Category Archives: Private Equity

The Role of Private Equity in Driving Up Health Care Prices

Posted on by • Posted in Freestanding Emergency Care, Health Policy, Out of Pocket Expenses, Physician, Physician Practice Management, Private Equity, Surprise Bills, Venture Capital • Leave a comment

https://hbr.org/2019/10/the-role-of-private-equity-in-driving-up-health-care-prices

Private investment in U.S. health care has grown significantly over the past decade thanks to investors who have been keen on getting into a large, rapidly growing, and recession-proof market with historically high returns. Private equity and venture capital firms are investing in everything from health technology startups to addiction treatment facilities to physician practices. In 2018, the number of private equity deals alone reached  almost 800, which had a total value of more than $100 billion.

While private capital is bringing innovation to health care through new delivery models, technologies, and operational efficiencies, there is another side to investors entering health care. Their common business model of buying, growing through acquisition or “roll-up,” and selling for above-average returns is cause for concern.

Take the phenomenon of surprise bills: medical invoices that a patient unexpectedly receives because he or she was treated by an out-of-network provider at an in-network facility. These have been getting a lot of attention lately and are driven, at least in part, by investor-backed companies that remain out of network (without contracts with insurers) and can therefore charge high fees for services that are urgently or unexpectedly required by patients. Private equity firms have been buying and growing the specialties that generate a disproportionate share of surprise bills: emergency room physicians, hospitalists, anesthesiologists, and radiologists.

In other sectors of the economy, consumers can find out the price of a good or service and then choose not to buy it if they don’t believe it to be worth the cost. In surprise bill cases, they can’t. Patients are often unaware that they need these particular services in advance and have little choice of physician when they use them.

To blunt growing bi-partisan political support for protecting patients from surprise bills, various groups have lobbied against legislation that would limit the practice. They include Doctor Patient Unity, which has spent more than $28 million on ads and is primarily funded by large private-equity-backed companies that own physician practices and staff emergency rooms around the country. Their work seems to be having an impact: efforts to pass protections have stalled in Congress.

Physician practices have been a popular investment for private equity firms for years. According to an analysis published in Bloomberg Law, 45 physician practice transactions were announced or closed in the first quarter of 2019. At the current pace, the number of deals to buy physician and dental practices will surpass 250 this year, far exceeding 2018 totals. Yes, these investments can provide independent physicians and small practices with an alternative to selling themselves to hospitals and can help them deal with administrative overhead that takes them away from the job they were trained to perform: providing care. But, at least in some cases, the investors’ strategy appears to be to increase revenues by price-gouging patients when they are most vulnerable.

Surprise billing from investor-backed physician practices isn’t the only problem. Private-equity-owned freestanding emerging rooms (ERs) are garnering scrutiny because of their proliferation and high rates. The majority of freestanding ER visits are for non-emergency care, and their treatment can be 22 times more expensive than at a physician’s office.

However lucrative in the short run, private investor-backed companies that hurt consumers are not likely to perform well financially in the long term. Unlike many other markets, health care is both highly regulated and highly sensitive to the reality or appearance of victimizing the sick and vulnerable. Consumer outrage leads quickly to government intervention.

Investors will benefit most by solving the health care system’s legion of problems and by adding true value to our health system — delivering high-quality services at affordable prices and eliminating waste. Those that try to maximize their short-term profits by pushing up prices without adding real healthcare benefits are likely to find that those strategies are unsustainable. Lawmakers and regulators won’t let them get away with such practices for long.

 

 

 

Many fear Hahnemann’s story will send a message: Buying a failing hospital pays

Posted on by • Posted in 2020 Election Issues, Academic Medical Center, Center for Economic and Policy Research, Chapter 11, Health Policy, Health System, Hospital Bankruptcy, Hospital Industry, Private Equity • Leave a comment

Many fear Hahnemann’s story will send a message: Buying a failing hospital pays

Hahnemann University Hospital. (Emma Lee/WHYY)

Philadelphia Academic Health System, the company that owns Hahnemann University Hospital, is in bankruptcy proceedings, but the hospital’s real estate is not included in the filing. That has sparked outrage from the nurses union, City Council, and even presidential hopeful Bernie Sanders. They say it shows the owner had a plan all along: let the hospital fail, and sell it for its  valuable Center City location.

Indeed, California investment banker Joel Freedman, CEO of Philadelphia Academic Health System, separated out the land beneath the hospital and its adjacent, related buildings from the operating business itself, as is common in private equity purchases.

In fact, that’s how private equity is supposed to work: Big firms buy struggling companies with the promise of financial support, and to improve their operations and business strategy. When things go right, the business succeeds, and the private equity firm sells it in a public offering or to another bidder for more than it paid.

In other cases though, the process is not so successful. Private equity firms often load companies up with debt, take dividends out for themselves, sell off valuable real estate, and charge monitoring fees and interest on their loans, leaving a company in a much weaker position than it would have been otherwise, and often on the verge of bankruptcy.

“The house never loses,” said Eileen Applebaum, co-director at the Center for Economic and Policy Research. “The private equity firm makes money whether the company succeeds or it doesn’t.”

Freedman formed Philadelphia Academic Health System to run the hospital. His California private equity firm is called Paladin Healthcare, and he has previously bought and managed hospitals in California and Washington, D.C. At the end of June, Freedman announced that Hahnemann, the 496-bed hospital at the corner of Broad and Vine streets, would close. In early July, Philadelphia Academic Health filed a Chapter 11 bankruptcy petition.

Applebaum, who has taught economics at Temple University and is a native Philadelphian, said that if Paladin Healthcare had really wanted to save the hospital, there are a few things it should have tried.

The most obvious, she said, would have been to diversify its payer mix. One of the reasons Hahnemann failed financially is because two-thirds of its patients were on Medicaid or Medicare — publicly funded insurance plans that reimburse hospitals for care at lower rates than private insurance does. Applebaum said it’s common for hospitals in areas with high rates of patients on public insurance to buy up smaller hospitals in the suburbs, or in other areas that attract more patients on private insurance.

“You see Thomas Jefferson University outpatient-care centers everywhere, you see smaller suburban hospitals that are part of the Thomas Jefferson system,” she said. “Yes, you want to serve the less well-off communities, but you have to balance that with other communities. Everybody knows this, this is not a mystery.”

Because this strategy is common, the fact that Freedman didn’t try it makes Applebaum dubious that he really wanted to save Hahnemann.

“It does not really appear that they made a good-faith effort to turn this hospital around,” she said.

Freedman declined to comment for this story, but he has said in previous statements that he tried to sell the hospital to a nonprofit, and that he asked the city and state for money to keep it open.

The imbalanced payer mix is not as much of an issue at St. Christopher’s, the 188-bed children’s hospital in North Philadelphia that is also run by Philadelphia Academic Health System. It reported a $58 million pretax profit last year and is not closing.

That’s because almost all kids in the United States have insurance through Medicaid or CHIP, a federal program. Even though those reimbursement rates are also lower than private insurance would pay, children’s hospitals are more accustomed to that, and they adjust their operations accordingly.

“Pediatric hospitals, particularly those who serve a low-income population like St. Christopher’s, have learned how to operate on a Medicaid budget, so to speak, and have found ways to be more efficient and work within that coverage in a way that a lot of hospitals that primarily serve adult patients maybe haven’t had to,” said Lisa Bielamowicz, co-founder of Gist Healthcare, a D.C.-based health care consulting firm.

Last week, a judge in U.S.  Bankruptcy Court in Wilmington gave the green light for hospital systems to bid on St. Christopher’s. A consortium of four health care systems has already expressed interest.

“There’s also an element of wanting to preserve the competitive dynamic and capacity for that care in the market by preserving St. Christopher’s, so that Philadelphia doesn’t become a one-horse town for specialty children’s care,” said Bielamowicz.

Losing St. Chris would leave only Children’s Hospital of Philadelphia for inpatient pediatric care. In 2018, two-thirds of the revenue at St. Christopher’s was from Medicaid. It was half that amount at CHOP.

Bielamowicz added that it would be in the best interest of the local systems to take on St. Chris, so vulnerable children didn’t end up in those hospitals’ regular emergency rooms, many of which are at capacity, without the proper resources to care for them.

St. Christopher’s will be auctioned off to the highest bidder, and the bankruptcy judge is expected to approve the sale in September. The hospital’s Erie Avenue site also was not included in the bankruptcy filing.

Hahnemann Hospital’s property — owned by Broad Street Healthcare, the holding company set up by Freedman — totals about 1 million square feet and, according to city records, has a market value of $58 million.

Brad Molotsky, a partner with the law firm Duane Morris who formerly worked as general counsel for Brandywine Realty Trust, said the downtown neighborhood shows promise for developers, but only ones with deep pockets.

“If you rebuilt a million square feet at 500 bucks a square foot, that’s a big ticket,” he said.

Applebaum, of the Center for Economic and Policy Research, said she is worried that a separate sale of the Hahnemann property to a developer will lay a road map for private equity firms around the country: Buy older hospital in areas that are gentrifying, separate the hospital from its real estate, let the hospitals go downhill, and then sell the real estate to the developers.

“It won’t matter that they lose money in the bankruptcy on the hospital, because they’re going to make so much money on the real estate,” she said.

Another Democratic presidential candidate, U.S. Sen. Elizabeth Warren, has released a plan that would force private equity firms and funds to share the responsibility for the debt the companies they buy take on in the financial restructuring process. As it stands now, neither Paladin Healthcare, the parent company, or MidCap Financial, which loaned purchase and operating funds to Philadelphia Academic Health System, are on the hook for any of its debt.

“It’s like you bought your neighbor’s house, you got a big mortgage when you bought your neighbor’s house, but it’s your neighbor who has to pay back the mortgage,” said Applebaum.

“So that’s a sweet deal if you can get it.”

 

 

 

Hospital billing is big business

Posted on by • Posted in Health System, Hospital, Hospital Industry, Private Equity, Rev Cycle Management • Leave a comment

https://www.axios.com/newsletters/axios-vitals-a4051909-429f-4b4c-a88b-22051b431ef7.html?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

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Health care’s administrative back end — services like verifying patients’ insurance, putting patients on payment plans and collecting patient debt — is bigger than ever, Axios’ Bob Herman reports.

The big picture: The U.S.’ fractured insurance system leads hospitals and doctors to spend tens of billions of dollars annually on billing software and services — none of which are tied to actual health care.

Driving the news: For-profit hospital system Tenet Healthcare decided to spin off its billing services unit, Conifer, into its own publicly traded entity in 2021.

Between the lines: Many hospital systems that send out bills have ownership stakes in these companies.

  • Tenet controls 76% of Conifer, which registered $1.5 billion of revenue last year. Catholic Health Initiatives owns the remaining 24%. They both use Conifer.
  • Catholic health system Ascension and private equity firm TowerBrook hold a majority stake in R1 RCM, which used to be named Accretive Health and was prohibited from doing business in Minnesota due to its aggressive collections practices. Two Ascension executives sit on R1’s board.
  • Bon Secours Mercy Health recently sold off a majority stake in its billing firm, Ensemble Health Partners, for $1.2 billion, the Wall Street Journal reported.

Researchers have cited administrative costs as a sizable source of health care waste. Some startups are trying to address this issue, but traditional billing and service firms are only getting larger and have providers as investors.

 

 

 

How tech-infused primary care centers turned One Medical into a $2 billion business

Posted on by • Posted in Physician Practice Management, Primary Care, Private Equity • Leave a comment

https://www.cnbc.com/2019/07/28/one-medical-opening-primary-clinics-in-portland-and-atlanta.html

Image result for How tech-infused primary care centers turned One Medical into a $2 billion business

Key Points
  • One Medical is now valued at close to $2 billion.
  • The company is signing on hospitals as partners, expanding geographically and adding services for mental health.
  • One investor says it can be “the Starbucks of primary care.”

Two years after leaving the traditional health-care world to lead primary care upstart One Medical, Amir Dan Rubin now faces a clear challenge. With competition heating up, he needs to rapidly expand the business into new areas without sacrificing the luxe service that patients have come to expect.

Founded in 2007 by physician-turned-entrepreneur Tom X Lee, One Medical has become popular in and around its hometown of San Francisco by providing on-demand care and easy mobile booking and by selling its services to big companies who offer access as a perk to employees. Google and SpaceX are among those employers, according to a person familiar with the matter who asked not to be named because the relationships are confidential.

One Medical is taking on a chunk of the $3.5 trillion health-care industry, which is riddled with inefficiencies, impersonal care and old technologies that don’t talk to each other and leave patients struggling to find and track their medical records. The company is trying to modernize the whole process, and asks patients to pay a $199 annual membership fee.

“The vision and the focus is to delight millions,” said Rubin, in a recent interview at One Medical’s San Francisco headquarters. “In health care, almost every stakeholder group is frustrated and so we looked to solve a lot of these needs simultaneously by starting from scratch and putting the member at the center of the experience.”

One Medical has 72 clinics in seven states, and Rubin said he’s focused on pushing into new areas. The company is opening locations in Portland, Oregon, as well as Orange County, California, and Atlanta. It’s also partnering with health systems Providence St. Joseph (in Portland and Orange County) and Advocate Aurora (in Chicago), which should lead to more referrals from doctors at those hospitals. Three more Southern California locations are slated to open this month in close collaboration with the University of California San Diego.

Keeping doctors happy

To fuel its growth, One Medical raised $220million last year in a funding round led by private equity firm Carlyle Group, bringing total capital raised to more than $400 million, which includes early money from Google Ventures (now GV) and venture firm Benchmark. The latest financing valued the company at about $1.5 billion, according to two people familiar with the matter. That valuation has subsequently edged up to closer to $2 billion based on secondary market transactions, said one of the people, who asked not to be named because the terms are private.

Overall, One Medical says it has 4,000 employers now offering the service as a benefit. But there’s a growing number of emerging competitors bidding for these contracts. They include Premise Health, Paladina, Iora Health, and Crossover Health.

One key piece to One Medical’s strategy is to make it an appealing place for doctors to work. It’s not uncommon for physicians in the U.S. to see 30 or more patients a day and keep visits to less than 10 minutes. One Medical limits doctors to 16 a day. The company also built its own medical records technology from the ground up to help doctors manage patient relationships, a big change from the existing systems that medical professionals say aren’t user friendly.

Providing a service that’s attractive to tech companies gives One Medical a big leg up in going after businesses.

“Historically, you’ve seen a lot of health-care services providers lag behind other consumer-facing industries, and that’s held them back with employers,” said Brian Marcotte, president and CEO of the National Business Group on Health, which represents employers. “They’ve done a better job at One Medical. You can feel it’s different when you walk in the door.”

One Medical is also adding mental health and pediatric services. Its providers are training to treat patients with anxiety and depression, and its clinics have started offering group counseling sessions. Kimber Lockhart, One Medical’s chief technology officer, said these group experiences have proven very popular in tests at various clinics.

Tech for patients

Lockhart’s tech team, with occasional advisory help from the doctors on staff, developed an app — Treat Me Now — for patients to get advice on whether to see a doctor or stay at home. It also has an online appointment scheduling system, and a video tool for patients to consult with physicians.

Even with One Medical’s efforts to apply elements of Silicon Valley into its business, the reality is that it runs a health-care operation, which is expensive to manage and comes with high administrative and overhead costs and loads of regulation. So investors have been told to remain patient about a potential IPO.

Steve Wise, a One Medical backer from Carlyle, addressed the road to profitability in a recent interview, when he explained the long-term vision.

“You wouldn’t think a firm like us would invest in a venture-style company that still loses money,” he said. “But it’s a space we know well and we believe in. We want to be the Starbucks of primary care. ”

WATCH: Here’s how One Medical is trying to improve patient experiences

 

 

 

Mixing medicine and money: Why the rise of health system VCs is raising ethical concerns

Posted on by • Posted in Bioethics, Conflicts of Interest, ECRI Institute, Ethical Pitfalls, Ethics, Food and Drug Administration (FDA), Health Policy, Health System, Hospital, Private Equity, Venture Capital • Leave a comment

https://www.healthcaredive.com/news/mixing-medicine-money-hospital-vc-funding-device-ethical-concerns/549392/

Industry-leading nonprofit health systems like Ascension, Providence St. Joseph and Cedars-Sinai have launched affiliated venture capital firms with increasingly more cash to fund start-ups. But the mixture of medicine and financial investment presents the potential for ethical pitfalls.

Deals involving at least one healthcare provider-linked corporate VC fund totaled roughly $1.3 billion last year, a record high nearly triple the amount recorded five years prior, according to data provided to Healthcare Dive by PitchBook, a financial data firm.

Health systems defend their corporate VCs, noting a separation of clinical and investment decisions along with general policies designed to prevent improper influence. Yet the potential for conflicts of interest looms, ethicists said in interviews — particularly when a health system’s hospitals adopt products from companies staked with funds via the affiliated VC.

“If you have a venture program that is really gearing up with some serious investments and they are going to use those devices in their own institution, I would say that’s a matter of concern,” said Jeffrey Flier, dean of Harvard Medical School from 2007 to 2016, in an interview.

“That doesn’t mean it would be done dishonestly, it just means that maybe they should promote doing it elsewhere, not in their own institution.”

A mixture of medicine and finance

The case of Gauss Surgical, a private medical device startup, illustrates how some of these questions can play out in practice.

Corporate VCs affiliated with nine hospital systems have invested in the company since its founding in 2011. A majority of those VC funds were launched in the past five years. A tenth system, Memorial Hermann Health System, invested directly in Gauss. All 10 systems also use — to varying extent — Gauss’ flagship Triton device in clinical practice.

A software platform designed to process images, Triton is used to quantify blood loss, typically during childbirth. Studies have shown standard practices, such as visually estimating or weighing bloody materials, to be inaccurate, leaving an opening for an improvement.

Between the 10 health systems invested in Gauss, 16 of their hospitals use Triton, according to Gauss. Overall, more than 50 U.S. hospitals use the device today, the Los Altos, California-based startup said.

Those running the funds invested in Gauss acknowledge the need for full disclosure to avoid any real or perceived conflicts of interest, particularly when their hospitals are using the device.

“It’s fair to ask why nonprofit systems have venture funds,” said Darren Dworkin, managing director of Summation Health Ventures, a joint VC arm for Cedars-Sinai and MemorialCare that launched in 2014 and has invested in Gauss.

Still, Dworkin, also Cedars’ chief information officer, argued the fund helps fill an investment gap for businesses like Gauss with promising ideas that might not otherwise have received financial backing.

“If there was perfect liquidity in the capital markets for all great ideas, maybe the case can be made that focus can be in other areas,” the exec said in an interview.

Timeline of investments in Gauss

Along with adoption — some hospitals routinely use the device in newborn delivery — has come controversy, however.

At one of those hospitals, St. Joseph Hospital in Orange County, California, an investment by the parent system’s VC fund led to objections from some healthcare staff over the adoption of Triton. The hospital is owned by Providence St. Joseph, which invested in Gauss through its VC arm, Providence Ventures.

Last April, 10 physicians working at the hospital signed onto a letter sent to Scott Rusk, the hospital’s chief medical officer, airing doubts over whether Triton improved patient outcomes, and questioning if its use was influenced by the chain’s financial investment in Gauss.

“We suspect that their use has been mandated by the health system due to investments made by the Providence Venture Capital Fund, and that the insistence that they be used has more to do with ensuring a return on investments than with improving patient care,” the doctors wrote, according to a copy of the letter obtained by Healthcare Dive.

In a statement to Healthcare Dive, Providence St. Joseph said clinical adoption decisions are made exclusively by clinical and operational leadership review, and are not influenced by Providence Ventures. After that review, hospitals in the system decide on their own whether or not to use such products.

“There was no directive from PSJH or Providence Ventures to use the device,” the chain stated on the Orange County hospital. “The decision was made to fund and adopt the Gauss solution at the local hospital level.”

Only three of the system’s 51 hospitals use Triton today, the organization said, and the Orange County hospital made the decision to start using the device before the merger creating Providence St. Joseph completed in July 2016.

But the fund isn’t entirely walled off from the rest of the system, as its leader also serves as a C-suite executive for the health system. Aaron Martin is the managing general partner at Providence Ventures as well as an executive vice president and chief digital officer for the broader PSJH system.

In response to the letter, Gauss stated it is “statistically impossible for a single practitioner or small group of practitioners to personally observe the impact of a monitoring device on patient outcomes across an entire population,” noting hemorrhage is a low-volume, high-risk event.

Testing Triton

The Food and Drug Administration cleared the device in 2014 as an adjunct to blood loss estimation techniques based on two clinical studies, respectively testing 46 patients and 50 patients, as well as a series of non-clinical studies.

Still, several doctors and one nonprofit group question Triton’s proven clinical value.

“It’s in its infancy,” said Abdulla Al-Khan, a doctor at New Jersey’s Hackensack University Medical Center, which has been testing the device since 2015. “Is it 100% reliable? I don’t think so. Is it perhaps better than a physician’s guesstimation of blood loss? Yes, probably.”

Al-Khan, who is the hospital’s director for its Division of Maternal-Fetal Medicine & Surgery and the Center for Abnormal Placentation, said earlier Triton studies “clearly had their limitations,” and plans to soon begin a study comparing all methods of blood loss estimation.

Daniel Katz, director of obstetric anesthesiology research at Mount Sinai, said in an interview arranged by Gauss that Triton’s clinical value has been well-demonstrated, giving healthcare providers a standard way to measure and keep track of blood loss. While Mount Sinai has an equity investment in Gauss through its corporate VC arm, Katz said he has not received any compensation from Gauss.

In a statement, Gauss said it “believes Triton has proven clinical value,” supported by “robust accuracy data,” particularly highlighting research done following its 2014 FDA clearance.

“Subsequent studies, published in peer-reviewed, academic journals, have demonstrated superiority compared with alternative means to measure blood loss and significantly improved clinical outcomes following adoption of Triton,” the company stated.

Gauss also noted a hospital pays a fee per annual subscription for the software as a service, no matter how often the product is used. It said adoption of the product is independent and goes through the hospital’s regular procurement process in instances where the health system has invested in the company.

The company did not make its CEO Siddarth Satish available for a phone interview.

However, the ECRI Institute, an independent organization that analyzes new technologies for providers, payers and government agencies, reviewed at Healthcare Dive’s request the body of evidence supporting Triton and concluded the device’s clinical value was far from established.

Diane Robertson, the institute’s director of health technology assessment, said the studies done have been small and low quality, noting limitations on trial design for controls, blinding and randomization.

“There isn’t any moderate quality or higher quality evidence on clinical outcomes improvement in patients with how this device is used,” she said.

In response to ECRI’s assessment, Gauss stated that a randomized, controlled trial would be “ineffective, impractical and potentially unethical.” The company further defended Triton’s studies, saying they showed it was more accurate than other estimation methods and is widely supported by leading physicians and experts.

A broader issue

Triton’s adoption spurs broader questions for nonprofit systems that have established VC arms.

About a decade ago, deals involving hospital-affiliated VCs were few, mustering less than $50 million in total value in 2008 and 2009 combined, according to PitchBook. Activity has steadily risen, surpassing $500 million in annual value in 2014 and reaching nearly $1.3 billion in 2018.

Little analysis has come with that money. Several ethicists told Healthcare Dive they were unaware of any published or ongoing studies examining hospital-affiliated VCs and the unique questions such funds pose for medical technology adoption.

“That is an issue of institutional conflicts of interest, which is, frankly, completely unsolved in general in healthcare,” said Steven Joffe, a bioethicist at the University of Pennsylvania. “We don’t have clear-cut mechanisms to make sure institutional conflicts of interest are navigated well.”

Most of the hospital systems invested in Gauss via corporate VCs said they take conflicts of interest seriously and have policies in place to prevent such influence.

For instance, Mount Sinai, which launched its VC back in 2008, has a board of people not affiliated with the health system to analyze the investments and clinical use, a spokesperson said.

According to ethics experts, such an independent review is a critical step to mitigate the potential for decisions to be made, which could compromise a hospital’s patient-driven mission.

But even the appearance of conflict can bring risks to an organization. In the case of St. Joseph in Orange County, uncertainty over the relationship between the hospital’s use of Triton and Providence St. Joseph’s investment in Gauss through its venture arm was enough to motivate physicians to speak out.

“One has to be very careful not to mix a medical practice with financial gain of an industry,” said Al-Khan, the doctor at Hackensack, which does not have such a VC arm.

The funds, though, appear to be here to stay.

In early 2019, Providence Ventures, which backed Gauss, literally doubled down, announcing its fund will expand from $150 million to $300 million. The fund targets companies just like Gauss: early-stage healthcare companies specializing in IT, medical devices and technology-enabled services.

 

Private equity sees ripe opportunity in healthcare this year

Posted on by • Posted in Health Policy, Horizontal Integration, Market Consolidation, Market Power, Mergers & Acquisitions, Private Equity, Undercapitalized, Venture Capital, Vertical Integration • Leave a comment

https://www.healthcaredive.com/news/private-equity-sees-ripe-opportunity-in-healthcare-this-year/548831/

Private equity investment in healthcare has ballooned over the past decade, and experts say 2019 is poised to be another robust year, with potential ripe targets in orthopaedics and mental health and addiction treatment.

Private equity deals in healthcare in the U.S. more than doubled over the past 10 years, according to financial data firm Pitchbook. In 2008 there were 325 deals (including buyers and sellers) and in 2018 that number swelled to 788, a record number of deals representing more than $100 billion in total value.

One of the largest recent deals was private-equity firm KKR’s nearly $10 billion purchase of Envision Healthcare last year, according to Preqin. Envision provides physician services to hospitals and operates hundreds of surgery centers across the country. Another big deal was the public-to-private takeover of athenahealth by Evergreen Coast Capital and Veritas Capital for $5.7 billion in 2018.

“It looks as though 2018 was a record year for the industry, and overall the trend in deal-making has been one of strong growth — this would suggest that 2019 could be another record year unless we see a change in the underlying conditions,” Preqin spokesman William Clarke told Healthcare Dive.

The Envision deal was among the biggest leveraged buyouts ever at more than $4 billion in debt, according to Pitchbook. The practice is criticized in several respects, including that many are financed by loading a company up with mounds of debt.​

Globally, healthcare accounts for about 13% of all private equity buy-out deals, according Preqin, an industry research firm.

The deals come amid a frenzy of consolidation, both vertical and horizontal, in the healthcare industry as hospitals and insurers try to scale up to insulate themselves from a number of headwinds and disruptors such as Amazon and Apple.

M&A began to accelerate after the Affordable Care Act, as many hospitals aligned themselves with physician groups, looking for greater reach into a market. But private equity firms “provide an attractive alternative to the traditional hospital-physician alignment models,” according to a recent report from the Investment Funds team at the law firm BakerHostetler.

Private equity investors are increasingly seeking deals in areas that are highly fragmented or areas that still operate in silos and are undercapitalized, Ben Isgur, health research institute leader at PwC, told Healthcare Dive. Fragmented areas provide an opportunity for private equity firms to come in and align a number of practices on the same platform, which increases size and scale to improve leverage in negotiations with payers.

Potential highly fragmented targets include orthopaedic practices, which are likely to see a number of private equity investments over the next few years, as well as gastroenterology and urology, according to BakerHostetler.

For example, “Only 30 orthopaedic practices in the country have more than 20 physicians in a single practice,” the report notes. Private equity firms’ attraction to these practices may have increased last year after CMS changed the rules to allow total knee replacements to be performed in outpatient settings. Previously, the agency only allowed total knee replacements to be performed on Medicare beneficiaries in an inpatient-only setting.

Orthopaedics, gastroenterology and urology also are ripe with lucrative ancillary services such as surgery and imaging centers and have high use thanks to an aging population, the report notes. There are more than 5,700 ambulatory surgery centers across the U.S. that perform more than 20 million surgeries every year, according to the Ambulatory Surgery Center Association. Medicare alone spent $4.3 billion on ASC services in 2016, according to the Medicare Payment Advisory Commission.

Investing in healthcare is also enticing for private equity investors as they seek to balance their investments. The healthcare sector is likely more insulated from a recession due to the aging population and demand for services, along with the projected increase in healthcare spending, according to a research report from PwC.

Another area experts are keeping an eye on for potential deals is in mental health, Isgur said.

“There is a huge need for these services and many of the providers are in small practices. The opportunity is to consolidate and capitalize and then build shared services around technology and back-office functions to create more value,” Isgur said.

Private equity investment in healthcare is not new; but like politics, healthcare is still very local, he said.

By 2008, private equity was already active in a number of areas including long-term care facilities, hospice, ambulatory surgery centers, acute care hospitals and clinical labs, according to a previous Health Affairs report.

Buying to sell

Private equity by its nature comes with controversy, with a business model based on buying for the purpose of selling for a one-time windfall profit for wealthy investors and for taking on big debt to finance the deals.

That leaves workers and patients last, critics say, and the sector’s forays into nursing homes brought those fears to the surface.

For years, unions have been critical of private equity firms in general. The American Medical Association, the nation’s prominent doctors group, is probing private equity investments into medical practices and its influence on healthcare. The report will likely be available in June, according to an AMA spokesperson.

The health of nursing home patients was put in jeopardy at facilities run by ManorCare, one of the largest nursing home operators in the country, according to a Washington Post investigation. ManorCare struggled financially when it was helmed by private-equity firm Carlyle Group and ended up filing for bankruptcy last year, nearly a decade after it was acquired by Carlyle Group.

A spate of nursing home acquisitions by private equity firms led to concerns about quality of care issues. Private equity bought up 1,900 nursing homes over the course of a decade, from 1998 to 2008, according to a GAO report from the time.

Isgur noted the controversy, pointing to the proliferation of freestanding emergency rooms in some states.

Some freestanding ERs are backed by private equity firms and may be closer and more convenient for consumers, but that convenience comes at a hefty cost. One insurer, UnitedHealth Group, has warned about that, too.

 

 

 

 

Why is healthcare such an attractive target for private equity?

Posted on by • Posted in Dry Powder, Market Consolidation, Market Power, Medicare, Medicare Advantage, Physician, Physician Practice Management, Physician Workforce, Private Equity, Smart Money Investors, Strategy, Uncertainty, Value Creation • Leave a comment

https://www.managedhealthcareexecutive.com/articles/why-healthcare-such-attractive-target-private-equity

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Thanks to TV shows and movies, we tend to think of
private equity bidding wars as involving fast-growing
Silicon Valley companies. But when Oak Street Health,
a Chicago-based network of seven primary care clinics,
began looking for investors last year, more than a dozen
firms flew to Chicago to court the physicians and most of
them ended up bidding for the group of seven primary care clinics, according to a report in Modern Healthcare.

Oak Street is not alone — almost any independent
physician group of scale these days is likely to be an
attractive target for so-called “smart money,” investors
and their advisers.

Increased regulatory requirements and complexity has led
many independent small groups to “throw up their hands
and decide to sell to or join larger entities,” says Andrew
Kadar, a managing director in L.E.K. Consulting’s healthcare
services practice, which advises private equity groups.
While many such physicians sell to a health system and
become salaried employees, investor-backed practice management groups may have certain advantages, Kadar says. “Each private equity firm has its own approach, but in general they tend to give physicians a continued degree of independence and are willing to invest in new tools and technology.”

What is private equity up to? What attracts these
titans of capitalism to one of the most bureaucratic,
heavily regulated industries in the United States? And
what does the acquisition spree mean for physicians?

Here are five things to know about private equity and
healthcare in 2019.

1. The feeding frenzy is just ramping up

The driving force behind investors’ interest in healthcare
is the amount of “dry powder” in the industry — the term
market watchers use for funds sitting idle and ready to
invest, which McKinsey estimates at around $1.8 trillion

Investors are hungry for deals, and healthcare providers
are an attractive target for multiple reasons:

• The healthcare industry is growing faster than the
GDP. Healthcare is a relatively recession-proof industry
(demand remains constant even during downturns).

• Many providers are currently not professionally
managed, and many specialties remain fragmented.

• Investors see an opportunity to create value by
increasing efficiencies and consolidating market power.

Thus, with many independent providers still competing
on their own, there remains ample opportunity to
roll up practices into a single practice-management
organization owned by investors. “A lot of deals are
making the headlines, but when you look closely you’ll
see that most specialties aren’t highly penetrated yet by
investors,” says Bill Frack, a former managing director at
L.E.K. Consulting who is now leading a new healthcare
delivery venture. “We are still at the beginning.”

2. Investors have various strategies for creating value

Far from the leveraged-buyout days of the 1980s, which
relied primarily on financial engineering to generate
returns, almost all private equity deals today require
investors to find ways to add value to organizations over
the course of their holding period (typically around five
to seven years). By and large, in healthcare they follow
two strategies for doing so.

The most prevalent play is to buy high-volume, high margin specialist groups such as anesthesiologists,
dermatologists, and orthopedic surgeons. The PE
group then looks to maximize fee-for-service revenue
in the group by ensuring that the team is correctly
and exhaustively coding patient encounters (via ICD10) and encouraging physicians to see more patients.

Simultaneously, they work to improve revenue-cycle
management and drive efficiencies of scale into sales
and back-office administration.

Private equity firms may also look to vertically integrate
by acquiring providers of services for which their
specialists were previously referring out. For instance, oncologist groups might buy radiation treatment centers;
orthopedic surgeons might acquire rehab centers;
dermatologists might acquire pathology labs to process
biopsies, and so on.

Investors exit either through a sale to a larger PE group or,
for the largest groups, through an initial public offering.
Consolidating fee-for-service providers “is a very mature
strategy, and there’s not a single specialty you could
name where an investor wouldn’t have an incentive to
[form a roll-up],” says Brandon Hull, who serves on the
advisory council of New Mountain Capital, a private
equity firm that is investing in healthcare, and is a longtime board member at athenahealth.

Hull says investors are starting to take another approach
to creating value — which he argues “is more virtuous
and aligned with social goals.” In this strategy, investors buy up general medicine specialists — such as internal
medicine, pediatrics, or ob-gyns — and then negotiate
value-based contracts from payers.

To succeed under these contracts, investor-backed medical
groups identify the most cost-effective proceduralists
and diagnosticians in their network and instruct general
practitioners to refer only to them; and they work hard
to play a larger role in patients’ health and thus keep
healthcare utilization down. Groups that employ this
approach include Privia and Iora Health. In this strategy,
investors typically exit by selling the organization to a
larger PE group, a payer, or a health system.

Interestingly, groups that pursue the first strategy often
transition to the second – for instance, an efficiently run
orthopedic group might start with a focus on growing
revenue by maximizing fee-for-service opportunities,
but then consider pursuing bundled payments for hip
replacements. Or an investor-backed oncology group
confident in its treatment protocols and ability to keep
operational costs down might accept capitated payments
for treating patients recently diagnosed with cancer.

3. Private equity can be a great deal for physicians

How these deals are structured depends on whether a
specialty group is the first group acquired by investors —

what is known in private-equity lingo as “the platform”—
or whether it’s being added to an existing group, what is
known as a “tuck-in.”

Physicians in the platform practice are often offered
substantial equity and can benefit from the group’s
appreciation — while, of course, being exposed to the risk that
their share-value may decrease if the group fails to deliver on
its intended value proposition. Physicians in subsequent tuckin groups tend to have simpler contracts with a salary base
and added incentives tied to productivity and other measures.
L.E.K.’s Frack says both models can be attractive, but
that a more simple employment model is probably best
suited to most physicians. “I would tell docs that if they
have a strong group of doctors, they don’t have much to
lose. Even if the deal falls flat for investors, the doctors
will likely just be acquired by another investor, and they
won’t be left holding the bag.”

4. Technology underpins it all

A similar private-equity healthcare frenzy in the 1990s failed
spectacularly. One reason for the collapse was that the
technology did not exist for investors to realize back-office
efficiencies and handle the complexity of value-based contracts.

Today, cloud-based EHR and revenue-cycle management
systems harness the power of network effects to help
provider organizations handle complex and unique
payer contracts, improve back-office efficiency through
automation and machine-learning, implement best practices
for care, and quickly onboard the new practices they acquire.

Technology is particularly important for the general
medicine specialist groups looking to win under fee-for-value contracts. “The moment you start to care about
a patient’s entire episode of care, you need a massive
upgrade of your back-end systems, including full
visibility into what’s happening to your patient outside
your office. Now the technology exists to truly achieve
care coordination,” New Mountain Capital’s Hull says.

5. Public perception can be a problem

Even if physicians believe a private equity deal is their
best option, there’s a public relations risk in tying a medical practice to capitalists whose ultimate goal is to earn a return. Most coverage of private equity in mainstream media outlets questions whether investors’ profit motive is bad for patients. Physician associations and medical journals have also raised concerns in a very public way.

Such public skepticism should worry anyone who
remembers the crash of the first private-equity wave in
the 1990s, says New Mountain Capital’s Hull, who ties
that crash to the failure of managed care. “The American
consumer perceived that doctors were getting bonuses
for denying them care; this became the grim punchline
of late-night talk shows, and the whole thing fell apart.”
Frack advises investors and physicians to “monitor
quality data like a hawk, so that the group can counter
anecdotal accounts of bad care.”

Hull adds that savvy investors should take a page from
the many healthcare startups that are laser-focused on building trust with patients, particularly when it comes
to end-of-life decisions and hospice care. “They know
that success in healthcare depends on patients trusting
their doctors to help them make the best medical
decisions,” Hull says.

Positioned to accommodate uncertainty L.E.K.’s Kadar argues out that whatever direction Washington decides to take healthcare, an efficient, professionally managed group practice with advantages
of scale is well-positioned to succeed — and private
equity is one way for physician groups to reach that goal.

“These groups can adapt more quickly than smaller,
independent practices, whether progressives or
conservatives are in power,” he says. As an example,
Kadar imagines a scenario in which Medicare-for-all
comes to pass. “It turns out that most [PE-backed] groups
do very well on Medicare Advantage contracts. If your
group is focused on delivering more efficient, effective care, with strong operations, you’re in a good position no matter what happens.”

 

 

 

 

 

Bon Secours Mercy Health to sell majority stake of RCM to PE firm

Posted on by • Posted in Alternative Revenue Sources, Bon Secours Mercy Health, Health System, Hospital, Operating Performance, Outsourcing, Private Equity, Rev Cycle Management, Subsidiary, Talent Drain • Leave a comment

https://www.modernhealthcare.com/finance/bon-secours-mercy-health-sell-majority-stake-rcm-pe-firm?utm_source=modern-healthcare-daily-dose-thursday&utm_medium=email&utm_campaign=20190530&utm_content=article4-readmore

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Bon Secours Mercy Health plans to sell a majority stake of its revenue-cycle management subsidiary Ensemble Health Partners to private equity firm Golden Gate Capital, the organizations announced Thursday.

The Cincinnati-based Catholic health system aims to sell 51% of the equity in Ensemble netting $1.2 billion in cash proceeds, which will be reinvested in Bon Secours Mercy when the deal is completed following the standard regulatory approvals.

“Our bread and butter is not to be a revenue cycle management company, so we thought maybe it was time to spin it out as a private company,” said John Starcher, Bon Secours Mercy Health president and CEO, adding that Golden Gate has the capital and expertise to continue to build out Ensemble.

Founded in 2014, Ensemble has grown to 3,600 employees in 30 states that serve 27 health systems. Then-Mercy Health acquired Ensemble in 2016, when it worked with about eight health systems, and invested around $60 million.

At that time, Mercy was coming off a failed revenue cycle outsourcing venture and an attempt to bring it in-house as its cost to collect, point of service collections and other metrics were trending negatively, resulting in a $135 million shortfall in expected cash collections, Starcher said.

Ensemble has helped Mercy Bon Secours accrue about $400 million to its bottom line over a three-year period, he said.

“Our terrible numbers had righted in less than one year,” Starcher said.

More providers are outsourcing their scheduling, billing and collections services as patients shoulder more of their healthcare costs and bad debt levels grow. Hospitals and health systems are turning to specialists that claim to deliver on patient satisfaction goals, which are poised to have a greater impact on reimbursement rates. Outsourcing also allows providers to free up capital and mitigate compliance risks.

“There is a tremendous amount of pricing and rate pressure on health systems,” said Judson Ivy, founder and CEO of Ensemble, adding that consumerism is another driving force behind outsourcing revenue cycle management as consumers seek a better experience. “There is also a talent drain on the industry.”

Meanwhile, alternative revenue sources are becoming a bigger part of hospital and health systems’ strategies. Ninety percent of hospital and health system executives in a recent survey indicated that new revenue streams were an urgent priority and expected to yield a return in the next three years, a study from Boston-based Partners HealthCare and healthcare private equity firm Fitzroy Health found.

Pressure on reimbursement rates from government and commercial payers have driven investment in revenue cycle subsidiaries, commercial real estate ventures, consulting spin offs, supply chain companies and other endeavors.

Bon Secours Mercy Health also has an IT subsidiary that specializes in Epic installations and a call center venture that manages the patient journey, among others, Starcher said.

“We also have expertise as we look across the continuum in marketing, supply chain and HR, and we think this is a burgeoning opportunity,” he said.

But you can’t monetize a mediocre service, Starcher said, offering a word of caution. A subsidiary can’t be so tethered to a health system that it can’t be priced competitively with other standalone companies, he said.

“While many health systems talk about this a lot, it doesn’t mean that it has been done successfully,” Starcher said.

Mercy Health and Bon Secours Health System completed their merger in September 2018, expanding its combined network to 43 hospitals, more than $8 billion in net operating revenue and 57,000 employees.

Over a four-month period following the merger, the health system reported $58.9 million in recurring operating income, which excludes restructuring and integration expenses, on operating revenue of $2.7 billion. With the $95.5 million of one-time costs, its operating income fell to negative $36.6 million. Those losses included an impairment charge on the now-defunct HealthSpan Partners’ investment in Summa and merger-related costs.

That compared to $72.9 million in recurring operating income on revenue of $2.69 billion over the same period the year prior. Operating income fell slightly to $68.2 million with $4.7 million of one-time expenses.