Bass, Berry & Sims was proud to host the 13th annual Health Care Investors Conference (HCIC) on September 20 as an associated event of the inaugural Nashville Healthcare Sessions conference. The firm welcomed more than 200 investors, company leaders, professionals serving entrepreneurial healthcare, and others to the HCIC at the Country Music Hall of Fame in downtown Nashville.
Funding Environment Toughest in 40 Years
The consensus of the four members of a panel on funding and financing healthcare is that the environment is tougher than they experienced in the wake of the 2008 financial crisis. One panelist suggested it was the most challenging fundraising environment since the 1980s, another time of high interest and inflation rates.
One factor they cited was a mismatch of valuations between founders and investors. Founders’ expectations for valuations still reflect the bumper 2021 valuations and are only starting to come in line with the lower 2023 valuations that buyers have. That has slowed exits from mature investments, locking up capital that could otherwise be redeployed into new companies.
Another factor is the impact of the difficulties experienced by Silicon Valley Bank. The bank’s troubles brought increased scrutiny to banks of its size, prompting regional banks to pull back on their lending to improve their balance sheets. Private debt is filling some of this gap, panelists noted.
Private Equity Focusing More on Fundamentals
Healthcare private equity investors have experienced two years of a correction from the stratospheric heights of 2021, according to this panel. Heightened geopolitical risks, higher inflation, and the gyrations of public markets all drove this correction, and as those factors stabilize, healthcare private equity investors should see more opportunities.
The panelists expect investments to be driven more by company fundamentals than investment themes. As with the fundraising panel, the private equity panel members are seeing the expectations of buyers and sellers begin to converge.
Panelists discussed the outlook for four sectors:
- Health tech/information technology: A bright spot amid an overall slowdown in transactions, deal activity in this sector is up year-over-year, has increased every month since March and is expected to accelerate in the second half of 2024, according to the panel.
- Physician practice management: Companies with strong organic growth, strong provider recruitment, and have demonstrated good physician alignment are the best bets in this sector.
- Pharmaceuticals and biotech: Companies that provide services to companies in this sector are the primary target of PE investing. These companies often provide critical services to small biotechs that lack the manufacturing and clinical trial infrastructure to bring promising new therapies to market.
- Value-based care: All three panelists are bullish on value-based care as an investment opportunity. One panelist experienced in this area is focused on companies that help providers and payers optimize their value-based care arrangements.
Driving Innovation in Health Systems
Panelists from Deloitte and Sheba Medical Center in Tel Aviv, Israel, described their global partnership to foster innovation in care delivery—known as ARC (Accelerate, Redesign, Collaborate).
Health systems looking to innovate have to grapple with healthcare’s strong tendency to stick with established ways of working. ARC works to overcome that comfort by enlisting clinicians in the effort to develop new and better ways to deliver care.
ARC is working with health systems in Bahrain, Canada, the United Kingdom and the United States. ARC has plans to build a 22-story building for its innovation accelerator and expand its health system partners around the globe.
Value-Based Care
A key theme in the discussion about value-based care was the issue of risk: Providers must face downside risk to truly transform the way they deliver care.
The predominance, from a revenue standpoint, of fee-for-service arrangements continues to hold back care transformation. In fee-for-service, physician compensation, for example, is based on productivity (via work Relative Value Units or work RVUs). It takes moving to a salary model with the right incentives to make value-based care work. Physicians also have to be trained on how to counsel patients to change their health behaviors.
Compiling more and better data (through interoperability) and making better use of data through some combination of precision medicine and artificial intelligence are poised to be major disruptors for value-based care, the panelists said. At the end of a given year, it’s easy to look back and determine which patients are among the five percent who drove costs higher. The aim of better use of data is to predict who will be five percenters in the coming year to drive early interventions and cut costs.
AI in Healthcare
The keynote speech provided investors with insights into the role that artificial intelligence (AI) is poised to take in healthcare: AI as a co-doctor, just as a pilot has a co-pilot. The speaker expects patient demands to drive adoption. Patients will soon no longer be satisfied relying on a doctor’s training and prior practice experience, especially when they can upload their diagnostic images into a generative AI tool and get a virtually no-cost second opinion.
Co-doctoring requires mapping AI tools onto clinical workflows, with more robust information systems that can accommodate algorithms at every step of care.
The speaker offered investors a set of questions to consider when evaluating healthcare AI applications:
- How will this technology integrate?
- Who owns the informatics stack?
- Does it make doctors better?
- What does the patient value?
- What does the health system value?
Digital Health in a Consolidation Phase
This panel’s discussion reinforced many of the same points of the keynote speech:
- Digital health tools must fit or replace existing clinical workflows to be successful.
- Consumers, while not usually the buyer, are a major influencer in the adoption of digital health solutions, from employer-sponsored plans to Medicare Advantage, where Star Ratings are largely determined by patient experience measures.
- Interoperability is a driving factor, as better, more standardized data helps the entire digital health ecosystem.
The explosive growth in the number of digital health solutions over the past several years yielded a huge number of solutions that solve a narrow problem. Health systems have been overloaded trying to cobble these together into a coherent approach to digital transformation. Now, a period of consolidation is occurring, with different platforms vying to meet the bulk of health systems’ needs.
Conclusion
While acknowledging the more challenging environment compared with the boom of 2021, panelists also discussed many strong opportunities in healthcare investing across a range of sectors. Panelists during multiple sessions suggested that those who are committed to healthcare investing are regaining some of their advantage over those investors drawn to healthcare during the boom.
Bass, Berry & Sims thanks everyone who attended this year’s HCIC conference. We look forward to hosting the event again next year. Please join us at the J.P. Morgan Healthcare Conference in San Francisco in January 2024. In the meantime, if you have any questions about the healthcare M&A market, please reach out to a member of our nationally-ranked healthcare practice.