Issue link: https://viewer.e-digitaledition.com/i/1488824
THE TREND OF private equity (PE) firms seeking high returns in health care has been in full bloom for more than a decade. But whereas previously PE was focused on a top-down approach of buying hospitals and health systems, that focus has begun to shift toward less-costly, smaller specialty groups and physician practices. Bain & Company's 2021 Global Healthcare Private Equity and M&A Report found that investors are pursuing new "buy-and- build" strategies in less-penetrated segments of the provider sector. The report notes that there is increased focus among PE firms on areas that are promoting the shift toward home- based and outpatient care, along with "risk-bearing targets" like Medicare Advantage providers operating under capitation models and behavioral health providers. MISSION ALIGNMENT IS ESSENTIAL For healthcare entities considering an investment from a private equity firm, the risk/reward calculus is complicated by recent downturns in patient volume and revenues due to COVID-19. The pandemic exposed the weaknesses that small providers face in a fee-for-service environment and amplified the need for healthcare companies to maintain sufficient capital resources on hand to remain competitive and viable. The short-term financial windfall that may come from an acquisition must be weighed against the long-term implications, especially for physician practices who need to consider whether they are going to be part of an eventual sale. PE firms have a term of exit, typically within five to seven years, to meet shareholder obligations, so it is fair to raise a concern about what happens when that time is up. Perhaps most impor tantly, compatibility relies on cultura l a l i g n ment bet ween PE f i r m s a nd hea lt hca re orga n i za- tions. The economic model must suppor t the ca re mission. Ensuring that the missions of the acquiring a nd acquired orga nizations a re tra nspa rent a nd well a lig ned is critica l for successful outcomes. IMPROVEMENTS IN EFFICIENCY AND ACCOUNTABILITY Partnerships between PE firms and medical groups have proven especially advantageous for easing the administrative burden for smaller providers. PE provides practices with a backstop to improve cash cycles and back-office processes, such as manage- ment reporting and compliance work. PE investment has also allowed post-acute companies to grow and test new business models, delivering greater access to in-home care and telehealth. Technology is breaking down the traditional brick-and-mortar localized care delivery system, expanding access and lowering costs. PE brings the capital, and the know-how, to build these assets at scale. In addition, the involvement of a PE firm creates visibility into the performance of a healthcare business, holding internal teams accountable for efficiencies to satisfy shareholders while delivering exemplary patient care. In August 2020, a JAMA study found hospitals acquired by PE firms experienced increases in net income as well as improvement in quality metrics. THINKING LONG TERM The healthcare industry is in a mature stage of PE involvement in core hospital service. With increased segmentation across the industry, the trend is growing and shifting. A JAMA study released in February 2020 found that more than 350 physician practices were acquired by PE firms between 2013 and 2016. The study concludes that PE firms see ample business opportunities in the physician practice space, expecting annual returns greater than 20%, though there remain "unknown implications for care delivery and patient outcomes" in the future. Provider leaders should consider what they need long-term out of a PE transaction, secure commitments to quality and ensure that the new management will continue to invest as the industry moves away from FFS and expands into new business models. Practices also need to consider the legal and compliance com- plexities that can arise out of the new administrative structures resulting from a PE investment. Risk Strategies healthcare practice experts have extensive experience evaluating and advising on these partnerships and stand ready to help you achieve the best possible outcomes. n For more information on your insurance options, please contact Jenn Negley, Vice President, Risk Strategies Company, at 267-251-2233 or JNegley@risk-strategies.com. Private Equity Expanding Pursuits in Healthcare Investment BY CHRIS ZUCCARINI, MANAGING DIRECTOR, NATIONAL HE ALTHCARE PR ACTICE, RISK STR ATEGIES COMPANY 1 7 M D N E W S . C O M /// M D N E W S C E N T R A L N E W Y O R K n 2 0 2 3