Amid the chaos, investors eye opportunities in health care
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Not everyone believes the marriage between Wall Street and health care systems will be a long and happy one, but for now the feeling is that there is opportunity in disruption.
Surveying this disruptive landscape is Michael Burger, director of the public finance health care group for Fitch Ratings. In this capacity, Burger rates the bonds of acute care hospitals, children’s hospitals, and cancer centers whenever they issue bonds. In the rating process, Fitch sends market signals to investors who consider buying these bonds. He confirms there has been investor interest in health care as Wall Street and private equity investors place their bets at a critical point in health care reform.
“We’re in low-yield environments right now, at least within the municipal health care environment. The bonds on that have higher yields, typically, so investors are looking for that opportunity.” — Michael Burger, Fitch Ratings
Burger was among the panelists addressing the financial benefits of mergers and consolidation — larger systems tend to perform better from the standpoint of operating margins — during the recent 2014 Digital Healthcare Conference produced by WTN Media. The two-day conference was organized around the theme “Preparing for Healthcare Business Model Disruption,” and some of those disruptive models are being driven by Wall Street’s interest in Main Street.
That Wall Street believes there’s opportunity to make money from industry chaos could be a short-term godsend for health care systems that consolidate to a scale acceptable to investors. But in an era of reduced reimbursement and a focus on quality outcomes rather than volume of services, hospitals and clinics are operating in uncharted territory. Health care reform has resulted in a wave of industry consolidation that’s not likely to subside anytime soon, and in a low-reimbursement environment, part of the motivation is to impress investors with the right business models.
The successful models not only include sufficient investment in electronic medical records but successful physician adoption of them. “To address the question of why there’s interest among private equity, it’s because we see so much disruption in our health care system, and there is a lot of opportunity if folks can create something new or really harness information and use it in a profitable way,” Burger says. “That’s why investors are there, because of that opportunity.”
Complicating matters are the crosscurrents that are increasing the degree of difficulty in an already complex environment. Investors are likely to covet systems with modernized clinical systems and business analytics; at the same time, the staggering cost of the enabling technology impacts balance sheets and therefore the ability to raise institutional capital.
With both for-profit and nonprofit entities seeking partnerships, and investors looking for yield in a low-yield environment, the hunt for smart investments might take some time. “We’re in low-yield environments right now, at least within the municipal health care environment,” Burger noted. “The bonds on that have higher yields, typically, so investors are looking for that opportunity.”
Peter Christman, executive vice president and COO of the UW Medical Foundation, cautions that consolidation alone will not be enough to woo investors. “Despite the fact that reimbursement does not appear to be heading in a positive direction, the need to invest and the need to expand in some ways appears to be increasing,” he said. “When you see for-profit companies coming together, the actual exchanged dollars are oftentimes not that significant. And then the question is, is the combined organization that much stronger?
“One would argue that you’re going to have to do two things: You’re going to have to cut costs in terms of the combined infrastructure, but at the same time you’re going to have to invest in order to maintain or increase the market share that you’ve invested in by merging or acquiring or being acquired. Measuring this at a time when the cost pressure is as difficult as it’s ever been — that’s a real conundrum for health care organizations.”