The Impact of Private Equity Investments on Health Care Providers

Episode Overview

Transcript:

Daniel J. Marino: 
 

Welcome to Value-Based Care Insights. I am your host, Daniel Marino. Recently, as we think about the health care space and read a lot of the current investments occurring over maybe the last six to 12 months, a lot of deals are being made by non-traditional health care providers. Frankly, it's been interesting to watch the role of say Walgreens as they've invested in large medical group in the Northeast, recently, CVS just in to deal with Village MD. And of course, Amazon has been working their deal with one medical for quite a while. So as long as, as well as these non-traditional health care providers trying to really get into the health care space. Private equity has also been extremely active, according to PitchBook, which is a firm that looks at health care data across the country. Been doing it for many, many years.  
 
They had a recent article that said, private equity notch, the second highest year of health care deal making in 2022. Obviously, health care is a large investment area for, a number of organizations and really has the opportunity to reshape how we deliver health care. Well, I am very pleased today to be joined by two gentlemen, extremely knowledgeable in private equity. Brian Greenberg, CEO and owner of Greenberg Advisors. Many years of experience in working through different deals with health care providers over his 25 years. Also pleased to be joined by Zach Eisenberg. Zach is managing director at Greenberg Advisors. Gentlemen, welcome to the program.  

Brian Greenberg: 

Thank you.  

 
Zach Eisenberg: 
 

Thank you, Dan.  
 

Daniel J. Marino: 

So Zach, maybe we can start with you. Obviously, there's a lot of investments that are occurring, private equity, very active in the health care space. Where are you seeing the big trends or the big hotspots in  of investment taking place?  

Zach Eisenberg: 
 

Yeah, thanks, Dan. Why don't I start by talking about some of the trends, or at least one of the trends And then I'll defer to Brian who can talk about specifically some areas of investment. So one of the biggest strategies that we're seeing across the board from private equity firms is colloquially known as buy and build. So that's basically employing add-ons as a way to bolster growth. So given the long sales cycle that are pervasive in health care, and just the overall fragmented nature in the RCM and health care IT space, we're seeing PE firms come in and speed up the rate of consolidation amongst vendors. So these groups are completing multiple acquisitions, sometimes multiple acquisitions in a year but certainly throughout the duration of their hold period.  And actually, on the prior point, Dan, we worked with one private equity firm, Sheridan Capital out of Chicago to do two deals last year with one of their portfolio companies, and then another private equity firm based in Boston to do four transactions.    

Daniel J. Marino: 
 

Wow. That's great. So were these portfolio companies across different sectors, analytics, revenue cycle management, or was it in a single sector?  

Zach Eisenberg: 
 

That's a great question. So they were both in specific verticals.  The first one was in the behavioral health, and they actually bought a revenue cycle firm and then an analytics firm, which honestly mirrors sort of the overall trends we're seeing across the investment landscape. Those are two very active areas, both being billing and analytics. And then the other was one singular market, which unfortunately, Dan, those deals haven't been announced yet, so I can't divulge too much, but they were in the billing sector as well.  

Daniel J. Marino: 
 

Yeah. It's amazing when you look across the industry and where some of the big needs are, where some of the big investments are, revenue cycle management clearly seems like there's a lot of activity. Analytics is another one. It's no secret that in hospitals, in health care in general, the ability to share data, to create interoperability is a big challenge in health care and has been a big challenge for many, many years. And I see that investment in the analytics and the technology space by private equity or by other firms being one way to really solve that problem.  Brian, how are you seeing it, or what's some of the conversations that you're having with some of these large firms?  

Brian Greenberg: 
 

Yeah, so I think you're exactly right, Dan. I mean, there is a lot of focus in the analytics space for the reasons you've mentioned and whether that's clinical analytics or financial analytics, it's all part and parcel to that focus on better understanding the care that's being provided, the data that's associated with it, and then translating that to either better care, hopefully, or, ideally also just more efficient care, which is something, you know, I think we'll probably get into at some point today around the hospital's labor shortages and their need for cash and things like that.  

Daniel J. Marino: 
 

Right, right. You know, a lot of our advisory and consulting support over the years, we've done a lot of turnarounds in the revenue cycle management space. We've gone into hospitals and into medical groups, and we've improved their performance. And a lot of the work that we've done is not only creating more efficient workflows, but we've also introduced technologies that have made things much more efficient. And frankly, that creates a strong  ROI. When you look in the RCM space and you look at firms that are creating these large investments, what's the return look like? Is it all around creating this advanced technology to create efficiencies, at least on the surface? That seems to me where it would be. Or is it in other spaces, maybe where you're working on trying to maximize reimbursement from the payers?  

Brian Greenberg: 
 

Well, it can come in a lot of different forms. As you know, it all depends upon the thesis that the investor enters with, right? Some of them have this sort of payer focused thesis, other have more of a tech driven ROI thesis. Others may have a plan to take what might have traditionally been a more service or labor focused offering, and to automate it and to generate returns. And really, that always comes down to who's looking, who the investors are, what their experiences are, and where they think the market's going. Right. So, right. It really just depends on who's investing.  

Daniel J. Marino: 
 

Well, and I think a few years ago, it seemed to me it was all about technology. Revenue cycle in particular was extremely manual. So what we've seen is that there was a lot of investment in new technologies to create efficiencies.  These days, I think the driver is a little different.  Although the technology is important, I think the challenges that we're seeing in the staffing shortages, workflow or workforce issues and so forth, at least to me, maybe creating a different, say, impetus for the investments, right? Because folks can't maybe hire, they want to do more with less obviously, costs. And managing costs are important. Staffing is obviously a big driver of cost.  At least on the surface that seems to me a big contributor to the investment and certainly to the returns that are expected. Does that come into play when you have some of these firms really thinking about what the ROI is or what they're looking to gain out of any type of a deal?  

Brian Greenberg: 
 

Absolutely.  Technology and any form including AI driven technology has become critical to the hospitals because they have those same labor shortages that we all read about in papers every day in all markets   in and outside of health care. So they're struggling to do what they need to do, which is care for patients. They obviously have back office and business office operations, and those are the parts of the hospital, the revenue cycle elements of the hospital operations that our clients interact with, right? And that is where our clients can help them, by automating certain functions and minimizing or reducing the need for certain elements of labor to make sure they get reimbursements, more fully, and more quickly, to be able to fund their core operation.  

Daniel J. Marino: 
 

Obviously, there's a lot of investments that are going into, say these analytic firms or the RCM firms and and so forth. Are you seeing a lot of investment dollars flowing into, say, some of the, the specialty groups like orthopedics and, and some of the other provider areas?  

Zach Eisenberg: 
 

Yeah, absolutely, Dan. I can answer that through our lens and our vantage point, which would be, companies that service those specialty provider groups. And, you know, one of the shifts we've been watching, or trends we've been watching, excuse me, for years is the is the shift to outpatient settings. So ambulatory groups and the specialty groups underneath that umbrella, as well as ambulatory surgery centers are getting a ton of investment and a ton of attention from private equity firms, but sort of maybe quasi tangentially related.   Another market that I would consider a specialty is behavioral health.  That could span mental health, could span addiction or treatment centers, adolescent programs. And unfortunately, that's one specialty market that had seen a steady increase, which was really just exacerbated by covid. So we've seen a lot of investment dollars from private equity firms flow into that space, both at the treatment center provider and also at the vendors servicing them, I think I mentioned this earlier, but we were involved in two deals in that space last year, we advised, a private equity firm in two acquisitions within the behavioral health market.  

Daniel J. Marino: 
 

If you're just tuning in, I am Daniel Marino, you're listening to Value-Based Care Insights. I'm here today with Brian Greenberg and Zach Eisenberg of Greenberg Advisors. We're discussing the impact to private equity in health care. As you were mentioning, Zach, investments in behavioral health clearly it's a need no doubt about that. Are you seeing that investments occurring in the traditional health care provider space? Or are these new firms coming in, new organizations coming in, creating these like, let's say, larger network of behavioral health services that can be offered to the public? Where are some of these dollars flowing into  

Zach Eisenberg: 
 

All across the board? Honestly, Dan, certainly we've seen a lot of money flow into the treatment centers themselves, right? And, you know, we're having conversations with a lot of private equity firms who have recently either gotten into the space or looking to get into the space, but also, in that in itself will breed add-on activity and treatment centers will merge and become larger, which will exacerbate the need for potentially larger vendors to service them.  

We've seen larger RCM vendors emerge to respond to that need.  

 
Daniel J. Marino: 
 

To a certain extent, I'm happy to hear that and as you mentioned since covid, the needs in behavioral health in the provider space has really grown exponentially and clearly there's not enough providers out there. So to a certain extent, happy to hear that that investment is incurring with the idea that we're going to create more maybe larger provider community. But then from a business standpoint, the reimbursement typically in behavioral health hasn't been that great. And I know there's a lot of work, we've done a lot of work on helping on behalf of providers to negotiate better contracts and rates to get higher reimbursement for behavioral health services. Are you seeing the investments that are occurring with private equity and these larger firms, are they influencing additional revenue opportunities coming from this? Or is it really about more creating, let's say, more providers creating efficiencies, reducing costs, where's the value driver through this?  

Zach Eisenberg: 
 

No, absolutely. I think that, and it's not specific to just behavioral health providers, but health care providers overall are tasked with a lot of things to do, other than delivering health care, which is what they're supposed to be good at, and it should be their primary objective, right? So I think there are reimbursement challenges across the board, which is certainly not specific to behavioral health or any specialty in general, but yes, one of the things we are seeing is that outsourcing these tasks which are non-core to health care providers, be it in behavioral health or elsewhere, does increase re reimbursement. And then, you know, one of the deals we worked on last year was an analytics company in behavioral health, and they offered financial analytics. So giving these treatment centers the opportunity to understand their financials and see where their revenue is coming from and see, you know, their aged receivables and so forth, just increases, I think how these treatment centers are ran and more broadly speaking, how the health care providers are run.  

Daniel J. Marino: 
 

Oh, yeah, yeah, absolutely. I think if you can really create that, you know, investment strong capabilities that can be offered to behavioral health services or you just totally upscale the whole business performance and ypically behavioral health providers they've been challenged with that. There's no doubt about that.  One question though that I did have, and,  I want to switch topics a little bit here. We've had the opportunity over the years, and in particular I have in doing a lot of strategy work with different hospitals and health systems, to help some of these larger health systems and hospitals create these health venture companies, so to speak. And in some cases, it's been a way for some of these health systems, larger health systems to start investing in say, some new angel companies or to be able to use some investment dollars to create some level of returns, maybe to invest in some new capabilities at the ground floor, that sort of thing. Are you working with many of these health venture companies, has this been an avenue that private equity has been interested in, in being able to, in invest in, to create an avenue of, of greater opportunity?  

Brian Greenberg: 
 

Yeah. They are included in our relationships, right? So goal as a firm and as a specialist in RevCycle and health care IT transactions is to make sure we know as many of the potential investors as possible,  both from the standpoint of, you know, their potential acquisition interests or their potential exit interests  

Daniel J. Marino: 
 

Right.  

Brian Greenberg: 
 

Buy and sell side. So, yeah, seeing these sort of sidecar investment arms of Ascension and Providence and some of the other large health systems out there has been pretty cool to watch. Really. Yeah.  We learn of a new one all the time, right? And so, you know, I think there's a lot of value in those firms in terms of how they're organized and their ability to create solutions that are tested before they hit the market, right within their own system and with their own physicians and professionals. So yeah, we like that end of the market a lot, and yes, we're familiar with that. 

Daniel J. Marino: 
 

Yeah. That's good to hear. I really do think for the right organization, there's a lot of value add here.  And I agree with you. I had the opportunity to  be an advisor in both Essentia Health Ventures a number of years back. And then when we had done work with GE Health care, I was  an advisor on their GE health care health ventures as well. And the fascinating part about that was the new technologies that would come in, and you would see kind of how the business approach would occur, the launch would occur, the needs that they were trying to solve, and of course, the investments, right? And you're structuring this on what the future opportunities would be. I found that fascinating. And, you know, again, all of 'em that come through, you know, I don't know, maybe you get 10 or 15 or 20% that actually, you know, you hit the home run and the other ones, you know, maybe you hit a single if you're lucky, but it's fascinating to watch, and I can't help but think that if more health care organizations, health care providers had that type of a structure in place, it could provide some nice opportunities for them to get in the ground floor on some of these services and maybe solve an immediate problem.  

Brian Greenberg: 
 

Yeah. Yeah. Nobody knows it better than they do, right? I mean, they're in it every day. They see it from every side, every single day. And I completely agree. The past couple years, as we've seen more and more of those enter the market, I'm just really excited about what that could become.  

Daniel J. Marino: 
 

Yeah.  

Brian Greenberg: 
 

You know, cause we kind of get caught up in the investment side of it, the MNA side of it, because that's what we do every day. But we don't lose sight of the human side of it. And you know what those solutions can do. It's, yeah,  

Daniel J. Marino: 
 

It's great. Yeah, you're absolutely right, Brian. Over the last, say six months or so, maybe a little longer than that, there's been a lot of economic pressures that we've all been facing, right? Inflation has gone up, the Federal Reserve has increased interest rates, have some of these economic challenges, do you feel like they're affecting some of the investments and some of the deals that are being, that potentially will occur in 2023? Or from your perspective, do you think these, the, the trends that we saw in 2022 are going to continue regardless of some of the economic constraints that we're under?  

Brian Greenberg: 
 

Well, I think there are a couple different elements to that topic.  So deal volume has decreased in the broader market. We've been fortunate in terms of our firm's focus and our client engagements in that most of the deals we work on are considered to be in the lower middle market. Certainly, you know, the cost capital has an impact on a lot of deals, but we think that the lower middle market is a little more insulated than some of the larger deals. Right. Quite frankly, we're not doing billion dollar deals over here, right? Most of our transactions are sort of up to about 150 million on the high end. So, you know, the ability for a buyer to either fund a transaction with equity and no debt capital or just simply to put more equity in and minimize the amount of debt capital, it's real. And so we've seen that transactions we've done. And so it really hasn't impacted the number of transactions. We've been able to close for our clients, fortunately. In terms of this year and how things play out, who knows, right? I mean, I think it would be a little overly optimistic to say that the market won't be impacted. But, so far so good. And we're just plugging away for, you know, well,  

Daniel J. Marino: 
 

Again, I go back to the challenges that we see in health care, the needs that we need to be overcome. And a lot of times if you structure it the right way, there's a lot of opportunity, financial opportunity returns and, and, and so forth. So, you know, I think there could potentially be some challenges, but for the most part, I think the opportunities for the right firm or providers or what have you to invest in certain areas still looks pretty good. Well, gentlemen, thank you. This has been wonderful. I really enjoyed the discussion. I think it's fascinating to see where some of the investment dollars are coming.    If any of our listeners are interested in learning more or maybe want to hear some advice, how can they get ahold of you or any thoughts?  

Zach Eisenberg: 
 

Yeah, sure. Dan, and, and thank you for the time today. Seriously, we're humbled and flattered that  you'd have us here, but for any listeners, they're certainly welcome to reach out to Brian or I directly, or visitor website greenberg-advisors.com. And then we also publish a buy report that speaks to the trends and themes of RCM and health care IT investing. So our next one should be out in the next week or so, and that covers all the RCM and health care IT, and a data from this past year.  

Daniel J. Marino: 
 

Oh, that's great. And where can they find that? Is that on your website?  

Zach Eisenberg: 
 

It is also on our website.  

Daniel J. Marino: 
 

Okay. Wonderful. Wonderful. Brian, any final pieces of advice you might want to give to our listeners, especially folks that are kind of thinking about getting involved in some investment activities?  

Brian Greenberg: 
 

I would say, we always appreciate some contact and conversation earlier rather than later.  And for years and years have told folks that whether they're looking to buy, sell, invest, or try to figure it out, right? Put that strategy element to what I should do and when I should do it, and how I should do it. We love to have those conversations early and just, we're long-term players. We've been doing this for a long time. We expect to be doing it for a long time. So people are just welcome to, to kind of shoot the breeze with us anytime.  

Daniel J. Marino: 
 

Yeah. That's great. Well, thanks again. I think this is fascinating discussion. I really enjoyed it. Appreciate both of your times and good luck to you guys as you're starting to work through 2023 and even beyond.  

Brian Greenberg: 
 

Appreciate it, Dan. Thanks, Dan. Thank you very much.  

Daniel J. Marino: 
 

I want to thank all of our listeners for tuning in today to Value-Based Care Insights. Until the next insight, I am Daniel Marino, bringing you 30 minutes of value to your day. Take care. 

About Value-Based Care Insights Podcast

Value-Based Care Insights is a podcast that explores how to optimize the performance of programs to meet the demands of an increasingly value-based care payment environment. Hosted by Daniel J. Marino, the VBCI podcast highlights recognized experts in the field and within Lumina Health Partners