Looming Reform Kills Mood for Healthcare Deals

HealthLeaders Media Staff, May 18, 2009

Remember last month when I said that healthcare bankers were "bullish" on healthcare lending, despite the bad economy? Well, it seems the mood has changed somewhat and I have to believe this is more reflective of the heightened uncertainty and angst around healthcare reform talk in Washington than it is about any changes in the economy.

In the last month, we have been bombarded with different healthcare reform proposals wending their way through Washington. Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, and Sen. Charles Grassley (R-IA), ranking minority member, who have been some of the louder voices recently, released policy options calling for a reform of the individual and small group health insurance markets, expansion of public health insurance programs, and tax credits for small businesses and low-income individuals. Any or all of these proposals could become legislation as soon as next month.

Meanwhile, House Speaker Nancy Pelosi (D-CA) says there will be healthcare reform legislation on the House floor by Aug. 1. And numerous other proposals are floating around.

A group of healthcare investment bankers and private-equity investors who spoke at a recent Nashville Health Care Council meeting say deals are getting done but volume is still down and they aren't predicting much change in the foreseeable future, at least until real reform takes place.

"Discussions in Washington are chilling the market now," says Bryan Cressey, partner with Cressey & Co., a Chicago private equity firm. While some companies are getting funding, there have been virtually no IPOs, and transactions on the private equity side have slowed considerably, says Duncan Dashiff, a managing director in the Nashville office of investment banking firm Shattuck Hammond Partners.

Nevertheless, Thomas Cigarran, chairman of disease management company Healthways, asked the group to reflect on what deals are attractive and what it takes to secure funding today.

"The keys to securing funding have to do with having a deep knowledge of healthcare so lenders know that you know how to improve your company," says Cressey. However, he adds, "You won't see transactions in companies that are reimbursement-sensitive."

Throughout economic cycles, "folks in our positions over-rewarded management teams that were more dreamers," says Jim Elrod, managing director of Vestar Capital Partners, a private equity firm in New York with $8 billion under management. "But we are in a moment of realism. The cavalry is not coming any time soon."

William Stitt, a managing director with Deutsche Bank Securities, says that deal volume is down by 60 percent since 2007 and 2008. "We are looking at lower leverage and seeing a lot of tightening in terms of lending and financing," says Stitt, who is based in New York.

A meeting on the status of healthcare lending wouldn't be complete without a prediction of future winners and losers in this ever-changing and unpredictable market.

"The winners are the folks who have companies that address conditions or populations and have generated good outcomes," says Elrod. He also notes that anyone in outsourcing and healthcare informatics will do well.

"One area we see as successful is healthcare IT, which will be a big beneficiary in the context of healthcare reform," says Dashiff. He says that while outsourcing from a revenue cycle standpoint has been big, there will also be a focus on clinical outsourcing businesses, such as those that run hospitalist companies. "There are a number of different subsectors in healthcare services where there is an opportunity to build," he adds.

Some of the losers will be home healthcare, hospice and nursing homes, according to Cressey. "The government says it will cut in those areas," says Cressey. But, he adds, there will be a natural floor because you can't eliminate more than 5% or 10% percent of providers. He also predicts that healthcare will make labor substitutions in the coming years. "For example, we will see more physician assistants subbing in for physicians and the market will allow it."

On a brighter note, as some European counties start to back away from government-sponsored healthcare, opportunities will open up for healthcare services companies willing to do business overseas. Says Elrod: "The hospital management business is white-hot in southern Europe."

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