Private equity continues to shape the future of healthcare through its investments in companies developing new care models, technologies and treatments. With the 2021 J.P. Morgan Healthcare Conference slated for January 11-14, Angela Humphreys and Ryan  Thomas, co-chairs of the Healthcare Private Equity Team at Bass, Berry & Sims, moderated a virtual panel of healthcare journalists and analysts who took a look back at how private equity responded to the pandemic in 2020 and a look ahead to 2021.

The panel included:

  • Andy Mychkovsky, Creator, Blog
  • Sarah Pringle, Editor, PE HUB
  • Claire Rychlewski, Healthcare Reporter and Midwest Deputy Editor, Mergermarket
  • Shira Stein, Health Policy Reporter, Bloomberg

A few key takeaways from the discussion are outlined below. To listen to the full conversation, click here.

Pandemic’s Immediate Impact on Deals

  • Despite coming to a screeching halt at the onset of the pandemic, deal flow rebounded in late Q2 and is now back in full swing, reflecting a “perfect storm” of pent-up deal demand. Both strategic and private equity backed-companies are looking for inorganic growth opportunities. This is being driven in part by the prominence of healthcare solutions and innovations in the face of COVID-19 and a fear of a potential increase in capital gains tax rates in 2021. When deal activity resumed in late spring, investors focused on business models that performed well during lockdowns, including behavioral health, home health, telehealth, women’s health and health information technology (HIT).
  • Investors valued “resilience through the pandemic” exemplified by pharmaceutical services and home care companies, both of which did well in 2020. Sectors that investors favored less in 2020 included physician practice management companies in specialties that rely on elective services and facility-based providers.
  • Businesses that rely on brick-and-mortar locations and fee-for-service reimbursements struggled with both lockdowns and high costs for personal protective equipment (PPE).
  • Companies that provide services or solutions (including HIT) for payers fared better than those that provide services or solutions to provider organizations.

Policy Outlook for Biden Administration

  • Policy-making slowed the Trump administration’s initiatives on drug pricing regulation, pushing them until after the election, while the administration fast-tracked plans for Medicare to move more kidney care into home settings.
  • Telehealth companies received a boost as federal regulators relaxed many of their own rules and used their public health emergency powers to override state licensing rules. Already an area with bipartisan support, telehealth legislation may be bolstered by the generally positive view of telehealth among patients.
  • The Biden administration is expected to use executive orders to strengthen the Affordable Care Act (ACA), expand the use of social determinants of health in government health programs, and reverse many Trump administration regulations.
  • Some Trump policies that the Biden administration is likely to roll back include short-term health plans that offer fewer benefits than the ACA requires, work requirements for Medicaid beneficiaries, and efforts to widen religious conscience exceptions for providers regarding LGBTQ patients.
  • The Center for Medicare & Medicaid Innovation (CMMI) also could be a focus for the Biden administration. The Trump administration pushed many value-based care (VBC) initiatives through CMMI, and that could embolden the Biden team to use CMMI to try to achieve its policy goals. CMMI will try to extend its influence by encouraging commercial payers to adopt more of its VBC arrangements.

Potential Changes for Antitrust

  • Nominating former California Attorney General Xavier Becerra to be the Biden administration’s HHS Secretary may signal a harder line on antitrust in healthcare, potentially even seeking to lower the Hart-Scott-Rodino Act (HSR) filing threshold.
  • Becerra’s nomination also is a sign that the Biden administration may pursue policies similar to California Senate Bill 977  which would have required a healthcare system, private equity group or hedge fund to obtain the written consent of the California Attorney General prior to a change of control or acquisition transaction with a healthcare facility or provider, including a physician practice.
  • Healthcare entrepreneurs are monitoring three regulatory areas: interoperability, price transparency and the future of Medicaid 1115 waivers, which allow states to experiment with their Medicaid plans. Strengthening interoperability would improve the flow of data from patients to start-up companies hoping to provide services based on those data.

Looking Ahead to 2021

Several areas will continue to be a focus for investors in 2021 after gathering strength in 2020, including:

  • Companies that provide services for VBC arrangements, especially Medicaid managed home care companies and autism services companies that have incorporated telehealth, are expected to see growth.
  • Payer services with a VBC component, such as providing data analytics for population health management, are expected to thrive.
  • Asynchronous care models, including care coordination for chronic diseases, are another sector poised for strong growth. With Livongo’s rise to an initial public offering (IPO) in 2019 and multi-billion acquisition by Teladoc in 2020, investors have signaled confidence that the model works.
  • Telehealth providers saw their market share grow to around 20-25% of outpatient providers. In 2021, growth will come from adding remote patient monitoring, self-collection testing, and other asynchronous services.
  • The IPO market is expected to continue to be active for healthcare, including the continuation of special purpose acquisition companies (SPACs) as a way to complete IPOs for larger healthcare companies, such as the recent CanoHealth IPO.
  • Institutional investors will continue to provide historical, if not increased, levels of allocations to healthcare private equity funds.
  • The healthcare private equity investment and deal market will remain robust across numerous subsectors and remain “the place to be” for many investors in 2021.

With these predictions and developments that are unforeseen, 2021 looks to be another fascinating and busy year for private equity in healthcare. We look forward to further discussing these trends with senior executives and healthcare dealmakers at our upcoming BBS Connect event during the annual J.P. Morgan Healthcare Conference.

The webinar was also summarized in an article by MedCity News, “Private Equity Sees Robust Markets in Healthcare,” that was published December 29 and is available online.