The healthcare industry in the US is going through some changes, as the country is getting used to the new system under the Affordable Healthcare Act. Private equity firms have sensed an opportunity and moved on from buying traditional high-reimbursement medical groups towards companies working in primary-care and managed-care space.
Increase in Deal Numbers
A Modern Health report looked in to the change in the industry and noticed private equity firms are increasingly interested in these relatively small primary-care groups. Its first quarter mergers and acquisitions watch found a total of 294 deals. This was a hefty increase of 25.1% from the first quarter deals done in 2014. Furthermore, deal value more than doubled. It increased from $48.9 billion to $97.9 billion.
Interestingly, the provider sector managed to attract a lot more deals, increasing by 46.8% in the first quarter. The total value of these provider sector deals also increased to an almost four times higher total from 2014. In the first quarter of 2015, provider sector deal value stood at $18 billion.
Why Primary-Care Sector?
The changes in healthcare legislation in the US have also meant changes in the whole industry. New ways of delivering care along with new payment models have been introduced by smaller healthcare service providers. Value-based care is increasingly important in the country and investors want to be in the middle of it all right from the start.
Although the industry is still going through a lot of uncertainty, this uncertainty is not necessarily bad for private equity. Todd Spaanstra, a partner at Crowe Horwath’s accounting and consulting firm, told the Modern Healthcare that private equity firms are well suited for betting and investing in these shared-savings payment models in the sector.
The primary-care sector provides better long-term opportunities to sell the companies onwards to insurers or health systems. According to the article, “Primary-care groups that can demonstrate better quality and lower costs in managing medically complex patients will be valuable in a healthcare system that will increasingly reward cost-effective care.”
Private Equity Firms Competing Over Deals
There is also increased amount of competition, especially as good value primary-care groups are still hard to find in the US. One of the most recent deals includes the Oak Street Health deal from last month. The Chicago-based primary-care clinic provider went looking for investment last year and ended up talking with 40 different private equity funds. The company talked with around 15 firms, before selecting a New York-based private equity firm Harbour Point Capital.
Mike Pykoz, the CEO of Oak Street Health, told Modern Healthcare that, “It was a competitive process to pick someone. There are not a lot of people who are doing what we’re doing.” The industry is continuing to attract private equity firms, especially as new providers are getting involved with the healthcare sector. The changing scene could benefit PE firms a lot and provide more interesting investment opportunities. It remains to be seen how many PE firms will get involved in the sector and whether the risk will pay off in the end.