Global Healthcare Private Equity and M&A Report
As an industry, healthcare makes up nearly 20% of US GDP and only 6% of technology spending. This suggests that healthcare has historically underspent on technology and demonstrates upside for future technology spending. As highlighted in Bain and KLAS’s 2022 Healthcare Provider IT Report, a recent survey of providers shows that they are prioritizing their software budgets in five key areas: revenue cycle management (RCM), patient intake/flow, clinical systems/electronic health records (EHR), telehealth, and cybersecurity.
Macroeconomic and secular trends seem top of mind for providers. More than 50% of survey respondents cited labor shortages or inflation concerns as the top catalysts spurring new IT spending. Three of the five key areas for IT spending are tied to themes of optimizing resources and improving financial outcomes. Providers are also seeking software-based solutions to respond to the secular trends of value-based care and healthcare consumerism. Additionally, as providers add more nodes to their IT systems, they seem to be looking to cybersecurity solutions to protect their patients’ information.
Several private equity investments over the past few years illustrate ways to participate in the five key areas where healthcare providers are prioritizing IT spending.
- Revenue cycle management: Given the financial pressures facing providers, half of providers cite investments in RCM as a top priority for 2023. The largest provider IT deal in 2022 was in RCM, with Berkshire Partners and Warburg Pincus investing $2.3 billion in Ensemble Health Partners, providing a partial exit for Golden Gate Capital. We also saw Veritas Capital merge Coronis Health and MiraMed to create a multispecialty RCM platform.
- Patient intake/flow: Providers continue to invest in solutions that enable seamless capacity management and boost productivity. THL and Premier, a leading healthcare improvement company, completed a $50 million growth round in Qventus, a patient flow automation platform. Bain Capital invested in LeanTaaS, a cloud solution optimizing hospital operations and capacity management, also highlighting the focus on patient intake/flow in a post-Covid world.
- Clinical systems: Electronic health record systems house critical patient data and integrations, and providers are continuing to look to optimize their EHRs. Marquee deals such as Oracle’s $28 billion acquisition of Cerner and Hellman & Friedman and Bain Capital’s $17 billion acquisition of Athenahealth closed in 2022, signaling investor confidence in the potential to turbocharge these assets.
- Telehealth: Telehealth enables better provider engagement with one another and with patients, and has become integral to care delivery. Patient Square Capital took SOC Telemed, the largest national provider of clinician-to-clinician acute care telemedicine, private in a deal worth over $300 million. Equip Health, a telemedicine company focused on eating disorder treatment, raised a Series B round; investors included Tiger Global and General Catalyst.
- Cybersecurity: Healthcare data breaches rose 17% annually from 2016 to 2021 with medical organizations the most common victims of third-party attacks. In 2021, Boston Children’s Hospital was the target of an attack that was thwarted by the FBI. The past year saw a number of platform build plays: Abry-backed CloudWave’s acquisition of Sensato, and Warburg-backed Claroty’s acquisition of Medigate.
While quarterly buyout volume for provider IT assets had its weakest quarter since 2017 in the fourth quarter of 2022, the four deals announced during the quarter comprised assets in EHR (OneTouch Health), telemedicine (Werksarztzentrum Deutschland), procurement (Inprova), and enterprise resource planning (ERP)/financial controls solutions (UHB Consulting). Private equity can invest behind the broader theme of helping providers do more with less (see the chapter “Healthcare IT: Two Very Different Half Years”) but will need the right strategy to succeed, especially as the provider IT sector matures relative to other areas in healthcare IT. Furthermore, while most activity in healthcare IT is provider focused, payer IT is converging with provider IT as the line blurs between the end markets they serve.
Amid growing vendor proliferation, PE investors can build IT platforms that address a broad set of provider segments or functional needs
The Bain and KLAS survey found that vendor proliferation and expanding tech stacks are driving changes in how providers plan to make software investments in 2023. Around 70% of providers plan to look to their existing vendors for IT needs before considering offerings from new vendors.
One implication for private equity investors is to consider platform plays that address either (1) a broader set of provider segments or (2) a broader set of functional needs. The first strategy expands the addressable market and will likely make the platform more appealing to providers that operate across several segments (such as health systems). The second strategy will make the platform more appealing to providers who are looking to enhance a range of complex processes. These two platform construction strategies can be accomplished through organic actions, but are generally accomplished via M&A.
Expand end-market coverage: Private equity investors can help unlock additional growth for their portfolio companies by backing expansion to new specialties/end markets, thereby growing total addressable market, including share of wallet and new logo opportunity. Investors should look to acquire assets with strong functional capabilities and develop a value creation plan focused on extending these core capabilities to different customer segments. M&A can serve as a key accelerant, bringing with it team members who understand these end markets and reference customers with whom to build.
Avista-backed XIFIN, historically a lab-focused RCM provider, showcases this strategy in acquiring OmniSYS and Computerized Management Services in 2021 to enter into the pharmacy and radiology segments, respectively. In pursuing end market expansion, investors should ensure that the new markets they enter are cohesive with the overall strategy of their platforms.
Expand solution set to grow: Investors can help providers reduce operational complexity and tech stack interoperability issues by solving a broader range of functional needs. Private equity investors can help their portfolio companies expand their solution suites to serve their end markets more comprehensively.
In 2022, a couple of deals demonstrated this strategy. Francisco Partners-backed Kyruus, a patient intake/access company that started as a provider directory but has grown in its offerings, acquired patient engagement company Epion. In RCM, Clearlake Capital-backed FinThrive added to its front-end RCM capabilities through its acquisition of PELITAS, which offers patient access/intake solutions.
Funds attempting to expand their end markets and solution set should be selective about the initial asset they use as their foundation
Some funds may choose to pursue building an IT platform that offers broad functionality to a diverse set of end markets. Few companies have the benefit of being broad both in whom they serve and what they offer. It is possible, but it is easier to do when starting from (1) a system of record such as an EHR or ERP or (2) a workflow comprised of interconnected point solutions, such as RCM.
System of record: Private equity investors can take a well-established EHR and use M&A to expand capabilities and broaden market reach. Consider TPG and Leonard Green-backed WellSky. TPG agreed to acquire Mediware in 2016 and transformed it into WellSky in 2018 with the ambition to offer broad solutions across the continuum of care. WellSky expanded end markets into private duty and home health, via its Kinnser Software (2017) and ClearCare (2019) acquisitions. WellSky also expanded its solutions set, adding capabilities in care coordination and patient engagement via its CarePort Health (2020), Healthify (2021), and TapCloud (2022) acquisitions.
Workflow comprised of interconnected point solutions: Investors could look to workflows or processes that encompass a wide range of interconnected point solutions such as RCM, which has a host of front-, middle-, and back-end modules. The Waystar platform brought together one entity that was stronger in the hospital market and another in the ambulatory market, via the Navicure and ZirMed merger (2018). This strategy appealed to EQT and CPPIB, which acquired a majority stake in Waystar from Bain Capital (which retained a minority stake) for $2.7 billion in 2019. Since then, Waystar further expanded its end market and solution set via its $1.3 billion acquisition of eSolutions (2020), a Medicare-focused RCM provider, and its $450 million acquisition of Patientco (2021), a patient billing and engagement platform. Waystar redefined itself as a company focused on simplifying and unifying payments across the revenue cycle.
Provider IT investors should define value creation plans that will increase appeal to customers and future investors
Provider IT investors that deliver on customer needs will enable growth and provide strong exit opportunities for their assets. This applies for assets of all sizes:
- Point solutions with a narrow market focus: These assets typically serve emerging customer needs. Value creation plans tend to focus on developing technology so compelling that providers are willing to adopt a solution from a new vendor. Assets in this size range are well positioned for sponsor-to-sponsor exits or platforms pursuing M&A if there is growth headroom in the current market. In 2022, venture capital-backed OnCall Health, a behavioral health telemedicine company, was acquired by Warburg-backed Qualifacts, a suite solution provider to behavioral health companies.
- Subscale provider IT platforms serving several markets: As discussed above, there are several ways to continue to broaden either market focus or product functionality to appeal to more providers and improve exit opportunities. These assets are attractive to sponsors, strategics, and public exits in the right market conditions.
- Large-scale IT platforms with broad reach: After a certain size, large platforms may become less likely to trade sponsor-to-sponsor and instead become well positioned for a public or strategic exit. Strategic exit opportunities extend beyond healthcare companies, as disrupters like Amazon and Microsoft have demonstrated meaningful interest in scale healthcare assets.
Regardless of the value creation strategy, provider IT assets with compelling customer value propositions will be attractive to future investors. Beyond M&A to build a platform, acquiring new customers, cross-selling products, and defining an efficient operating model will be key to value creation. As payers and providers continue to converge, this focus on defining a clear value creation plan will remain critical.