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2022 Private Equity Investment Lessons in the Healthcare Provider Space

private equity in healthcare

 

It used to be easier!  

Private Equity (PE) firms drove economies of scale and rapidly expanded multi-location businesses following a tried-and-true playbook.  

However, today they face stricter regulation, provider shortages, and competition from powerful regional health systems for the same talent and same markets. Additionally, Medicare, Medicaid, and commercial payors are putting increasing pressure on provider businesses to deliver higher quality at lower cost or transition to capitation models.  

In 2022 and beyond, here are four winning strategies we will see successful PE investors implement across their healthcare platforms: 

1. Be Thematic

Focus on a specific market segment/theme and pursue investments consistent with that thesis. Resist the temptation to pursue deals outside of your area of expertise.  

2. Focus on Regional Density vs National Scale 

In the provider space, achieving regional density within a state or even a specific set of counties is more beneficial than nationwide expansion without that regional density. Having a strong market position in a specific area creates negotiating leverage with Medicaid, regional commercial payors, and Managed Medicare plans. That means being heard when rate changes are needed to address labor cost inflation, labor shortages, and other matters affecting the cost of care. These local payor relationships are critical for the company’s ability to prevent margin erosion and to provide competitive compensation to employees.   

3. Understand Access to Care and Competitive Landscape  

  • Consider the presence of dominant health systems which may have established payor relationships and may already operate multi-specialty outpatient networks. Geographies where such conditions are present are much harder to enter.  
  • The best opportunities often lie in underserved geographies with less access to care. The challenge with entering these geographies is that there are no existing provider platforms to acquire. De novo growth is challenging as well because such regions can be less attractive for providers and other employees.  
  • Provide proper incentives to the employees who will fuel de-novo growth. Making management and providers partial owners of the practice can go a long way toward motivating them to serve a remote community.  
  • Work closely with local payors and regulators in highlighting gaps in access to care which your company will address. Make sure these stakeholders understand the difficulty of attracting and retaining talent and the importance of providing competitive compensation.  
  • Be sure to do your due diligence on the regulatory environment and proactively address concerns. State-level regulators in certain geographies have stepped-up anti-trust investigations and scrutinized even relatively small acquisitions. Be ready to demonstrate how your transaction and possible expansion will improve access to care and potentially lower costs.   

4. Invest in Bending the Cost Curve 

  • Add on integration: Do not underestimate the importance of properly integrating add-on acquisitions.  
  • Good change management will keep acquired practices from losing key talent and minimize pain points when centralizing billing, financial reporting, and other back-office functions.  
  • Centralized back-office infrastructure: Platforms that go to market without a fully centralized back-office infrastructure “leave money on the table” because they show lower margins and often appear less organized during the sale process.  
  • Outsourcing risks vs benefits: Outsourcing parts or all your Revenue Cycle Management or Accounting processes can help contain costs but may also create operational risks. If you choose to outsource, consider how you are going to maintain visibility into key process KPIs, and retain control over data quality and cybersecurity.   
  • Automation vs outsourcing: If you are considering outsourcing to lower-cost offshore markets, compare the ROI of that decision to ROI on automation and IT upgrade projects. These projects may come with an upfront cost but usually pay for themselves quickly and produce better margins in the long run.  
  • Provider compensation: Think about aligning provider compensation with your long-term objectives. While physician compensation is usually tied to collections, some operators have started paying physicians based on the profitability of their practice (or a measure of profitability that is directly influenced by the doctor). That structure incentivizes providers to be good stewards of the company’s resources and make better hiring and purchasing decisions.  

For more insight on Private Equity solutions in healthcare, contact CrossCountry Consulting today.

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