While healthcare reform and the renewed focus on reducing federal spending have created a great deal of uncertainty for healthcare providers, investors appear to have rejected the possibility of a completely gloomy future and instead are working to identify investments that will thrive under the new reimbursement environment. Hospital operators have recently experienced an uptick in activity, but the for-profit hospital sector pales in comparison to the activity expected for certain other healthcare sectors, which have attracted a great deal of interest from private equity firms and other private investors.
Recently, three leaders in the healthcare equity market sat down with Becker's Hospital Review to discuss trends and opportunities for healthcare private equity during 2011, noting the sectors they are bullish about as well as those that face bleaker futures.
Aaron Kneas, Managing Director, Creative Health Capital
George "Bo" Hinton, Managing Director, Coker Capital
Scott Poole, Partner, Ridgemont Equity Partners
Q: Let's begin by getting an understanding where all of you currently focus your energies. Can you tell me a bit about your firms and which healthcare sectors you are most active in?
Aaron Kneas: We're a boutique investment bank primarily providing capital raising for healthcare service companies and M&A advisory. We've done a lot in the ambulatory surgery center space as well as the nursing home and specialty (long-term acute-care and cancer) hospital space. I focus the majority of my time looking exclusively at healthcare service companies, many of which are facility based. What we're doing is trying to come up with creative financial solutions to help either the operator grow or to allow the original investors to take chips off the table.
Bo Hinton: We are a middle market, healthcare-exclusive investment bank, primarily focused on healthcare services, including deep expertise with hospitals and other healthcare providers. Within these sectors, our firm provides M&A advisory and capital raising services.
Scott Poole: Ridgemont Equity Partners was formed a little over a year ago and was spun out — we were previously the private equity fund for Bank of America and before that for NationsBank. We focus on four industry verticals — energy, basic industries & services, healthcare and technology/telecommunications. I focus all of my time on healthcare; we look to invest $25-$75 million in these transactions.
Q: Which areas have you been engaged in the most over the last 2 years? Where do you see activity now and in the near future?
AK: We've done a handful of transactions this year with healthcare real estate investment trusts. We've seen a lot of activity and interest in that market, and we feel it's a pretty good option for smaller operators that might not have access to the bigger financial institutions.
Another trend we're seeing is a handful of providers trying to get their hands around the post-acute space, such as LTAC, inpatient rehab and skilled nursing. Here you see some nursing home operators looking to expand their offerings. Similarly, rehab hospital companies are buying LTAC providers. The companies are looking to best serve those post-acute patients under the new healthcare reform law, focusing specifically on the law's regulations around readmission rates.
BH: Over the past several years, we have seen a high percentage of our transactions result in a sale to a strategic buyer. This is particularly true within the provider segment due to uncertainty surrounding reimbursement and the impact of healthcare reform. For hospitals, weak admission trends and cost containment efforts combined with increasing capital requirements to build out areas such as healthcare information technology and physician networks is driving consolidation. Our firm has completed a variety of hospital affiliation transactions over the past twelve months and we maintain an active dialogue with numerous additional hospitals and other provider that are actively evaluating their alternatives. We expect this trend to continue for the foreseeable future.
SP: Over the last 20 years, we've invested close to $500 million in 20 or so healthcare companies, and they have spanned a variety of subsectors — a little pharma, a little med tech but mostly services. Over that timeframe, we've invested in healthcare businesses during a variety of economic cycles and reimbursement paradigms and we like to think that it has provided us with a lot of healthcare domain experience.
Right now we are probably most focused on companies we think are part of the solution, if you will; companies that improve quality, reduce costs and increase efficiency. That's our big theme around healthcare investing. The current pace of spending is unsustainable, and we need solutions within the healthcare system that bring down costs while increasing quality. The business models that do that are going to be the winners, in our opinion.
Q: What sectors are you bullish on?
AK: We're bullish on the ASC space as a low-cost setting and feel like there's a lot of synergy and a lot of margin there versus some of the other sectors. We've also seen some skilled nursing facilities that have really renovated or built new facilities to take on a higher acuity or more rehab-focused patient, and we're bullish on that.
Another space we're bullish on is the medical home model. There are a handful of those rolling out, and there is a lot of data on how the medical home, with more involved physicians, can reduce the cost of healthcare.
BH: With the amount of private equity capital out there that's looking for a home, it's still an attractive time for quality companies looking for investment capital.
Businesses that are well established with a demonstrated pathway to growth and minimal headwinds on the reimbursement or regulatory front are able to receive attractive valuations.
We continue to see a lot of interest in anything that favorably plays the cost trend; any sort of service that moves care to a lower-cost setting and removes cost from the system is of interest — things that make the system more efficient and provide higher quality patient care and patient experiences. Vascular access centers represent an emerging area which plays these trends and as a result is generating increasing interest from strategic and financial buyers.
We are also seeing continued strong interest within the laboratory services sector. There are a number of middle market opportunities for investment, particularly in pathology. It's an area which continues to enjoy good reimbursement support, a strong lobby behind it and a lot of room for consolidation.
SP: One of the subsectors I'm bullish on is urgent care. Here the idea is you visit a retail clinic maybe because you have difficulty getting an appointment or maybe don't have a primary care physician. We also currently have a situation where many individuals getting care in an ER are not in need of emergency care. From a co-pay perspective, the visit will probably cost you 2-3 times less than the co-pay for the ER. For the payor, the cost could be up to five times less.
We like revenue cycle management companies, those companies that bill and collect for doctors. Typically they do so quicker than the physicians' office can do in house, and they typically collect more than is collected in house for a price that is less than the doctor would typically incur from having it done in house. It fits squarely within our healthcare investing theme.
We also like specialty managed care/cost containment companies, which manage the utilization of specialty services, like physical therapy or radiology, for large insurers. By managing utilization and eliminating medically unnecessary care, they drive cost out of the system.
Q: Where do you see a bleak future?
AK: There are a lot of headwinds for home healthcare. It just seems the reimbursement there is continually cut.
BH: A wide range of provider segments continue to have a bleak outlook for marginal operators as well as those companies without the scale or availability of capital to compete. Within these sectors we anticipate increasing consolidation.
SP: We try to steer away from sectors we think are likely to suffer reimbursement cuts. One area where we have concern would certainly be homecare. We're not actively looking for portfolio companies [in that space].
Q: Any other thoughts on the future and where investment interest may trend?
AK: We've seen a handful entrepreneurs looking at more specialized programs where they really become an expert in providing care within a certain specialty. They're not just looking for patients within an immediate geography but are looking to advertise and have people seek them out. One of our clients, a cancer hospital, has been extremely successful getting patients directly rather than going through physicians. It creates a sound business model because they don't have to rely on direct physician referrals.
BH: The number of private equity firms willing to consider investments in sectors with regulatory and reimbursement exposure has declined in recent years. Those that are actively considering investments with reimbursement exposure typically have longer track records within the healthcare provider segment and deep, subsector specific expertise. Those firms without this degree of comfort tend to seek areas such as outsourcing, business services, and HCIT which seek to enhance the efficiency and quality of the healthcare system. These include physician businesses that provide outsourcing to hospitals including hospitalist and radiology providers. We expect interest in these areas to remain high.
SP: In keeping with our healthcare investing theme, we also like the ambulance service space. Well run independent ambulance providers can often provide emergency 911 ambulance services more efficiently than municipalities can on their own and thus save the municipalities money. Ambulance services has the added benefit of being extremely fragmented. There's something like 15,000 providers in that space, which presents the opportunity to make tuck-in acquisitions for low purchase multiples making them all that more accretive.
Recently, three leaders in the healthcare equity market sat down with Becker's Hospital Review to discuss trends and opportunities for healthcare private equity during 2011, noting the sectors they are bullish about as well as those that face bleaker futures.
Aaron Kneas, Managing Director, Creative Health Capital
George "Bo" Hinton, Managing Director, Coker Capital
Scott Poole, Partner, Ridgemont Equity Partners
Q: Let's begin by getting an understanding where all of you currently focus your energies. Can you tell me a bit about your firms and which healthcare sectors you are most active in?
Aaron Kneas: We're a boutique investment bank primarily providing capital raising for healthcare service companies and M&A advisory. We've done a lot in the ambulatory surgery center space as well as the nursing home and specialty (long-term acute-care and cancer) hospital space. I focus the majority of my time looking exclusively at healthcare service companies, many of which are facility based. What we're doing is trying to come up with creative financial solutions to help either the operator grow or to allow the original investors to take chips off the table.
Bo Hinton: We are a middle market, healthcare-exclusive investment bank, primarily focused on healthcare services, including deep expertise with hospitals and other healthcare providers. Within these sectors, our firm provides M&A advisory and capital raising services.
Scott Poole: Ridgemont Equity Partners was formed a little over a year ago and was spun out — we were previously the private equity fund for Bank of America and before that for NationsBank. We focus on four industry verticals — energy, basic industries & services, healthcare and technology/telecommunications. I focus all of my time on healthcare; we look to invest $25-$75 million in these transactions.
Q: Which areas have you been engaged in the most over the last 2 years? Where do you see activity now and in the near future?
AK: We've done a handful of transactions this year with healthcare real estate investment trusts. We've seen a lot of activity and interest in that market, and we feel it's a pretty good option for smaller operators that might not have access to the bigger financial institutions.
Another trend we're seeing is a handful of providers trying to get their hands around the post-acute space, such as LTAC, inpatient rehab and skilled nursing. Here you see some nursing home operators looking to expand their offerings. Similarly, rehab hospital companies are buying LTAC providers. The companies are looking to best serve those post-acute patients under the new healthcare reform law, focusing specifically on the law's regulations around readmission rates.
BH: Over the past several years, we have seen a high percentage of our transactions result in a sale to a strategic buyer. This is particularly true within the provider segment due to uncertainty surrounding reimbursement and the impact of healthcare reform. For hospitals, weak admission trends and cost containment efforts combined with increasing capital requirements to build out areas such as healthcare information technology and physician networks is driving consolidation. Our firm has completed a variety of hospital affiliation transactions over the past twelve months and we maintain an active dialogue with numerous additional hospitals and other provider that are actively evaluating their alternatives. We expect this trend to continue for the foreseeable future.
SP: Over the last 20 years, we've invested close to $500 million in 20 or so healthcare companies, and they have spanned a variety of subsectors — a little pharma, a little med tech but mostly services. Over that timeframe, we've invested in healthcare businesses during a variety of economic cycles and reimbursement paradigms and we like to think that it has provided us with a lot of healthcare domain experience.
Right now we are probably most focused on companies we think are part of the solution, if you will; companies that improve quality, reduce costs and increase efficiency. That's our big theme around healthcare investing. The current pace of spending is unsustainable, and we need solutions within the healthcare system that bring down costs while increasing quality. The business models that do that are going to be the winners, in our opinion.
Q: What sectors are you bullish on?
AK: We're bullish on the ASC space as a low-cost setting and feel like there's a lot of synergy and a lot of margin there versus some of the other sectors. We've also seen some skilled nursing facilities that have really renovated or built new facilities to take on a higher acuity or more rehab-focused patient, and we're bullish on that.
Another space we're bullish on is the medical home model. There are a handful of those rolling out, and there is a lot of data on how the medical home, with more involved physicians, can reduce the cost of healthcare.
BH: With the amount of private equity capital out there that's looking for a home, it's still an attractive time for quality companies looking for investment capital.
Businesses that are well established with a demonstrated pathway to growth and minimal headwinds on the reimbursement or regulatory front are able to receive attractive valuations.
We continue to see a lot of interest in anything that favorably plays the cost trend; any sort of service that moves care to a lower-cost setting and removes cost from the system is of interest — things that make the system more efficient and provide higher quality patient care and patient experiences. Vascular access centers represent an emerging area which plays these trends and as a result is generating increasing interest from strategic and financial buyers.
We are also seeing continued strong interest within the laboratory services sector. There are a number of middle market opportunities for investment, particularly in pathology. It's an area which continues to enjoy good reimbursement support, a strong lobby behind it and a lot of room for consolidation.
SP: One of the subsectors I'm bullish on is urgent care. Here the idea is you visit a retail clinic maybe because you have difficulty getting an appointment or maybe don't have a primary care physician. We also currently have a situation where many individuals getting care in an ER are not in need of emergency care. From a co-pay perspective, the visit will probably cost you 2-3 times less than the co-pay for the ER. For the payor, the cost could be up to five times less.
We like revenue cycle management companies, those companies that bill and collect for doctors. Typically they do so quicker than the physicians' office can do in house, and they typically collect more than is collected in house for a price that is less than the doctor would typically incur from having it done in house. It fits squarely within our healthcare investing theme.
We also like specialty managed care/cost containment companies, which manage the utilization of specialty services, like physical therapy or radiology, for large insurers. By managing utilization and eliminating medically unnecessary care, they drive cost out of the system.
Q: Where do you see a bleak future?
AK: There are a lot of headwinds for home healthcare. It just seems the reimbursement there is continually cut.
BH: A wide range of provider segments continue to have a bleak outlook for marginal operators as well as those companies without the scale or availability of capital to compete. Within these sectors we anticipate increasing consolidation.
SP: We try to steer away from sectors we think are likely to suffer reimbursement cuts. One area where we have concern would certainly be homecare. We're not actively looking for portfolio companies [in that space].
Q: Any other thoughts on the future and where investment interest may trend?
AK: We've seen a handful entrepreneurs looking at more specialized programs where they really become an expert in providing care within a certain specialty. They're not just looking for patients within an immediate geography but are looking to advertise and have people seek them out. One of our clients, a cancer hospital, has been extremely successful getting patients directly rather than going through physicians. It creates a sound business model because they don't have to rely on direct physician referrals.
BH: The number of private equity firms willing to consider investments in sectors with regulatory and reimbursement exposure has declined in recent years. Those that are actively considering investments with reimbursement exposure typically have longer track records within the healthcare provider segment and deep, subsector specific expertise. Those firms without this degree of comfort tend to seek areas such as outsourcing, business services, and HCIT which seek to enhance the efficiency and quality of the healthcare system. These include physician businesses that provide outsourcing to hospitals including hospitalist and radiology providers. We expect interest in these areas to remain high.
SP: In keeping with our healthcare investing theme, we also like the ambulance service space. Well run independent ambulance providers can often provide emergency 911 ambulance services more efficiently than municipalities can on their own and thus save the municipalities money. Ambulance services has the added benefit of being extremely fragmented. There's something like 15,000 providers in that space, which presents the opportunity to make tuck-in acquisitions for low purchase multiples making them all that more accretive.