Disclosed deal value reached the highest level ever in 2019
The provider sector continued to be very active in healthcare, accounting for 159 of the 313 healthcare PE deals done in 2019, with activity consistent with 2018. While deals in North America rose and Europe remained flat, the Asia-Pacific region returned to levels in line with historical norms following a spike in 2018.
North America still accounts for most of the provider deal activity. Eight of the top 10 deals took place in the region, led by the $4.2 billion investment in Press Ganey.
In Europe, providers contend with limits on scaling due to the disparate healthcare systems and different languages across borders. European provider deals focused mainly on retail health companies that have limited reimbursement risk, and increasingly on HCIT. Many assets continued to execute buy-and-build strategies with add-ons to establish scale before being traded in the coming years.
Although deal volume dipped in Asia-Pacific, investors continued to focus on executing buy-and-build strategies to develop hospital and services platforms in fragmented markets. These private-sector solutions address issues of patient access and affordability across the region. For example, medical e-commerce and e-health business JD Health raised $1 billion from a consortium of buyout funds, including CITIC Private Equity Funds Management, CICC Capital Management and Baring Private Equity Asia, in order to develop its data and technology capabilities.
Three major investment themes stood out during the year globally:
- a continued focus on lower-cost and consumer-focused sites of care;
- the expanding role of the provider in a value-based world;
- the enabling of physicians to focus on care delivery.
1. A continued focus on lower-cost and consumer-focused sites of care
The ongoing shift to sites of care that deliver a better or lower-cost patient experience has created opportunities to build scale businesses in traditionally fragmented provider landscapes. In addition, some subsectors such as behavioral health have tailwinds from growing awareness and coverage. Retail health, behavioral health and home/hospice care all attracted interest.
Retail health. Investors continue to put capital into retail health and its derivative plays. Historically, the investment thesis relied on consolidation, multiple arbitrage and limited exposure to reimbursement risk.
Today, many of the assets have reached scale, so value must also come from increasing same-store sales and trimming costs. Given the high valuations for retail health assets, investors will need to do thorough due diligence and have a clear, multipronged value creation plan beyond consolidation.
For example, JAB Holding acquired National Veterinary Associates, a veterinary clinic chain. Goldman Sachs Capital Partners acquired Capital Vision Services, which runs the MyEyeDr. optometrist chain, one of the largest transactions ever in vision care at $2.7 billion. And Advent acquired Vitaldent, the Spanish dental chain leader, which signals that opportunities still exist in the well-known dental space.
Behavioral health. Investors continued to embrace a wide range of behavioral health companies in mental health, substance abuse, eating disorders and autism/applied behavior analysis. The broader segment is benefiting from underlying trends including greater awareness of mental health and substance abuse issues, destigmatization of treatment, supply shortages and a favorable regulatory environment.
Autism is one of the hottest markets within behavior health. It’s fragmented and undersupplied, with coverage tailwinds in certain geographies. That presents an opportunity for autism platforms to rapidly expand, professionalize the industry and create benefits of scale in recruiting and training, payer relationships and systems to support the patients and staff.
For example, TPG Capital formed Kadiant Inc., a behavioral health platform focusing on autism. A number of platforms acquired in previous years have been executing add-on investments to expand their footprints, as illustrated by KKR-backed BlueSprig Pediatrics’ acquisition of Thrive Autism Solutions.
Home/hospice care. Home-based care models continue to gain share given patient preferences and the cost advantages. Models are long established and will benefit from long-term volume trends and consolidation opportunities. Investors are taking advantage of this trend. For example, in Germany, Advent acquired Bonitas Medical Fund, a home healthcare services provider. Additionally, Medicare Advantage in the US also creates more opportunities to shift toward the home.
While reimbursement risk remains an overhang, the longer-term shifts around site of care and the fragmentation in these spaces continue to provide opportunities for investors. Since the success of such assets also tends to be tightly linked to the strength of their operational ground game, gaining a deep understanding of operations during diligence is critical.
2. The expanding role of the provider in a value-based world
Some investors are expanding the role of a provider by positioning the organization to assume risk in a value-based care environment. They have again turned to creative investment theses and structures that involve both vertical integration and horizontal capability expansion—all in the pursuit of enabling better management of patient outcomes and financial risk.
Consider vertical integration first. “Payviders,” organizations that blur the lines between payer and provider, continue to be an emerging segment of the market, as evidenced by Optum’s acquisition of DaVita Medical Group. For investors, this could signal more competition for assets, or opportunities for creative partnerships with payers.
In a variant of this theme, TPG made an investment in Kelsey-Seybold Medical Group, a multispecialty group that owns a Medicare Advantage plan.
Investors also are looking horizontally for complementary provider-focused assets. Warburg Pincus merged Summit Medical Group, an independent multispecialty group, with CityMD, an urgent care provider. With a complementary geographic footprint and an ability to increase access to Summit’s patients and divert emergency department visits with CityMD’s footprint, the merged company is positioning itself for a fee-for-value environment.
In the gravitational pull of value-based care, investors look for assets that can be successful in a fee-for-service world, yet have the capabilities to enable them to manage risk in a value-based world as well.
3. Enabling physicians to focus on care delivery
As regulatory and administrative burdens mount for providers, investors are pursuing themes that seek to alleviate the situation, including next-generation physician practice management (PPM), HCIT and outsourced services.
Next-generation physician practice management. The PPM segment has historically been active as physicians prioritize clinical care over administration and recognize the benefits of scale from being part of a larger organization. The first wave of PPM investment focused mainly on in-hospital cost centers such as anesthesia and emergency departments. However, investors now are setting their sights on emerging segments such as radiology, gastrointestinal (GI), ophthalmology and dermatology.
Radiology is an attractive category given the long runway for consolidation and the growing benefits of scale for both groups and imaging centers, especially with the promise of artificial intelligence and other advanced technologies. US Radiology Specialists, a provider group founded by Charlotte Radiology and Welsh, Carson, Anderson & Stowe, added a range of assets to its platform including American Health Imaging, an Atlanta-based radiology practice group and Radiology Ltd., an Arizona-based radiology practice. Radiology Partners also received a $700 million investment from Starr Investment Holdings, bringing up its valuation to more than $4 billion.
Platform building within GI also was active through 2019. Waud Capital Partners-backed GI Alliance made nine acquisitions and partnerships over the course of 2019.
HCIT. Capitalizing on provider organizations being squeezed on profit margins and mired in administrative and regulatory burdens, HCIT companies are finding ways to make their life easier. Provider HCIT activity increased slightly from 35 deals in 2018 to 36 deals in 2019, with total disclosed deal value rising from $8.2 billion to $10.1 billion.
Revenue cycle management and payments investments continued to be attractive as providers looked for solutions to reduce denials, maximize revenue and get paid faster. The increasing share of patient payments creates even further complexity.
As discussed further in the HCIT section, Golden Gate Capital bought Ensemble, an RCM provider.
Outsourced services. Beyond IT-related plays, investors showed interest in a range of possible outsourced services to providers spanning clinical, financial, operational and administrative areas. For example, FFL Partners sold Crisis Prevention Institute, a provider of crisis prevention and behavior management training programs, to Wendel for $590 million. Igenomix, a provider of fertility laboratory services, was acquired by EQT for $450 million.
Asset quality matters more than ever
Over the next few years, investors in the provider sector have an opportunity to simultaneously bend the healthcare cost curve, create better outcomes for patients and improve the performance of their assets. They will also need to monitor a few trends in this dynamic sector:
- patients gaining more skin in the game;
- a continued shift to fee-for-value reimbursement models;
- continued consolidation; and
- inefficiencies in the current healthcare model.
In the near future, we expect interest to focus on alternate sites of care, behavioral health, post-acute and emergent PPM segments. Derivative plays on these segments, such as HCIT assets selling into these attractive end markets, will also be appealing.
Investors will push the envelope on developing capabilities of their provider assets, in order to position them to take on risk in a value-based world. Given the high multiples for scale assets, more investors may pursue a buy-and-build approach.
In general, we expect deal theses to rely more on go-to-market and operational improvements as well as market due diligence. Information on clinician variation, quality of patient care, clinician recruiting and retention, variation in site and practice performance over time, and management of referral sources have become critical during diligence.
Given high multiples and the scale of some of the assets, winning requires more than just participating in a growing market; sponsors will have to pull on every performance lever. They need to rev up the dual engine of differentiated same-store sales growth and differentiated M&A, fueled by a best-in-class playbook. In addition, at least in Europe, we also expect expansion into new verticals (physio, aesthetics, vision care) that have had limited participation by PE to date, as investors try to replicate successes they’ve seen in dentistry, pet care and IVF.