States is now furnished through some type of managed care plan, including health maintenance organizations (HMOs). Managed care plans are increasing their market share overall, and in the Medicare population in particular. This trend may accelerate as a result of the merger and consolidation of providers and payers in the health care industry, as well as discussions among members of Medicare and Medicaid beneficiaries served through managed care plans. Currently, there are only two types of treatment for ESRD: dialysis and kidney transplantation. Transplants are limited by the scarcity of compatible kidneys. Approximately 12,200 patients received kidney transplants in the United States during 3 1996.6 Therefore, most patients must rely on dialysis, which is the process of removing toxins and excess water by artificial means. The primary types of treatment options for dialysis patients are hemodialysis and peritoneal dialysis and are based on the patient’s medical conditions and needs. According to HCFA, in 1996 there were approximately 3,082 Medicare certified ESRD treatment centers in the United States. Ownership of these centers was fragmented. As of 1996, the ten largest providers of dialysis accounted for approximately 1,500 facilities (49\% of the facilities) and care for 108,000 patients (50\% of the patient population). Privately owned freestanding clinics represented 27\% of the facilities and hospital based clinics accounted for the remaining 23\%.7 The dialysis industry has experienced significant consolidation in recent years. Large chains have continued to purchase small to medium independent operators and chains. In 1994, National Medical Care, the largest provider of dialysis in the United States, acquired several dialysis centers for a total of $145.3 million in cash.8 Over the next 12 months, National Medical Care increased their acquisitions, spending $260.8 million by the end of 1995. By contrast, the second largest provider of dialysis services, Vivra, spent only $4.3 million in dialysis related acquisitions in 1994.9 Small public companies have entered the dialysis market and have offered stock to acquisition targets, which has further accelerated the consolidation process. For example, in 1994, Renal Treatment Centers (Purchased by Total Renal Care in 1998) spent $50.3 million in cash, issued 87,608 shares of common stock valued at 6 United States Renal Data System: USRDS 1999 Renal Data Report. National Institutes of Health, National Institutes of Diabetes and Digestive and Kidney Disease. Bethesda, MD 1999 pp. 102-112 7 Ibid, pp. 165-171 8 W.R. Grace, 1994 Annual Report, p. 37 4 approximately $1.8 million and issued a $7.5 million dollar note for seven acquisitions completed during the year. These acquired centers provided care to approximately 1,373 patients.10 Because of this increased consolidation, the availability of acquisition targets has decreased significantly. Part of the consolidation attractiveness to chains has been the ability to group additional facilities under a centralized management system. This centralized system allows the provider to hold a tighter control over the expenses and operation of individual facilities. For example, billing may be conducted for several states through one location providing the dialysis chain with increased personnel cost savings. However, this does not mean that the corporate office dictates prescriptions for dialysis patients. Each facility conducts its operations, in large part, upon the applicable laws, rules and regulations of the jurisdiction in which the center is located. A patient’s physician, either affiliated with the provider or a physician with staff privileges, has medical discretion as to the particular treatment modality and medications to be prescribed for the patient. Similarly, the attending physician has the authority in selecting particular medical products for each patient. Acquisitions of these centers, primarily by larger chains or operators of smaller physician owed clinics, range widely with regards to purchase price. “Purchasing terms are usually based on potential revenue, i.e., number of regular patients in the facilities. Prices range from $10,000 to $40,000 per patient. During 1988-89, one hospital in Ohio bought a unit with 50 patients for $2.3 million, i.e., $46,000 per patients. The average purchase price in 1988, however was estimated at $18,000 to $20,000 per patient. Prices 9 Vivra, 1994 Annual Report, p. 17 Renal Treatment Centers, 1994 Annual Report, p. 14 10 5 apparently fell in 1989 to an estimated range of $15,000 to $18,000 per patient; changes in federal income tax law, quite independent of ESRD, significantly slowed corporate acquisitions. In states without CON (Certificate of Need) regulations, the prices tend to be lower.”11 National Medical Care National Medical Care or NMC, was established in 1972 by Dr. Constantine Hampers and is the largest provider of dialysis services in the United States with approximately 574 outpatient clinics and a patient base of 50,000.12 On a per patient basis, NMC held approximately 25\% of the service market. But despite its size, NMC had not grown so large without controversy. In 1995, The New York Times ran a series of articles on dialysis and specifically mentioned problems at National Medical Care as well as questionable business practices that could impact the quality of care for each patient. One such practice, known as “reuse,” reduces the service providers medical supply cost significantly by reusing a patient’s dialyzer several times with the same patient despite a warning label on each dialyzer that states “Single Use Only.” While potentially inflammatory, research in dialysis has yet to prove reuse is harmful to patients undergoing treatment. 11 Rettig, R.A., and Levinsky, N.G. Kidney Failure and the Federal Government, Committee for the Study of the Medicare End Stage Renal Disease Program, National Academy Press, 1991, pp. 130 12 Wall Street Journal, February 5, 1996 6 In 1995, NMC had sales of $2.077 billion, an increase of 10.75\% over 1994 sales of $1.875 billion. Pretax operating income for this same period increased from $287 million in 1994 to $315 million in 1995.13 (exhibit 4 ) The Bids Baxter International Inc. Baxter is currently the largest manufacturer of dialysis products worldwide holding 42\% of the approximate 3.1 billion dollar market. For 100\% of the outstanding stock, Baxter has offered $3.8 billion in stock and debt. Under the proposal, Baxter would include $1.8 billion in Baxter stock, extend W.R. Grace a note of $300 million, assume debt of $425 million, and make a cash payment to W.R. Grace of $1.275 billion. If the transaction is completed, Baxter would emerge the largest integrated dialysis company in the world. Fresenius AG (Germany) Fresenius AG is one of the largest manufacturers of dialysis products in the world with an estimated market share of 13\%. (exhibit 2) Fresenius owns and operates a few dialysis clinics in Europe and South America. Unlike Baxter, which has made an offer to purchase 100\% of the outstanding stock, Fresenius has offered $2.3 billion for 13 1995 W.R. Grace Annual Report 7 approximately 55.2\% of NMC’s stock. The remaining 44.8\% of the outstanding stock would be held by existing W.R. Grace shareholders. Under this proposed transaction, Fresenius estimates 1996 sales of $3.5 billion and would become the largest fully serviced provider of dialysis in the world. The deal would be completely financed through an issue of debt. Conclusion The W.R. Grace Board of Directors needed to make a decision and the market was waiting. The Board had set its mind to selling the division, it was just a question of adequate price and fulfilling their obligations to their shareholders. 8 Exhibit 1 Medicares ESRD Spending Hospital Admission Dialysis Treatment Drugs Physician Visits/Fees Lab Transportation Other 38.0\% 28.5\% 10.5\% 10.5\% 3.0\% 2.0\% 8.0\% Source: Health Care Financing Administration 9 Exhibit 2 Dialysis Products Market Worldwide Baxter Gambro Fresenius Other 42.0\% 32.0\% 13.0\% 13.0\% Source: Wall Street Journal 2/5/96 10 Exhibit 3 Market Comparison Between Service Providers 1994 Revenue (millions) Pretax Profits (millions) Intl & Domestic Clinics NMC $ 1,875.1 $ 227.1 624 Vivra $ 284.0 $ 50.0 150 REN $ 132.0 $ 14.0 60 RTC $ 87.0 $ 12.0 46 TRC $ 81.0 $ 11.0 65 Source: Company Filings 11 Exhibit 4 National Medical Care Financial Snapshot 1995 1994 1993 Revenue $ 2,076.8 $ 1,875.1 $ 1,512.9 Income before Tax* $ 104.6 $ 227.1 $ 192.0 Tax $ 82.6 $ 102.4 $ 76.7 Net Income $ 22.0 $ 124.7 $ 115.3 *Includes allocation of interest expense of 93.5, 60.4, and 43.9 for 1995, 1994, & 1993. Source: 1995 W. R. Grace Annual Report 12 Exhibit 5 National Medical Care Net Assets as of Dec 1995 Current Assets Property & Equipment Other Assets $ $ $ 665.9 399.3 993.7 Total Assets $ 2,058.9 Current Liabilities Other Liabilities $ $ 533.8 89.8 Total Liabilities $ 623.6 Net Assets $ 1,435.3 Source: 1995 W.R. Grace Annual Report 13 ... Purchase answer to see full attachment