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Private Equity Finds Opportunities in Healthcare as ACA Drives Fee for Value Model

May 19, 2016, 07:19 AM
Filed Under: Healthcare

The outlook for the healthcare industry remains challenging thanks in part to uncertainty over the upcoming presidential election and the continued changes ushered in by the Affordable Care Act (ACA). However, despite the uncertainty and rapid changes across healthcare, private equity investors are still attracted to many real opportunities. These are some of the observations presented by William Douglass, Group Head and Managing Director, CIT Healthcare Finance, a division of CIT Group Inc., a leading provider of commercial lending and leasing services, in “Affordable Care Act Drives Changes in Healthcare Market”, the latest piece of market intelligence in the CIT Executive Insights video series.

“‘Fee for value’ has been a popular buzzword for many years, but is starting to become reality,” said Douglass. “It is imperative for the long-term success of all providers to understand these changes and adjust their business models accordingly. These industry-wide changes driving healthcare are resulting in consolidation of highly fragmented sectors, particularly within post-acute care.”

Some of the other healthcare trends Douglass discusses include:

  • Affordable Care Act Implementation Continues: Many of the ACA’s central tenets to push the system away from fee for service to fee for value are only starting to take shape, and this year’s political rhetoric suggests only more uncertainty to come. But this core principle of the ACA is significantly embedded now and will continue to drive behavior and activity within the industry.
  • Fee for Value Models Gain Traction: Reimbursement models are being designed by insurance companies and federal programs to focus on quality measures and efficiencies. Bundled payment programs are promoting greater care integration and connecting the previous silos of caregiving. An example of this is the Centers for Medicare & Medicaid Services’ recently launched Joint Replacement Program for managing hip and knee procedures from surgery through post-acute care and recovery.
  • Private Equity Investors Still See Opportunities: Demand for healthcare services remains strong, though delivery of care is shifting to the lowest cost setting, and consumers are being burdened with a larger share of this cost while demanding greater quality. All of this creates opportunity for private equity investors to target certain sectors that require greater scale, investment, and improved efficiencies to survive.
  • Behavioral Health and Healthcare Real Estate See Investment Activity: The behavioral healthcare sector is benefitting from ACA-generated increased insurance coverage, a clear unmet healthcare need, and state and federal legislation addressing mental health concerns. Healthcare real estate, specifically related to skilled nursing, assisted living, and medical offices, is also experiencing increased investment activity.
  • M&A Activity Somewhat Slower in Early 2016; Healthcare Sector Maintains Sound Fundamentals: Last year, the healthcare sector recorded the highest M&A volume ever, with approximately 1,400 transactions. However, 2016 has started off a bit slower. As we look near-term, we continue to see a healthcare sector that is navigating change but maintains sound fundamentals for growth and is better equipped to withstand economic cycles.

Founded in 1908, CIT is a financial holding company with more than $65 billion in assets. Its principal bank subsidiary, CIT Bank, N.A., (Member FDIC, Equal Housing Lender) has more than $30 billion of deposits and more than $40 billion of assets. It provides financing, leasing, and advisory services principally to middle-market companies across a wide variety of industries primarily in North America, and equipment financing and leasing solutions to the transportation sector. It also offers products and services to consumers through its Internet bank franchise and a network of retail branches in Southern California, operating as OneWest Bank, a division of CIT Bank, N.A.

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