Not everyone believes the marriage between Wall Street and health care systems will be a long and happy one, but for now the feeling is there is opportunity in disruption.
Surveying this disruptive landscape is Michael Burger, director of the public finance healthcare group for Fitch Ratings. In this capacity, Burger rates the bonds of acute care hospitals, children’s hospitals, and cancer centers whenever they issue bonds. In the rating process, Fitch sends market signals to investors who consider buying these bonds. He confirms there has been investor interest in healthcare as Wall Street and private equity investors place their bets at a critical point in healthcare reform.
Burger was among the panelists addressing the financial benefits of mergers and consolidation — larger systems tend to perform better from the standpoint of operating margins — during the 2014 Digital Healthcare Conference produced by WTN Media. The two-day conference was organized around the theme “Preparing for Healthcare Business Model Disruption,” and some of those disruptive models are being driven by Wall Street’s interest in Main Street.
That Wall Street believes there’s opportunity to make money from industry chaos could be a short-term Godsend for healthcare systems that consolidate to a scale acceptable to investors. But in an era of reduced reimbursement and a focus on quality outcomes rather than volume of services, hospitals and clinics are operating in uncharted territory. Healthcare reform has resulted in a wave of industry consolidation that’s not likely to subside anytime soon, and in a low-reimbursement environment, part of the motivation is to impress investors with the right business models.
The successful models not only include sufficient investment in electronic medical records, but successful physician adoption of them. “To address the question of why there’s interest among private equity, it’s because we see so much disruption in our healthcare system, and there is a lot of opportunity if folks can create something new, or really harness information and use it in a profitable way,” Burger says. “That’s why investors are there, because of that opportunity.”
Complicating matters is the crosscurrents that are increasing the degree of difficulty in an already complex environment. Investors are likely to covet systems with modernized clinical systems and business analytics; at the same time, the staggering cost of the enabling technology impacts balance sheets and therefore the ability to raise institutional capital.
With both for-profit and nonprofit entities seeking partnerships, and investors looking for yield in a low-yield environment, the hunt for smart investments might take some time. “We’re in low-yield environments right now, at least within the municipal healthcare environment,” Burger noted. “The bonds on that have higher yields, typically, so investors are looking for that opportunity.”
Peter Christman, executive vice president and COO of the UW Medical Foundation, cautions that consolidation alone will not be enough to woo investors. “Despite the fact that reimbursement does not appear to be heading in a positive direction, the need to invest and the need to expand in some ways appears to be increasing,” he said. “When you see for-profit companies coming together, the actual exchanged dollars is oftentimes not that significant. And then the question is, is the combined organization that much stronger?
“One would argue that you’re going to have to do two things: You’re going to have to cut costs in terms of the combined infrastructure, but at the same time you’re going to have to invest in order to maintain or increase the market share that you’ve invested in by merging or acquiring or being acquired. Measuring this at a time when the cost pressure is as difficult as it’s ever been — that’s a real conundrum for healthcare organizations.”
A conundrum for investors seeking growth, Christman suggested, is that a growth strategy might not be the best strategy in the future, given the lower reimbursement environment. He also stated that the best strategy is essentially to take better care of people, but that does not necessarily mean doing more. In fact, it would argue for doing less to the point where hospitals have fewer admissions per 1,000 patients each year. That means fewer outpatient procedures, particularly in areas where they have been shown to be largely ineffective or marginally effective, and also doing less by virtue of monitoring patients.
“Healthcare does have some for-profit investing going on, including some investing in basically venture capital, and I think the intent there is still to make a significant margin,” Christman said, “and if the margin is no longer there, then basically to move on. That’s a problem for healthcare because the fundamental needs of the community must be dealt with, whether or not they are profitable to the degree that Wall Street believes they should be or not. That kind of a moral conundrum.”
Alan Eisman, executive director for health care industry for the enterprise software company Information Builders, is not worried that reliance on Wall Street would place shareholder value over the welfare of patients. He noted that in terms of reimbursement, private payers would follow the lower-reimbursement leads of government payers. “The incentives are changing,” Eisman stated. “You still have close to 50% of all the care provided by Medicare and Medicaid, publicly financed programs, and the private payers are following suit.
“The goals and the reimbursements are more tied to outcomes and value-based purchasing, which involves things like patient satisfaction, which is highly dependent on the physicians. So the ones that were publicly held companies, more profit-driven and bottom-line driven, are being drawn to the same kinds of incentives and goals we traditionally associate with the nonprofit types of providers.”
The fact that private equity money is getting into the healthcare space also is an indication that investors think healthcare can become much more efficient, a contention that industry observers like Don Berwick have also made. Another capability investors might look for in providers is the ability to reduce bad debt, especially with patients increasingly responsible for a larger out-of-pocket portion of medical bills.
Ashok Singh is senior vice president of health care engineering for TransUnion Healthcare, which has developed software solutions to help hospitals reduce their bad debt. As the cost of providing care has increased, he noted that employers have shifted more costs to their patients, with higher deductibles and higher out-of-pocket costs. Consequently, the amount that hospitals are unable to collect from patients has skyrocketed, and based on its knowledge of consumer credit, TransUnion has developed data tools to provide a 360-degree view of patients, including their ability and willingness to pay.
“TransUnion Healthcare is owned by Goldman Sachs,” Singh noted. “Goldman Sachs looks at it from a financial standpoint, that a lot of this money is being left on the table. What kinds of tools and techniques can we develop to help the hospitals collect that money faster and more efficiently and more often?”
Singh noted that healthcare has its own 80-20 rule — of all the money people owe directly to hospitals, 80% actually have the ability to pay, but hospitals only collect from 20% of them. Technology tools could not only start payment discussions upfront, before non-emergency care is delivered, but also have the affect of disciplining consumers to think more carefully about their healthcare spending. “It’s definitely informing them,” Singh says. “In the absence of any of that dialogue, the patient doesn’t quite know what the obligations will be.”
Contributing writer Joe Vanden Plas is editorial director of In Business magazine in Madison.