The healthcare industry has attracted a great deal of interest from private equity firms over the last few years. Many healthcare professionals believe the interest will continue, if not increase, as healthcare reform and other changes sweep U.S. healthcare. Private equity firms can be valuable assets for hospitals and health systems looking for assistance with capital or the strength of a partner. Private equity traditionally has large cash flows allowing for capital expenditures. Additionally, they generally know how to run organizations successfully.
Here, James Moss, vice president at Buxton, a market planning and marketing services firm for various industries including healthcare, and Matt Montgomery, senior vice president at Buxton discuss five elements that private equity firms consider and review when choosing potential healthcare investments. Knowledge of the practices and focus areas of private equity firms could help hospital executives to leverage options for partners. Awareness of these areas could also help executives streamline the initial steps of a transaction.
1. Current and future footprint. When private equity executives consider a potential acquisition or partner, they most likely look at a prospect's current and potential footprint on a local and national scale, along with its service line optimization.
"Generally speaking, when private equity firms come to Buxton to assess healthcare providers, one of the big components to understand first is where a provider fits within the current geographic market a provider serves," says Mr. Montgomery. "The question of 'what is its current footprint in the market?' helps us develop a baseline." Factors like service demand, consumer profiles and existing supply are considered.
Once the current "footprint" in the local market is analyzed, private equity companies consider a provider's future footprint potential. As Mr. Montgomery puts it, "How big the organization can be when it grows up." This element is important because of the healthcare industry's increasingly fragmented space. "With many healthcare organizations ripe for consolidation, it is good to have a more global focus on a national scale," says Mr. Montgomery.
The final piece to consider is the hospital's service line optimization at each facility. "Regardless of whether the hospital functions mainly in a traditional campus environment or has evolved into an off-campus, consumer-oriented model of outpatient locations, we try to define the programming mix so we can understand its potential," says Mr. Montgomery.
2. Past investments, capital expenditures. Private equity will also review a hospital's capital expenditures and liabilities with great depth. Trends in those areas help them determine a hospital's potential footprint. Each firm varies but most often, they like to see trends that show investment for growth.
"[Private equity] generally likes to invest for growth and sustainability," says Mr. Moss. "They would prefer to partner with a hospital that has had the foresight to invest for its future."
Investments in a new facility and IT infrastructure may be preferred compared to capital expenditures into office supplies and day-to-day expenses. "It is similar to how people do not want to purchase old cars. They would much rather buy a car with new tires and recently changed oil," says Mr. Moss. "That is the equivalent of a private equity firm looking at a hospital's capital expenditures. Have they recently upgraded their systems, updated the infrastructure and do they have new x-ray equipment? Just like a consumer, private equity firms want to invest in something that is new and current so the investment is not a drain as soon as it is purchased."
Depending on the private equity firm, some may view capital expenditures into physician recruiting or salaries as beneficial. According to a private equity source that preferred to remain anonymous, investments in physicians and medical staff may grow the market or add service lines to the hospital. Those are seen as valuable uses of capital.
3. Compatibility with existing portfolio. When a private equity firm considers a potential merger or acquisition with a healthcare organization, it is looking to leverage its existing portfolio.
"Private equity firms want to be involved with a company in the same spectrum of existing portfolios. They won't want to feel forced to create new synergies to manage the company, they want the portfolio to fit as is," says Mr. Moss.
If a healthcare organization does not fit a private equity company's current investment strategy, it will not want to spend time and energy associated with growing the investment because it would not contribute to, or benefit from, established investments.
4. For-profit over non-profit. Private equity firms will shy away from non-profit hospitals and health systems because non-profits deal with more board member, committee and community interaction than a private equity firm may prefer. In cases that non-profit providers are acquired, they will generally be transitioned into for-profit hospitals or health systems. For instance, Steward Health Care System, backed by Cerberus Capital Management, acquired Caritas Christi Health and Morton Hospital & Medical Center. They were both non-profits that became for-profits after the acquisition.
Private equity likes to be autonomous and work within an entrepreneurial environment. A for-profit hospital or health system may be viewed as a more profitable venture because the private equity firm's decisions and actions may not be subject to review by as many, or any, external parties.
5. Transparency. When considering a transaction, a private equity firm will conduct a very thorough due diligence analysis around the hospital's operations and finances. Hospitals or health systems hoping to consider a private equity partner will need to be very transparent.
"A firm will want full disclosure on everything. It always helps to have all ducks in a row before a private equity firm comes in. That sort of transparency must be led by the hospital executives," says Mr. Moss.
Private equity firms would like to see all the data a hospital has available including facility data from each clinic, outpatient center or hospital-owned location, patient data and encounter data.
"The data is unique to each facility so it contributes to the hospital's entire picture," says Mr. Montgomery.
Patient data allows perspective on the types of patients that frequent the hospital. An understanding of a hospital's patient population sheds light on its current and potential footprint. Encounter data helps private equity firms to forecast the potential patient volume a hospital could experience.
"Based on the amount of data available, companies will build forecast models that help private equity firms or providers understand the impact of opening a new clinic or changing operations at a hospital," says James Moss. "The interaction of all three forms of data is integral to understanding a hospital's potential. That is why private equity firms prefer open access to the data."
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Here, James Moss, vice president at Buxton, a market planning and marketing services firm for various industries including healthcare, and Matt Montgomery, senior vice president at Buxton discuss five elements that private equity firms consider and review when choosing potential healthcare investments. Knowledge of the practices and focus areas of private equity firms could help hospital executives to leverage options for partners. Awareness of these areas could also help executives streamline the initial steps of a transaction.
1. Current and future footprint. When private equity executives consider a potential acquisition or partner, they most likely look at a prospect's current and potential footprint on a local and national scale, along with its service line optimization.
"Generally speaking, when private equity firms come to Buxton to assess healthcare providers, one of the big components to understand first is where a provider fits within the current geographic market a provider serves," says Mr. Montgomery. "The question of 'what is its current footprint in the market?' helps us develop a baseline." Factors like service demand, consumer profiles and existing supply are considered.
Once the current "footprint" in the local market is analyzed, private equity companies consider a provider's future footprint potential. As Mr. Montgomery puts it, "How big the organization can be when it grows up." This element is important because of the healthcare industry's increasingly fragmented space. "With many healthcare organizations ripe for consolidation, it is good to have a more global focus on a national scale," says Mr. Montgomery.
The final piece to consider is the hospital's service line optimization at each facility. "Regardless of whether the hospital functions mainly in a traditional campus environment or has evolved into an off-campus, consumer-oriented model of outpatient locations, we try to define the programming mix so we can understand its potential," says Mr. Montgomery.
2. Past investments, capital expenditures. Private equity will also review a hospital's capital expenditures and liabilities with great depth. Trends in those areas help them determine a hospital's potential footprint. Each firm varies but most often, they like to see trends that show investment for growth.
"[Private equity] generally likes to invest for growth and sustainability," says Mr. Moss. "They would prefer to partner with a hospital that has had the foresight to invest for its future."
Investments in a new facility and IT infrastructure may be preferred compared to capital expenditures into office supplies and day-to-day expenses. "It is similar to how people do not want to purchase old cars. They would much rather buy a car with new tires and recently changed oil," says Mr. Moss. "That is the equivalent of a private equity firm looking at a hospital's capital expenditures. Have they recently upgraded their systems, updated the infrastructure and do they have new x-ray equipment? Just like a consumer, private equity firms want to invest in something that is new and current so the investment is not a drain as soon as it is purchased."
Depending on the private equity firm, some may view capital expenditures into physician recruiting or salaries as beneficial. According to a private equity source that preferred to remain anonymous, investments in physicians and medical staff may grow the market or add service lines to the hospital. Those are seen as valuable uses of capital.
3. Compatibility with existing portfolio. When a private equity firm considers a potential merger or acquisition with a healthcare organization, it is looking to leverage its existing portfolio.
"Private equity firms want to be involved with a company in the same spectrum of existing portfolios. They won't want to feel forced to create new synergies to manage the company, they want the portfolio to fit as is," says Mr. Moss.
If a healthcare organization does not fit a private equity company's current investment strategy, it will not want to spend time and energy associated with growing the investment because it would not contribute to, or benefit from, established investments.
4. For-profit over non-profit. Private equity firms will shy away from non-profit hospitals and health systems because non-profits deal with more board member, committee and community interaction than a private equity firm may prefer. In cases that non-profit providers are acquired, they will generally be transitioned into for-profit hospitals or health systems. For instance, Steward Health Care System, backed by Cerberus Capital Management, acquired Caritas Christi Health and Morton Hospital & Medical Center. They were both non-profits that became for-profits after the acquisition.
Private equity likes to be autonomous and work within an entrepreneurial environment. A for-profit hospital or health system may be viewed as a more profitable venture because the private equity firm's decisions and actions may not be subject to review by as many, or any, external parties.
5. Transparency. When considering a transaction, a private equity firm will conduct a very thorough due diligence analysis around the hospital's operations and finances. Hospitals or health systems hoping to consider a private equity partner will need to be very transparent.
"A firm will want full disclosure on everything. It always helps to have all ducks in a row before a private equity firm comes in. That sort of transparency must be led by the hospital executives," says Mr. Moss.
Private equity firms would like to see all the data a hospital has available including facility data from each clinic, outpatient center or hospital-owned location, patient data and encounter data.
"The data is unique to each facility so it contributes to the hospital's entire picture," says Mr. Montgomery.
Patient data allows perspective on the types of patients that frequent the hospital. An understanding of a hospital's patient population sheds light on its current and potential footprint. Encounter data helps private equity firms to forecast the potential patient volume a hospital could experience.
"Based on the amount of data available, companies will build forecast models that help private equity firms or providers understand the impact of opening a new clinic or changing operations at a hospital," says James Moss. "The interaction of all three forms of data is integral to understanding a hospital's potential. That is why private equity firms prefer open access to the data."
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