Update from Germany

In This Issue:

• The Liberalization of the German Health Care Service Sector
• German Cabinet Approves Corporate Tax Plan 2008
• New German Telemedia Legislation Clarifies Some Issues; Clouds Others
• Squeeze-Outs in Germany: Becoming Stale for Hedge Funds?

The Liberalization of the German Health Care Service Sector
By Dr. Stephan Rau

The introduction of the medical ambulatory service center has changed Germany’s health care industry in ways not seen since 2003. Prior to 2004, only physicians working in their sole local offices or in local partnerships could provide ambulatory medical services. However, effective in 2004, a new form of ambulatory medical service provider was introduced: the Medizinische Versorgungszentren, medical ambulatory service center, or MVZ. An MVZ may be owned by anyone having any license within the public health care system, and this license is not very difficult to obtain. For example, all a company has to do is sell wheelchairs or similar products to apply for a license, and, as a result, an investor in such company may become the beneficial owner of an MVZ.

Panel Physicians Amendment Act

On January 1, 2007, the Panel Physicians Amendment Act (Vertragsarztrechtsänderungsgesetz or VÄndG) came into force, further advancing the deregulation of the ambulatory health care service sector in Germany. Until 2006, a license to provide ambulatory medical services only entitled its bearer to do so at a certain location. Physicians and MVZs were not allowed to apply for two licenses in two different locations. Following the enactment of the VÄndG, MVZs and groups of physicians may now open branches and provide services in various regions and—theoretically—all over Germany.

However, a system of determination of need (Bedarfsplanung) still limits this possibility. According to Bedarfsplanung, regulatory health care bodies may decide that in certain areas a “market” need for general practitioners or physicians of certain specializations does not exist and that further applications will be rejected. In this case, any new applicant—be it a physician or an MVZ—has to buy a license from a retiring physician with comparable qualifications. According to the government’s current plans, however, the entire system of determination of need may be abolished within the next two years.

MVZ Business Models

The MVZ not only enables investors to enter the ambulatory medical market, it also significantly eases the strict separation between inpatient and outpatient services. Traditionally, German hospitals were—except for cases of urgencies—not allowed to provide outpatient services to the vast majority of the population, i.e., the publicly insured. This changed in 2004 when hospitals could legally own an MVZ, thereby entering the outpatient sector. Until 2006, however, hospitals were largely not allowed to employ physicians who provided both inpatient services in the hospital and outpatient services in the MVZ. Rather, employed physicians could only work in one or the other. The VÄndG has abolished this inconvenient prohibition.

To enter the outpatient sector, hospitals generally tend to establish MVZs through wholly owned subsidiaries. Because this practice often provokes the resistance of their new competitors, i.e., physicians working in private offices, some hospitals prefer to enter joint ventures with leading entrepreneurial physicians.

This model appears more promising—in particular, one can look at the U.S. experience and the failures of physician practice management organizations (PPMs) versus the successes of ambulatory service centers (ASCs). PPMs were providers of outpatient services that were solely owned and run by investors who had previously purchased the physicians’ offices and employed those physicians. Many of those PPMs became insolvent because the physicians did not have sufficient incentive to generate wealth for the company. ASCs, however, are an entirely different story. Most of them are highly profitable, and some of their providers are publicly listed. ASCs are usually run by management companies who also hold shares in the ASCs—albeit with physicians as co-shareholders.

Conclusion

Germany’s health care service system has been opened up to new investment and structuring opportunities. While they may seem commonplace to anyone familiar with the U.S. health care system, in Germany such structures would have been unthinkable only a few years ago.

In its deregulation plans, the German government is pursuing its objective to increase competition among various health care service providers and to realize greater synergies across the industry. While this has been the case for hospitals and nursing homes for quite some time, the German health care service sector has finally nailed its intentions for the ambulatory and outpatient sector to the door—private investments are wanted.

German Cabinet Approves Corporate Tax Plan 2008
By Dr. Gero Burwitz and Dr. Dirk Pohl

On May 25, 2007, the German Parliament approved a draft corporate tax plan (enterprise tax reform), which is scheduled to become effective on January 1, 2008. The reform seeks to create a more competitive tax environment for companies by reducing the nominal tax rates, avoiding the (further) erosion of the tax base in Germany by limiting in particular the amount of interest companies can deduct from their taxable income, and limiting the use of loss carry-forwards by significantly tightening the change of control rules. It is very likely that the new law will be implemented. The second chamber of the Parliament still has to approve the tax plan. A final decision is planned on July 20, 2007.

Notwithstanding the reduction of the tax rates, U.S. investors likely will find that the limitation of the deduction of interest will result in a notably higher effective tax burden on leveraged financing structures in Germany.

Reduction of Nominal Tax Rates

The draft bills provide a reduction of the average tax burden for corporations from 38.65 per cent to 29.83 per cent, consisting of a corporate tax of 15 per cent (currently 25 per cent), a solidarity surcharge of 0.83 per cent (5.5 per cent of the corporate tax) and an average trade tax of 14 per cent, depending on the tax rate of the local community.