High Stakes

Taking Bets: Private Equity and the Hospital Business

Private equity has no interest nowadays in investing heavily in the hospital business.

Unless they do.

The investors, bankers, lawyers and brokers attending the McGuire Woods Healthcare and Life Sciences Private Equity and Finance conference in Chicago this week couldn’t quite settle on whether PE firms will be putting their highly-pursued money into acute care in the year ahead.

Just say no

For some, healthcare PE simply has better places to invest. After all, buying and operating hospitals is hard work. It’s difficult to acquire enough hospitals to achieve the scale needed to generate efficiencies. The regulatory environment makes it tough to buy a hospital and tough to operate it afterwards. Reimbursement for traditional services is under great pressure. Hospitals are massively capital intensive enterprises. Insurers are buying physicians around them and Walgreens wants their primary care patients. If that isn’t enough, it can take a long time to exit the business and be rewarded for your time, money and sweat.

PE would be smarter, they say, to put its resources into ASCs or any number of outpatient specialties, such as behavioral health, dermatology or dentistry, where the need is great, the reimbursements are strong(er) and the industry would benefit from consolidation. The options are rich.

But wait …

Cerberus-backed Steward Healthcare just purchased eight hospitals from Community Health Systems and other hospital companies have enjoyed recent and substantial investments from the PE world. Apollo Global Management’s investment in RCCH HealthCare (f/k/a RegionalCare) is a good example.

After all, there is real need and a real opportunity for investors with smart operators to improve the operations of poorly performing but critically important hospitals. There are new markets where forward-looking hospital companies can plant a flag. There are new (or newly re-visited) partnership models – such as joint ventures with not-for-profits and REIT financial arrangements – that are fueling the development of hospitals in non-traditional ways.

However you disrupt the healthcare puzzle, acute care hospitals will remain a vital piece and, often, the biggest one.

Our take

It’s true that there are many compelling options for investors looking to put their money to work into the healthcare industry. It’s a booming, creative moment in which the delivery of healthcare is being redefined and new service companies offering new opportunities abound. A lot of PE money will go there – and should. These creative solutions will make healthcare better.

But leading hospitals and health systems aren’t standing still, either. They are transforming, too. More than once we heard panelists ask: “What does it mean to be a hospital anyway?” It’s not what it was, and it won’t be what it is today.

The turbulence in the market reflects the disruption and creative energy of entrepreneurs, physicians, business leaders and policy makers putting their best thinking and capitalist tendencies against some of the most important healthcare challenges.

To be clear: The hospital marketplace is harder for PE firms than it was a decade ago and headwinds, as the analysts say, still blow.

Here’s one: Regional not-for-profit players are in the hunt for strategic acquisitions that expand their networks, strengthening their ability to care for large populations. These local, powerful brands can sell well.

But creative PE-backed operators can partner with these regional players, bringing patience, creativity, boldness and the critical financial resources needed to make these broader networks work well.

We expect PE to continue to invest in acute care, especially in those cases where investors and operators are building platforms from which they can evolve the delivery care.

Smart PE can pursue, build and win opportunities others can’t imagine.

And we need solutions in healthcare that we can’t yet imagine.