BMN Blog

NOV 19
What is the future of Private Equity in Healthcare?

During my 30 years in healthcare consulting, I have seen several reform initiatives come and go.

 

In many cases, the initiatives have enhanced the ability of consumers to access insurance coverage and ultimately healthcare. In 1993, President Clinton proposed legislation that led to growth in Health Maintenance Organizations (HMOs) and also the HIPAA privacy standards which are still in place today. In the 2000s, President George Bush proposed changes to the Medicare program that led to the implementation of Medicare Part D coverage.

 

In 1990, healthcare spending accounted for 12.1 percent of GDP. By 2010, healthcare spending accounted for 17.4 percent of GDP. With the aging of America, healthcare spending will continue to rise. As a result, investors continue to develop ways to invest in healthcare.

 

Private equity has taken a large interest in the healthcare sector. Since 2011, healthcare has ranked in the top three industries as it relates to investor returns. Consolidations of providers continue to play a prominent role in the evolution of the industry.

 

With these forces affecting the healthcare industry, how does private equity factor in to the future? Private equity groups are investment groups that seek to deploy their capital into the healthcare sector, including physician groups, hospital systems and other ancillary services that support the healthcare system (Information Technology, Ambulatory Surgery Centers, Pharmacy, etc.).

 

Private equity “PE” firms generally value a practice based on its EBITDA, which is earnings before interest, taxes, depreciation and amortization. The PE firm then applies a multiple of that earnings amount to determine what they will pay to acquire the practice. They are paying a multiple for the future cash flow of the practice. In the early days of PE investment, older providers viewed the transaction as their exit strategy. While this may be the primary factor for some providers, many others are viewing the PE investment as an opportunity to consolidate and expand their practice in both the number of providers and the geographical area they serve.

 

In addition to the cash proceeds associated with the purchase transaction, the provider is often provided with an investment opportunity in the PE firm venture which was created to acquire their practice. At the same time the PE firm is purchasing the provider, they are investing in other providers within the same venture. As a result, it is important to know who you, as the acquired provider, is being associated to determine the quality and reputation of the other practices. This is often the deciding factor between which PE firm a practice or provider chooses to sell to and partner with.

 

Is it worth it? Factors to consider include the competition within your specialty, need and access to capital, desire for growth, desire to diversify your personal asset holdings, transfer of future risk and your ability to transfer decision-making and control over to the PE firm.

 

If you are considering this type of transaction, you should begin to prepare now. And generally, it is important to evaluate the compensation, reimbursement cycle and operational aspects of your practice on a routine basis, which I consider to be at least annually.

 

Areas which a PE firm will review as a part of the acquisition include:

  • Compliance with appropriate billing and revenue cycle management practices, including coding for services provided and overpayments to be repaid
  • Practice management and EHR implementation and effectiveness
  • Compliance with applicable laws associated with provider compensation, including Stark Laws and other Anti-Kickback provisions
  • Leases and other contractual arrangements for equipment and facilities
  • Deferred compensation, employment contracts and buy-sell agreements in effect with owners and providers
  • Professional liability and other liability claims
  • Accuracy of your accounting records and evaluating current and future EBITDA

 

As you evaluate a Private Equity firm and transaction, it is important to assemble a team of advisors who are familiar with these types of transactions. Advisors typically include your accounting and consulting firm, your attorney, and your revenue cycle consultants. In addition, you should evaluate the use of an investment banking firm which serves as the liaison between you and the PE firm to evaluate the transaction and works on your behalf.

 

PE firms will continue to invest in the healthcare sector. You should know your industry and the market forces affecting it. This type of transaction may or may not be right for you and your practice.

 

Jerry Callahan, CPA is a healthcare consultant with Pearce, Bevill, Leesburg and Moore.

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