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Affordable Care Act Gives Private Equity Good Reason to Invest

April 2, 2014

This article was originally published by Smart CEO on April 2, 2014. 

As the overhaul of the U.S. healthcare system gets underway, private equity firms are looking to get in on the action.

The Affordable Care Act (ACA) mandates sweeping changes to payment and healthcare delivery models. As part of this change, the world is moving away from the fee-for-service model in favor of a value-based approach, with cost shifting a risk to providers. Now, the emphasis is on delivering better quality healthcare at a lower cost.

As a result of this shift, there are new opportunities for investment in the healthcare sector. At the same time, previously relied upon healthcare delivery solutions may be less lucrative going forward. For example, filling beds in hospitals is no longer a formula for success. CEOs of hospital systems need to concentrate on new outpatient revenue streams since government programs emphasize cutting bed days.

“Anything that yields better results at a lower cost is going to grab attention from both investors and healthcare organizations seeking to remain relevant,” says Steven Kops, financial advisory services partner at WeiserMazars. “We are still in the beginning stages of what is sure to be a massive disruption in the sector. As this evolution continues, there will be clear winners and losers.”

Some types of healthcare organizations are already being touted as early winners. For example, urgent care centers have seen substantial growth, with the number of facilities increasing
from 3,000 in 2003 to 9,300 in 2013, according to the Urgent Care Association of America. Urgent care centers provide patients easy access to care at a lower price. Fifty to 100 new clinics
continue to open annually as the number of hospital emergency rooms decreases nationally. What makes an urgent care center so unique is that they commonly provide on-location evaluations —
blood drawn for lab testing, EKGs, stitches and X-rays.

Private equity firms have already begun to show interest in these facilities. Because the ACA is expected to boost the number of people with health insurance by more than 30 million over
the next decade, urgent care centers are sure to be increasingly popular, and private equity wants to get in on the ground floor.

An early leader in the recent wave of investments was venture capital firm Sequoia Capital and private equity firm General Atlantic’s 2010 purchase of MedExpress, one of the top urgent
care chains in the U.S. Since then, many private equity firms have moved into the space, including LLR Partners and health insurer Well Point, which invested in Chicago-based Physicians Immediate
Care, a chain of 20 urgent care clinics. Enhanced Capital Partners bought NextCare Holdings Inc., one of the nation’s larger providers of urgent care services, with 86 clinics nationwide.

Homecare, hospice and community based medicine are also receiving a lot of positive attention from the medical community and investors because they reduce costs by keeping patients out of the hospital setting. The $18.9 billion hospice industry is projected to grow 7.4 percent annually through 2017, causing it to catch the eye of private equity firms such as Clearview Capital, which invested in St. Croix Hospice of Minnesota. Kohlberg Kravis Roberts & Company, Summit Partners and GE Capital have also all put money into homecare and hospice providers recently.

“While urgent care facilities and hospices are definitely receiving attention, this is just the tip of the iceberg. Many more subsectors within the healthcare industry are also seeing significant private equity investment and will see even more as demands on the healthcare system continue to evolve,” says John Burke, state president of New York at WellCare Health Plans. “The industry remains explosive, competitive and growing as the demand for efficiency, lower costs and quality care drive the overhaul of medical delivery as we know it.”

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