Sizing Up Health Care

Consolidation in health care industry spurs migration of attorneys to large multipractice firms

When Gerald Hinkley decided on a change of scenery for his health care practice, small and regional firms didn't make his shortlist. With deals he's handled for community hospitals and academic medical centers growing bigger and more complicated each year, Hinkley was looking for a big firm with its fingers in everything from government regulations and litigation to corporate transactions and real estate. Hinkley joined Pillsbury Winthrop Shaw Pittman as co-chairman of the health care industry team last January after 15 years at Davis Wright Tremaine.

"The client base hasn't changed, but the complexity of what they need has really changed," Hinkley said. "Davis Wright was a great firm, but to maintain my client base I needed to be more full service in California." Last year, he says, he worked with 42 Pillsbury attorneys from different practice areas -- including lawyers from the corporate, litigation, real estate, M&A, pension, tax and regulatory groups. He said he had some access to that variety of expertise at the 425-attorney Davis Wright, but they weren't in California, the state most of his clients call home. (Hinkley has represented Marin General Hospital, Lucile Packard Children's Hospital at Stanford and ValleyCare Health System in Pleasanton, among others.)

"I was having trouble bringing non-health care specialty work like ERISA, tax and corporate and securities in because the lawyers were not nearby," Hinkley said. "Pillsbury has 300 lawyers in California and we basically do everything you can think of."

Hinkley's not a special case. When seasoned health care lawyers leave a firm these days, their typical destination is a firm of the same size or bigger. Last February, Sacramento, Calif., managed-care litigator Stephen Goff took his team of 10 lawyers from 90-lawyer McDonough Holland & Allen to 3,500 attorney DLA Piper. This past May, litigator William Helvestine left 270-attorney Epstein Becker & Green, focused almost exclusively on labor law, government contracts and health care, for the 500-lawyer Crowell & Moring. Like Hinkley, they say the broader trends that are reshaping the health care industry -- particularly consolidation and increased regulatory scrutiny -- are making their work more complex.

The cases and deals are bigger and call for teams of specialists from diverse practice areas. Billing rates seem to bear out the transformation of what was traditionally a lower-middle market practice. Health care partners at big firms say they're billing $500 to $900 per hour, in line with counterparts in traditionally higher-rate practices. Los Angeles Sheppard, Mullin, Richter & Hampton partner Eric Klein said his 70-lawyer team's work carries no heavily discounted rates compared to other corporate deals. "There's so much demand right now -- there's really not much reason to discount unless it's a large multimillion-dollar client."

And some midsize firms have felt the pressure. The McDonough Holland firm dissolved in the year after Goff and his managed care litigation group departed. Los Angeles-based health care boutique K&R Law Group shuttered in mid-2006 shortly after major client PacifiCare Health Systems Inc. was acquired by UnitedHealth Group Inc. UnitedHealth had legal relationships in place, mostly with big firms, said Robert Hayden, an employment law attorney formerly at K&R and now at Rheuban & Gresen in Encino, Calif. K&R's health care lawyers handled regulatory, corporate and litigation work, he said.

One exception is Los Angeles-based health care boutique Hooper, Lundy & Bookman. The 57-lawyer firm appears to be thriving, according to other health care lawyers. Two partners at the firm did not respond to interview requests for this story.

Martin Fineman, the partner in charge of Davis Wright's San Francisco office, said he agrees with the premise that health care is gravitating toward large multipractice firms. But he said Davis Wright maintains a broad health care practice with 13 full-time attorneys in California alone -- more, he contends, than Pillsbury -- representing hospitals, health care systems, physicians, academic research institutions and other clients. "I'm surprised at the idea that Gerry left here because those elements aren't present at this firm or that they were better available at Pillsbury," he said.


The Big Get Bigger

The quest for scale by big hospital and physician groups and health plans has been one major driver of change. Sheppard's Klein said the country's health care sector is in the midst of the biggest wave of consolidation since the 1990s. In the past two years, he said, between a third and a half of all medium to large managed-care physician groups in California have been a buyer or seller.

"What's happening across the country is hospital systems are reaching out and acquiring doctors at an incredibly quick pace," Klein said. "California is having huge amounts of activity in the acquisition of physician groups by hospital systems and by HMOs."

In the past year, Klein's group has represented Bristol Park Medical Group, which was acquired by Memorial Health Services, a large hospital system in Orange County. Sheppard also represented Talbert Medical Group Inc. in its merger with HealthCare Partners Affiliates Medical Group, one of the biggest physician groups in the state.

Between the health reform law and pending Medicaid and Medicare overhauls, he anticipates more of the same. "The big are getting bigger -- that's causing the consolidation process to further accelerate," Klein said. "By the time folks in D.C. figure out what it is they're doing, the entire health care system will have changed."

As clients get bigger, they invariably bring more work in house. Paul, Hastings, Janofsky & Walker partner James Owens, who focuses on transactions and regulatory matters for large health systems, said more of his clients have sophisticated in-house departments. Many are staffed by his former colleagues and competitors from other firms. Owens said they handle the more day-to-day work and farm out strategic M&A and affiliation or antitrust and tax matters to big firms like his. Paul Hastings, which has about 30 health care attorneys in California, advised Arizona-based ambulance services company Rural/Metro Corp. in its acquisition by Warburg Pincus this past June.

IP expertise, another area where big firms tend to have more depth, is also in demand. Owens said IP attorneys with market knowledge are needed to draft agreements for the sale and ownership of new surgical techniques or treatments. Privacy concerns surrounding medical information add an additional area of compliance to the health care practice, Owens said. But that's work practitioners can handle at smaller firms, he said.

The rising tide has lifted litigators, too. Helvestine said Epstein Becker was one of a few specialty firms involved in an early mammoth multidistrict case involving health insurers about 10 years ago. Venued in Miami, In re managed care litigation involved more than 600,000 doctors -- at the time the largest class ever certified -- and many medical groups and associations, Helvestine said. Skadden, Arps, Slate, Meagher & Flom; Gibson, Dunn & Crutcher and O'Melveny & Myers, among many others, worked on the case. "But that was a much larger and more complex nationwide class action litigation than at the time we typically handled," Helvestine said of Epstein. "You saw the entry of the really large Am Law 100 firms into the health care arena. [As a result] the smaller firms are having a hard time keeping up."

With his own work more and more driven by complex litigation matters, Helvestine decided Crowell & Moring had more to offer. Crowell had beefed up its California litigation base with a group of white-collar lawyers from Talcott, Lightfoot, Vandevelde, Woehrle and Sadowsky in Southern California in late 2008, and a year later with a team of San Francisco and L.A. litigators from Folger Levin & Kahn.

"If you are a single-specialty or limited-specialty firm, sometimes you have trouble attracting other specialties to the firm," Helvestine said.


An Era Of Specialists

Health care partners are drilling down into specialties within their own practices, too. Sacramento litigator Goff said his mentors were generalists handling a lot of different matters, such as managed care contracting and licensing work. Now, attorneys who do managed care work, like himself, usually don't do any regulatory work and vice versa. Goff specializes in handling contract and other disputes between health care providers and payers, as well as problems that arise out of acquisitions and spinoffs of health care businesses. "Because of the incredible specialization, you have a real desire to be at a larger firm where you can carry all those specializations," Goff said. "Health care organizations are needing the kind of services that big firms provide, and that's hard to get in the small boutique anymore."

Patrick Kapsner, the chief executive of MemorialCare Medical Foundation, said he's always turned to big law firms for major business transactions. For real estate-related work, he's tapped Steven Sunshine at Bryan Cave. Sheppard's Klein handled the combination of Bristol Park Medical Group, where Kapsner had been CEO, with MemorialCare Medical Foundation.

Kapsner said the advantage of big firms is their "grander perspective" -- Big Law attorneys know how transactions are structured in other states and countries. They know the difference between Northern and Southern California, which Kapsner says are unique markets. "You can get a really fine boutique attorney, but without the experience of other locales you don't get the same overall vision of what others are doing," Kapsner said.

Still, nothing trumps a top-notch specialist. Kapsner said he turns over contract negotiations with health plans to Karen Kaplan of four-lawyer Rosenberg and Kaplan in Beverly Hills. "It's a very unique skill set that that boutique does extremely well," Kapsner said. "If Karen was acquired by a big firm, I would be moving to that big firm."

By Petra Pasternak

Source: The American Lawyer