In thinking about the most relevant topics for today’s healthcare industry, the two issues that practically every healthcare executive and industry stakeholder that I speak with want to hear about are: (A) healthcare reform; and, (B) consolidation. While the focus of my work relates to consolidation, specifically meaning mergers and acquisitions between healthcare businesses, these two important topics are certainly not mutually exclusive of each other, because the former indeed plays a significant role in fully understanding the latter.
Being an investment banker that works exclusively with healthcare organizations, consolidation (i.e., mergers and acquisitions, financings, transactions, etc) is what I focus on every day. My job is to advise various types of healthcare entities through a transaction process, whether it is assist with an acquisition (”buyside advisory”), facilitate a sale (”sellside advisory”), work with lenders to facilitate capital or restructure an organization’s debt (”capital markets solutions”), or to provide strategic advisory (i.e., valuations, etc). When someone asks what line of work I am in and I respond by saying that I am an investment banker, they will often kind of scoff as though I was the original architect of the government’s TARP program or perhaps as if I were Bernie Madoff’s broker. At the very least, there is almost always a comment about how the last few years must have been rough. However, I enjoy taking these opportunities to explain how the work of a healthcare investment banker such as myself rarely has anything to do with the happenings of Wall Street and in fact, the last three to five years have been perhaps the most interesting times for healthcare bankers within the past half century, because while most bankers are negatively impacted by the risk and volatility experienced by the broader financial markets, it’s different when you work with middle market healthcare companies, many of which are not-for-profit to start with, in the largest period of consolidation that perhaps any industry has ever seen.
This isn’t to say that the economic crisis of the past few years has completely avoided the healthcare industry. In fact, I cringe when I hear talking heads on CNBC or Bloomberg recommend healthcare stocks based on the idea that this industry is somehow shielded from economic stress and market volatility. And while the healthcare industry may be more resilient than some other sectors, such as technology or energy, in the long run, we are far from being “recession proof”.
Indeed, healthcare businesses have experienced significant tumult since the markets were first rocked in 2007. However, the healthcare industry is unique from any other, which means the dynamics of the economic model and the industry’s stakeholders operate differently from what one might find in say the energy sector or working with manufacturing businesses. Even the healthcare technology sub-sector is very unique compared to the broader technology world, and in its own regard is much more like the general healthcare industry than technology.
The healthcare industry is currently experiencing one of the greatest periods of consolidation in the last century; however, it is unique, in that while we can quantify valuations and multiples, comparing this data with historical figures, the more critical element of today’s consolidation trends within the healthcare industry has to do the multiple systemic and macro-level drivers that are ultimately behind this consolidation. While it seems no one can really figure out what the policymakers will do when it comes to healthcare reform, including the policymakers themselves, the industry has come to terms with a few inevitable factors that most believe are here to stay.
First, the regulatory burden for healthcare providers is only going continue to escalate, meaning the system will become more regulated. The more our government spends on healthcare, the more they will demand on having access to every nook and cranny where some bad apples may try to exploit their programs, or just generally where government thinks they are a better alternative versus a market-driven system.
Second, quality is gradually becoming the primary metric for the evolving payment system. No longer will reimbursement be based on any sort of economic value, cost of care or inflationary dynamic. Instead, the healthcare payment model will be driven by quality, even though there is no real solution as to how we can adequately measure quality systemically, and even where it can be measured, quantifying quality into a reasonable “value” element is proving much more difficult than policymakers would have hoped.
And third, the evolution towards quality has spawned a new outlook on delivery, which is geared more towards efficient delivery of care and business management solutions that were historically more common in non-healthcare enterprises. The rise of healthcare information technology has introduced an entirely new way of delivering, managing and measuring quality of care. Further, many healthcare facilities have achieved new levels of growth simply due to the fact that they started operating their organizations more like businesses, as opposed to relying on the historical status quo to save them.
Overall, this wave of consolidation within the healthcare industry is still in its infancy, because while most markets experience broad consolidation as a result of one or two acute drivers, the current trend of consolidation within the healthcare market is being driven by numerous catalysts. Moreover, these drivers are systemic, meaning they are so compelling that not only is consolidation the best solution that entities can turn to, they are indeed becoming the only alternative that will allow many healthcare organizations to continue growing or even remain sustainable at all.