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KKR Closes $1.45 Billion Health Care Strategic Growth Fund

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Aims to Back Innovative Growth Companies

KKR, a leading global investment firm, today announced the final closing of KKR Health Care Strategic Growth Fund (including parallel vehicles, “HCSG” or the “Fund”), a $1.45 billion fund dedicated to health care growth equity investment opportunities in the Americas. KKR will be investing more than $265 million of capital in the Fund alongside external investors through KKR’s balance sheet and employee commitments.

“The health care sector has demonstrated strong fundamentals throughout multiple cycles,” said Ali Satvat, KKR Member and Head of KKR’s Health Care Strategic Growth investing efforts. “Significant advances in medical innovation have yielded new products and services for patients, while consolidation and novel approaches to care delivery have the potential to improve clinical outcomes and reduce associated costs. These dynamics have created a significant market opportunity and an unmet need for strategic growth capital. We look forward to working with high-growth companies in the health care space for which KKR can be a unique partner in helping them achieve scale.”

The Fund received strong backing from a diverse group of new and existing global investors, including public pensions, insurance companies, family offices, and high net worth individual investors. “We are pleased that our enthusiasm for the attractive health care growth opportunities that the Fund enables is shared among a diversified group of global investors. This interest in the space, along with our strong team and record in health care, has helped us significantly exceed our initial target for the fundraise,” said Alisa Wood, Member and Head of KKR’s Private Market Products Group.

HCSG aims to generate strong returns for investors by investing in health care-related companies advancing innovative products or services and led by high-quality management teams. In particular, HCSG expects to make equity investments of up to $100 million and focuses on themes such as clinical / technological innovation, cost containment, and consolidation of therapeutic offerings or care providers.

“KKR’s health care investment team has been investing globally across the health care sector for more than 20 years, resulting in extensive industry experience, an established reputation within the space, and a strong track record of scaling health care-related companies,” said Jim Momtazee, KKR Member and Head of KKR’s Health Care investment team. “We believe that we can be a valuable partner to management teams running innovative, high-growth companies by leveraging this experience.”

KKR has deployed approximately $12 billion globally in the health care space across private markets. Beyond delivering financial capital, KKR helps companies grow by providing access to the firm’s operational expertise, global infrastructure, deep network, and resources from its more than 100 current portfolio companies worldwide. Over the last year, KKR has executed a number of transactions as part of the firm’s health care growth equity strategy, including Ebb Therapeutics (formerly known as Cerêve), Slayback Pharma, and Ajax Health.

 

Under ACA, largest health plans net lion’s share of underwriting gains while smaller players struggle

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Financial market data. Image: Pixabay

The gap between the haves and have-nots has grown wider in the health insurance sector—and policy changes may be the culprit.

Most health plans are relatively small, posting an annual revenue of less than $2 billion, and are generally close to just breaking even financially. But the top three largest fully insured health plans by revenue—UnitedHealth Group, Kaiser Foundation Health Plan and Anthem—“exhibit performance that is dramatically differentiated from that of other market participants,” according to a new analysis from Deloitte.

For example, between 2011 and 2016, the top three saw their share of underwriting gains rise considerably even as their share of enrollment and revenue declined. By 2016, those three plans generated 84% of all underwriting gains in the fully insured market, while they accounted for just 55% in 2011. The top 10 plans, meanwhile, accounted for 92% of all underwriting gains in 2016.

What was behind that trend? Post-2014, one of the main reasons was the “number and magnitude of the losses suffered by many other health plans,” particularly in Affordable Care Act commercial individual products, the analysis said. Those losses were so large that they offset almost all the underwriting gains posted by the health plans not in the top three or top 10—thus magnifying the largest plans’ share.

For-profit insurers also grew faster and posted significantly higher margins than their nonprofit peers, the analysis found. While for-profit plans accounted for 66% of all underwriting gains in 2011, that share rose to 76% by 2016. Nonprofit plans, in comparison, saw their underwriting margins slip from 2.3% in 2011 to 0.8% in 2016.

The analysis also looked at health plan performance on the company and state levels. It found a significant increase in the number of plans with annual losses, a steep decline in average margins and widening variation among plans’ performance from 2011-2016. In addition, the number of states with health insurance market turbulence and unfavorable health plan financial performance increased.

Deloitte said its findings showed how large of a role public policy has played in driving change in the insurance markets in recent years. In addition, it highlighted the financial benefits associated with national scale.

Yet the firm also pointed out that it’s worth paying attention to how smaller-scale nonprofit plans are faring, given that they “play critical roles in their local communities and healthcare ecosystems.”

These plans, it noted, may lack the resources to withstand more disruption and “down years.” But with Republicans moving to unwind the ACA, that’s exactly what might lie ahead.

 

 

Congress floats temporary patch for CHIP funding shortfalls

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In its short-term appropriations bill, Congress has included a provision aimed at helping states keep their Children’s Health Insurance Programs afloat while lawmakers try to pass a longer-term measure. But that gesture may not go nearly far enough.

The bill would direct the secretary of Health and Human Services to allocate previously unused CHIP funding first to “emergency shortfall states”—or ones that are in danger of running out of money—before other states. The federal government has already been redistributing funding from past years to states that were facing shortfalls in October and November.

Those shortfalls exist because federal funding for CHIP expired Sept. 30, and Congress’ efforts to pass funding reauthorization measure have been stalled by partisan disputes over how to pay for it. The Senate Finance Committee has advanced its version of a CHIP bill—which doesn’t outline any offsets—while a companion bill, containing cuts to other healthcare programs, cleared the House despite Democrats’ objections.

If Congress fails to pass a long-term CHIP funding measure, at least five states and the District of Columbia predict they will run out of money for the program by the end of 2017 or early in January, according to a survey from the Georgetown University’s Center for Children and Families. Some states have already sent notices to families advising them to start researching private health insurance options.

The center’s executive director, Joan Alker, also isn’t impressed by the CHIP provision in the short-term appropriations bill, calling it a sign Congress is trying to “kick the can down the road.”

“The longer Congress postpones action on long-term CHIP funding, the more states will be forced to waste time and money developing contingency plans,” she wrote in a blog post, adding, “the more states that send out notices, the more likely it will be that some kids will fall through the cracks.”

Outlook Darkens for Not-for-Profit Hospitals

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The revised outlook from Moody’s comes amid a larger-than-expected drop in cash flow this year and the ongoing uncertainty regarding federal healthcare policy for public and not-for-profit hospitals.

Moody’s Investors Service has downgraded from stable to negative its 2018 outlook for the not-for-profit hospital sector based on an expected drop in operating cash flow.

“Operating cash flow declined at a more rapid pace than expected in 2017, and we expect continued contraction of 2%-4% through 2018,” said Eva Bogaty, a Moody’s vice president.

“The cash flow spike from insurance expansion under the Affordable Care Act in 2014 and 2015 has largely worn off, but cash flow has not stabilized as expected because of a low revenue and high expense growth environment,” Bogaty said.

In a briefing released Monday, Moody’s said hospital revenue growth is slowing and is expected to remain slightly above medical inflation, which declined to a low of 1.6% in September. Hospitals can’t translate volume growth into stronger revenue growth because of the lower reimbursement rate increases across all insurance providers and higher expense growth.

In addition, rising exposure to governmental payers will dampen revenue growth for the foreseeable future due to a rapidly aging population and low reimbursement rates. Medicare and Medicaid, represent 60% of gross patient revenue in 2017, Moody’s said.

Key drivers of expense growth include rising labor costs, driven by an acute nursing shortage and ongoing physician and medical specialist hiring. Technology costs are also rising as systems are upgraded and IT staff is needed for training and maintenance. While the ACA’s arrival heralded a drop in bad debt from 2014-16, bad debt rebounded in 2017 and will continue to grow at a rate of 6%-7% in 2018, Bogaty said.

“Rising copays and use of high deductible plans will increase bad debt for both expansion and non-expansion states,” she said.

In the near-term, uncertainty regarding federal healthcare policy will have a marginal fiscal impact on NFP hospitals. Bogaty said ambiguity surrounding the ACA does affect the planning and modelling of long-term strategies, while recent federal tax proposals will add to rising costs for hospitals.

The outlook could be revised to stable if operating cash flow resumes growth of 0%-4%. A change to positive could result from expectations of accelerated operating cash flow growth of more than 4% after inflation, Moody’s said.