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The Keckley Report

Financial Sponsors Pose Unique Challenge to Healthcare Providers

By November 8, 2021March 1st, 2023No Comments

Today marks the opening day of the Healthcare Financial Management Association’s (HFMA) Annual Conference in Minneapolis. This year’s theme is appropriate: “Reset your true north.”

To veterans of the industry, HFMA is widely recognized as the THE go-to for professional education about how money moves in hospitals, medical groups, and a widening array of health delivery settings. In Minneapolis, attendees will hear about rev cycle, surprise billing, coding and the day-to-day mechanics of managing an organization’s finances. They’ll hear about hospitals at home, consolidation and price transparency. They’ll hear about near-term changes in the political environment and longer-term technology innovations that enable new approaches to treatment and care management. And Joe Fifer, the organization’s widely respected CEO, will alert attendees attention to growing role of consumers as direct purchasers and influencers.

This year, HFMA celebrates its 75th anniversary and it may be its most consequential. Outside pressures for affordability, equitable access and price transparency are finding their way into regulations like surprise medical billing and constraints on consolidation. But the specter of proposed increases to both the corporate tax rate (from 21% to 26.5%), capital gains (from 20% to 25%) and related carried interest rules (from 3 to 5 years, fully deployed- although still no word on waivers) are prompting investors to rethink future capital deployment. Case and point for providers: add on strategies could become much more prevalent for niche investors in need of more predictable cash flows. Despite these headwinds, private equity’s role in healthcare delivery services remains strong: through the first 3 quarters of 2021, deals and deal values in healthcare and health information technology already exceed last-year’s totals with no slow-down.

For CFOs in Minneapolis, the role of PE deserves particular attention in re-thinking “true north” for two reasons:

PE Funding is Playing a Bigger Role in Healthcare Delivery

Today, PE sponsors have close to $1.5 trillion in dry powder looking to be deployed; healthcare delivery is an attractive target because most provider-sectors enjoy ‘pricing power’ which investors see as a hedge against market volatility.

PE activity through Q3 2021 across all industry sectors in the US is estimated at $787B (including pending deals), which is greater than all capital invested in FY 2020 ($698B). As a % of total capital invested, healthcare has ranged in the high single digits for the past 5 years relative to all industry sectors. But through Q3 2021, that % is roughly 14% (of course things could shake out in Q4). The notable story there is fairly obvious- lots of health tech investments as an add on or platform play. That’s not to say recent investing trends in areas like the provider space will stop, such as the hot space Behavioral Health (which loosely defined can encompass a lot of different operators, from folks like Pathways to Community Psychiatry). Difference being is how these existing assets will incorporate digital health and/or analytic platforms (if they haven’t already); and as a result if this will make historically siloed services attractive targets in the future.

Exit Opportunities are Accelerating

Strong valuations combined with rapid economic growth are fueling the trend. Current estimates suggest that 1,129 exits will be completed through Q3 2021 across all sectors, with 20% in healthcare. Timing is key: exit values last quarter ($638 billion) were 50% larger than the next-highest annual figure including one in the Top 10 (Agilon $7.8 billion). The potential for tax-law changes next year and high valuations are undoubtedly part of the story.

“Resetting True North” is an appropriate theme for HFMA’s gathering. But nothing is clearer than the over-size role private equity will play in its navigation.

That’s the challenge moving forward.


P.S. The Infrastructure package that passed the House 228-206 at 11:30 pm Friday night costs $1.2 trillion of over eight years including $550 billion in new spending. It includes $110 billion for roads, bridges and other infrastructure, $73 billion for electric grid and power structures, $66 billion for rail, $65 billion for broadband, $55 billion for water infrastructure, $47 billion for flooding, fire and coastal resiliency, $39 billion for transit modernization, $21 billion for environmental remediation and $7.5 billion for electric vehicles and EV charging, zero-emission buses and ferries. Only in DC is a cross-over vote by 13 Republicans from the House’ 213 GOP members called “bipartisan”.


“Statement of FTC Office of Public Affairs Director Lindsay Kryzak on District Court’s Decision to Grant Preliminary Injunction Halting New Jersey Hospital Merger”; August 4, 2021; FTC

“PE exits are on a historic run as firms net billions”; October 26, 2021; Pitchbook

“Pricing power is highly prized on Wall Street”; November 6, 2021; The Economist


Recent Deal Announcements

Papa– a tech enabled elderly care platform meant to connect college and nursing students to senior citizens who need help with basic daily activities like transportation, house chores etc- raised $150M in its Series D funding round, bringing the company’s valuation to approximately $1.4B. The round was led by Softbank’s Vision II fund, with participation from names like TCG, Tiger Global Management, Canaan, and Initialized Capital just to name a few.

United Dental– a practice management organization with a proven track record of broad market penetration (and successful exits valued in the billions) in countries like Australia, New Zealand, and Canada- has raised $5M in its Series B round, which was primarily led by High Speed Ventures, the investing arm of High Speed Alliance, a dental/physician backed family office. Dr. Ray Khouri, Founder & CEO of United Dental will continue to lead the group’s expansion efforts as the model is rolled out in the U.S.

Truepill– you probably already know their partner organizations like direct-to-consumer pharmacy service providers HIMS and NURX, but the backbone fulfillment engine of these companies is poised to shine on its own. California based, specialty telehealth provider Truepill raised approximately $142M in its latest Series D funding round, bringing the company’s valuation to roughly $1.6B. Truepill’s model is unique in that it combines pharmacy fulfillment, traditional telehealth, and at home testing services all under one umbrella. This is the company’s 7th funding round, and the latest deal brings total fundraising to $256M for the year.

Vitable Health– an employer sponsored healthcare provider focused on filling gaps in traditional direct to consumer models, especially for hourly workers- has raised $7.2M in its latest funding round. Vitable’s offerings include primary, urgent, chronic care and mental health services to name a few. The latest financing will help the organization build out both its telehealth and mental health services. Current investors include names like well-known incubator Y Combinator and others.

Kaufman Hall: Hospital finances hit hard in September

Per Kaufman Hall’s latest Hospital report:

  • “The median Kaufman Hall Operating Margin Index was 3.2% in September, not including federal CARES Act funding. With the aid, it was 4.1%.Not including CARES, the median change in Operating Margin declined 18.2% from August to September. Compared to pre-pandemic levels in 2019, the median change in Operating Margin decreased 1.7% year-over-year (YOY).” Other measures:

  • Total expenses grew 2.2% between August and September. Within that, labor costs grew 1.4%.

“National Hospital Flash Report Summary: October 2021”; November 1, 2021; Kaufman Hall

Study: U.S, Pays 230% More for Prescription Drugs than Other High-Income Countries

Background: A 2021 study found that US prices for brand-name drugs were 344% of those in other high-income countries at manufacturer (“list”) prices, but the difference was smaller (230%) after an adjustment to approximate lower US net prices. “We estimated what 2020 national US savings would have been at HR 3 maximum international prices rather than US manufacturer and net prices for insulins and 50 top brand-name drugs by sales.” Findings:

International reference pricing would have lowered 2020 US spending on study products by 52.3% or $83.5 billion, from $159.9 billion at US net prices to $76.3 billion.

Mulcahy et al “Estimated Savings From International Reference Pricing for Prescription Drugs”; September 10, 2021; JAMA

Study: Private Equity acquired Hospitals Faster in Pursuing Financial Improvements

The analysis consisted of 4,781 hospitals, including 228 that were acquired by private equity. Should come as no surprise that compared to non-PE facilities, Private Equity acquired hospitals tend to expand service lines (and are quicker to do it) that are rewarded by payers.

Cerullo et al “Private Equity Acquisition And Responsiveness To Service-Line Profitability At Short-Term Acute Care Hospitals”; November 2021; Health Affairs

Related Study: independent dialysis center ownership declining

In this cohort study of 6738 Medicare-certified dialysis facilities in the continental US, small chain-affiliated and independently owned facilities had 3.48 higher odds of acquisition post-PPS (2011-2016) compared with pre-PPS (2006-2010). Risk of closure did not change.

  • The proportion of small chain-affiliated and independently owned facilities declined from 29% (1383 of 4750 facilities) in 2006 to 15% (1038 of 6738) in 2016. Among 13 481 facility-years, 6352 (47%) were for profit, and mean (SD) census was 68 (59) patients.

Sloan et al “Trends in Dialysis Industry Consolidation After Medicare Payment Reform, 2006-2016”; November 5, 2021; JAMA Health Forum

Study: Low Value Services Used Most Frequently in Specialist Dominated Health Systems

This cohort study measured and reported the use of 41 individual low-value services and a composite measure of 28 services for 556 health systems serving 11,637,763 Medicare beneficiaries: Findings:

  • The mean (SD) use of each of the 41 low-value services ranged from 0% (0.01%) to 28% (4%) of eligible beneficiaries. The most common were preoperative laboratory testing (mean [SD] rate, 28% [4%] of eligible beneficiaries), prostate-specific antigen testing in men older than 70 years (mean [SD] rate, 27% [8%]), and use of antipsychotic medications in patients with dementia (mean [SD] rate, 24% [8%]).

  • Systems varied widely in the provision of low-value care; those with a smaller proportion of primary care physicians, without a major teaching hospital, serving a larger proportion of non-White patients, headquartered in the South and West, and serving areas with higher health care spending delivered more low-value care.

Ganguli et al “Low-Value Care at the Actionable Level of Individual Health Systems”; September 27, 2021; JAMA Internal Medicine

Related study:
Mass General researchers studied urinalysis testing use in 14 surgical procedures. Findings:

  • Among 13,169,656 procedures, 25% were preceded by urinalyses within 30 days. Among procedures for which urinalyses were obtained, 89% were not indicated.

  • Among this subset of urinalyses, the mean (SD) price per test was $17 ($108.48), with a mean of 79.5% of the price paid by the insurer. Across procedure categories, between 5.8% and 28.0% of these urinalyses were followed by an antibiotic prescription. Spending on antibiotics ranged from $20 to $65 per course, and the course duration ranged from 5.9 to 10.5 days across procedure groups.

Shenoy et al “Prevalence, Costs, and Consequences of Low-Value Preprocedural Urinalyses in the US”; August 2, 2021; JAMA Internal Medicine

Study: Insulin Prices Increases More as Result of Middlemen

In this cross-sectional study of the distribution of insulin prices between 2014 and 2018:

  • Mean list prices of 32 insulin products increased by 40.1% (from $19.60 to $27.45), while mean net prices received by manufacturers decreased by 30.8% (from $10.53 to $7.29).

  • Net expenditures per 100 units of insulin increased by 3.2% (from $15.11 to $15.59) while the share of a hypothetical $100 insulin expenditure accruing to manufacturers decreased by 33.0% (from $69.71 to $46.73) and the share accruing to health plans decreased by 24.7% (from $13.82 to $10.40).

  • The share of insulin expenditures retained by pharmacy benefit managers increased by 154.6% (from $5.64 to $14.36), the share retained by pharmacies increased by 228.8% (from $6.21 to $20.42), and the share retained by wholesalers increased by 74.7% (from $4.63 to $8.09).

Van Nuys et al “Estimation of the Share of Net Expenditures on Insulin Captured by US Manufacturers, Wholesalers, Pharmacy Benefit Managers, Pharmacies, and Health Plans From 2014 to 2018”; November 5, 2021; JAMA Health Forum

KFF Analysis: Medicare Advantage Options Increase, Part D Decrease in 2022

Per KFF’s review of government data:

  • 3,834 Medicare Advantage plans will be available in 2022–an increase of 8% from 2021.More than 26 million Medicare beneficiaries – 42% of all beneficiaries – are currently in Medicare Advantage plans. In 2022, the typical beneficiary will have 39 plans to choose from in their local market.UnitedHealth and Humana account for 45% of Medicare Advantage enrollment in 2021.

  • The number of Medicare Part D stand-alone prescription drug plans offered in 2022 is decreasing by 23% to 766 plans, primarily the result of firm consolidations. The typical Medicare beneficiary will have a choice of 23 stand-alone drug plans next year, 7 fewer than in 2021.

“A Record 3,834 Medicare Advantage Plans Will be Available in 2022, Up 8 Percent From 2021, While the Number of Medicare Part D Stand-Alone Plans is Decreasing Mainly Due to Firm Consolidations”; November 2, 2021; KFF


CMS Releases Final Rule on Surprise Bills: Hospitals, Physicians Don’t Like it, Insurers Do

Last Thursday, the Centers for Medicare & Medicaid Services released its interim final rule on surprise medical billing. The key point of contention in the final rule – which take effect on January 1, 2022 — is the independent dispute resolution process for some out-of-network billing, which presumes that the payer’s out-of-network reimbursement is the starting point for negotiations. The disputing stakeholders will have a 30-day “open negotiation” to determine a payment. If they’re still at loggerheads, they can open the dispute resolution process, which is conducted by a jointly select a “certified independent dispute resolution entity”

“CMS Issues Surprise Billing Final Rule”; November 5, 2021; Health Leaders Media

Penn Wharton Analysis: Build Back Better will Add $2.4T to National Debt between 2022 2031

The Penn Wharton Budget Model for the Build Back Better Reconciliation framework: Key assumptions: 2022-2031:

  • Increased Spending above baseline: $3,981 trillion led by $1.963B child and EITA tax credits, $701B for childcare and pre-school

  • New revenues: $1.554T led by modifications to tax rates in 8 tax categories including surcharge on increase in international tax rates ($278B), high income households ($267B), minimum corporate tax ($195B), drug rebate rule change ($174B)

Reconciliation Framework, Penn Wharton Budget Model November 1, 2021; Wharton


Employer Vaccine Mandate Update: States Push Back, Court Halts Implementation

Thursday, the Labor Department issued its Vaccine Mandate requiring employers with 100 or more employees to require vaccination or weekly mandatory testing. 26 states including 3 Blue States (KS, KY and LA) filed suit against the order saying the federal government does not have the authority to issue the requirements.

Friday, a three-judge panel on the New Orleans-based Fifth U.S. Circuit Court of Appeals granted an emergency stay prohibiting enforcement of the rules for now, saying they raise “grave statutory and constitutional issues.”

“Workplace Vaccination Program”; November 4, 2021; CDC

“Federal appeals court issues stay of Biden administration’s vaccine mandate for private companies”; November 5, 2021; CNN

The Economist Analysis: Covid-Related “Excess” Deaths 3x Higher than Official Tally

“Many people who die while infected with SARS-CoV-2 are never tested for it, and do not enter the official totals. Conversely, some people whose deaths have been attributed to covid-19 had other ailments that might have ended their lives on a similar timeframe anyway…Although the official number of deaths caused by covid-19 is now 5m, our single best estimate is that the actual toll is 16.8m people. We find that there is a 95% chance that the true value lies between 10.3m and 19.5m additional deaths.”

“The pandemic’s true death toll”; November 2, 2021; The Economist