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Saturday, March 30, 2019

Private equity sees ripe opportunity in healthcare this year

Private equity investment in healthcare has ballooned over the past decade, and experts say 2019 is poised to be another robust year, with potential ripe targets in orthopaedics and mental health and addiction treatment.
Private equity deals in healthcare in the U.S. more than doubled over the past 10 years, according to financial data firm Pitchbook. In 2008 there were 325 deals (including buyers and sellers) and in 2018 that number swelled to 788, a record number of deals representing more than $100 billion in total value.
One of the largest recent deals was private-equity firm KKR’s nearly $10 billion purchase of Envision Healthcare last year, according to Preqin. Envision provides physician services to hospitals and operates hundreds of surgery centers across the country. Another big deal was the public-to-private takeover of athenahealth by Evergreen Coast Capital and Veritas Capital for $5.7 billion in 2018.
“It looks as though 2018 was a record year for the industry, and overall the trend in deal-making has been one of strong growth — this would suggest that 2019 could be another record year unless we see a change in the underlying conditions,” Preqin spokesman William Clarke told Healthcare Dive.
The Envision deal was among the biggest leveraged buyouts ever at more than $4 billion in debt, according to Pitchbook. The practice is criticized in several respects, including that many are financed by loading a company up with mounds of debt.​
Globally, healthcare accounts for about 13% of all private equity buy-out deals, according Preqin, an industry research firm.
The deals come amid a frenzy of consolidation, both vertical and horizontal, in the healthcare industry as hospitals and insurers try to scale up to insulate themselves from a number of headwinds and disruptors such as Amazon and Apple.
M&A began to accelerate after the Affordable Care Act, as many hospitals aligned themselves with physician groups, looking for greater reach into a market. But private equity firms “provide an attractive alternative to the traditional hospital-physician alignment models,” according to a recent report from the Investment Funds team at the law firm BakerHostetler.
Private equity investors are increasingly seeking deals in areas that are highly fragmented or areas that still operate in silos and are undercapitalized, Ben Isgur, health research institute leader at PwC, told Healthcare Dive. Fragmented areas provide an opportunity for private equity firms to come in and align a number of practices on the same platform, which increases size and scale to improve leverage in negotiations with payers.
Potential highly fragmented targets include orthopaedic practices, which are likely to see a number of private equity investments over the next few years, as well as gastroenterology and urology, according to BakerHostetler.
For example, “Only 30 orthopaedic practices in the country have more than 20 physicians in a single practice,” the report notes. Private equity firms’ attraction to these practices may have increased last year after CMS changed the rules to allow total knee replacements to be performed in outpatient settings. Previously, the agency only allowed total knee replacements to be performed on Medicare beneficiaries in an inpatient-only setting.
Orthopaedics, gastroenterology and urology also are ripe with lucrative ancillary services such as surgery and imaging centers and have high use thanks to an aging population, the report notes. There are more than 5,700 ambulatory surgery centers across the U.S. that perform more than 20 million surgeries every year, according to the Ambulatory Surgery Center Association. Medicare alone spent $4.3 billion on ASC services in 2016, according to the Medicare Payment Advisory Commission.
Investing in healthcare is also enticing for private equity investors as they seek to balance their investments. The healthcare sector is likely more insulated from a recession due to the aging population and demand for services, along with the projected increase in healthcare spending, according to a research report from PwC.
Another area experts are keeping an eye on for potential deals is in mental health, Isgur said.
“There is a huge need for these services and many of the providers are in small practices. The opportunity is to consolidate and capitalize and then build shared services around technology and back-office functions to create more value,” Isgur said.
Private equity investment in healthcare is not new; but like politics, healthcare is still very local, he said.
By 2008, private equity was already active in a number of areas including long-term care facilities, hospice, ambulatory surgery centers, acute care hospitals and clinical labs, according to a previous Health Affairs report.

Buying to sell

Private equity by its nature comes with controversy, with a business model based on buying for the purpose of selling for a one-time windfall profit for wealthy investors and for taking on big debt to finance the deals.
That leaves workers and patients last, critics say, and the sector’s forays into nursing homes brought those fears to the surface.
For years, unions have been critical of private equity firms in general. The American Medical Association, the nation’s prominent doctors group, is probing private equity investments into medical practices and its influence on healthcare. The report will likely be available in June, according to an AMA spokesperson.
The health of nursing home patients was put in jeopardy at facilities run by ManorCare, one of the largest nursing home operators in the country, according to a Washington Post investigation. ManorCare struggled financially when it was helmed by private-equity firm Carlyle Group and ended up filing for bankruptcy last year, nearly a decade after it was acquired by Carlyle Group.
A spate of nursing home acquisitions by private equity firms led to concerns about quality of care issues. Private equity bought up 1,900 nursing homes over the course of a decade, from 1998 to 2008, according to a GAO report from the time.
Isgur noted the controversy, pointing to the proliferation of freestanding emergency rooms in some states.
Some freestanding ERs are backed by private equity firms and may be closer and more convenient for consumers, but that convenience comes at a hefty cost. One insurer, UnitedHealth Group, has warned about that, too.

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