Private equity’s role in the future of healthcare

Investors are well-positioned to take advantage of industry’s changing landscape

Fifteen years from now, what will healthcare look like, and what types of companies will be delivering it? Will new technologies shape how we access healthcare? Will new companies emerge that will change the way healthcare is provided in response to patients’ expectations or statutory change? In many ways, the future is as clear as mud.

But there are certain things we do know.

Today, private equity investors consider much of the healthcare industry fragmented, operationally inefficient, and unresponsive to consumer preferences. These same traits, paradoxically, make healthcare highly attractive to private equity participation. Private equity firms are organized for the purpose of investing funds held by people and organizations with capital to put to work, and these investments are typically made in industries that are perceived as ripe for consolidation and managerial oversight.

Private equity consolidates assets and can vertically integrate previously separate organizations to create efficiencies. It uses capital and managerial skills to create greater value from sectors of the economy that are — as a recent article in The Economist described the healthcare system — “untouched by innovation, disruption and consolidation.”

We know that the unrelenting pace of digital and technological development — particularly in the areas of data utilization, quality improvement and inter-operability — will continue in healthcare delivery. But this enhancement is expensive and requires significant investment. We also know that consumerism, aided by immediate access to technology, is on the rise in healthcare. Patients, at a time convenient for them, want access to their health information, instant and secure communications with physicians and immediate feedback. The technology supporting consumerism in healthcare is evolving fast, whether through new apps, telemedicine or hospital and other providers’ digital portals.

Finally, we know that at 18% of our national GDP, healthcare spending is unsustainable. As a result, the way in which healthcare providers get paid (aka “reimbursed”) is shifting, albeit slowly, from payments based on fee-for-service to payments for performance, quality and value.

In the face of this shift, not only must existing healthcare providers find ways to reduce operating costs and improve overall quality, but they must anticipate that the transition from a fee-for-service payment system to one based on performance and value will require new models of delivery and organization.

Amidst these developments, private equity has a role to play. According to the PwC Health Research Institute, the number of healthcare deals involving private equity increased from 229 in 2009 to 672 in 2017. Some 747 are projected for 2019. Looking forward, private equity investors appear well-positioned to take advantage of the growth of consumerism and the shift to value-based payments.

Private equity can inject the capital required for new technologies on a scale that individual physician practices and specialty groups cannot. In addition, private equity can offer the “managerial capital” (analytics, business expertise and other resources) to create models of organization responsive to new payment methods based on quality and value.

How will private equity affect patients’ quality of care and the overall patient experience? In the 1990s, with “fee-for-service” firmly in place, private equity participation produced mixed reactions because cost-cutting measures were often viewed as rationing and reducing care. Beyond 2019, however, all providers will face a new era of reimbursement — one in which the quality, rather than the quantity of healthcare services, will dictate how much providers get paid. It is likely that to achieve the highest quality on a scale large enough to reduce costs, private equity’s involvement in healthcare delivery will enhance the patient experience.

This is not to suggest that now recognizable facets of New Hampshire’s healthcare delivery landscape, such as hospitals, will disappear — their presence in the healthcare delivery system is and will remain vital. Private equity, however, will play a role in adapting to the evolution in reimbursement, in applying new technologies to support care and to measure quality, and in supporting existing providers as well as new entrants as they adopt new models of healthcare delivery.

Andrew B. Eills is an attorney with the Manchester-based law firm of Sheehan Phinney.

Categories: Health