What’s Hot In PE-Backed Healthcare: Provider Outlook

Sarah Bailey

The U.S. healthcare industry is, in a word, enormous. Health expenditure as a share of GDP hovers around 17%, representing the third largest portion of the economy. For that reason, the industry is, in another word, consequential. How it fares has a meaningful impact on the economy, market, and labor force writ large, which is why examining the industry’s investment trends is a critical bellwether for economic health.

Over the last few years, the results of that examination have been less than stellar. Healthcare deal volume was heavily impacted by the pandemic and compounded by interest rates, labor shortages, regulatory scrutiny, and lack of buyer confidence.

The prognosis for the rest of 2024 is, however, cautiously optimistic – particularly for the provider-based market. Sponsors invested in healthcare provider organizations (and their related portfolio CFOs) are well positioned to lead value creation into 2025, so long as they understand and respond to the issues relevant to this unique corner of the healthcare world. We call these issues “hot zones”. This outlook provides a prescriptive cheat sheet to recognize and respond to these hot zones.

The Hot Zones:

1. Margins moving in the wrong direction: The combination of a shifting payer mix, rising labor costs, supply chain disruptions, and increasing reimbursement challenges means that providers are facing significant margin compression. This will result in the most consequential impact of all: declining cash flows. Sponsors want cash flow visibility now. CFOs will need to analyze both top-and bottom-line issues to understand and improve working capital and liquidity.
   
2. Pressure to push the exit button: Sponsors with provider investments are eager to exit. For many, the weak deal market and healthcare-specific headwinds have caused them to hold these investments far longer than intended and well past traditional hold times. Sponsors need to offload assets to return capital to LPs. Accordingly, portfolio CFOs will need to be onboard to offload.
   
3. Lengthening labor shortages: Simply said, providers need more people to provide care. The number of healthcare workers in the U.S. has been steadily declining for almost a decade but fell precipitously following pandemic burnout. It’s not just a reduction – it’s a true shortage that will only increase over the next decade. (By next year alone, experts predict a shortage of more than 400,000 home health aides and 29,000 nurse practitioners, among many other types of physicians, nurses, and allied healthcare professionals). If finding more people isn’t a realistic long-term solution, support operations (like Finance and Accounting), will be tasked with getting creative about how to do more with less.
   
4. In-patient on the outs: Payers, providers, and patients aren’t always on the same side, but they do agree on a desire to shift care away from inpatient settings. For payers and providers, it’s economical. For patients, it’s practical. Whatever the motive, the trend will result in more acquisitions and roll-ups in specialties that can be shifted to outpatient settings (like cardiology, urgent care, ortho). Deal activity is further fueled by sponsors keen to put their record dry powder to work but tempered by regulatory and media scrutiny. As with all acquisitions, the squeeze is only worth the juice if CFOs can recognize synergies and achieve cost-savings targets.

The Prescription:

1. Manage margins: CFOs must fix their margin woes now. For some, this may be a problem to tackle by modernizing data capture and analytics in a way that provides enhanced visibility. For others, particularly those who are concerned about running out of cash this year, it will mean borrowing tools from the restructuring world, including triaging liquidity via 13-week cash flows as well as optimizing procurement and improving revenue cycle management (RCM) operations.
   
2. Get ready to get exit ready: CFOs must prepare now to get exit ready by 2025. Given the number of investments that will come to market, buyers will have the luxury of being picky. They’re looking for quality assets that enable a squeaky-clean deal. Providers that have enhanced their infrastructure, realized integration synergies, and have visibility into cash flow will have an easier path toward exit. The so what? For CFOs, it’s time to drive the kind of operational efficiencies that will ease diligence and increase valuation. That looks like a combination of IT modernization, tech-stack enhancement, and RCM automation, all of which can lead to significant savings and support near-term multiple yield and long-term scale. CFOs need to start doing the last mile, sell-side readiness work now.
   
3. Leverage tech to mitigate staffing deficiencies: How can a finance executive fix an HR problem? They can’t produce more people, but they can invest in meaningful ways to support existing people by reducing administrative burdens. That means a sizeable (but returnable) investment in the kind of tech solutions that drive efficient scheduling and streamline workflows: Workforce management solutions to enhance staffing efficiency, RCM automation to reduce labor spend and revenue leakage, and AI-related tools for near-term impact on billing, support, enrollment, claims processing, and coding. It also means selectively outsourcing the right functions (IT, HR, payroll, lab services, supply chain) to further reduce administrative burden.
   
4. Integrate and facilitate: CFOs tasked with realizing deal returns will need to have a laser focus on post-merger integration. This is particularly true for acquisitions involving disparate specialties where dissimilar back-office functions must be harmonized. Success will require increased visibility into holistic data and financial results, a consolidated close process, procurement and supply chain centralization, and tech stack (particularly ERP) integration. As acquired entities shift care to outpatient centers, it will also require CFOs to think through novel IT issues related to handling the newly remote interface between provider and payer.

The Quick Cheat Sheet for Provider-Based CFOs:

Want to skip to the end? What’s hot in provider-based healthcare is the promise of more (unique) deals and exits, even as providers struggle with talent and margin issues. Smart provider-based CFOs will understand these hot zones and respond by:

• Leveraging margin compression as a reason to, finally, enhance cash flow visibility, optimize procurement, and improve revenue cycle operations.
• Driving tech-stack modernization and RCM automation for improved efficiency and sell-side readiness.
• Scaffolding labor issues with tech to automate and vendors to outsource administrative functions.
• Focusing on post-merger integration playbooks to ensure ultimate readiness to capture synergies for deals on the horizon.

Sarah Bailey is a Managing Director with Accordion, the leading financial consulting firm focused on private equity.