Introduction

Throughout 2022, the healthcare industry grappled with public health crises, economic and financial pressures and a dynamic regulatory environment. We expect 2023 to continue challenging industry stakeholders. Those best positioned to face legal and regulatory headwinds will be, in turn, best positioned to manage risk, reconfigure care delivery models and capitalize on market opportunities. We summarize below some of the most notable developments expected to impact healthcare in the new year.

The New Arms Race: How Retail Giants Will Reshape Primary Care in the Next Decade

Numerous mega-retailers have a new focus in expanding their market share: the healthcare sector. Similar to the impacts of retail leaders in other industries, these retailers and pharmacy giants have cultivated market share amidst a shift away from traditional brick-and-mortar healthcare providers to a virtual model that will fundamentally reshape the industry over the next decade.

Advancements in technology and the effects of COVID-19 have accelerated this shift, resulting in three emerging trends: (1) technology has prompted an increasing desire for more information when making purchases, including the ability to compare discrete options; (2) consumers who were previously unwilling to participate in remote healthcare services acclimated to them during the pandemic and (3) retail giants have cultivated brand familiarity that is expected to spur customer adoption of healthcare services by nontraditional actors, stimulating a virtuous cycle of company expansion and consumer adoption.

These patterns are evident in the increase in mega-retail company M&A activity over the last five years:

  • Amazon's pending acquisition of primary care provider One Medical, its 2020 launch of Amazon Pharmacy following its 2018 acquisition of PillPack and its recent development of Halo, its wearable fitness bracelet.
  • Walmart's 2019 launch of Walmart Health, which now operates more than 30 health centers in Supercenter Stores; its 2021 acquisition of telehealth provider MeMD Inc. and its partnership with Transcarent Inc., a healthcare platform that offers low-cost prescription drugs to self-insured employers and their employees.
  • Best Buy's 2021 acquisition of Current Health, a remote patient monitoring, telehealth and patient engagement platform, and its 2018 acquisition of GreatCall, a health and medical alert service.
  • Walgreens's 2020 launch of Walgreens Health, which operates "health corners" in ~100 Walgreens stores across the U.S.; its 2022 acquisition of a majority ownership in CareCentrix Inx., a post-acute care company and its 2021 acquisition of a majority ownership in VillageMD, a primary care provider that recently acquired Summit Health-CityMD.
  • CVS's 2018 acquisition of health insurance company Aetna, which has expanded to offer virtual primary care appointments.

These recent acquisitions demonstrate the shift to a new technology-driven model for delivery of healthcare services from consumers' homes and regular retail pharmacies and point toward larger healthcare industry changes to come.

Healthcare Consolidation in the Crosshairs

While much attention has been paid to antitrust review of horizontal health system and hospital mergers, in 2023, stakeholders also should expect to see increased scrutiny of vertical integration. In particular, in late 2021, the Federal Trade Commission (the "FTC") voted to withdraw its approval of the vertical merger guidelines it jointly issued with the Department of Justice in 2020, with the majority of FTC Commissioners asserting that those guidelines "suffer[ed] from serious deficiencies" including overreliance on purported procompetitive benefits of vertical mergers at the expense of diminished market competition. Also in 2021, the FTC indicated that physician practice transactions remain top of mind by issuing orders to six health insurance companies to provide information that will allow the agency to study the effects of physician group and healthcare facility consolidation that occurred from 2015 through 2020.

Further complicating matters, state lawmakers are increasingly seeking to exercise robust oversight over healthcare transactions: these laws allow state agencies to work alongside federal antitrust enforcers to analyze potential anticompetitive effects of healthcare consolidation and, moreover, allow states to review smaller—often vertical— transactions that do not meet federal reporting thresholds. For example, in 2021, Oregon adopted the Equal Access to Care Act, which expressly provides the Oregon Health Authority (the "OHA") with review and approval authority over healthcare mergers and acquisitions. In 2022, California adopted the California Health Care Quality and Affordability Act, which, among other things, established the Office of Health Care Affordability (the "OHCA"), whose portfolio is to collect data informative to the legislature and the public regarding healthcare expenditures. Unlike the OHA, the OHCA does not have the authority to block or challenge healthcare transactions; notwithstanding, healthcare entities will be required to provide the OHCA with written notice of any potential agreement or transaction that will occur on or after April 1, 2024, raising concerns over timing of transactions, premature disclosure, confidentiality and cost.

Provider entities and healthcare investors alike should prepare to navigate an increasingly complex regulatory environment with new, untested transaction hurdles at both federal and state levels.

The Future of Healthcare Data: Implications of the American Data Privacy and Protection Act

The U.S. digital health market is predicted to reach $240.7 billion by 2026, fueled in large part by a dramatic surge in telehealth and mobile healthcare. Digital health companies face an ever-changing landscape of piecemeal data privacy regulation, including the Health Insurance Portability and Accountability Act of 1996, the Federal Trade Commission Act and the Food, Drug, and Cosmetic Act, as well as state laws. Earlier this year, the House Energy and Commerce Committee approved the American Data Privacy and Protection Act (the "ADPPA"), a landmark federal privacy bill with significant bipartisan support. The ADPPA covers a variety of sensitive data types, including "any information that describes or reveals the past, present or future physical health, mental health, disability, diagnosis, or healthcare treatment of an individual." While the ADPPA would not apply to health data already covered by HIPAA, it would apply to all health data not subject to HIPAA regulation—for example, health data controlled by certain tech companies and app developers in the digital-health space.

Though the ADPPA was not passed during the 2022 lame-duck congressional session, the bill provides important insights into the broad-reaching data oversight lawmakers and regulators may seek to exercise in the near future. To prepare, companies and investors operating in the digital-health space may wish to assess how increased regulation might impact health-data usage and liquidity, review and revise existing data privacy risk and compliance protocols and stand up procedures to address enhanced individual data privacy rights, including broad consent, access, deletion and portability rights.

Implementation of the Inflation Reduction Act: What Life Sciences Investors Need to Know

The Inflation Reduction Act (the "IRA"), signed into law by President Biden on August 16, 2022, seeks to lower prescription drug costs, which will significantly impact investors in life sciences companies. Notably, the bill: (1) requires the Department of Health and Human Services (the "HHS") to negotiate maximum prices for certain Part B and Part D prescription drugs and biologics; (2) caps out-of-pocket spending on prescription drugs for Medicare Part D beneficiaries and (3) requires drug manufacturers to pay a Medicare rebate for raising prices over the rate of inflation. Given the expected negative impact of HHS negotiations on manufacturers of successful products, investors should assess whether and how targets have developed or implemented mitigation plans. Further, even though the IRA may lead to increased drug purchasing by eliminating the beneficiary share in the catastrophic phase and capping out-of-pocket spending, corresponding increases in manufacturer revenues may be offset by the additional cost-sharing that will be required when patients exceed their out-of-pocket maximum. Finally, because manufacturers will be required to pay a rebate for raising prices above the inflation rate, investors should evaluate the starting prices of a target's drugs and whether the target has adjusted pricing strategies in light of recent legislative developments.

Artificial Intelligence for Life Sciences and Healthcare Companies

The utilization of AI in medical devices has drastically increased over the last five years, and this pace is likely to continue in 2023 as medical device companies develop new ways to leverage machine learning. A key issue to watch is the increased implementation of dynamically updating AI, which can continuously learn and adapt in real time based on new input data. Medical devices designed to continuously update challenge the Food and Drug Administration's (the "FDA") traditional regulatory framework based on approval or clearance of a static, unchanging device.

In 2019, the FDA issued a discussion paper describing a potential "total product lifecycle" regulatory approach to premarket review for artificial intelligence and machine learning-driven software modifications. In January 2021, the FDA issued its Artificial Intelligence/Machine Learning ("AI/ML")-Based Software as a Medical Device ("SaMD") Action Plan to respond to stakeholder feedback. In the Action Plan, the FDA expressed its intent to issue draft guidance to address Predetermined Change Control Plans. In these plans, developers would anticipate likely modifications to the AI/ML SaMD and provide the methodology used to implement those changes in a controlled manner with appropriate risk-mitigation measures. The FDA review would include premarket risk assessment of the AI/ML SaMD that establishes how patient risks would be continually managed throughout the product lifecycle and set expectations for the manufacturer to monitor any changes. The total lifecycle framework would also require manufacturers to provide continued transparency about the function and modifications of the AI/ML SaMD post-approval through the collection and monitoring of real-world data and subsequent reporting to the FDA.

Click here to continue reading . . .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.