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.

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 colleague Nesko Radovic and Jessika Garis of RSM US.

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Advanced PPM Topics: Payor Contracting Strategies & Value Based Care & Purchasing – 4 Key Takeaways

By Nesko Radovic and Jessika Garis

As value-based care gains momentum in the healthcare industry with over ten million Medicare beneficiaries assigned to an accountable care organization, providers and payors are looking for new ways to move away from traditional fee-for-service models and toward some form of value-based care. Experts at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 19, 2020 provided insights into how value-based care is affecting payor contracting and the impacts these changes are having on private equity investors.

Experts included Michelle Werr, Principal at HealthScape Advisors and Tom Goila, Partner at Comvest Credit Partners. Jessika Garis, Director at RSM US LLP, moderated the panel.

Here are four key takeaways from the panel discussion:

1. Physician Practices must understand the types of markets that are available and where those markets are heading, to position themselves for a successful value-based arrangement. As markets increasingly favor value-based arrangements, a practice’s position will depend on its line of services, current payor contracts, and financing mechanisms available. Practices must understand a variety of markets, from Medicare Advantage, which is leading the value-based care movement, to commercial markets, which are implementing new models, to Medicaid markets, which vary depending on the state and whether the state has a developed value-based strategy.

2. Payors and providers are shifting toward a more collaborative approach. More physician practices are engaging consultants or hiring business managers to understand the various reimbursement models and the impact that those models may have on their practices. Providers are also joining pilot programs without financial burden, which offer a practical view of the models’ application. Finally, practices are trending toward consolidation based on their specialty or geographic location to gain leverage over payors.

3. Private equity investors provide an opportunity for physician practices to increase their size and scale, and better position themselves to negotiate with payors. This leverage with payors is often a significant factor in staying profitable and competitive in the current market. As markets transition to value-based arrangements, investors will place value on practices that have experienced leadership, infrastructure and knowledge to pivot their practice to value-based reimbursement models.

4. Experts projected that moving towards value-based contracting will ultimately eliminate the risk of high healthcare costs associated with private equity investments in specialty care. This is an important part in providing price transparency and revealing the actual value that the physician practice supplies to the market. Based on that value, practices will attract payors and join in more value-based arrangements, resulting in overall growth in business.

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.

McGuireWoods is continuing its effort to profile up-and-coming women leaders in private equity. For this profile, we are pleased to feature Naile Kovuk of Hughes & Company. Access her profile.

To recommend a rising star for a future interview, email Amber Walsh at awalsh@mcguirewoods.com.

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.

Northlane Capital Partners (NCP) has announced it has invested in VMG Health.

VMG, based in Dallas, is a valuation and transaction advisory firm focused exclusively on healthcare.

NCP, based in Bethesda, Md., is a middle-market private equity firm focused on healthcare and business services. Founded in 2003, the firm seeks investments in North American companies with EBITDA of $5 million to $30 million.

Terms of the investment were not disclosed.

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.

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 Scott Becker and Timothy Fry.

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State and Federal Policy Changes Impacting Healthcare Markets – Six Key Points

By: Scott Becker & Timothy Fry

Federal and state policymakers could impact healthcare investment markets in the coming year, particularly as more policymakers learn about private equity investment in the healthcare space, according to experts who spoke on a panel at the 17^th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20 in Chicago.

Experts included Governor James Hodges, President – State Government Relations, McGuireWoods Consulting LLC, Stephanie Kennan, Senior Vice President – Government Relations, McGuireWoods Consulting LLC, Thomas Londrigan, Sr. Vice President & Director, McGuireWoods Consulting LLC, Rick Kes, Partner, RSM and Scott Becker, Partner, McGuireWoods LLP.

Here are six key points from the panel discussion:

1. Surprise billing initiatives could enhance scrutiny of private equity investment in healthcare companies. Washington policymakers would like to end surprise out-of-network bills from hospital specialists. This initiative has introduced some elected representatives and their staff to the healthcare private equity model. Not all have viewed this investment favorably, as key interest groups have made their negative views known to both sides of the aisle. As such, investors should be aware that future efforts to curb surprise billing may also impact private equity investment, with at least one bill (H.R. 5825) introduced to target certain healthcare investors.

2. Significant voter interest remains in healthcare reforms, but the panel experts found it difficult to see pathways for significant federal change. Voters consistently cite healthcare as their top concern, and leading Democratic candidates at all levels are focusing their 2020 campaign messages on healthcare, like during the 2018 midterm election. That said, panelists were skeptical that proposals like Medicare-for-All could be enacted. Panelists even questioned whether reforms with bipartisan appeal, like prescription drug pricing efforts, could succeed in Washington’s current polarized environment.

3. Instead, panelists predicted that the courts will drive federal healthcare policy in 2020. Panelists discussed pending cases, including a third constitutional challenge to the Affordable Care Act, which is set for oral argument before the Supreme Court this fall. Even Medicare reimbursement issues may see more judicial action than congressional focus, as CMS is tied up in multiple site neutrality disputes/appeals that challengers have brought, and thus far won, against the agency.

4. Telemedicine investments may finally be boosted by policy headwinds. The panel experts agreed that policymakers increasingly view telehealth and telemedicine initiatives positively. Many states have enacted statutes addressing telehealth reimbursement. It appears that state legislators and CMS regulators now believe that such care can be high quality and cost effective after witnessing the success of initiatives like hospital remote monitoring efforts. Since the panel, the COVID-19 pandemic has led to additional telemedicine changes in federal law. All told, investors could use such policy changes to build telehealth platforms.

5. State diversification is one way for investors to mitigate policy risk. Business considerations often necessitate expanding operations beyond a core state of operations. Panelists suggested state policy may be another factor. For example, Illinois has had its share of budget challenges, which have resulted in delays of Medicaid payments to providers. A state-diversified platform is likely better positioned than a platform located only in Illinois to withstand cash flow challenges arising from these delays. Further, as states explore policies like benchmarking Medicaid to reduce costs, or adding beneficiary work requirements, provider platforms that are reliant on Medicaid reimbursement should consider expanding their businesses to other states. Expansion into other states may also have the added benefit of diversifying the platform’s participation in commercial third party payor networks.

6. Investors should consider adding a political strategy to their healthcare platforms. As noted above, private equity investors are facing enhanced scrutiny. Conversations with policymakers could help change the narrative if private equity is able to reach these policymakers before their views are set. Forming such relationships can also be critical when a platform is reliant on government contracts or is seeking state licensure or certificate of need approvals. While most investors may rely on overall industry conditions, certain investors may need to focus on specific initiatives to protect and grow their businesses.

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Note, since the panel, the scope of the COVID-19 pandemic has grown more significant and acute. Our panel likely would focus more on this topic if held today.