Financial Experts Discuss Deal-Making Trends05.08.15
Recent reports continue to show that deal volume in the healthcare industry is at a high point. Both PWC and Irving Levin Associates have released studies recently that show that transactions continue at a rapid pace – more so in particular sectors than others (e.g., Behavior Health and Physician Medical Groups).
On Wednesday, the Nashville Health Care Council continued this ongoing discussion during its “Financing the Deal” event, where financial experts discussed the latest happenings in healthcare transactions. Here are a few key takeaways from the discussion:
1.Deal volume will continue at its current pace while interest rates are low, valuations are high and the healthcare environment continues to shift.
2.Nonprofit hospitals are looking to reduce costs and respond to reimbursement changes. They are in need of scale and have limited access to capital. The challenge is trying to adjust to a model remains largely unknown. Many are asking “How do I make sure I'm viable and a must have?” In response, they are building “asset lite models” to cast a wider net and trying to play one step ahead without being too risky. The panelists expect that we will see the results of this in five to 10 years - both the good and bad.
3.How is the move from volume to value impacting M&A? Everybody is thinking about it. If a buyer knocked on the doors of a physician practice a decade ago, they wouldn't have wanted to talk. Now they are willing to talk and take risks. It’s not about just buying IT (e.g., EMR) systems, but figuring out how to take things to next level. The shift from volume to value is also causing a lot of activity on the post-acute side, which will allow for more coordination. Ultimately, whether a provider decides to stay independent is largely based on the answer to one question: are they ready for value-based models and other reimbursement changes?
4.Creative structures are of great interest. Healthcare companies – providers in particular – are finding success with innovative deal structures. Examples included minority investments, joint ventures and other creative structures that mimic a private equity model (e.g., HealthSouth’s deal with Encompass). Eb LeMaster of Ponder and Co. pointed out two reasons why the healthcare industry will continue to see more loose collaborations: 1) these relationships provide a way for those without access to capital to tap additional resources and 2) they provide system benefits without a loss of control (see: Vanderbilt Health Affiliated Network).
5.What are the key ingredients to successful investor / company relationships? Companies need to understand the dynamics of the financial arrangement first and foremost. When a company takes money, they must recognize that they will lose some control – and they have to trust one another and share a common vision. Also, when a company makes the decision to accept money from investors, they agree to accelerate growth like never before. Lastly, they must be prepared to eventually sell the company.
6.What will happen in King v. Burwell? There were a variety of opinions, and no one was willing to take a stand on which way the Supreme Court will rule, but all agree that there will be a significant financial impact if subsidies are eliminated by the Court’s ruling. The ruling, however, will not do away with other key aspects of the Affordable Care Act which are driving a lot of change in the industry.