Where Some See Healthcare Challenges, PE Sees Roll-Up Opportunity

Subsectors such as dermatology and behavioral health face less reimbursement pressures and have other opportunities for private equity

Some areas of healthcare are more challenging to private equity than others. Namely, those subsectors facing reimbursement pressure, and facility-based subsectors with a lot of brick and mortar exposure.

Les Levinson, a partner and co-chair of the Transactional Healthcare Practice at law firm Robinson + Cole, says that those challenging healthcare investment opportunities that have a lot of brick and mortar locations—sunk costs that might not easily be recouped—have a silver lining: opportunities for roll-ups and for management to create some of the value that PE is known for.

Behavioral health is a “long-standing favorite” of private equity, Levinson says. “Addiction treatment centers—the kinds of things that are not necessarily covered fully or covered at all by insurance—you’re getting a lot of private pay.”

The dermatology subsector is also seeing a lot of interest from private equity due to patients often paying out of pocket, lessening the reimbursement risk. “There are many procedures that are done in dermatology offices that are cosmetic that are not necessarily going to be reimbursed by insurance. So, you know that the dollars that are attributable to that procedure are going to be fully paid by the patient, and private equity is going to be able to enjoy those benefits more than they would be where there’s an insurance cap on a particular procedure.”

Both addiction treatment and dermatology were name-checked as areas of healthcare consolidation driving opportunities in the smallest end of the middle market in a recent webinar highlighting the top three plays for healthcare private equity.

John McKernan of The Riverside Company says, “What we often look for are providers that typically fall outside the scope of where a hospital system or an integrated delivery network are focused on acquiring, and band them together and create a level of scale that can succeed, given the changing payment structures.”

You can watch the full video interview with Levinson here: