Publication | ThinkSet

Healthcare Investment Opportunities Abound—If You Know Where to Look

John Kelliher and Bryan Cote

Fall 2018

Medicare Advantage, substance abuse treatment and group specialization seen as growth areas for healthcare investment

Roiled by structural upheaval, plagued with political uncertainty and historically resistant to change, the US healthcare market is no place for faint-of-heart investors. But behind these real and persistent challenges, the sector bristles with opportunities for private equity (PE) managers. Healthcare represents 17 percent of US gross domestic product this year and is projected to account for more than 20 percent within the next 10 years, virtually assuring top-line growth for many ventures across the entire sector, from physician practices to hospital systems.

The trick is identifying areas most likely to produce profitable growth. There’s no shortage of places to look, as providers and insurers consolidate, the population ages and Congress and state legislators consider sweeping proposals to treat opioid addiction and related social matters. Some of the uncertainty clouding healthcare may clear away if Democrats win control of one or both houses of Congress later this month. In the resulting gridlock, neither party will have the power to enact major changes in Medicare policy or payment systems, a vital condition for predictability in investment decisions through the 2020 election cycle. When it comes to healthcare, at least, divided government is better.

There’s payback potential for these healthcare investment opportunities

Substance abuse and psychiatric services

Despite talk about curbing opioid addiction, no major federal programs are pending. But watch for smaller provisions embedded in larger bills, geared toward providing funding for community-based treatment.

One potentially hot area: community-based housing with healthcare services to treat the full range of conditions associated with opioid addiction, including mental illness. Hospitals and health insurers are moving into risk-based arrangements that hold them accountable for a community of patients at a fixed budget. Ensuring that the community has proper housing and services will emerge as a new focus. Hospitals are seeing their emergency rooms fill up with psychiatric cases, and they’re looking to manage these cases instead of referring them out. Providers that can support this new site of care by bundling services together and taking on the financial risk of treating patients for a fixed price will find willing customers in municipalities, payers and hospital systems.

Medicare Advantage

Wildly popular with seniors and finally at cost parity with traditional Medicare coverage, this program is unlikely to face changes in the next few years regardless of who controls Congress. The best opportunities lie in businesses that provide services to the thousands of existing Medicare Advantage plans, including risk adjustment, benefits and chronic care management and providers that assume sub-capitated risk.

Physician practice groups

As specialists in fields like dermatology, ophthalmology, cardiology and primary care combine into larger groups, they can bargain more effectively with insurance companies and healthcare networks. There’s a reward to scale as the entire industry consolidates and looks for cost savings, but integrated groups need to have complementary services and must prepare to accept episodic or bundled payments and take on risk. Those groups have an opportunity to serve as de facto benefit managers for the insurers.

One emerging area could be the combination of women’s healthcare services and pediatrics. Hospitals are expanding these service lines, focusing on labor and delivery, women’s services and services for children. Payers, particularly managed Medicaid insurers, are looking for more preventive care during gestation to avoid preterm birth, as well as postpartum complications and costs stemming from things like a parent’s depression or a child’s asthma or autism. In most cases, there will be growing demand for bundled payment and to take on risk for postpartum episodes.

Durable medical equipment (DME)

This sector, out of favor for years because of frequent policy changes, may finally be attractive again as the full impact of the Medicare competitive bidding program works its way through the industry, which appears stable after a decade of changes. DME suppliers may present an opportunity going forward—if suppliers have a plan to compete with Amazon, which is pushing into the space and has signed up hospitals in several markets already.

BRG Experts

Related Professionals

Bryan R. Cote

Managing Director

New York

John J. Kelliher

Managing Director

Washington, DC
Federal Policy