Private equity’s case for value-add healthcare initiatives

The private equity world’s contributions to the healthcare industry include an increase in the industry’s robustness; a grasp of the value of various niches that traditional lenders and institutional investors in public markets, might easily miss; and a willingness to finance innovations.

Unfortunately, the private equity investors in this industry have been caught up in a controversy over “surprise billing,” which became part of the 2020 presidential campaign. It culminated this summer in a Health and Human Services regulation that bans the practice of out-of-network or “surprise” billing for emergency room services.

Yale University researchers have argued in a much-cited paper that two large private-equity backed companies (Envision and TeamHealth) accounted for the bulk of the exorbitant bills that in turn triggered that controversy.

Out-of-network billing, though, is a small part of a much bigger picture.

Looking at the 10-year period that began in 2010, one study found approximately $750 billion in private equity deal value. The annual amount for deal value rose steadily throughout that period, from $41.5 billion in 2010 to $119.9 billion in 2019.

In 2020, though, both the total number of deals and their value dropped, because the pandemic was bad for dealmaking. But the numbers didn’t drop as far as one might have predicted. .As a Bain report says, there was and still is a “demand for targets with defensible niches and strong category leadership positions in their sectors.”

Critics allege that the infusion of private equity money into the healthcare industry is bad news for that industry itself and for its patients. The indictment is a familiar one: private equity firms care only about short-term, bottom-line numbers, one is told. This means that they make the portfolio entities ‘leaner and meaner,’ laying off staff on the one hand and hiking charges on the other. That presumably increases the resale value of the entities, which is the only goal. So (on this argument) private equity money isn’t the solution to what ails us. It is what ails us.

That argument raises obvious questions of its own. First, can’t we agree that everybody has a bottom line? If the entities now owned by private equity funds were publicly owned for-profit corporations, they would be more transparent, but they would not be any less profit driven than PE owned corporations are. Nor is there any good reason to believe a priori that private equity firms look to shorter-term horizons that do public investors.

Second, and related, there is some reason to believe that private equity is moving into this field because the public markets have become less welcoming. The private capital isn’t necessarily seeking new worlds to conquer, it is being drawn into a vacuum.

Third, let us look at empirical evidence. Let us take a brief look at some quite recent deals in order to understand what private equity firms are bringing to the table.

At the end of July, SLR Capital Partners raised $480 million in equity commitments for healthcare direct lending funds. Various pension funds, wealth managers, and family office investors have invested in these funds so that they can do healthcare cash flow, life science, and asset-based healthcare lending. With anticipated leverage, this was expected to bring the firm’s total in the strategy above $1 billion.

SLR has a track record. It has about $8 billion in assets under management Since 2006 it has lent approximately $2.5 billion in such loans, through credit cycles. Its borrowers, such as the skilled nursing operator to whom it recently provided a $7 million asset-based revolving line of credit,  get the benefit of its industry knowledge.

SLR fills a need. It is available when more traditional sources of financing aren’t. This makes the industry as a whole more robust against credit cycle fluctuations.

A month later there was an unrelated announcement in a related market space. Caisse de dépôt et placement du Québec (CDPQ) and funds advised by Centerbridge Partners agreed to pool an undisclosed amount of funds to buy Medical Solutions from TPG Growth.

Since the purchase price was undisclosed the public doesn’t know how much TPG Growth, which had bought a majority interest in May 2017, gained on the deal. But the growth of Medical Solutions in the intervening four years plugged what soon proved to be a critical hole in the market.

Medical Solutions, after all, is a provider of temporary staffing for healthcare facilities. During the pandemic, its services were much in demand, as the country’s clinical workforce became subject to burnout, so managing the necessary turnover in the ultimate “frontline” business became an essential business in itself.

TPG here can be congratulated for being far-sighted, or at least medium-distance sighted. More than four years is longer than one usually has in mind when critiquing quarter-by-quarter “short term” thinking. 

Last week, TT Capital Partners made an equity investment, again of undisclosed size, to “fuel [the] ongoing business momentum” of MediStreams.

MediStreams works on the reimbursement side of the healthcare world. Since 2009, MediStreams has offered providers the software they need to keep track of remittances, reconciliations, and payments.

Healthcare providers often have a high volume of patients and a complicated range of payment streams, with piles (or ePiles) of related correspondents. This of course is what MediStreams offers to automate, and where it adds value. It has a proprietary engine for extracting the key data elements and a neural network for payer mapping and predictive analysis that allows a reduction of the manual labor.  So yes, there may be staff layoffs as a consequence of the automation of the ‘paperwork,’ but this doesn’t suggest either a weakening of the industry or service to the patients.

In the words of the co-founder and CEO of MediStreams, Jim Coyle, “Our existing technology is highly scalable, and this investment from TT Capital will help us get our services into the hands of more providers interested in driving down the cost of getting paid.” 

Earlier this month, Pharos Capital Group, a middle-market PE firm with headquarters both in Dallas and in Nashville, acquired THEMA Health Services.

THEMA is a Medicare-certified provider of hospice, skilled health care and palliative care services in the state of Arizona that serves more than 2,000 patients at sites across the state.

Its patients didn’t have to come to THEMA. THEMA was also willing to go out to them. It supplies skilled home health care and palliative care services to non-hospice patients.

The investment in THEMA is part of a broader pattern for Pharos. One of its post-acute care platforms, the Charter Health Care Group, offers hospice, home health, complex care management, and palliative care services, thereby delivering care for more than 5,000 patients in seven states.

The Charter Health Care Group’s plan is precisely to fill the care gaps between home health and hospice.

In general, a granular look at specific deals will confirm a sense that private equity is being drawn into the healthcare world in increasing volume because it smooths out the operation of that world, both over credit cycles and in response to crises. 

That some may argue is its value add.

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