Thought Leadership

Publish Date

May 21, 2016

Ten Years of Healthcare Industry Investing: Dynamic Change, New Opportunities

Michael Cole, Managing Director, Healthcare Industry Leader, Transaction Advisory

Region: North America

The health care industry’s last 10 years have been characterized by dynamic and paradigm-shifting changes, and yet, in some ways, many of the healthcare industry’s key sectors look and feel the same they always have. Ten years ago, the universe of health care financial investors largely included those that had invested significant efforts to understand the complexities associated with providers and related reimbursement risks. As such, within the provider care sector, these private equity investors tended to compete with strategic buyers for opportunities to buy and build multi-location provider care business in both acute and post-acute care settings. Despite some cyclical reimbursement influences, these business models, and the related M&A activity, are generally the same 10 years later.

However, in the last 10 years, the counter-cyclical nature of health care and its ever-increasing contribution to the United States Gross Domestic Product has drawn many financial sponsors to an industry others previously viewed as too risky due to regulation and complexity. More importantly, the numerous changes influencing the industry have prompted private equity recognition of investment opportunities. In the last five years, the deal landscape has seen the dramatic influences of healthcare reform with The Patient Protection and Affordable Care Act, increased regulatory scrutiny, continued shift to outpatient settings of care, a rush to physician employment, healthcare consumerism and sector-specific reimbursement cuts and payment model changes. As a result, we witnessed robust and unparalleled M&A activity during the last decade.

The influences driving industry change created new business models and, thus, new opportunities for investment. We’ve seen private equity investment in companies poised to bend the cost curve or capitalize on evolving and uncertain payment models (e.g., bundling, pay for performance, etc.). These emerging business models are both broad and deep – examples include (i) companies founded to manage post-acute care delivery to patients in evolving bundled payment models and (ii) technology-based concerns that optimize care coordination and reduce unnecessary utilization. Simply, the innovation and entrepreneurialism underpinning business models that didn’t exist ten years ago significantly grew the number of financial sponsors investing in the industry.

The next five years promise similar opportunities (and challenges), as we’re on the precipice of evaluating the impact of a number of key industry changes, including the impact of value-based payment models, accountable care organizations, etc.. With the American demographic as it is, healthcare – the provision of and payment for healthcare services, industry innovation, capital market influences and the like – will continue to drive tremendous investment opportunities underpinning M&A growth.