Private Equity In Healthcare – A Review of 15 Niche Investment Areas

Private equity investment in healthcare continues to grow considerably. This article provides observations and insights on 15 investment niches. It also provides some initial thoughts on the market as a whole.

Here, we divide the article into two core parts. First, there is an overview of investment by private equity. Second, the article discusses fifteen (15) specific investment areas. 

Each market sector is listed here, followed by whether we perceive that there is less, equal or more private equity interest in that sector as compared to last year.  

1. For-Profit Hospitals and Health Systems (less);
2. Healthcare IT and EHRs (equal to more);
3. Laboratory Businesses (equal to more, significant risk factors);
4. Medical Devices (equal to less);
5. Behavioral health (more);
6. Urgent Care (equal to more);
7. Dental Practice Management (equal to more);
8. Ambulatory Surgery Centers (equal to less);
9. Dermatology (more);
10. Care and Case Management (more);
11. Accountable Care Organizations and Population Health Back Office Services (more);
12. Anesthesia Practice Management (equal to more);
13. Revenue Cycle Management (equal to more);
14. Specialty Pharmacy (equal to less); and
15. Pain Management (equal to more).

Overall, there continues to be a tremendous amount of interest in the following sectors: hospital companies, physician practice management models (dental, dermatology, anesthesia, pain, emergency and more) lab and toxicology companies, health IT companies, behavioral health, dental practice management, urgent care, anesthesia, dermatology, pain management, surgery center companies, revenue cycle and back office services.

Further, we note:

1. Some niches are receiving very high profits – generally due to a flooding of the space or regulatory or payor review this doesn’t last and timing of exit is often critical.
2. Some sectors clearly deliver a product payors or patients of facilities really need or want – unless driven by propriety technology, the profits in these areas are generally rationale not exorbitant margin.
3. Some of the above market profits are driven by an ancillary effort than a core part of the business – e.g., lab profits in some practice or ASC models, or ancillary profits to pain management or dermatology models.

Bart Walker, a partner at McGuireWoods LLP, summarizes certain initial thoughts as follows. Please read below under Section II Investment Areas for a fuller discussion of these areas.

1. Labs.  Regulatory scrutiny of lab arrangements has remained extremely tight. Despite years of somewhat aggressive tactics by some entities, OIG and whistleblowers continue to find new fodder for litigation and investigations. (See “OIG Fraud Alert on Lab Payments to Physicians” (July 2014), “OIG Advisory Opinion 13-03” and the April 2014 settlement with Health Diagnostics Laboratory Inc. and Singulex Inc.). Continually slashed rates for lab testing coupled with certain dominant players (e.g., LabCorp, Quest) who often have exclusive arrangements with a lot of payers creates an environment that may encourage aggressive practices to remain a viable competitor.
2. Dental.  The dental industry remains incredibly fragmented.  A number of well-funded, private equity-backed companies are working to roll up the space. At the same time, state boards are much more active in policing corporate practice of dentistry than their medical board counterparts.
3. Urgent Care. After a hiatus of 18-24 months, we are seeing a resurgence of interest in urgent care and some new and interesting models, specifically around freestanding ERs and joint ventured urgent care.
4. Dermatology.  The legal and regulatory issues surrounding dermatology are very interesting — these practices and groups potentially have elements of lab testing, in-office and ASC-based surgery and cosmetics all under the same roof. There has been a great deal of increased interest in dermatology.
5. Pain Management.  A key challenge the pain management sector faces is tension among competing policy interests. On the one hand, you have the need for increased laboratory testing to make sure patients are on adequate doses and to try to combat opioid addiction problems. But on the other hand you have challenges with overutilization that are hard to police. 

I. Healthcare Investment Overview.

1. Healthcare Investment Growth. The healthcare arena has moved from a situation where boutique private equity funds and boutique lenders focused on the arena to a spot where all or most major lenders and private equity funds spend a great deal of time in the broader healthcare arena. Health care merger and acquisition activity grew by 14 percent in 2015, to 1,498 transactions, setting a new record for healthcare M&A deal volume. In 2014, which held the previous record, 1,318 deals were announced across 13 health care sectors. Spending in 2015 reached $563.1 billion, beating the previous record of $387.7 billion spent in all of 2014, according to Health Care M&A News.

Healthcare is often defined, for investment purposes, to include several broad categories and dozens of niches. Healthcare includes provider-based companies, (1) entities that actually serve patients such as providers and health systems (such as Nashville, Tenn.-based hospital operator Hospital Corporation of America); (2) healthcare related or healthcare services, e.g., health IT and revenue cycle management companies, or organizations that sell into or provide services to providers and (3) life sciences, i.e. medical device and pharmaceutical companies (such as Johnson & Johnson).

2. The Scope of Private Equity Investment in Healthcare. In 2014, slightly more than $29.6 billion, a dramatic increase from $16 billion in 2013, was reportedly invested in healthcare by private equity funds in the form of healthcare buyout deals globally, according to Bain. As in previous years, North America led investment activity; five out of the top 10 deals involved targets in the U.S. Two mega-deals contributed to the increase in value of deals from 2013: the $4.4 billion purchase of MultiPlan led by Starr Investment Holdings and Partners Group and The Carlyle Group’s approximately $4 billion purchase of Johnson & Johnson’s Ortho-Clinical Diagnostics business.

The average size of healthcare-specific funds fell in 2015, after three consecutive years of growth, according to PEI Research & Analytics. The average healthcare-specific fund in 2015 was $360.7 million, down from $379.15 million in 2014. Despite the fall, average fund size remained well above post-financial crisis lows of 2011 and 2012, which saw average sizes of $84.55 and $79.74 million, respectively. 

II. Investment Areas.

1. For-Profit Hospitals and Health Systems (less interest). There continues to be great interest in for-profit hospital companies. The PPACA and King v. Burwell decision has largely been positive for the large hospital companies. (See “CHS, Tenet, HCA, LifePoint and UHS shares surge after SCOTUS upholds subsidies,” Becker’s Hospital Review, June 2015). There are huge, publicly traded for-profit companies that have enjoyed large growth in the last couple years, such as HCA and Community Health Systems (which acquired HMA), as well as smaller private equity hospitals that continue to aim for growth, such as Capella Healthcare, based in Brentwood, Tenn., among others (Capella recently sold for a reported $900 million dollars. See “Capella to be sold for $900M: 5 things to know about the deal,” Becker’s Hospital Review, July 2015.) In one example of why for-profit hospitals attract investors, HCA’s share prices have climbed steadily in recent years — up over 50 percent in the past 12 months alone — and the hospital operator’s main investors, such as Bain Capital and KKR & Co. L.P., sold additional stakes in the public company for billions.

There remains huge interest and large transaction volume with the large hospital companies. At the same time, the last six months have been a tougher time for stock prices and results of the large for profit hospital companies.

The consolidation of large payers is of concern for hospitals, health systems and private equity firms, as payers consolidate power and become more interested in investment opportunities. (See “Anthem Buys Cigna – And Then There Where Three – 7 Key Points”. See also “The 10 Largest for Profit Hospital Companies”.)

Private equity firms have also profited from recent mega-mergers in the for-profit space. For instance, Blackstone Group LP — Nashville, Tenn.-based Vanguard Health Systems’ largest shareholder — collected more than $600 million from Vanguard’s sale to Tenet Healthcare Corp. in Dallas. In addition, real estate investment trust Ventas recently acquired Ardent Health Services for $1.75 billion.

According to Modern Healthcare, private-equity healthcare deals in recent years have included a string of hospital acquisitions, and investors have said more deals will follow. But with an influx of private equity comes the inevitable exit of those very same investors, often within three to seven years. And those investors seek to leave with healthy profits, raising concerns that whatever profit they take could come at the expense of companies they own.

In regard to private equity in the for-profit space, Scott Becker, a partner at McGuireWoods LLP, said, "This is an area where there has been tremendous private equity investment already, both with big hospital chains like HCA and other big area hospitals.  Right now we are seeing some consolidation and merging of investments such as with Capella, however the influx of new investments has largely stalled." 

2. Healthcare IT and EHRs (equal to more interest). The healthcare IT arena is one where there continues to be the proliferation of a ton of companies and investments, some of which may take it to the next level.  Others of which will struggle to gain traction.  According to Bain, private equity interest in health IT assets was strong again in 2014, but deal activity was tempered due to a longstanding trend of high valuations, thanks to competition from strategics and strong financial markets. Enticing IPO markets also drove many VC-backed firms straight to IPO without passing through private equity ownership, such as venture-backed firms Castlight Health and Everyday Health, which made their IPO debuts in 2014.

Unlike private equity activity, venture capital investments flowed abundantly into the healthcare IT segment in 2014. According to Rock Health, VC funding for US companies in the digital health space in 2014 was $4.1 billion, nearly equal to the total funding of the previous three years combined. Notable assets that received venture funding during the year were telemedicine company Teledoc, payer services asset MedHOK and respiratory digital therapy firm Propeller Health. The level of venture activity heralds a sizable pool of assets to capture private equity interest in years to come, even if some go straight to IPO or strategic buyers without passing through private equity hands. A great deal of the health IT action now focuses beyond the large EHR systems installed by hospitals and providers.

The EHR market has matured to a significant extent. A once-crowded field of vendors has narrowed significantly. The top 10 EHR vendors account for nearly 60 percent of the total hospital EHR market: Epic, Cerner, eClinicalWorks, Allscripts, Practice Fusion, NextGen Healthcare, GE Healthcare, Cerner, athenahealth, McKesson and Amazing Charts. Among physicians, top-used vendors include Centricity, Practice Fusion, VA-CPRS and athenahealth. (See “50 things to know about the EHR market’s top vendors,” Becker’s Hospital Review, July 2015.)

Hospitals and health systems are typically in the middle of the EHR discussion, but payers are starting to enter the conversation as well. With health insurance companies concerned with cutting down costs and improving the health outcomes of patient populations, some payers, such as Aetna, are now mining data collected from EHRs to try to intervene and steer consumers to a healthier lifestyle.

As the industry increasingly turns to data and analytics to address healthcare costs, private equity investments in health IT originally centered on EHR systems. Now it focuses just as much on systems that analyze data and a whole range of other applications. Veritas Capital, a New York-based private equity firm, bought cloud-based data aggregate and analytics giant Truven Health Analytics in 2012 for $1.3 billion. Veritas sold Truven to IBM Watson Health for $2.6 billion in February of 2016. 

3. Laboratory Businesses (equal to more interest; significant risks). Over the last few years, the OIG has increased scrutiny on lab businesses due to expansion in this area. For example the growth rate of lab business billed to Medicare is three times that of other businesses. (See “Doctors Cash in On Drug Testing for Seniors and Medicare Pays the Bill, Wall Street Journal, Christopher Weaver and Anna Wilde Mathews – May 10, 2014). The lab business, both on a large scale and small scale, remains a huge area for investment, coinciding with a focus on preventive care and coordinated efforts to treat patients with chronic disease. For instance, Levine Leichtman Capital Partners has invested $110 million in Genova Diagnostics Inc., a specialty clinical laboratory with a testing approach tailored to personalized treatment and prevention of chronic disease. Gene-sequencing giant Illumina Inc., private equity firm Warburg Pincus LLC and venture capital firm Sutter Hill Ventures invested $100 million to seed a new consumer-facing human gene platform called Helix in August 2015.

Avista Pharma Solutions acquired the GMP contract manufacturing, development and animal health services business of Scynexis. As part of the transaction, Avista will occupy Scynexis’s former research and GMP manufacturing facility in Durham, N.C., and hire substantially all employees associated with the contract services business.

Mr. Becker says, " There is a good deal of risk in this sector, as payers and the federal government try to discourage unneeded or excess testing as well as financial relationships with referral sources.   There have also been well publicized challenges to major players in the sector, such as with Theranos.  However, there is serious growth in direct-to-consumer testing and testing in the way of genomics and precision medicine." 

4. Medical Devices (equal to less interest). The medical device arena continues to focus around the five to 10 largest companies. However, there are hundreds of small and mid-sized device startups and small companies that are either trying to be entrepreneurial middle men or direct providers of devices. Medical device sales are expected to grow 4.9 percent annually through 2016 as a result of technological innovation and the aging population. Although the industry faces some challenges (such as reduced reimbursement, the Patient Protection and Affordable Care Act’s 2.3 percent medical device tax and the FDA regulatory process), fields such as orthopedics, telehealth and mobile health have still experienced growth. For example, Wall Street Health Partners has invested $50 million in RTI Biologics’ purchase of Pioneer Surgical Technology, Inc. — a prominent provider of orthopedic and other biologic implants.

Strategic buyers continued to dominate the medtech sector. Many sought to expand their product portfolios through acquisitions. For example, Cardinal Health purchased home healthcare supplier AssuraMed for $2 billion, Thermo Fisher Scientific acquired genetic testing firm Life Technologies for $15 billion and Valeant Pharmaceuticals bought Bausch + Lomb Holdings for nearly $9 billion. That competition — plus the general lumpiness and cyclicality of the sector — meant another down year for medtech private equity activity. The only private equity deal worth more than $1 billion in the sector was KKR’s $1.7 billion stake in Panasonic’s healthcare business. As a result, medtech represented only 13 percent of total healthcare private equity deal value and 19 percent of deal count. Notably, there were additional private equity investments in multi-industry companies with medtech business lines, such as Cinven’s $2 billion acquisition of CeramTec, a maker of ceramic parts for replacement knees and hips as well as components for the auto and electronics industries, but this activity was not enough to change the overall balance between private equity and strategic buyers by much.

Medtech investors continued to focus on product-based companies over service-based ones; for example, Anacacia Capital acquired Hills Holdings’ healthcare equipment business. Other product subsectors that saw investments include diagnostic equipment, orthopedic equipment, medication delivery devices, cardiac implants and dental implants. There is also increased animal health interest, such as The Riverside Company’s acquisition of a controlling stake in Simcro, a New Zealand manufacturer of medication delivery devices for production animals.

5. Behavioral Health (more interest). There has been a significant increase in investment interest in behavioral health, including substance abuse businesses, and this investment interest is widespread across the spectrum of investors. Interest has increased due to the rising demand for behavioral health services and the requirement that health insurance companies do not use more restrictive requirements when reimbursing mental health and substance-abuse related claims than they do with medical related claims.

In 2014, an estimated 22.7 million Americans needed addiction treatment for a problem related to drugs or alcohol within the past year, of which only 2.5 million received treatment at a specialty facility, according to a report from the National Institute on Drug Abuse. The combination of increased demand, a lack of adequate providers and increased sources of payers has created opportunities for private equity investors in the behavioral health market, according to a recent Law360 report by industry experts from McGuireWoods and HCP & Co.

The behavioral health sector saw a 24 percent increase in deal volume from 2013 to 2014, according to PwC. In October of 2014, Acadia Healthcare Company bought CRC Health Group from private equity firm Bain Capital for $1.2 billion. Meanwhile, AAC Holdings, the parent company of American Addiction Centers, which operates six substance abuse facilities across the U.S., has seen its shares climb 109 percent since its IPO last October. The sector saw the entrance of seven new private equity firms within the first three quarters of 2015 alone. Recovery Centers of America (RCA) is building eight substance use treatment centers in the northeast U.S. in 2016, driven by $231.5 million in financing from New York private equity firm Deerfield Management.

State and national legislative insurance changes have made substance use treatment a $35 billion-a-year industry, according to a report from Common Health. The PPACA’s expansion of coverage for behavioral health and substance abuse specifically has garnered the interest of investors. Reimbursement in this sector has been on the rise: From 2002 to 2011, the National Survey on Drug Use and Health found the number of respondents using Medicaid and Medicare payments for treatment increased by 23.1 percent and 19.5 percent, respectively. 

6. Urgent Care (equal to more interest, growth in related stand alone emergency department sector). Geoffrey Cockrell, chairman of the private equity group at McGuireWoods law firm, offered the following insight on urgent care: “Two years ago, urgent care was a white-hot industry. Then, prices increased and the investing market dried up, leaving only strategic buyers. There are not many platforms of scale to support financial buyers’ investment. Recently, however, pricing has become more rational and the industry has come roaring back. Companies are now exploring additional elements, such as primary care and entering rural markets.”

There is currently significant interest in investing in urgent care. This includes investment in firms such as CVS’ Minute Clinic (one of the first broadly rolled out urgent care companies) to standalone emergency departments to simple urgent care units. There was an almost 20 percent growth in existing clinics in the past four years, with the total number of urgent care clinics exceeding 9,000, according to a February 2014 McGuireWoods report. The expansion is expected to continue; IBIS World estimates the sector will produce more than $18 billion in revenues in 2017 at more than 12,000 clinics. Private equity investment has driven the expansion in recent years. For example, in June of last year, ABRY Partners, a leading private equity firm, completed a majority stake acquisition of FastMed Urgent Care, the second largest independent urgent care organization in the U.S. (See “20 things to know about urgent care,” Becker’s Hospital Review, June 2015.)

Private equity firms aren't the only ones taking note of the investment opportunity—urgent care investment has gained traction among insurers and hospital systems as well. In April 2015, UnitedHealth Group's Optum portfolio acquired urgent care franchise MedExpress and its 141 facilities, with plans to open 25-30 new clinics in the 2016. Hospital-owners HCA Holdings and Tenet Healthcare have also invested aggressively in urgent care clinics. HCA expanded its ownership to 66 urgent care facilities by the close of FY 2015 through strategic acquisitions, like the purchase of Coppell, Texas-based CareNow. Tenet Healthcare's urgent care arm MedPost, launched in 2014, has expanded into eight states.

Along with growth in urgent care comes the evolution of orthopedic-specific urgent care. This involves the development of urgent care models centered on particular specialties. These are often created to feed an orthopedic practice as well as to generate  profit. For instance, OrthoNOW has established itself as a franchise business of specialized orthopedic urgent care centers. The company opened its first location in Miami in 2010 and became a franchise program last year with a network of urgent care centers.

According to a recent analysis of the urgent care industry, despite a decrease in the number of urgent care clinics as of late, investors have pumped roughly $3 billion into the burgeoning urgent care industry since 2008. Also, in a 2014 white paper from McGuireWoods and UCAA, one industry professional predicted the urgent care industry will see a lot of activity through 2019 and beyond, since some large metropolitan areas could support two to three times the number of current urgent care providers.

7. Dental Practice Management (equal to more interest). According to Mr. Becker, "The dental practice management sector has seen tremendous private equity investment during the past five to 10 years. This makes sense, as everyone needs dental services, the money involved is material and there are still a large number of independent dentists." In the past decade alone, more than 25 private equity firms invested significantly in dental practice management, and some large companies in the sector have seen annual revenue of more than $100 million. This has evolved to the point where there are at least 10 large-scale dental practice management companies. In early July, Dental Care Alliance, which reached $241.3 million in revenue in 2013, was sold to New York private equity firm Harvest Partners, LP.

The dental practice management has seen tremendous investment over the last 5 to 10 years.  That stated dental is an area where all of the population needs dental help, the money spent on it is material and there remain a large number of independent dentists. 

According to Mr. Walker, “Dental practices continue to appeal to private equity funds because they’re mostly commercial pay or cash pay, so there’s relatively low exposure to reimbursement changes from governmental payers, and it’s a fragmented industry. The top 3-5 companies only control 5-10 percent of the market, so there’s lots of room to consolidate and aggregate practices together. It’s still a pretty profitable business and there’s a need [for their service].”  Other DPM models do focus heavily on Medicaid patients.

Mr. Walker also notes several recent deals in the sector.  For example he notes the following three recent dental deals:

1. Dental Care Alliance announces Northeast Dental Management Affiliation (230 practices across 12 states)
2. Berkshire Partners to acquire Affordable Care from American Capital for $800 million dollars (200 affiliated practices in 40 states); and
3. Blue Sea Capital investment in Deca Dental (30 practices)

8. Ambulatory Surgery Centers (equal to less interest). ASCs have not experienced large growth recently. However, the approximately 5,500 ASCs in the country continue to deliver solid profits. According to a recent overview of the ASC industry, each year, physicians perform more than 23 million procedures in ASCs. Approximately 25 percent to 30 percent of ASCs are owned or managed by multi-facility chains. Roughly 96 percent of ASCs were for-profit in 2013, showing no change from the number of for-profit ASCs in 2008.

The big four specialties for ASCs include ophthalmology, orthopedics, GI and pain management, according to an ASC analysis. Overall, these specialties remain strong and reasonably independent. Ophthalmology, GI and pain management provide the largest number of cases to ASCs by case volume. Orthopedics, in contrast, comprises 15 percent of all ASC surgeries, but is very important by revenue.

There are a number of companies that invest heavily in and manage ASCs, including some of the largest private equity firms in the country. TPG Capital has backed Deerfield, Ill.-based Surgical Care Affiliates, which is one of the largest ASC companies and led by Andrew Hayek. Welsh, Carson, Anderson & Stowe has close ties with Addison, Texas-based United Surgical Partners International (led by Brett Brodnax), another prominent ASC company. Additionally, in 2010, private equity firm H.I.G. Capital completed a major investment in Tampa, Fla.-based Surgery Partners, one of the largest ASC operators in the Southeast. Surgery Partners (led by Mike Doyle) merged with Symbion.  In 2014, AmSurg Corp. (led by Chris Holden) acquired Sheridan Healthcare. Many deals occurring in the ASC sector concern existing centers rather than startups, and with many ASCs remaining independent, investors will continue to be attracted to the ASC space.

It is anticipated that private equity-backed ASC companies will begin considering new acquisitions. For instance, USPI (which formed a joint venture with Tenet) has suggested it anticipates increased M&A activity in the coming years as ASCs partner with other providers to form strong affiliations in the face of healthcare reform challenges.

"For ASCs, we have seen many of the companies diversify away from being straight ASC companies," says Mr. Becker. "There has also been a fairly stable number of ASCs for the last 5 to 7 years, therefore chain store growth as well as growth in new facilities is relatively flat."

9. Dermatology (more interest). The dermatology arena has also experienced significant growth. Like pain management providers, dermatologists offer professional services and there are opportunities for specific situations in dermatology where people make outsize profits. Some examples of recent dermatology transactions include New MainStream Capital's 2015 deal with Anne Arundel Dermatology, one of the largest dermatology providers in Maryland, and Varsity Healthcare Partners 2016 agreement to sell Forefront Management Holdings, a physician management group in dermatology, to the private investment arm of pension fund giant Ontario Municipal Employees Retirement System.

According to a 2014 report by investment bankers Brown Gibbons Lang & Company, dermatology practices continue to attract private equity interest and outside capital investment. Beginning with Audax Group’s October 2011 recapitalization of Advanced Dermatology and Cosmetic Surgery, six dermatology platform investments have been made by private equity sponsors. Over the past year, the number of new funds seeking an investment in dermatology has grown dramatically. Existing platforms have continued to expand, and a number of sponsors have tapped operating executives to build platforms.

Investment activity has expanded outside traditional dermatology hotbeds such as Florida and the Southwest, with acquisitions in the Midwest and Great Plains fueled by a strong capital markets environment and a sense of urgency for funds to deploy capital. Numerous factors contribute to the attractiveness of dermatology practices as investment platforms. Dermatology remains a highly fragmented market, and the multi-site, multi-unit structure of group practices is ideal for pursuing buy and build strategies. Elective, cash pay, ancillary services in cosmetic dermatology allow for direct-to-consumer marketing, while medical dermatology provides a solid foundation for recurring cash flows. Practice branding lends well to physician transition, unlike other medical specialties where the practice goodwill resides predominantly with the physicians. Scale is key, not only in terms of geographic reach but also number of providers. Achieving a certain level of scale affords the ability to bring pathology lab services in-house and provide additional ancillary services and products.

10. Care and Case Management (more interest). Entities that provide case management services  have drawn small but increasing interest from investors looking to get in early on evolving and preventive-focused care delivery and payment models. Separately certain pe firms like Summit Partners have invested heavily in large groups such as Health Partners and Dupage Medical group.  private equity firms could be betting long-term on the ability to sell these managed-care-savvy medical groups to insurers or health systems, which may pay a premium for practices that can prove care-coordination and analytics expertise. Primary care groups that can demonstrate better quality care and lower costs in managing complex patients will be valuable in a healthcare system that rewards cost-effective care. 

According to Modern Healthcare, there were 113 deals involving providers in the first quarter of 2015. That is a 46.8 percent increase from Q1 2014 and a total of $18 billion in M&A activity. Private equity groups increased their activity in the healthcare market, with 41 healthcare deals in Q1 2015, including 14 in the provider space. By comparison, private equity groups made just 28 total deals in all 2014, with 10 in the provider space. For example, in March, New York-based private-equity firm Harbour Point Capital invested in Oak Street Health, a Chicago-based network of seven primary care clinics that focuses on coordinating care for traditional Medicare and Medicare Advantage plans. According to Oak Street Health CEO Mike Pykosz, the group was courted by about 15 firms.

According to Mr. Cockrell, “This sector has created some very smart business models. These models include saturating the population with heavy doses of primary care to manage and/or avoid chronic conditions.”

11. Accountable Care Organizations and Population Health Back Office Services (more interest). With the growing number of ACOs in the U.S., a great deal of companies — small, mid-sized and large — have developed around providing services to ACOs. (See “50 things to know about ACOs,” Becker’s Hospital Review, July 2015.) Valence Health in Chicago — a provider of value-based care solutions — helps hospitals, health systems and physicians switch to value-based care models by providing software, consulting, data aggregation and other services. In June, Valence was chosen by Centegra Health & Wellness Network — an association of primary care physicians and specialists — to support its clinically integrated network. There are other companies that provide more focused services to IPAs, physician-hospital organizations and ACOs. For example, Optum, a division of UnitedHealthcare, focuses on information and technology enabled health services.

According to Mr. Cockrell, "there's more private equity funds looking for ways to invest and get involved with value-based industry change. More funds are looking at ways to take on risk and become a risk-taker in the sector, and we've seen private equity funds buying up large primary care practices and taking a stake in organizations with capitated or risk-based contracts."  

For instance, last year private equity firm Great Point Partners helped bankroll the merger of Orange Health Solutions and MZI HealthCare. Orange Health, founded by former UnitedHealth Group executives, provide services to hospitals and healthcare organizations to help establish value-based care models and ACOs. MZI helps providers, health plans, ACOs and other healthcare entities with data analytics, predictive modeling, medical care management and health benefit management technologies. Arcadia Healthcare Solutions, an EHR data aggregation and analytics company, acquired managed services and ACO implementation provider Sage Technologies, giving Arcadia end-to-end exposure in the managed care sector. The acquisition was bankrolled by Peloton Equity, Morgan Stanley Alternative Investment Partners, Zaffre Investments and Escalate Capital Partners.

12. Anesthesia Practice Management (equal to more interest). During the last few years, there has been an evolution in the number of anesthesia practice management companies in the country. These companies serve both major hospital systems and a number of smaller companies that provide services on a regional basis or to physician-driven ambulatory surgery centers. For instance, Sheridan Healthcare sold to AmSurg in 2014 for $2.35 billion. Private equity groups, such as MadisonDearborn Partners, LLC, Blackstone Group LP, and Goldman Sachs Private Capital Investing Group have invested significantly in anesthesia practices. Knoxville, Tenn.-based TeamHealth Anesthesia is one of the leaders in outsourced anesthesia and pain management. The physician-led company has what is nearly the largest bench of specialists in the country delivering hospital-based services. Its physicians provide anesthesia services in community hospitals, major medical centers and teaching facilities.

Small private anesthesiology firms, feeling the pressure of reduced reimbursement rates from large insurers, are welcoming acquisition deals with big-time suitors like Mednax, TeamHealth and AmSurg Corp.  According to Mr. Becker, "There has been tremendous consolidation and activity here from existing firms and those like Amsurg that have broken into this area.  Due to good profits and active deal flow, it continues to draw serious private equity interest. It seems like there is still a lot of consolidation to be done." 

13. Revenue Cycle Management (equal to more interest). Financial buyers have made a strong showing in the revenue cycle management sector, as evidenced by the spike in mergers and acquisitions last year. The market for revenue cycle companies saw 47 transactions in 2015, with more than $3.2 billion exchanging hands, according to a report from Greenberg Advisors. Investments in revenue cycle management software and services over the coming years are expected to increase by upwards of 15.51 percent. Globally, the total spend on RCM solutions is projected to surpass $7.09 billion by 2020.

A well run revenue cycle can make or break the success of a health system, therefore the value of revenue cycle service providers in the industry is unquestioned. Mr. Cockrell says, "There are a wide array of generalist private equity funds that would like to gain exposure in healthcare markets, but don't want to take on direct reimbursement risk. Revenue cycle companies present a great opportunity for these funds to make a solid investment without taking on risks they aren't prepared for."

Moreover, the number of revenue cycle management companies focused on the outsourcing of billing and collections continues to increase. Black Book projects the market for outsourced revenue cycle management will grow at a compound annual growth rate of 26.5 percent through 2018. 

Some notable private equity deals in the RCM sector last year included Thoma Bravo's purchase of MedeAnalytics, Arlington Capital Partner's acquisition of Ontario Systems (for which NXT Capital supplied $39 million) and Edgewater Growth Capital Partner's portfolio Boulder Healthcare Solution's acquisition of The ROI Companies. 

RCM vendors have also been snapping up smaller players to shore up their end-to-end service offerings. For instance, last year RCM-provider Emdeon acquired both Altegra Health and Capario to expand its revenue cycle capabilities. The Emdeon-Altegra deal was valued at $910 million. In the first quarter of 2016, Pamplona Capital Management closed its acquisition of MedAssets for $2.7 billion. The transaction is one of what the company expects to be a series of acquisitions aimed at creating a single company capable of replacing the patchwork of vendors hospitals typically use for billing. In January, Pamplona made a strategic investment in Patientco, another technology vendor that provides payment services to the healthcare market.

14. Specialty Pharmacy (equal to less interest). There continues to be great interest in the development and funding of specialty pharmacy distribution companies, as well as companies that focus on the actual development of pharmaceuticals. For example, hepatitis C pill Sovaldi posted $3.48 billion in sales for the second quarter of 2014, which puts Foster City, Calif.-based Gilead Sciences, the maker of the drug, on track to become one of the top-selling pharmaceutical companies. In addition, healthcare-focused private equity firm BelHealth Investment Partners sold Aureus Health Services, a leading provider of specialty pharmacy services, to national grocer Meijer.

According to Bain, the generic pharmaceutical producer segment drew significant private equity interest in 2014. In 2015, CVC Capital Partners teamed up with Temasek in a $2 billion deal to buy generic drug firm Alvogen from Pamplona Capital Management, while its peer Cinven sold its own generic pharma group Amco to Concordia Healthcare for $3.5 billion. One driver of the private equity interest in this segment is that investors face less competition from potential strategic buyers than in other healthcare segments. In the US, generics manufacturers face revenue dips similar to the patent cliffs faced by their branded pharmaceutical counterparts when their post-patent exclusivity periods end. This volatility in revenue streams makes them less attractive to publicly traded strategic buyers.

15. Pain Management (equal to more interest). There continues to be a substantial increase in interest in pain management clinics. Nearly 100 million Americans suffer from acute and chronic pain, nearly a billion is spent each year on pain management, and a large amount of dollars is spent each year on treatment. A good deal of pain management profits are also derived through ancillary services such as ASCs and lab tests.

There has been a tremendous increase in investment interest in the pain management sector during the last several years. This is driven by the core pain business and revenues from ancillary services — such as lab testing and ambulatory surgery centers — divided by pain management physicians. Activity in this space since 2010 includes Chicago Growth Partners’ acquisition of Advanced Pain Management, Sentinel Capital Partner’s investment in National Spine & Pain Centers and the 2012 formation of Prospira PainCare, which was created with the backing of three private equity firms and has acquired pain centers across the country.

In 2014, Pain Doctor, a leading pain management company providing standardized care and high quality service, received a significant growth capital investment by Catterton Partners, the leading consumer-focused private equity firm. The investment's intention was to expand Pain Doctor's reach across the U.S. and build its support businesses, which include lead generation, lab services and natural pain relief supplements.