Healthcare is underrepresented in the public asset classes, according to data provided by HCPEA. It represents just 12% of Standard & Poor's 500, but is 17% of the gross domestic product. Moreover, Miller explains that the total healthcare equity market cap is $1.3 trillion; however, only a sliver of that is represented by for-profit hospitals and health systems (note that nonprofit hospitals cannot be traded): • 70% pharma/biotech • 16% medtech • 8% managed care • 6% other (including hospitals, nursing, doctors, distribution, services, supplies, life science, etc.)
"Healthcare is so fragmented that the vast majority of healthcare companies are too small to be publicly traded. The only way to access this investment class is through investment in private companies via private equity funds," Miller says.
What makes these opportunities so appealing to private equity firms now has much to do with the Patient Protection and Affordable Care Act. Fitch Ratings recently reported that although nonprofit hospitals still face financial challenges, they will benefit from increases in patient volume and "dramatic reductions" in uncompensated care, and be helped by provisions in the legislation that will promote "efficiency and effectiveness in the delivery of care" via pilot programs and payment incentives. Nonprofit hospitals or systems that traditionally served a large proportion of the poor and uninsured are expected to benefit from the legislation, which will extend insurance to 32 million previously uninsured.
There have been numerous well-publicized agreements between private equity firms, such as the Blackstone Group, which acquired the majority share of the 16-hospital, Tennessee-based for-profit Vanguard Healthcare system. Another well-publicized deal was the buyout of Massachusetts-based Caritas Christi Health Care, which was a nonprofit, by Cerberus Capital Management. The 2010 sale not only gave Caritas a cash infusion, but altered its tax status to for-profit. These acquisitions moved to center stage the use of private equity capital as a strategic opportunity for healthcare leaders.