More private equity firms are pursuing hospital partnerships as healthcare business models continue to evolve, says BDO’s David Friend.
Amazon, JP Morgan, and Berkshire Hathaway made news last year when they announced that they were forming a new healthcare organization. There’s no doubt their organization will be innovative in many ways, but David Friend, MD, MBA, managing director in The BDO Center for Healthcare Excellence & Innovation, predicts that the very form of their new venture will be innovative: He thinks they will consider forming a “benefit corporation.”
A benefit corporation is a hybrid between a regular, for-profit corporation and a not-for-profit organization. Benefit corporations can raise capital on the stock market like any other corporation, but the stated priority of the corporation is typically something other than maximizing profit. In the case of a healthcare organization, for example, the first priority could be taking care of its patients, rather than making money.
“Most people have never heard of it,” Friend says. “If you’re interested in really fixing health care, but still want access to the capital markets, a benefit corporation is one way to go.”
This is one of 10 predictions for 2019 issued by BDO in late 2018. Two others —one related to telemedicine and the other related to sources of alternative capital—pertain to hospital finance.
Benefits of a Benefit Corporation
If BDO’s prediction comes true, the healthcare organization that emerges from the combined efforts of Amazon, JP Morgan, and Berkshire Hathaway would not be the first high-profile company to form as a benefit corporation. One already exists in the clothing world: Patagonia.
“Patagonia is trying to build a company that could last 100 years,” said Patagonia founder Yvon Chouinard in 2012, on the day Patagonia signed up with B Lab, a not-for-profit organization that certifies benefit corporations. “Benefit corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.”
Benefit corporations came into being in 2010, when the state of Maryland passed the appropriate authorizing legislation. As of mid-2018, more than 30 states and Washington D.C. have passed such legislation. The legislation typically states that benefit corporations must have a purpose of “creating a general public benefit.”
A healthcare organization set up as a benefit corporation could focus on the mission of improving health care, providing better care for its members, innovating in health care, or any other benevolent mission other than profit, Friend notes. Yet it could raise money in ways that a not-for-profit can’t, namely through the stock market.
“I would argue that one of the enormous problems in health care is that at the moment, the number one priority of most companies is making money. So, it’s no surprise that healthcare costs are rising,” Friend says. “A benefit corporation can have a different priority, but still raise equity in the stock market. So our thinking is if Amazon, JPMorgan, and Berkshire Hathaway want to break the mold, this might be one way to do that.”
Telemedicine Will Grow
Another prediction by BDO is that more and more hospitals will turn to telemedicine as a new revenue stream. Two key factors are driving that prediction: Rural hospitals are suffering, thus are unable to meet local demand, and urban hospitals need more patients.
“I think the demand for rural health care through telemedicine will intensify because changes in payment models, paired with declining populations in rural communities, are making it increasingly hard for rural hospitals to survive,” Friend says. “So a lot of rural areas are doing without. More and more, you’re going to see telemedicine filling in the need.”
And urban hospitals will fill that need too, he says. With the right technology, hospitals can “see” patients at great distances at a moment’s notice. Providers can see more patients this way, and a telemedicine visit is more convenient for the patient than making an in-person appointment and driving in.
“It’s pretty clear that health care is a local business—very few people travel a long distance for their care,” Friend says. “So you’re better off expanding your catch basin by 500 miles using telemedicine. Then if a patient is really sick, he or she can come in.”
Friend says he believes payment will eventually catch up to telemedicine—after all, it is a less expensive way to treat a greater number of patients—making the investments in that technology pay off.
Alternative Sources of Capital
BDO originally predicted that the growth in telemedicine would be funded by another innovation, crowdsourcing—raising money from many individuals making small donations, rather than one or a few organizations making big donations. However, Friend says BDO could also see the growing telemedicine business being funded by venture capital.
And telemedicine is just one example of the services that should attract venture capital in the years ahead. Another is concierge medicine, Friend says. Investors see that as a future trend and are willing to back hospitals that want to develop such services.
“Venture people are talking to hospitals non-stop now,” he says. “Ten years ago that wasn’t the case, and back then hospitals were not interested anyway. Since then the venture people have figured out that health care is an interesting space.”
A key factor behind those investments is the fundamental change in culture, Friend says. Businesses like Amazon have taught consumers that much of what they need can be delivered to their homes, and many health services are in that category. This includes the area of elder care, where 56 percent of healthcare organizations expect electronic or telemedicine capabilities to have significant impact on improving the quality and safety of care by 2020, according to BDO’s Candid Conversations on Elder Care study.
“If you look at what’s happening in retail, you realize that the culture has changed,” he says. “Sears is the equivalent of the modern hospital. People don’t always need to go to the store to buy things, and they don’t need to go to the doctor or the hospital as often. Ninety-eight percent of health care is not an emergency—it’s more generalized stuff. The number of people who have to go to the doctor in person is shrinking. Nothing changes overnight, but the trend is inexorable. So you’re seeing more and more private equity money partnering with hospitals, because hospitals are realizing their primary business model is changing.”
Interviewed for this article:
David Friend, MD, MBA, managing director in The BDO Center for Healthcare Excellence & Innovation.