PE shops that invest in healthcare companies can help with efficiency but also play a part in driving prices up. Is it possible for these firms to combat this without federal intervention! I know they just want to make money but seems a little immoral to me.
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"Healthcare" is a very broad umbrella term for many, many subsectors, and the strategy private equity firms employ in their investment varies broadly by sector.
Pharma, biopharma, and biotech companies tend to be the focus of venture or growth capital investors, and in this case the investor is usually just backing an innovative idea and providing growth liquidity to the founders.
Healthcare IT, similarly, draws a lot of early stage investor attention for the same reason, but you also see some buyouts for the more established firms- Athenahealth will be an interesting case study here: its unique value proposition drew backing by venture and growth investors, and now it has reached a market penetration and a scale where it is seeking an buyer to bring some traditional business sense (focusing on maximizing sales strategies, strategic acquisitions, bringing in seasoned leadership, controlling costs, etc) to a high growth company, which could be either a PE firm or a strategic buyer.
Where I suspect your original comment was targeted, healthcare services, is to me the most interesting aspect of healthcare because its the one we all interact with- hospitals, physician groups, urgent care centers, etc. The PE firms that invest in these spaces and actually do it well (which are now the ONLY firms that invest here- its impossible to win here unless you know exactly how to do it) usually don't "raise price". Instead they aggregate supply by rolling up individual practices in a fragmented market, create a brand and roll out a marketing strategy (healthcare is now consumer retail, lets be real), standardize operations and leverage a centralized "back office" to drive efficiencies on each marginal acquisition, and bring in professional leadership to an industry that in the last 30 years hasn't had a change in leadership and has resisted technology and modernization. You can' t raise price on the people who pay for healthcare out of their pocket, they either don't have the money or they'll go elsewhere. And its tough tough tough to raise the prices insurance companies will pay as they have all consolidated and have all the negotiating leverage (unless we're talking about a healthcare services provider with extreme scale-HCA).
That got much longer than I meant it to! TL;DR: My experience in this space is PE firms are doing much more good than harm for prices, quality, and access to care in the healthcare space.
mm103 You're spot on with regards to healthcare services. Much of the issue in that space really comes down to increasing operational efficiencies. Almost every aspect of the revenue generation for service providers is governed by CMS, which in turn governs how insurance and reimbursement rates are set by everyone. Cash-only clients aside, as that's a supply and demand situation, Since all of the prices are set in advance, HC Services are limited in the revenue they can earn. And even then, leverage only goes so far to increase the non-medicare/non-medicaid reimbursement rate. Those rates are set in stone. Anyone that takes medicare or medicaid will not get a cent above what is on the fee schedule. For insurance, providers will get a higher reimbursement rate if they have the size and scope to do more procedures while being able to bill in network. However, unless you have a massive footprint, that's extremely hard to do.
It's funny you brought up HCA, as negotiating can only go so far. HCA's size advantage doesn't add much bottom line comparatively. While they can get a better reimbursement rate, it's not about higher rates, it's about a higher volume. If a 1 Level ACDF creates $75,000 in total billing and gets reimbursed on average at $50,00, HCA's size advantage may turn that 50K to 55K in reimbursement. They won't get close to a 100% reimbursement rate for the facility. Yes, the 5K in reimbursements matters, as volume is a huge factor - Getting 5K more per surgery in reimbursements over 200 surgeries is $1MM in bottom line revenue. Across their 297 facilities where you can reasonably assume that an ACDF can be performed, that means an added $297MM to the bottom line. Where HCA has its advantage is that it can leverage multiple insurers better than a smaller group. For a smaller group, it may not make sense to be in-network with all insurers in a given area. For a a hospital system, the cost-benefit tips in favor of being in-network once you hit HCA's size.
While that higher reimbursement rate is nice, what makes HCA so strong isn't being the better negotiator, but the economies of scale created by being able to get better reimbursement rates, regardless of the size, with multiple insurers across its geographic scope. IF you have 50 facilities in Texas, being in network with all of the carriers who cover Texas means a higher overall reimbursement (before negotiating) than being selective. Medical reimbursements is a volume game, and that's the big driver of revenue. Remember, insurance companies have access to the same information that HCA does, so both are on an equal footing. HCA getting a 10K increase on reimbursement for an ACDF is nice, but if they only do a high volume of ACDFs a year. That's peanuts versus taking a $100 increase on a procedure that they see 10,000 of in a year. Having more insurers giving you smaller increases ends up producing more value for HCA than going for the big home runs.
Frieds , you're preaching to the choir! I live in specifically this space and agree completely, and as an aside its fantastic to find someone else on here with a shared perspective- I don't see many healthcare services conversations on WSO. For that reason, and because the original question was quite broadly drawn, I abstracted my response to the highest level I could while still trying to be helpful.
You're of course right to highlight that it's a volume game. Of the 2 topline inputs, price and volume, you can only meaningfully move the needle on volume for the reasons you explained so well. I'd also highlight a detail that is implicit in your analysis, and that is when a health services provider is considering driving a hard bargain with insurance companies on price/reimbursement rate, they risk reducing their steerage. Payors can (and do) get quite creative when it comes to encouraging and incentivizing their members to go to other providers even while keeping you in their network.
Where I think it can get really interesting going forward is with some of the specialized providers who operate in niches where demand for their services drastically outweighs supply. Hospital operators spend all day, every day trying to drive volume to their facilities (hence the huge investments in outpatient points of care), but there are other providers- residential substance abuse, eating disorder clinics, etc- with incredibly long waitlists and a dearth of qualified and reputable providers. I find these really interesting types of spaces to think about, where the investment thesis can be about scalable investment and responsible growth.
I look forward to seeing you around the forums and hopefully having some more healthcare-specific topics!
I've been around WSO for years (and holy shit, I'm almost an 11 year vet of the boards!), so I"ve definitely be around the block. I think the reason most people don't discuss HC Services, besides being, and it really is, a niche area, it's one that requires an understanding of the space and no amount of M&A deals can replace spending time dealing directly with HC Services. I grew up in the business before even starting college, so I've seen first hand all this shit. I honestly think most people don't get the scope of HC Services from a PE Standpoint. The only value in buying out service providers is to bolt-on into a larger organization and achieve volume, or buyout a practice, increase efficiencies, and then either form a a "super-practice" if you will or lever it into a regional coverage practice for a facilities provider. And that's not including the Medspa space, which still amuses me that there are buyouts of Medspas.... then again, it's a cash-only business, so that does make it worthwhile.
To your point, I don't think that there is an implicit argument to be made about service providers driving a hard bargain with insurance companies on price/reimbursement rate to reduce steerage. From my own experience, people are stupid and will follow the recommendation of their physician if seen on a referral basis or have to deal with the follow-up position due to continuing care rules from an emergency room visit. For the former, most physicians refer to other physicians they trust and know personally, not necessarily people on the "in-network" list. From a Payor standpoint, there is nothing that can be done to specifically send a patient to an in-network provider. While they can create incentives all they want, it doesn't always happen that way. From an emergency room standpoint, once EMTALA comes into play, the provider has a duty of care that has to be met regardless of the Payor's in-network status. If there is an actual physician-patient relationship, regardless of whether or not the obligations under EMTALA are fulfilled, the provider is required to treat the patient. While I can argue that this is done to protect the provider from being sued for malpractice or abandonment, it ultimately comes down to the duty of care. This is crucial because no amount of poking and prodding by a Payor can stand in the way of the duty of care a provider is obliged to provide provided a physician-patient relationship exists until such discharge or termination occurs. If the Payor says that a patient cannot see a provider while still treating, that may open up a can of worms that Payors will not want to go down. That said, I do generally agree that the Payor will incentivize the use of in-network providers where possible. This is why I mentioned the focus of HCA's leverage being their ability to negotiate with multiple insurance companies better than a service provider could. By being in-network, HCA doesn't need to avoid the steerage issue as they can direct patients to whichever facilities are in-network for a given insurer.
As far as the supply/demand issue, I think part of it is the dearth of quality providers and part of it is the lack of funding due to ridiculous rules and legislation. In NJ, for example, to get admitted to a substance abuse facility, I've heard stories that you need to claim addictions for multiple substances (ex. Heroin and Alcohol) to get on a list, and even then, insurance will not necessarily cover enough time for a stay to be effective. That is something that blows my mind. An addict wont' be able to do well after treatment with only 10 days of in-patient treatment covered and the remaining 20 days coming out of pocket. I also think the lack of federal funding for these programs makes service providers wary about opening up facilities as well. At the same time, with the way the opiate crisis is going, I think that more money will be directed to help service providers open up niche centers to cover treatment. The problem is that once you get into such specialized treatment, I don't know how scalable the model really is due to the added labor component.
At some point in the next day or so I'll PM you. I'd like to take the conversation off line and chat.
Frieds mm103
Thank you both for the writeup!
I messaged some of you through PMs and sorry for hijacking the thread, but its rare to see such well-informed discussion on the healthcare services PE space on WSO, so wanted to take the chance to see if anyone had any recommended resources to learn up on this space. Will be transitioning to a role focused on HC service buyouts from a HC growth equity role, so keen to see if anyone has any good pointers. This may be helpful to the OP as well. Thanks!
Great conversation. Agree that HC services has become a volume game on relatively fixed DRG rates that commercial payors benchmark to. What intrigues me is the fact that hospital operators I've communicated with are now spending considerably more time evaluating the potential to capture patients previously underserved by the healthcare ecosystem. Contracting independents to increase OR utilization and the # of inpatient admissions works, but with physician shortages, increasing competition across provider systems, and larger costs to recruit, it seems to me that certain players are shifting to "sourcing" models, often through ambulatory sites of care, to drive previously untapped patient volume. I'm fascinated with systems that are trying to crack the puzzle of how to engage underserved communities who haven't signed up for government insurance. If these populations are effectively sourced, then providers can significantly increase volume to their facilities and form the key relationships to establish a long-term consumer base.
Frieds mm103 zyxvzyxv
I clicked on the thread because the headline made my blood boil, but unexpectedly, this has turned into an outstanding thread. Really appreciate your contributions here.
My firm is focused on healthcare and life sciences, but we end up spending a lot more time on the product side (drug development services, mostly) than on the provider side. In any case, would love to join a group PM.
Lot of good comments here. I think you were referring to the Martin shkreli/valeant ....ok lets be honest everyone was playing this game ( mylan with epipens... munger and buffet with davita ). The game of taking old products and non innovative and figuring out reimbursement systems to get massively higher revenue while doing nothing on the operations side.
That game is somewhat dead as benefit managers have gotten smarter. Now things like epi pens are still stupidly expensive and not fancy at all. I don’t think you can make money doing that now but a lot of people made a lot of money doing it for a long time. Mylan should see 75% lower compensation than they do now, but it’s a matter of investors losing money now if they are forced to cut costs and not a chance to buy some shit product and hike the price 1,000% and make yourself a hundred million. Lots of idiots did that. Surprisingly valeant the poster child for that might have the least amount of risks now...I only see about 5-10% of their ebitda coming from price hike stupid products now.
No expert in the field but I would guess there’s a place for pe in medicine. Not every business scales to a public a company and doctors are in general idiots at running businesses. And they should just be doctors and not have to worry about that stuff of running a mid-sized practice.
There are still some areas pe is behaving badly in health care. Look up helicopter ambulances. As far as I can tell some very bad practices in that area and pe is huge in that space.
There are bad actors in many segments of healthcare, including physicians. I think on more occasions than not, they are non-sponsor-backed businesses, but clearly some PE funds have paid a price for failing to monitor or operate the right way (e.g. Sterling with Ameritox).
To your point, if you can get good doctors that provide quality levels of care, you can make money and help people. The PE funds can manage the other shit that providers struggle with.
Can you elaborate on the Air Ambulances a bit?
As far as PE in Medicine goes, it makes sense for the operational level where they have the efficiency and practical ability to effect operational changes. As I said before, when it comes to the actual practice of medicine, that's the domain of the physicians. Most physicians don't understand the business side of things - which makes it significantly harder for them to do well with the actual practice of medicine. This is because they don't teach doctors about the business side of things which doesn't help. Doctors aren't taught in med school anything about how being in practice actually is - just how to practice.
Look up air medical and air method. Pray to god you never have to deal with them. Here’s a recent #### article:
Link
The free market, when left to its own devices, almost always creates better products for lower prices. Leaning on capitalism to improve health services and products is exactly the MORAL thing to do.
Healthcare Technologist here if you guys end up making that private group. Would love to listen in and provide contributions where I can.
If we let old people die naturally (i.e. "leaving them by the tree and moving on"), we'd rid the mess of inefficient, wasteful healthcare that we have today.
Sometimes I wonder if we keep old people alive for the (sole) purpose of milking money from the(m)(ir) medical needs. It's really a shame, since it diverts money from the young who actually have decades in front of them.
This is such a ridiculous comment that I'm not even sure how to respond. Here goes nothing.
1) Tons of waste in the healthcare system that has literally nothing to do with 'letting old people die naturally'. How about we tackle that before arbitrarily denying people the choice to seek treatment?
2) You really wonder if the sole purpose of keeping old people alive is to milk them of their money?? Putting aside the obvious moral/ethic connotations of your statement, you do realize that their money doesn't just get vaporized upon their death, right? It's still going to go somewhere (much of it to the government).
P.S. Is 'leaving them by the tree and moving on' a phrase you made up? Not only have I never heard it before, but it doesn't return any sort of results on Google
don't bother, he's just here for comedic relief as a quick posting history can attest to how useless most of his posts are.
HC Services does have some “bad business”. Beyond unnecessary services, out of network rates are pretty common, even for large chains / outsourcers (e.g. ED physicians by Envision / TeamHealth if you google). There are also reimbursement support stuff (like in dialysis). Most of the lab stuff has some kind of reimbursement issue if you dig deep enough. Historically, lot of these companies were smaller and fragmented, and the bad practices didn’t come to light. As they get rolled up and become larger under PE ownerships, it’s a bit more visible. And tbh the space is mostly PE owner (not enough public names), so could say it’s mostly HC issue in general, but becoming PE issue given their ownership and more performance based models.
Another effect of PE or large ownership is the referral game within their chains. Even for Medicaid / CHIP patients, it can be fairly profitable to bring in patients for a low margin business and then refer them to something high margin (eg eye glasses) and that was not possible before PEs started connecting dots on some of the distant providers.
Whether it’s volume / utilization increase or out of network / shady billing - these will continue driving healthcare cost higher.
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