By Anastasia Gnezditskaia
The healthcare sector is quite attractive for private equity acquisitions, because it is recession resistant, and offers growth and payer stability, according to Aesto Health CEO Scott Ferguson who spoke at a recent webinar on the “Five Hidden Dangers Threatening the Growth of PE-backed Healthcare Practices.” The webinar was hosted by DealFlow’s Healthcare Services Investment Conference.
With the sizeable baby boomer patient segment, the healthcare market is expected to account for 20% of the country’s GDP in the next five years, according to Ferguson. And, with government financing covering 50% of spending due to the ageing population being an increasing share of patients, this market provides unique payer stability.
In addition, with an average age of physicians around 53 years old, many practice owners will soon approach the retirement age and seek an opportunity to sell. This makes founder-owned physician practices a valuable object for private equity backing.
Attractive as it is for private equity participation, healthcare acquisitions have a number of pitfalls to watch out for. What are they?
According to Ferguson, these pitfalls have to do with one common pattern – the acquisition process in healthcare is slow. And with demand for founder-owned medical practices among private equity funds far outreaching supply, the speed of decision making in reaching a letter-of-intent stage could be crucial for beating the competition. That is why accelerating the process without skipping important steps is key.
Data collection
This step takes most of the time during the discovery process and has a potential to slow down the entire deal significantly. Obtaining data from a seller could be way more challenging in healthcare than in other types of businesses. “The strength of founder-owned physician practices is about taking care of their patients, and not about the administration,” said Ferguson. With health data being trapped in medical systems, the speed of extracting it is not designed for M&A deal cycles. Medical records are “designed for the purposes of patient notes and billing, and not M&A.”
On average obtaining all the required data takes between 4 and 8 weeks, although in many cases it takes months, according to Ferguson. All in all, it is the lengthiest part of the acquisition process, taking around 57% of the total time in the runup to the letter of intent.
Organizing and analyzing data
Even though not as lengthy, data organization and analysis also take a significant amount of time. The process of data organization takes around 28% of the entire process, or between 2 and 3 weeks on average. It entails organizing “hundreds of practice management and EMR systems,” and is still mostly done via Excel sheets, says Ferguson.
Once the data is organized, the buy side proceeds to its analysis. In this step, which takes around a week, or 15% of the time, “lies the most value for the deal,” says Ferguson. Analyzing the data, which entails calculating pro forma and scenarios, leads to a decision on a letter of intent.
The collection, organization and analysis of data make up the discovery stage of the M&A process, based on which a letter of intent is generated. Once the deal is completed, the process moves on to a transition stage, which includes the migration of electronic health records, enterprise systems, adjusting marketing efforts by reaching out to the patient base, and informing the physicians, among others.
What could be done to accelerate the M&A process?
In order to beat the competition, it is important to speed up the process. One crucial way to do it is to take control of data collection, Ferguson said. With this step taking 57% of all the time, and it could also be the largest bottleneck, as well as the most decisive step for reaching the LOI. “Don’t just put [the task of collecting data] on seller’s lap,” he said adding that physician practices are not used to collecting such data in a short time span.
Ways to control data collection on the buy side could be engaging the sell side’s accounting or advisory firms.
Another important step that the buy side could do is centralize the deal data, he said. “Take it out of spreadsheets and put it in the database, that way you not just have it better organized, but also provide a centralized access.”
This step will enable the buy side to conduct a comparative analysis between the ongoing deal and other deals in order to reach better decisions. By centralizing deal data “you will do a huge favor to all other participants in the dealmaking process,” he said.
Finally, in the acquisition process, what is advisable to do is to automate pro-forma calculations. That way one can “cut out human error and save at least 2 weeks of time,” Ferguson said.
All these steps will enable the buy side to make an offer faster, and reach a decision that is more accurate. These are “simple things to fix,” he said adding that “simple does not always mean easy.”
