- Healthcare Dive is reporting: Private equity interest in healthcare hit a record again in 2018, according to Boston-based consulting firm Bain & Company.
- The trend of private equity groups rolling up various specialty physician practices, which appears to be gaining steam, is worth watching.
- Bain’s report on global healthcare private equity and M&A tallied 316 deals globally in 2018, a jump from 265 the year prior.
Healthcare Dive is reporting: “Private equity interest in healthcare hit a record again in 2018, according to Boston-based consulting firm Bain & Company.
Bain’s report on global healthcare private equity and M&A tallied 316 deals globally in 2018, a jump from 265 the year prior. Deal value also spiked to record levels, reaching a total disclosed value of $63.1 billion, the highest on record since 2006. The most activity was in North America, which also captured the highest values.
The deal roundup includes the pharmaceutical and device sectors. One of the largest deals in 2018 was private equity firm KKR’s buyout of physician services provider Envision Healthcare for nearly $10 billion. Another deal to make Bain’s top-10 list included a European deal in which Recordati, a drugmaker, was purchased for $7.4 billion. Private equity investors are looking for deals in areas that are highly fragmented, areas that still operate in silos and are undercapitalized, Healthcare Dive previously reported. Fragmentation provides a means for private equity to come in and align practices on the same platform, in an effort to increase size and scale. PE firms may be taking a closer look at orthopedic practices and mental health services for deals, along with other areas of the healthcare sector.”
The trend of private equity groups rolling up various specialty physician practices, which appears to be gaining steam, is worth watching for a couple of reasons. First, as more services that previously were only provided inpatient or in hospital outpatient department settings can be performed in an ambulatory surgery center (ASC) or physician office setting, the risk for “cream skimming” increases. I’ve seen a lot of press (and even had conversations with members that have voiced the same concern about disruptors like CVS/Aetna, Google and Amazon.)
Although CVS/Aetna, Google and Amazon will likely reduce unnecessary utilization and reallocate volume among local health systems, their primary focus is on managing complex populations (or providing support services to those bearing the risk for complex populations). This will negatively impact health systems that aren’t partnered with them. But I wouldn’t call it true cream skimming.
For the private equity-backed physician groups, it’s a different story. It’s not hard to imagine a national orthopedic group or cardiovascular group leveraging its scale to drive down supply costs with vendors while maximizing contracting rates with health plans similar to the various publicly traded ED staffing groups that are an imperfect but close analog in terms of contracting strategy. These groups will then route the relatively healthy, well-insured to their offices while leaving the underinsured and complex cases at the hospital.
Second, when a large percentage of an orthopedist or interventional cardiologist group’s revenue is derived from procedures performed in their own facilities, it likely will be harder for the health systems where these groups still have privileges and provide care to their sickest patients to engage these physician groups in efforts to improve outcomes, reduce internal costs and reduce the total cost of care.