How to Invest in Healthcare Services

Healthcare is one of the most rapidly evolving sectors in private capital investment as policymakers, providers, entreprenuers and consumers continue to redefine the landscape. In this Privcap conversation, experts from Comvest Partners and HealthInvest Equity Partners zero in on trends in the healthcare services sector, outlining what to expect in the near future and how all of this impacts the private equity investment strategy.

Privcap: How does an increased hourly minimum wage impact the healthcare services sector and your approach investing in that space?

Roger Marerro, Comvest Partners: The impact of minimum wage in healthcare services will likely be similar to other sectors insofar as it’s going to shine an even greater light on efficiency of delivery mechanisms. Minimum wage increases will affect providers that have a disproportionate amount of low-level compensated people. These programs will need to either pass the increased costs on to their government or commercial funding sources or we are going to see a greater push to at-risk models where providers control more of the care continuum on a capitated or bundled payment basis. We’ve seen a big push in that direction already, but I think this will, if anything, continue to precipitate the push toward at-risk provider focused models.

Tim Howe, HealthInvest Equity Partners: Minimum wage levels are important for companies providing home care beyond the skilled healthcare services reimbursed by Medicare. Many of these workers who are providing companionship, assistance for the activities of daily living, light housekeeping, and the like are [earning] close to minimum wage. The companies bill consumers directly for these services. A significant rise in minimum wage rates will likely put upward pressure on the wages of these agencies’ work forces; however, since it is a direct cost traceable to a specific hourly service provided, the companies should be able to manage the impact through appropriate pricing of the service. The minimum-wage work force is not an overwhelming component of most facility-based healthcare providers, even the largest of hospitals. Any mandated increase in the minimum wage would likely cause a modest temporary reduction in overall profitability until reimbursement levels are adjusted accordingly.

Our investment strategy is focused on developing efficient specialized healthcare providers that typically employ highly trained skilled workforces. Hence, our companies are only indirectly affected by the minimum wage issue to the extent it affects employment and the consequent affordability of healthcare for individuals in the area.

A significant trend in today’s market appears to be a push toward provider-focused risk-delivery models. How does this impact your approach to putting capital to work in healthcare services?

Howe: I am a fan of providers taking on the risk of the cost of care; that is, the merging of insurance carriers and providers. If this is done on a large scale with a meaningful geographic market position, it can lead to a profitable operation and a healthier population. Putting capital to work in one of these combined entities, in a market where there are a limited number of combined provider/carriers who together cover the vast majority of the population, is likely to be rewarding. In addition, I believe there will always be room for the independent specialized efficient healthcare provider who can contract with the combined entities, deliver quality care profitably and therefore be an attractive place to be investing capital.

Marerro: The push toward provider-focused and at-risk delivery models where providers themselves are taking on economic risk for the delivery of healthcare is the biggest trend that we are seeing in the sector. The Affordable Care Act precipitated the trend of physician practices, hospitals, and/or integrated delivery networks banding together in order to take on risk. We believe this will continue across party lines in government; that model is here to stay, and we are looking for investment opportunities that either are directly taking risk and developing the business intelligence tools to be able to do that, and/or business models that are helping providers and payers to better manage their sicker populations.

Roger, you mentioned services banding together. What did you mean?

Marerro: What we’re seeing through the Affordable Care Act is that accountable care organizations, or ACOs, have been institutionalized. That is a government payer construct that formalizes the banding together of disparate providers in the community in order to work together to take on shared risk, shared savings programs and to share upside and downside in some cases. This model has precipitated many other models of at-risk providers banding together to do something similar.

What are some examples?

Marerro: Mayo Clinic, Geisinger [Health System], Cleveland Clinic—those are all very well-known examples of health systems bringing together doctors, nurses, oncologists, podiatrists, physical therapists, and other specialists all in one integrated network so that the entity can essentially act as a de facto health plan, but do it in a way that they can control and better coordinate the provisioning of care.

Will this trend continue and how does it impact investing in the sector?

Howe: As new technologies have been applied to the healthcare industry, vast advances have been made in the industry, such as information processing, imaging, diagnostics, treatments, and therapies, and this has changed—and will continue to change—how healthcare is both provided and paid for. New systems of managing the costs continue to emerge, involving a variety of new services. Business models or combinations that enable providers to contain costs for payers while enhancing the providers’ revenues are inevitable. The profitability of these arrangements, however, is not always long-lasting; once the cost savings are substantial, competition is a factor and a pricing challenge emerges and new models cycle in. In fact, we have seen a long history of cycles of consolidation and breakups of companies ever since the introduction of the prospective payment system in 1983. The goal has always been revenue enhancement, cost containment, and improved clinical outcomes. Attempts at integration have been both horizontal and vertical. From the perspective of private equity, change and disruption represent opportunity.

How are consumer-focused trends dictating the delivery of healthcare today and how does this impact the private equity model?

Marerro: Things like urgent care and physical rehabilitation and ambulatory surgical centers and free-standing ERs are all consumer-oriented healthcare services that are also seeing a lot of growth. Urgent care is an area that we’ve had success. Urgent care clinics get patients out of the hospital and into a more efficient care delivery environment—getting people out of a very high-cost, expensive emergency departments. We will see continued consolidation in consumer-facing retail healthcare delivery models like this because they are able to improve both the quality of outcomes on a more efficient basis.

Howe: Because of the increasing amount of information and the speed with which one can gather it and draw conclusions, consumers are taking much more control over their healthcare than ever before. Information on personal health matters and disease conditions is readily available on the web. Insurance programs can be compared rapidly and purchased based on personal fit. Providers are being scrutinized and reviewed daily in social media. All of this, plus the trend towards “consumer-driven healthcare,” whereby individuals directly shoulder more of the cost of their healthcare, means the consumer is taking on more responsibility for the purchase decision for his or her healthcare services, compared to a physician or payers who have been able to direct traffic in years past.

As a result, it is critical that the healthcare providers we invest in focus on consumer satisfaction first—convenience, ease, quality of care, follow-ups, clear information, value—and then provide the services efficiently such that we can operate profitably within the confines of the reimbursement levels available. “Value-based” care is, fortunately, something both consumers and payers can agree on, and this is what is necessary to provide as an operator.