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Building a Successful Health Care Portfolio

Today's health care environment requires private equity firms and their partners to understand the industry's intricacies and how to leverage technology.

Building a Successful Health Care Portfolio

This content is brought to you by Plante Moran.

The booming health care market offers lucrative investment opportunities. In 2017, private equity investment in the U.S. health care market totaled $83 billion, up from $72 billion in 2016, according to the American Investment Council. And the surge is continuing. The first few months of 2018 saw the busiest start to a year in health care mergers and acquisitions in more than a decade, with approximately $156 billion worth of M&A deals (of all types, not just private equity) already agreed upon, the strongest start in over a decade, according to Bloomberg Markets.

It’s a complicated market in the midst of major structural changes. The business model is changing from fee-for-service—in which providers are paid for each service performed—to value-based, in which they are paid based on the overall outcome in terms of a patient’s health. Payers reimburse at a lower rate, or in some cases not at all, for ancillary services like lab work. Instead, payers are focused on services that improve outcomes in demonstrative and quantifiable ways. Their move to bundled payments and capitation (paying a set amount per patient) is squeezing margins. Meanwhile, patients accustomed to better service in other sectors of the economy are becoming more demanding consumers of health care.

These new realities create new challenges. They require that a private equity firm and its accounting partner have in-depth knowledge of its intricacies. Plante Moran, which has more than 2,000 health care and 400 private equity clients, works closely with its clients to help them profit from the new age of health care.

Plante Moran’s work with Frazier Healthcare Partners is a good example. The firm, which has raised $4.2 billion from 11 institutional funds, specializes in both growth buyout and venture investments. On the growth buyout side, Frazier leverages its knowledge and long-term relationships in the health care industry to identify possible acquisitions.

Technology is one of the most important factors. Health care has underinvested in technology compared with other industries like finance. Providers who have not changed their cost structures will suffer. Traditional hospitals, for example, are fixed-cost machines and many struggle to retool. But those that use technology to streamline and automate processes and lower costs can thrive. New free-standing emergency clinics, for instance, can deliver cost-effective care that is customer-friendly and appropriate.

Pre-acquisition due diligence is especially important and requires specialized actuarial and legal skills to evaluate risks and revenue streams. A buyer needs to understand a target’s care model and associated risks, as well as whether its revenue streams and payer sources are well-diversified. It should also take professional liability and other exposures into consideration.

After an acquisition, Frazier usually focuses initially on evaluating and then upgrading or replacing technology, including building the company’s data reporting and analysis capabilities. An early win can be automation of paperbased processes that either prevent clinicians from focusing on patient care or that drive up administrative costs in the back office.

Even in this age of high valuations in general and increased complexity in health care specifically private equity firms that are equipped with the right expertise and experience can find and profit from health care investments.

This story originally appeared in the November/December 2018 print edition of Middle Market Growth magazine. Read the full issue in the archive.


Duane J. Fitch, CPA, MBA, FACHE, is a partner with Plante Moran and has more than 25 years of experience specializing in helping health care organizations develop and exceed their strategic, financial and operational objectives.