Bass, Berry & Sims and Deloitte presented the 2021 Health Care Investors Conference virtually on November 16. Angela Humphreys, chair of the Healthcare Practice Group and co-chair of the Healthcare Private Equity Team at Bass, Berry & Sims, and Phil Pfrang, partner, Global Life Sciences and Health Care M&A Transaction Services Leader at Deloitte, led the panel discussions and conversations during the conference.
Here are some of the most significant takeaways for healthcare investors from the stimulating discussions and presentations.
The COVID-19 pandemic significantly accelerated the pace of change in healthcare, panelists said. The takeaway for investors is to evaluate whether companies have a business model that can handle rapid change and the management skills to make adjustments.
Heading into 2022, speakers continue to see strong tailwinds for healthcare M&A, including:
- Payers remain interested in disruptive solutions that can control costs, with home-based care being a prime example.
- The pandemic destabilized many smaller provider-based organizations, and as a result, they may be more open to a sale to an investor-backed platform company.
- Scale and technology matter more than ever, driving strategic advantage for companies with shrewd technology investments.
The main headwinds to healthcare transactions are rising labor costs in more labor-intensive sectors and high valuations that make it more challenging for investors to create value.
The difficulty of obtaining representations and warranties insurance (RWI) is a major issue affecting deals late this year. High deal volume in healthcare is bumping up against the limits insurance carriers set for themselves in terms of exposure to the industry and the capacity of their teams to carry out underwriting. RWI bids for January signings show signs of this bottleneck easing, at least for the early part of 2022.
Panelists said behavioral health fits many investment models, with a huge, demonstrated market growing with the greater recognition across society of the need for mental health and addiction treatment services. Behavioral health also benefits from the strong interest of payers, who see $4 in value for every $1 they spend on behavioral health services. As with many of the areas that investors currently favor, behavioral health also is marked by a shortage of physicians. New entrants hope to fill the gap with a mix of other providers and/or technology.
Home-based care also responds to the physician shortage, as intervening earlier in the home can replace physician visits. The business model has a strong patient preference in its favor and reduces the danger of health facility-acquired infections, most notably from COVID-19. Payers also favor home-based care for their lower cost.
Value-based care (VBC) was discussed at length. The initial public offerings of companies that deliver or facilitate VBC show the public markets see the size of the opportunity in this area. Panelists discussed the need to combine changes in the way physicians practice under VBC with changes in the way they are paid and incentivized. In VBC, physicians are taking on a new duty—managing the total cost of care—and they have to be paid for that duty for the arrangement to work.
The primary trend on the regulatory front is increasing transparency. Hospitals and insurers face more required transparency on pricing for both services and pharmaceuticals.
Another part of this trend is surprise medical billing. The regulations to implement the No Surprises Act (Act) aimed at eliminating surprise bills from out-of-network providers and facilities go into effect on January 1, 2022. (See the Bass, Berry & Sims legal analysis of the first installment of the regulations here.)
The financial protections in the Act—affecting emergency services, non-emergency services provided by out-of-network providers at in-network facilities, and air ambulance services—will be enforced from January 1, as the Act requires. Regulators are offering some leniency on the informational protections designed to reduce situations in which consumers unknowingly receive out-of-network care. Regulators recognize that some technical challenges remain to provide this information to consumers. The Biden administration plans to issue guidance on “good-faith compliance” with provisions of the law that have not been through the rulemaking process.
Both Bass, Berry & Sims and Deloitte expressed their intention to host next year’s 12th annual Health Care Investors Conference in person. They expect another busy year for healthcare M&A in 2022, kicked off by an in-person J.P. Morgan Healthcare Conference in San Francisco January 10-12, 2022.