The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Trey Andrews and Jeff Alberg.

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What Investors Should Understand About Investments in Hospice, Home Health and the Broader Post-Acute Sector – 3 Key Points

By Trey Andrews and Jeff Alberg

The post-acute care sector, with a focus on home health and hospice, continues to attract high levels of interest from investors due to organic growth opportunities and consolidation drivers. This is the case despite recent reimbursement changes affecting home health agencies that have been brought on by value-based care models implemented by the Medicare program, according to experts who spoke on a panel at the 17^th Annual Healthcare Private Equity & Finance Conference in Chicago on February 19, 2020. The experts’ discussion highlighted current market conditions and trends for acquisitions in the post-acute space, attractive subsectors and markets for investments, and preliminary reactions to the implementation of the Patient-Driven Groupings Model (PDGM), the newest government reimbursement scheme for home health agencies.

Experts included Jonny Miller, Vice President, Revelstoke Capital Partners LLC; Jim Moskal, Managing Director, Livingstone Partners; Aaron Osmundson, Managing Director, Quadriga Partners; Whit Polley, Chief Development Officer, Angels of Care Pediatric Home Health; and Pete Tedesco, Principal, Health Enterprise Partners. The panel was moderated by Trey Andrews, Attorney, McGuireWoods LLP.

Here are three (3) key points from the panel discussion that investors should understand about the state of the current post-acute care market:

1. Implementation of the Patient-Driven Groupings Model (PDGM). The implementation of PDGM, on January 1, 2020, marked the most significant change to the Medicare program’s payment methodology for home health services in nearly 20 years. Consistent with the trend seen across the health care industry, PDGM shifts the reimbursement model for home health agencies from volume-based care to value-based care. As a result, investors interested in home health agencies have recently adjusted their investment strategies to allow the changes stemming from PDGM to take effect. Investors are in a “wait and see” mode resulting in a pause in investment in the home health sector. However, investors are also being presented with attractive opportunities for investments in the home health sector at discounted multiples due to an uptick in home health sellers that are not in a position to weather the reimbursement changes of PDGM. In sum, investors may have hit pause on actively shopping for home health agencies to wait and see how PDGM plays out, but when presented with opportunities, investors are still very active in the home health space. The panel experts predict that any potential slowdown in the home health sector will likely only be temporary, as the industry observes the practical effects of PDGM.

2. The Continued Rise of Interest in Hospice. Although investors could be throttling back on investments in home health agencies during the first half of 2020, they are not abandoning the post-acute space as a whole. Panelists instead indicated that they have shifted their sights towards the hospice sector based on an investment strategy keen on U.S. population demographics and an increased focus on post-acute care in general. Panelists indicated that the hospice sector continues to be highly attractive due to its lack of consolidation and continued fragmentation in regional areas. They also mentioned that the increased need for providing palliative care services to patients, the shifts to value-based contracting, and an aging U.S. population, all play into the attractiveness of investing in hospices. While PDGM could have an impact on home health investments, it appears that investors seem to be shifting their interest to the hospice sector, which has already been extremely active over the last six to twelve months.

3. Post-Acute Sleeper Sectors. When discussing ancillary or sleeper sectors in the post-acute space, the panel experts indicated that other areas of the post-acute care sector, which have traditionally garnered less investment and attention, particularly such pediatric home health, non-medical home care, and palliative care, are increasingly attractive investments in non-traditional post-acute care providers. First, the panelists highlighted the significant consolidation opportunities for investments in pediatric home health providers. Panelists expressed interest in pediatric home health providers as a gateway for offering patients additional services, such as private duty nursing, therapy, and even hospice services in some instances. While value-based care has not yet been implemented in pediatric home health, panelists emphasized that pediatric home health providers are building important relationships with payors now in order to be ready for its eventual implementation in the market. Second, panelists found attractive opportunities in the non-medical home care sector, which, despite not being covered by Medicare, offers investors the upside of less regulation and more robust reimbursement rates than those seen throughout the rest of the post-acute sector. Non-medical home care, like home health care, has experienced rapid growth as an aging U.S. population base seeks new post-acute services to allow them to maintain significant independence in their own home. Panelists also noted that there is growing interest in palliative care providers who bridge the gap for healthcare services between home health and hospice—currently a significant gap in the post-acute care model. Although not currently a reimbursable service under Medicare, investors are continuing to look at palliative care as a service offering to patients that is necessary and in high demand.

The McGuireWoods COVID-19 Response Team has been incredibly active and remained ahead of the game with informing clients of the most significant legal and business issues affecting healthcare. You can access all coronavirus webinars (recorded and upcoming) and thought leadership pieces here.

We see various opportunities for distressed investing, both with respect to platform transactions as well as tuck-in transactions as certain businesses struggle to emerge from the COVID-19 pandemic

The authors have launched a new podcast called “Across the Table Podcast.” This podcast provides timely and relevant discussions with specialists and professionals of the healthcare private equity and finance industry. We’ll share latest developments, provide insight, identify issues and talk takeaways.

In the first episode, Mark Freedlander, Pittsburgh partner, discusses distressed investing in the healthcare sector, including an overview of the out-of-court and formal-bankruptcy process, common issues in distressed M&A and the importance of diligence. As the financial markets and economy negatively reacts to COVID-19, we are focusing our attention on opportunities for investing in distressed healthcare businesses. Successfully closing a transaction when the target is in financial distress presents some unique challenges. Whether the business has sought bankruptcy protection or is outside of the formal court process, there is opportunity for significantly cheaper deals, albeit with greater risk, available.

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Lauren M. Graff and Richard Grant.

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Looking Ahead to New Perspectives in Pharmacy Investing: 5 Key Points

By Lauren M. Graff and Richard Grant

While the market for middle market investments in pharmacy providers has leveled off, there are plenty of big pharma pain points that leave the door open for new solutions and growth in the industry. According to experts who spoke on a panel at the McGuireWoods 17^th Annual Healthcare Private Equity & Finance Conference in Chicago on February 19, investors simply need to be willing to look more broadly to pharma-adjacent companies for new investment opportunities.

The presenting experts included Mike Alberts, Vice President of Cohere Capital Partners, Kent Berkley, Vice President of Frazier Healthcare Partners, and Dexter Braff, President of The Braff Group. The panel was moderated by Richard Grant, a McGuireWoods LLP partner.

Here are five key points from the panel discussion.

1. Pharmacy provider investing has grown too large for mid-level private equity. The wave of deals in the early 2000s has caused a supply issue in the pharmacy investment space. One expert estimated that between 2004 and 2015 there were over 200 transactions involving the purchase of pharmacy providers. The fast-moving market has left very few opportunities for mid-level private equity investing; the issue is not in demand but in supply. Currently, opportunities for direct investing in pharmacy providers are essentially open to only large investors that have the ability to drive provider costs down, i.e. insurance companies. However, these large providers are not without their pain points — including the search for further cost containment — and they are generally open to discussions with anyone that can present a possible solution to their problems. As one expert summarized, it is easy to focus on the overcrowding of the inpatient and outpatient hospital space, but investors should get creative with their perception. It is not the elimination of mid-level private equity investment opportunities, but a new focus on how to help large providers with their pain points.

2. The good news is pharma is a $300 billion medication problem in search of technological solutions. Not surprisingly, the answers to large providers’ problems are tech-based. Pharma encompasses retail space, long-term care, and hospital pharmacy, each with their own individual pain points presenting an opportunity for a new solution. There is already a lot of pharma-related technology on the market, however, and providers are faced with the issue of communication across technologies. Software that can communicate with other software is the gap in the market, particularly software that keeps both patient data and the patient within its purview. Large providers, insurance companies, and hospitals are unwilling to buy numerous applications and software that cannot successfully communicate with one another.

3. Focus on customer service and revenue will follow. Experts on the panel also noted that it is too easy to get caught up in the search for the margin in pharmacy investing, and urged investors to instead focus on the intersection of margin and where one can build a business. They suggested that, in the current market, if one can build a business by focusing on bettering provider and patient engagement, revenue will follow. Patients want convenience, both in obtaining their medication and in getting their questions answered, which seems to suggest a balance between technology efficiency and a people-forward model. Experts noted the new CVS model – bringing its pharmacists up front, out from the back of the store – encourages direct interactions with customers, providing patient care in the same place prescriptions are filled and creating a healthcare hub. This model is on one side of the spectrum while Amazon’s PillPack prescription delivery service may be on the other. Both are trying to meet customer needs with different approaches.

4. Growth in the industry: Central Filling Facilities. While opportunities for direct investing in pharmacy providers are falling, they may not have altogether disappeared. Experts argued central filling facilities is a fast-growing area. The model is centered around a single facility that produces large amounts of scripts that are sent through multiple channels: directly to patients at their homes, to hospitals, or to retailers, focusing on large-scale production at a high efficiency rate. While the typical model is a large facility filling all types of scripts, central filling facilities may also specialize in a particular area of medication or medicine.

5. Pharma-adjacent spaces provide opportunities for pharma-like investing. With the consolidation of pharmacies putting direct investment opportunities out of reach of mid-level private equity, specialty providers may be the answer. The panel suggested that behavioral health may have some roll-up opportunities, and the market may see a growth in this area as pharmacies turn more of their focus towards it. Methadone clinics particularly show a developing interest, but the underlying thesis of such clinics is not pharma but rather therapeutic intervention. Creative partnerships may also be the key; experts cited the recent partnership between Humana and the private equity firm of Welsh, Carson, Anderson & Stowe, which should result in the launching of more primary care centers aimed towards the Medicare Advantage population. Long-term care facilities provide a unique platform that may lend itself well to such partnership opportunities.

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Amanda Roenius  and Timothy Fry.

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The Evolution of Sub-Specialty Investment Strategies: Five Takeaways

By Amanda Roenius and Tim Fry

Private equity investment in various sub-specialties, such as retina and oral surgery, continues to be a significant trend, providing even more opportunities for private equity to invest in the healthcare space. Experts spoke on a panel titled “Advanced PPM Topics: The Evolution of Sub-Specialty Investment Strategies” at the 17th Annual Healthcare and Life Sciences Private Equity & Finance Conference, held in Chicago on February 19 and 20, 2020.

Experts included Giovanni Barbat, President at American Vision Group; Roy Berjano, Co-Founder and CEO at Scale Physician Group; Richard Hall, President and CEO at US Oral Surgery Management; Todd Roland, Principal at GCM Grosvenor; and Timothy Wentink, Managing Director at Twin Brook Capital Partners. The panel was moderated by Tim Fry, an attorney in the Chicago office of McGuireWoods LLP.

Here are five key takeaways from the panel discussion.

1. Additional opportunities (and complexity). The growth of sub-specialties provides additional opportunities to expand the scope and target range of investment opportunities. As the experts opined, both multi- and single-specialties provide excellent growth opportunities within a specific sector. At the same time, investors should understand the unique challenges of investing in sub-specialties given the additional complexities surrounding payor relationships, referral patterns, and physician alignment. These complexities should be carefully weighed and addressed at the outset to maximize success.

2. Understanding payor reimbursement is key. Investment in sub-specialties requires a more thorough expertise in the specific sector, especially as it relates to payor reimbursement. For example, experts commented that as private equity investment in sub-specialties increases, payors will begin looking for more continuity of care and to better understand the investment structure. Additionally, although many sub-specialties remain heavily fragmented, certain sub-specialties tend to see a higher percentage of Medicare and Medicaid reimbursement, causing some investors to shy away. Understanding the reimbursement landscape not only better positions investors from a financial standpoint, but payment diversification will continue to play a major role for investment.

3. Create a clear vision for sub-specialties within the platform. Investors should have a clear vision for their sub-specialty investments. As the experts opined, in some healthcare sectors, sub-specialty investment has been slower to see growth. Accordingly, in those sectors, experts suggest investors focus their investments on fewer sub-specialties as opposed to “owning the market.” According to some experts, this strategy will, in turn, provide more time to focus on the day-to-day needs of growing a particular investment. On the other hand, some experts juxtaposed this discussion, looking to sectors such as vision in which it may make sense for investors to own more of the market and become vertically integrated. Ultimately, for success, private equity funds will need to create a clear vision for what their sub-specialty investments look like based on the overarching sector.

4. Growth models may differ. Understanding growth strategies and how they may vary between sub-specialties is important for success. As investors look to grow their sub-specialty investments, it is important to understand that not all sub-specialty investments can (or should) grow at the same rate. Accordingly, the experts encouraged investors to fully understand the business they are committing to and partnering with in order to best set forth a realistic growth model. Similarly, experts also caution that there is the potential for growing too quickly, urging investors to take careful consideration in selecting practices within a sub-specialty with whom to partner.

5. Physician alignment is mission critical. Alignment, especially amongst younger, entrepreneurial physicians, is a key component for sub-specialty investment success. In discussing how investors can best ensure alignment and incentivize new physicians, the experts suggested treating physician alignment as its own separate business model. Investors should provide physicians with a separate pitch deck and consider various incentive models, such as rollover equity or an associate equity pool to attract younger physicians and gain their buy-in to the overall model. Investors should seek to strike a balance in aligning with both the more seasoned physicians, who are better positioned to sell, while at the same time, attracting the next generation of providers who will help excel growth.