Private Equity in Healthcare: The Value Creation Strategy (Part 1)

Value creation strategies are utilized in large corporations, nonprofit organizations, and even New Year’s resolutions. Simply put, a value creation strategy transforms a good idea into a great idea by (i) practicing consistency and (ii) leaning into a strong support system. As discussed previously, in the healthcare industry, this ‘value creation strategy’ comes in several different flavors, and this week we’ll discuss the benefits of consistency in healthcare.   

i. Regulatory Sophistication

Healthcare is one of the most regulated industries in the United States where incorrectly billing the Centers of Medicare and Medicaid Services (CMS) could land you huge fines if not significant jail time.

One of the dirty secrets of the healthcare world is that many providers, just like your local bookstores, are ‘mom and pop shops’ that often lack the sophistication to implement and follow proper regulatory guidelines. The Anti-Kickback Statute and Stark Law may seem straightforward at first glance, but the intricacies can land healthcare professionals in trouble if they don’t tread lightly. Private equity brings this sophistication to the table and ensures everything from referrals to billing is done by the book and in a consistent manner.

ii. Enhanced Quality

Private equity investors are at the forefront of innovation, desperately trying to create something of significantly more value than when they bought it. Without the extra dollars provided by private equity, investment towards research and development, better treatments, and new technologies would dramatically decrease, stamping out better outcomes for future generations.

Further, without an institutional investor, quality outcomes often are not at the center of focus for many independent healthcare firms. Tracking outcomes with clear benchmarks is often a heavy lift for operators that are often providing critical services in addition to running the other facets of the business (accounting, inventory management, scheduling, patient recruitment, referral management, et cetera). Hence, quality tracking is often nascent at best, and nonexistent at worst for these smaller practices.

The entrance of an institutional investor vis-a-vis private equity puts a large focus on enhanced quality tracking and outcomes – a primary driver of value in the business that creates a wider competitive moat.

iii. Uniform Standards

Private equity, being an entity that is already a significant risk-taker, often likes to create value by de-risking its assets. A common and pointed way to do this is to create reliability in the portfolio companies they invest in with the goal of establishing consistent standards of care and service delivery across affiliated healthcare providers. Ensuring that the end consumer receives a high-quality and reliable product regardless of the specific location, facility, or provider they visit within the private equity backed enterprise.

While this practice often isn’t accretive to the topline and may not increase cashflow, it does add incremental value by assuring a potential future buyer that future cashflows are more certain to occur – increasing the value a buyer may be willing to pay for an equity stake in the business. Like a boyfriend or a quality employee, greater certainty and more predictability is significantly more valuable than less certainty and less predictability.

For the patient, this assures that all care is up to a minimum standard without regard for propensity to pay, community wealth, skin color, culture, or insurance.

So, although it’s natural to be hesitant to have conversations about private equity in healthcare, the strategy - when implemented appropriately – produces positive outcomes for us all. Due to the financial support provided by private equity investors, healthcare facilities can improve consistency in outcomes by implementing (i) proper regulatory guidelines, (ii) enhanced quality, and (iii) uniform standards. Most importantly, this means that we can more confidently attest that any patient who walks into a private equity backed facility will receive a level of care suitable for their needs.