Stormy Weather at the J.P. Morgan Healthcare Conference

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The Big Story: 5 takeaways from the 2023 J.P. Morgan Healthcare Conference

“Integrating services will be key for healthcare organizations this year, executives said. Health systems and insurers view it as long-term savings opportunity and a path toward higher-quality care.”

What we heard in San Francisco

By Anne Hancock Toomey, Hollie Adams and Crista Stark

Talk about headwinds. Literally, the weather at last week’s annual J.P. Morgan Healthcare Conference in San Francisco was tumultuous. Rainstorms. Wind. Falling trees. Wearables beeping alarms on the wrists of participants.

Everyone was anticipating a moment of sun. But, mmmm, not so much.

It was quite a metaphor for today’s healthcare industry.

The best description from the attendees about the industry: Watchful waiting and careful consideration.

Those of us who were in and around the conference see a healthcare investment landscape highlighted by fewer deals, smaller deals, a proportional increase in additive deals and a deep focus on organic growth and same store performance. As seen in CVS’ recent activity, it’s not that deals aren’t happening, but that there’s a laser-focus on finding the right one that will be well worth the work of getting it done.

We’re happy to share what we learned while holed up in hotel lobbies, random meeting spaces and sprinting to the next event – about what’s new and next for the industry. As always, we view this from the perspective of strategic communications. But first, a few of the storylines from the conference. We’ve broken them into two sets of highlights – one for health services companies and the other for health systems.

Outlook for Health Services Companies

Transaction Environment

Look for the reduced availability of capital and higher interest rates to dampen deal volume at least for the first half of 2023, then likely pick up for the second half. In the meantime, transactions will likely be easier for small- to mid-sized companies that aren’t highly levered.

• That early slowdown is expected to create an uptick in creative financing structures such as minority recapitalizations and co-investment. For example, where current sponsors may be tapped out, a co-investment group can bring new equity capital to the table and help drive growth in the interim.
• Some private equity firms are moving away from their traditional playbook of investing in companies that match their usual “themes” and areas of focus. Instead, they’re backing a proven entrepreneur or management team to build a company through multiple smaller transactions in a space where they have conviction about longer-term opportunity. They’re buying the parts and building the bike, rather than buying it pre-assembled.
• That may mean lining up the executive team now and working on a thesis before building or buying a platform. When deals ramp back up mid-year, these teams will be primed to move.

Strategies for interim value creation

Given this nuanced environment, healthcare companies, systems and PE firms alike aren’t sitting around doing nothing. There’s careful action, laying the groundwork for what’s next. They’re taking a hard inward look. They’re evaluating what changes need to be made to be better positioned for aggressive organic growth.

• Those who’ve been relying on a highly acquisitive roll-up strategy are now turning their attention to fully integrate new assets into the larger operation. Name of the game: Value Creation – much harder than accretive growth. Now’s the time to focus on the hard work of integrating to a single tech, ops, finance and brand platform – bringing with it all the people politics (read: physician pushback) that can work for you or against you when making hard change. Better be thinking about a communications strategy to bring your people along, friends.

Interest in thematic investments

Investors remain bullish on PPMs, although these models are very capital intensive and may not be feasible in all instances. The bullishness is particularly true for organizations with a focus on value-based care. For example, pairing primary care with attractive subspecialties like cardiovascular care and oncology.

• Cardio is the new ortho. There was palpable excitement among investors for the promise of cardio – and oncology. There are at least three cardiology platforms coming this year, and blue-chip PE firms are very interested in more. Why? 50% of cardiac cases can be done safely in the outpatient setting now, as long as there’s a backstop for acute intervention nearby.
• Don’t write off orthopedics just yet. It’s still very attractive, in large part because the privately backed orthopedic space is well developed. It remains a complicated specialty and business model but is a mature sector with a proven thesis.
• A caveat: Physician rollups are capital intensive. Pointing to the environment described above, that need for capital may make a deal tougher to get across the line.
• Behavioral health and tech-enabled services companies that help advance value-based care remain attractive. Why? Because some investors who’ve been all-in on physician practice management worry their portfolios are overexposed to reimbursement risk. For balance, they’re looking to tech that solves actual* problems. Revenue cycle and governance, risk management and compliance solutions to name two.
• *The important thing here is to have solid proof of concept and a clear line to solving well-defined problems. We heard talk that the relatively easy money for all things tech and digital health is a thing of the past. Vaporware got too much attention in recent years, and investors are recalibrating.

Outlook for Hospitals and Health Systems

Admittedly, JPM is less focused on the hospital and health system piece of the industry, so our takes are a bit lighter here. In short: It’s a combo of defense and offense for the nation’s largest players.

Defense

• Health systems are challenged by the economic environment and aftermath of COVID. These organizations don’t have the luxury of watchful waiting as they need to take cost out of their systems now. A gear shift into performance improvement mode is consistent across the board.
• In some cases, performance improvement won’t be enough. More consolidation is predicted across the acute care landscape, creating safety in scale and partnership. Will state AG’s stand in the way? Well, they won’t make it easy.
• The well-earned healthcare hero halo effect for health systems seems to have largely subsided. Health systems find themselves squarely in the crosshairs of media, unions, and regulators alike. Many are frustrated by the narrative building against them and the lack of advocacy from state and national associations. (We hear your cry.)

Offense

• On the flipside, health systems are more open to partnership with private capital. There’s a proliferation of PE firms that include health systems as their primary LPs with a mandate to invest in companies that bring real solutions to common challenges. Much more expeditious than in-house R&D.
• Smart health systems also recognize that private capital isn’t – or doesn’t have to be – competition. It’s not a zero-sum game. For example, the physician carveout is picking up steam. Systems are working with PE firms and backed companies to move employed physicians into an independent practice model – particularly ortho, cardiac and primary care. A word of advice from our experience: This requires deft change management. While often beneficial for all parties, transitioning physicians from one model to another requires intentional engagement and communication to successfully work through the process putting people at the heart of it all.

Additional contributors:
Eric Mayeda, Sri Mani, Sheila Biggs, Dan Schlacter, David Jarrard, Emme Nelson Baxter, David Shifrin