Strathspey Crown and the first Medicare-Medicaid opt-out company in medtech | A conversation with Robert Grant

Strathspey Crown CEO Robert Grant

If Robert Grant is successful – a good bet, judging by his track record – 1 day his new venture, private equity firm Strathspey Crown, will be known as a leader in the nascent field of "lifestyle medicine."

Grant, a former president of Allergan (NYSE:AGN) and, most recently, CEO of Bausch & Lomb, describes lifestyle medicine as an umbrella of products, floating across aesthetics, dentistry, ophthalmic, sports medicine and other areas of healthcare that are focused on improving life, rather than saving or prolonging it.

More important to the long-term future of healthcare, however, may be Strathspey’s ambition to be the first Medicare-Medicaid opt-out manufacturer in medical technology, by acquiring companies and technologies that don’t take a single dollar from the government insurance programs – and therefore aren’t subject to stifling government regulations Grant blames for weighing down a large swath of the healthcare market.

We caught up with Grant recently, in advance of his appearance as a panelist at the upcoming MassDevice Big 100 Roundtable West, to discuss the inspiration behind Strathspey Crown, his push to return power to physicians and how the U.S. is turning into a 2-tiered healthcare system.

Interested in hearing more in person? Register here to join us Dec. 11 Talk me through the thought process behind the creation of this new entity called Strathspey Crown.

Robert Grant: I saw a compelling need in the marketplace, because companies and doctors, due to over-regulation, are no longer able to work closely together anymore. I felt that, at its core, this was very problematic, because during the course of my career the relationship between physicians and companies has led to the American engine of innovation in medicine. It’s always the doctors that come up with the ideas.

But I got concerned, when looking out into the future, that if this over-regulation continued across all of healthcare, we would lose our leadership position in the world in medical technology. That’s not good for patients, that’s not good for industry and that’s not good for America. That was the biggest inspiration for me.

I realized that it pivoted around the inclusion of government funding. If you could build a company that never took a single dollar from the U.S. government, you would not fall under the auspices of what is referred to as false claims. You would be able to operate free from regulations – some of them part of Obamacare, some of them not part of Obamacare – that are referred to as anti-kickback and inducement, also Sunshine Act and Stark Laws.

Doctors used to play a very meaningful role in the advancement of medicine and, while it might sound heretical for me to say this, they’ve been marginalized. If you don’t believe me, then go to your doctor and ask them what they think. The doctor writes a prescription for you (whether it’s for a medical device or a pharmaceutical product) and you go to a pharmacy, you might not a get a product that they wrote you a prescription for; you might get a generic version, you might get a medical device that the group purchasing organization of a hospital said they had to use.

Those decisions are made purely for profit. They’re not made because the doctor knew the patient, knew his/her diagnosis or knew what he/she needed. It was someone on the other side of a computer that put together a formulary. Or had put out a GPO contract and said that the doctors had to be compliant.

The doctor no longer has a voice. Can you pinpoint the moment when this phenomenon began?

RG: The environment has dramatically changed and the reason is because our government, like many across the world, is struggling to figure out how to pay for its population that doesn’t have insurance. So the first thing that comes out is they want to stop fraud and abuse. When there’s potential for fraud and abuse, they regulate more and more.

What happened is that, because the reimbursed products became very regulated, the cash-pay products – which have been acquired by the large strategic companies and are sold adjacent to those reimbursed products in other divisions or sometimes within the same division – the cash-pay products get needlessly regulated at the same level as the reimbursed products.

When I was working at Allergan and Bausch + Lomb, there were rules about cash-pay products. What I was told by our compliance departments was that, because we had to follow 1 compliance methodology we had to treat both businesses the same. I thought to myself that this creates a large negative synergy for large strategic companies, which all take money from the government, to acquire cash-pay businesses because they’re going to, in effect, over-regulate those businesses.

In the reimbursed market, the total addressable market is limited by the number of people you’re going to treat. There’s only so many people that get glaucoma, that get cancer, that get heart disease, that get diabetes. You can’t change that, it’s not in our ability as marketers to impact the static nature of the number of people that suffer from certain ailments.

However, in the cash-pay business, the opposite is true. The number of patients that could purchase your technology is a function of choice, and therefore it is only limited by the number of patients that you could convince could benefit from those products or services. When you’re no longer able to work in a manner that allows companies to grow, or help the practices to grow the overall market, because of regulation, anti-kickback and anti-inducement, it dramatically curtails what the doctors can do with companies. It used to be that we could do all sorts of co-op advertising and assist the practices in growing. But don’t you still see a fair number of companies in the dental and ophthalmic industry working with physicians to build their practices? Are you saying those efforts are limited in effectiveness?

RG: They have been dramatically limited in effectiveness. They can no longer do co-op advertising, and whatever service they provide a doctor cannot be tied to anything related to his/her volume of purchases. In addition to that, the companies have to provide the same service to every other doctor in the market. As a result, those efforts are dramatically watered down. The intent of these efforts in the past was that you could basically tie those 2 together, you could have practice consulting in exchange for more purchase of product. Now you’re unable to do that. How long did it take you to put this business plan together?

RG: I’ve been interested in private equity for the past 15 years, but it changed dramatically with the advent of 2 things.

First, the reimbursed products became so regulated – and I understand there are good reasons why – but it became so regulated that the cash-pay products that were sold alongside them became so regulated that it no longer made sense for them to be sold alongside each other.

Two, the Jobs Act passed about 6 months ago. This allows the number of investors to go from 500 to 2,000, without being publicly traded – effectively it allows you to choose who your shareholders will be, because once you’re public you can’t choose who your shareholders are.

Third, the advent of Obamacare and the upholding of the individual mandate, which includes all of the Affordable Care Act, and this election as well has a big impact on the future of healthcare in this country. Now that Obamacare is clearly here to stay, I believe our country is rapidly moving toward the 2-tier system that is so common in many other countries.

I’ve lived in several different countries in this world; my daughter was born in a private-pay, 2nd-tier healthcare hospital in Australia that never took any government dollars. Every other country in the world has moved to a 2-tier healthcare system where they’ve decided to pay for their population that can’t afford health insurance. At the same time, after deciding that they could no longer cover those costs, those countries have decided to no longer pay for those choices that the consumer would be willing to pay for themselves. That’s true in lifestyle technologies and products that are a crossover from medical need and lifestyle benefits. We’re talking about this concierge medicine phenomenon, where doctors are no longer accepting Medicare and accepting annual fees to cover patients?

RG: Yes, when a doctor is on a government healthcare system, he or she may have to see as many as 50 or 60 patients a day to make ends meet and that is a direct affront to delivering quality care. Then the idea behind Strathspey Crown is you will essentially be a Medicare-, Medicaid-, CMS-free company?

RG: Obviously we have to follow FDA rule,s but we are the first Medicare, Medicaid opt-out company. Do you think this will pave a new trail in healthcare delivery in the U.S.?

RG: I believe that this nation will go to a 2-tiered healthcare system automatically, whether or not Strathspey Crown is the leader of it or not. From an opportunistic perspective, I believe that in a 2nd-tier healthcare system, it’s important that doctors have a restored voice in the dialogue and that patients have a restored choice in the dialogue about what they get. We shouldn’t be in a position where, just because we want to get costs down, we basically tell all the patients, "You can only get this level of care because we’re going to provide it to everyone."

If the consumers are willing to pay for it out-of-pocket and that relieves burden off the healthcare system spending for government dollars, they should be allowed to do that. That’s why concierge medicine is taking off. We already have a 2nd-tier healthcare system in this country. We just never formally called it that. So you’ve coined the phrase "lifestyle medicine." What does that mean?

RG: We’ve referred to products as lifestyle products or lifestyle technology, but I’ve never heard of it specifically referred to as a category. What’s important to us is that all of these products and technologies are benefiting patients at a lifestyle level. These aren’t life-saving products, they’re life-enhancing, and that’s an important distinction, because the future of medicine is going to be more geared around life-enhancing than it is around addressing new medical needs. Specifically, are you speaking about the population bump that comes from aging baby boomers?

RG: Over the next few generations, we’re going to be in a situation where healthcare is going to truly transform our nation, as we are dealing with issues of patients and populations living longer lives and how we cover that – as governments, we’ll no longer be able to afford it. Also, how we address technologies that are more pro-active in their care approach versus reactive. Our current government-paid healthcare system is very reactive, by necessity: You get sick, you treat it.

The future of healthcare in the 2nd tier is more pro-active. You don’t have to be sick before you see a doctor. You don’t have to be sick to create a regimen and plan for your wellness for the next 30 and 40 years. That is the focus – we’re trying to lead to where our patients are able to look as good as they feel and feel as good as they look. What about other markets beyond aesthetics. Do you see things like preventative knee replacements or joint replacements falling under the lifestyle healthcare umbrella?

RG: I believe there are a number of products in sports medicine that are available in other countries that fall into this space. These are products that allow you to run faster and jump higher than you ever could in your younger state. I believe the future of lifestyle healthcare will include both products that are addressing a medical need, because you need a new knee, but the government is not going to cover those products that allow you to jump higher and run faster. If Granny falls down and breaks her hip, the government understands they need to pay for that at a basic level.

What other countries have moved toward a model of is that if a product has both a medical need as well as a lifestyle benefit, then the government says, "OK, we’ll cover you for what you need to get back walking, but we’re not going to cover Granny to be able to slam-dunk a basketball."

I believe that companies should be allowed to opt out of Medicare payments for those particular technologies, so they can bring those technologies into this country. Right now, if a product is intended to cover a medical need at all, independent of the fact that it has a lifestyle benefit associated with it, CMS is looking at that product as a burden on the system, because then everyone is going to want the hip that helps you jump higher and run faster and the government is going to be forced to pay for it under our laws. It’s not that way in the rest of the world. In 2-tier systems there’s a distinction: The products get approved by the regulatory system, they’re on the market for several years to establish comparative effectiveness, and then the companies decide country-by-country whether to pursue approvals for coverage decisions. It’s not a parallel process like we have in the United States. Let’s talk about the structure of Strathspey Crown, because it’s a bit unique in that this is a private equity but your primary investors are physicians.

RG: We are physician-owned. They are passive owners of the company, but they help us in making better-informed decisions. Doctors are the genesis of the best ideas, the best new innovations and technologies, and because of that we want to be able to partner closely with them in ways that they are currently (in medical technology, in the reimbursed realm) unable to do. Will these physician-investors also be customers?

RG: Sure, but we don’t have any requirements to be our customers. In fact, we will never ask, either directly or indirectly, our investors to buy a single 1 of our products. We have a core value of freedom and we want our doctors to deal with their patients as they see fit.

In fact, we’re so strongly of that mindset that we don’t believe governments need to intercede between doctors and their patients and when they do they actually diminish the quality of care, particularly when a patient is willing to pay for it out of his or her own pocket. Instead of being 1 of 70 patients a day, they could be 1 of 10 or 12 patients a day. Everybody understands that equation. We believe our unique partnership with doctors allows us to innovate care for those patients. And we will only acquire or license products that we believe doctors also feel represent the highest level of quality for safety and efficacy. In addition, products that we all feel like we can stand behind. How will the management of the companies you acquire work?

RG: We will either acquire or in-license products in the cash-pay segments of medicine, and there will be management teams that come along with those products from time to time. In some circumstances, we will also be building up our own organizational structure around those products.

I do not believe in a heavy leverage structure for debt. I would rather have our company focused on shareholders’ returns rather than debt-holder returns. The decision process is also different in a company when you have high leverage, because high leverage deals typically require you to terminate a lot of people for deal synergies and I just generally don’t believe in deal synergies because they never come without unintended cascading consequences. Has there been any pushback from potential investors about possible swings in the cash-pay market as a result of the recession?

RG: There was some impact from what happened at the economy, but at a practice level most of the impact came because the practices stopped advertising and stopped investing. The practices that did the opposite during the great recession actually came out on top after the recession.

We believe the market for patients who want lifestyle products will only be increasing as the population ages and as government care becomes more and more focused on catastrophic care, rather than lifestyle enhancement. The market for lifestyle enhancement today is worth $20 billion and is expected to grow to $30 billion by 2016. Alongside Strathspey Crown’s investment arm, you’re also building out a political action committee, correct?

RG: We’re building a PAC, independent of Strathspey Crown, where we’ll have several thousand physician members in specialty healthcare as our members, and we expect to have a significant voice regarding the future of healthcare in this nation. Will this be a vehicle to parry against some of the regulations you mentioned earlier, which you say are harming healthcare?

RG: Correct. But it’s not that we think those regulations are necessarily bad. We think they’re necessary on the government-pay side of healthcare. They’re just not necessary on the cash-pay side, which has become an unintended casualty of the increased regulation that was necessary to the government side of healthcare.

We have 1 strong motto in our firm, which is: "Of doctors, for patients." One of the requirements we have, in addition to never asking 1 of our doctors to buy a single 1 of our products, is that we require our investor physicians to put forward absolute transparency to all their patients, that they have ownership in the company. It’s not required by law in the vast number of states in this country, but it’s something we think is necessary . When you talk about a 2-tiered healthcare system, it leaves the impression that this system is only for the affluent. How do you respond to that?

RG: Someone might think that Audis might be luxurious and only for the affluent, but the choice of who gets those products is up to the consumer. Just because you might not be affluent doesn’t mean you should have the right to have that car taken away from you, or to be able to aspire to those technology and products. It’s your choice.

Choice is a very strong, compelling need for American culture. In general, when you think about the total population that’s going to benefit from our technologies, in every other country where 2-tiered healthcare systems exist and thrive, about 10% to 25% of the population really becomes recipients of that system – and that’s large enough.

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