Healthcare resources worldwide are coming under tremendous strain from the COVID-19 pandemic, but for healthcare-oriented investors, there’s good reason to believe the sector will remain resilient and reward those who are patient and smart.
Private equity activity in healthcare had concluded a banner year in 2019 when the coronavirus hit. Total disclosed deal value hit a record high of $78.9 billion, and the average deal size rose by about 25% as funds completed relatively larger transactions, according to the Bain & Company 2020 M&A report.
Excitement about the healthcare sector in North America has been driven by the long-term demographic trend of aging populations, increases in chronic conditions and the ample spending ability of the baby boomer generation now reaching their senior years.
The current public health crisis does little to dampen the tailwinds that were giving lift to the healthcare industry. Indeed, the healthcare sector demonstrated during the last recession that investors who remain focused on the fundamental drivers of healthcare expansion will be rewarded.
Bain & Company’s analysis (PDF) found that North American healthcare PE investments made during the 2008-09 recession had a multiple on invested capital nearly 50% higher than other sectors.
Another catalyst for the sector is the record $1.5 trillion in dry powder funds that PE investors are holding. Market dynamics are likely to make valuations in the sector more attractive in the coming months.
Notably, healthcare deals continued to push forward in March even as markets plunged and concerns spiked over the spread of the virus in the U.S. Eye Health America announced on March 23 its acquisition of Dillon Eyecare Associates to continue its expansion in the southeast. A day later, HTD Health reported it had acquired CareVoice, a digital tool to facilitate advance care planning and communication for end-of-life care.
That’s not to say that the pandemic won’t have any impact on healthcare deals, though. The ideal scenario is a fairly rapid rebound as COVID-19 infection rates slow and social distancing measures pay off.
The pandemic seems likely to accelerate a long-term trend toward telehealth services, helped by the U.S. Senate’s passage of a COVID-19 emergency bill that loosened many restrictions on online consultations.
This will favor areas of healthcare that are most able to adapt to remote consultations and providers who have made the biggest strides toward developing these services. Those who have continued to rely heavily on in-patient visits, such as dentistry and orthopedics, could experience some pain in the short term.
One study published by Health Affairs found that radiologists lead the way in telehealth services, with 39.5% of them using the technology, followed by psychologists (27.8%) and cardiologists (24.1%).
At the other end of the spectrum were allergists/immunologists (6.1%), OB-GYNs (9.3%) and gastroenterologists (7.9%).
Hospitals, in particular, could face major financial strain in both the short and long term as they forgo high-margin elective procedures and put more resources into higher acuity cases.
Patients may also become more wary of seeking treatment at hospitals due to the perceived risks of infection. These factors may accelerate the trend we’ve seen in recent years toward ambulatory treatment centers for outpatient surgery and other services as physicians move away from the hospital setting and set up their own facilities.
This crisis also highlights the need for highly coordinated care by multiple players in the healthcare value chain. Managed care organizations (MCOs) and other narrow networks that seamlessly provide care may emerge on the other side as highly attractive investment opportunities and models for more efficient care with better health outcomes.
Going forward, more focus and investment are likely to go toward preventive care and services that target health outcomes rather than volumes, accelerating providers’ move away from fee-based reimbursement models to more value-based care.
Emerging from the pandemic with enhanced economic incentives for investing in a more effective healthcare system is a silver lining to the current difficulties being experienced around the country and the world .
Patrick Krause is a director at MHT Partners and head of its healthcare services practice.