DealFlow’s inaugural Healthcare Services Investment Conference, held Aug. 24-25, gave attendees the opportunity to network with top professionals in the fields of healthcare finance and investment. For those who couldn’t make it, a livestream of the entire event is available on demand. Highlights below provide an overview of the breadth and depth of information presented during the 2-day conference. Participants are still praising the value they received from the experience.
Day 1
There are certain simple operational improvements to be made based on a low-risk technology that can increase both healthcare enterprise value and competitive advantage, said Aesto Health CEO Scott Ferguson in his presentation on “Finance & Operations Using the Latest Technologies to Support Growth.”
One of the major problems impeding healthcare growth today is the slow process of M&A, as it takes too long to both obtain the data from sellers and organize it. The problem lies in the fact that every M&A transaction is driven by data, and the healthcare data is uniquely convoluted and inaccessible, and it uses an old-fashioned way of organization via spreadsheets. The basic solution of adding more people to gather and organize data does not tend to speed things up.
What is the “silver dollar” solution that could solve this problem? On the level of collecting data, it is to obtain a copy of the database, on the level of organizing data it is to automate calculations and pivot tables. In addition, for companies that conduct multiple acquisition deals, it is important to store datasets involving M&A so that they can run stored procedures for future deals.
To accomplish all this, the companies would benefit from using a purpose-built solution for healthcare data. Those are highly customized technologies for obtaining, organizing and analyzing data faster. They are low-risk, and able to boost enterprise value and competitive advantage.
When working on an MSO deal, it is most advisable to bring in a legal professional at a Letter-of-Intent stage, said Michele Masucci, partner at Nixon Peabody, and Jena Gady, healthcare associate at Nixon Peabody at a presentation on “Closing the MSO Transaction: Anticipating and Solving for Real World Obstacles.”
Bringing in a legal professional at this stage is important that you “do not negotiate against yourself and are not bound by the LOI while negotiating the deal,” Masucci said. The presence of legal counsel is also critical for the sell side during the M&A process. Specifically, it is crucial that a legal counsel reviews the data before it is submitted to the buy side, even though frequently the sell side is not inclined to pay any legal fees ahead of the deal. Yet, it would be important to have at least a one-hour call ahead of the transaction as it would help dealing with the lawyer on the buy side that aims to devalue the deal. One example of an issue that comes up at the end of the transaction and should be a part of the due diligence is a rep and warranty insurance.
Other area is HIPAA compliance, and the sell side should have its security risks assessed, including business associate agreements, as it needs to be fully informed about those when approaching the deal. In addition, when executing private equity M&A deals, it is important to keep in mind such issues as the timing for license transfers during the change of ownership, as well as the payer agreements that might require advance notice for approval.
The healthcare sector remains attractive for private equity investors, particularly during recessionary times as it is resistant to economic downfalls, and it is due to this that private equity deals stayed level in 2022, said Craig Evans, a healthcare banker at Citi at his presentation on “A Discussion of Historical Performance of PE Investments in Healthcare Services.” The sector is attractive as it is capable to fend off inflationary pressures and is non-cyclical.
In terms of specialties, the leaders in transactional activity in the last year were home health and hospice, as well as dental, while mental health saw a significant uptick in 2022. Other areas of high demand include digestive/gastro, orthopedics, ophthalmology and primary care.
As of now private equity has a lot of dry powder to invest, and it has a bullish position on certain healthcare subsectors. The areas of growth in terms of investments are ASCs, value-based care, home health and specialty practices.
In a joint panel on “Lessons Learned from Completing MSO Roll-Ups” Eric Tower, partner at Thompson Coburn, Cory Bagby, general counsel and chief compliance officer at Offor Health and Jay Bronner, CEO at American Orthopedic Partners spoke about ways to structure and standardize MSO deals. According to the discussion, in these deals, it is important to enable clinicians to retain certain control over the medical environment. In completing these transactions, it is vital to create a separation of duties so that new owners or investors do not undermine medical decision-making.
Clinical innovation is something that occurs from the ground up and therefore companies should drive physician engagement and incentivize physician performance in MSO roll-ups. In these situations, equity ownership by physicians and partnership structure is important, and it is crucial to make sure physicians’ compensation structure is tied up to the overall financial results so as to boost the culture of collaboration and make physicians benefit from the overall growth of the practice. Among challenges, MSO roll-up situations face roadblocks related to licensing, and access to good labor.
Ransomware attacks and stolen data as two key cyber risk events affecting healthcare, said Jon Moore, chief risk officer and head of consulting at Clearwater, during presentation about “Keys to Effective Cyber Risk Management in Healthcare.” These types of events, or breaches, have grown significantly in the healthcare sector, from 18 records affected in 2009 to 715 records affected in 2021. These security breaches entail high costs that involve legal penalties, fees to be paid and costs of rebuilding IT systems in case of ransomware attacks. The average cost per breach has reached a level of $10 million in 2022, making healthcare the most expensive industry to suffer a breach. In fact, these costs are so high that a relatively large breach can drive a company out of business, particularly in the case of smaller organizations.
All these risks and associated costs have made private equity firms more engaged in measuring risks and conducting cybersecurity due diligence during the M&A transaction. As a result, companies have to create their cybersecurity risk framework, with established goals and objectives, as well as developed cybersecurity profiles and vulnerabilities, and the current status of cybersecurity controls outlined. These frameworks should also include the likelihood of threat analysis, and determine the level of risk an organization is currently facing.
Creating a recession-resistant investment environment requires capital specialization, according to a panel on M&A in a Shifting Macroeconomic Environment with the participation by PwC partner Nick Donhar, managing director at Aon Vipul Patel, senior analyst at Cross Keys Capital Roy Barnes, healthcare managing director at Monroe Capital Matthew Evans and Kyle Brown, managing director at Brown Gibbons Lang and Co. According to the panel, rising interest rates have not been much of a factor for the healthcare deal flow. Private equity is conducting consolidation in the sector, with shifting “hot” specialties. One crucial change is that while earlier on, private equity funds did not have a healthcare focus, currently investments are mostly done via specialized funds dedicated to the sector.
One of the issues that frequently occurs in private equity deals is related to the supply chain, and the sell side CEO ad CFO should have their answers ready when it comes to those issues. It is vital that they can map and quantify spikes and are cognizant of pain points.
Valuations are not changing much within the sector, and are at midpoint levels or hot specialties. Strategic buyers remain a competitive option in the healthcare acquisitions. Other factor that private equity investors pay attention at are the reimbursement cuts by CMS, with their winners and losers. In addition, with the healthcare deals growing in size the issue of insurance of those deals frequently comes up.
Multiple EMR/PM systems remain an issue during the acquisition process in healthcare, according to Encoda CEO Michael Kallish who made a presentation on “Keeping Pace with Acquisitions From an Operations Perspective.” Due to this, it is hard to make claims consistent, and multiple EMR systems cause disruption in a provider workflow, resulting in a decreased productivity.
A solution to this problem is to install an EMR agnostic workflow and analytics tool. This way, claims go to payers in a unified form, and this method also enables companies to optimize collections. This new EMR approach instantly consolidates reporting, and enables companies to spend more time analyzing, rather than collecting data. This solution also makes a consistent data view possible, and it also allows healthcare practices to report not only on cash, but also on accrual data, enabling to align payments with the date of service.
Day 2.
Private equity deals in the healthcare sector have reached an unprecedented scale in 2021, at 1,043 deals, while the year 2022 is expected to be average in terms of deal amount, said Rebecca Springer, research analyst at Pitchbook, at a presentation on “Data Analysis: Understanding Private Equity Healthcare Investments in 2022.” In fact, deal flow in the sector has been on the rise since 2018.
In terms of types of investments, add-ons have seen the highest proportion, while buyouts and LBOs have a smaller share, at around 10%. Add-ons in the new geographies are the highest in the behavioral health sector, followed by dental and vision.
Other noteworthy trend is that the healthcare sector has seen a rise in job openings starting from 2022, while wages started to increase in 2021. In terms of public exits, the sector has seen 6 IPOs in 2021, while this year this option is off the table, with zero deals recorded. The average age of companies in the private equity portfolio has been on the rise as GPs delay exits amid market uncertainty. The US private equity sector has around $748.8 billion dry powder to be invested in the next 1-3 years with $84.6 billion devoted to healthcare services. The share of healthcare deals as part of the total number of private equity deals has increased over time, particularly due to consolidation in certain specialty areas.
Data systems have gone through an evolution, with the early 2,000s being an era of pure data exchange and the birth of tech standards, said Michael Kovach, executive director for strategic partnerships at athenahealth, during his presentation on “Driving Connectivity, Value, and Growth Across a Network.” Data systems have proceeded to the time period around the 2010s, which was an era of APIs and flexible data exchange. This was a time period of “appification of everything,” with the emergence of apps for any aspect of healthcare yet data from these apps not easily integrated. The time period around the 2020s became an era of true interoperability with data exchange possible from platform to platform. During this time it became possible to bring multiple data sources into a native workflow.
Athena is in the midst of this data exchange evolution, having reached 240,000 clinical endpoints while serving 20% of the US population seen annually. It provides a hybrid cloud infrastructure with both private and public cloud components and contains an ecosystem of 750+ API endpoints.
Athena provides the service of unlocking the data, with parallel processing database technology that is HIPAA compliant and can handle both internal and external data analytics. Its system can incorporate third-party data, such as data from payers, and provide data exchange. It also provides the service of making data fuel growth. Particularly, in the M&A process it enables migration and provides the service of data imports, that can be used when adding new providers. It also enables syncing across markets and localizing the data.
In light of these services, Athena’s provider count has increased from 40 in 2014 to 3,300 as of this moment. The company is currently investing in enabling connections to various EMRs and ecosystems, making sure platform exchanges enable connectivity on three levels – that of individual practice, provider network and ecosystem. The company is currently eying opportunities in supporting telehealth, as well as remote patient monitoring and chronic care management.
There is a number of forces that drive consolidation in the healthcare sector, one of the key ones being the rapid rise of telehealth with Amazon, BestBuy, and Apple stepping into this space, according to Ziegler managing director Niel Borg, who gave a presentation on “Why the Business of Healthcare is Driving Consolidation.” Ziegler’s healthcare practice, which is focused on midmarket, includes 45 professionals and has two-thirds of the portfolio devoted to the sell side. The company completed 65 deals in the least 2.5 years and plans to complete 20 more by the end of 2022.
The US healthcare sector is facing a number of challenges and changes, such as unsustainable costs, which increase 4% annually, and make up $3.6 trillion overall; poor outcomes with rising chronic conditions and a big share of wasteful spending. Added to that are significant shifts within the industry, such as the growing Medicare population, a fast emergence of value-based care (VBC) models, and a transition to alternative, risk-based models.
One critical factor driving consolidation within the sector is related to a workforce shortage, as driven by retirements and staff burnouts, with 47% of physicians affected. Added to that is the current prevalence of chronic conditions, with 50% of US population expected to be affected by one or several chronic conditions by 2023. The share of aging population is also growing, the reimbursement landscape is evolving, and many health systems are undergoing a redesign.
Other reality is that physician groups are currently facing challenges related to staff shortage and rising labor costs, which forces them to seek consolidation. The year 2021 saw a record number of transactions involving physician groups, at nearly 300.
Other factors behind the wave of consolidation include the rapid development of platforms and telehealth, and dramatic increase in interest in behavioral health as a specialty with 44 million people in the US suffering from mental health issues. As a result, the amount of private equity money flowing into that space is rising.
Finally, consolidation is driven by the entry of large players into the sector, including Costco, Amazon, CVS, Dollar General, Walmart, and others. Several players are already active in the space, including Amazon, Elevance Health, Cigna, Humana, which points to the signs of consolidation with a unique buyer list evolving. And, the performance of the healthcare sector tends to exceed common market indices, while valuations in public markets remain healthy.
