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Private Equity In Healthcare: What’s the Attraction?. PRIVATE EQUITY IN HEALTHCARE: WHAT'S THE ATTRACTION?. MODERATOR: James J. Kennedy, III, Esq., Shareholder, Carlton Fields PANELISTS : Todd Rudsenske , MBA, CPA , Managing Director, Cain Brothers & Company, LLC

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private equity in healthcare what s the attraction
Private Equity

In Healthcare: What’s the Attraction?

private equity in healthcare what s the attraction1


James J. Kennedy, III, Esq., Shareholder, Carlton Fields


Todd Rudsenske, MBA, CPA, Managing Director, Cain Brothers & Company, LLC

John Telenko, Vice President, Healthcare, Allied World Assurance Company, Ltd.


Private Equity in Healthcare: What’s the Attraction?


  • James J. Kennedy, Esq., Shareholder, Carlton Fields, PA


  • Carrie Cope, Esq., Shareholder,Schuyler, Roche & Crisham, P.C.
  • James Fasone, ARM, RPLU, SVP, Alliant Healthcare Solutions, Inc.
  • Ciara Frost, Esq., Partner, Kerns, Frost & Pearlman, LLC
  • Douglass Hewitt, Esq., Partner, Kubasiak, Fylstra, Thorpe & Rotunno, P.C.
  • John O’Byrne, Esq., Partner, Mendes & Mount, LLP

Private and Health Care

Current Situation

Weak Economy

Rate Reductions

Higher Expenses

Competitive Environment

Increased P/E Activity


Source: Wall Street research.


Private Equity and Health Care

Factors Driving Consolidation

Unprecedented combination of macro-economic influences, industry pressures and market dynamics driving consolidation.

Access to Full Continuum of Care

Risk Bearing Capabilities

Access to Capital

Management Expertise

Investments in Technology

Managed Care Expertise

Economies of Scale


Physician Integration

Operating Efficiencies

Physician Recruitment & Retention

Purchasing Leverage

Weak Economy

Low Interest Rate Environment

Private Equity


Hospitals and healthcare systems across the U.S. are evaluating their strategic options.

Private Equity and Health Care

Hospital and Health Care System Strategic Response

  • Market by market strategic assessment; portfolio analysis - invest, partner, divest or swap
  • Take advantage of opportunities to grow in existing markets where viewed as favorable partner
  • Clinical integration through physician acquisitions
  • Monetize non-core assets and re-deploy capital in markets with greater chance of success
  • Own across continue of care or partner to provide ancillary services (home health, post-acute, etc.)
  • Conversion to investor-owned
  • Multi-State Systems
  • Assess wherewithal to be a consolidator or proactively approach most favorable partner(s)
  • Formation of “super regional” systems
  • JV strategies to pursue growth, defend market share, build networks (acute & ambulatory surgery)
  • Clinical integration through physician acquisitions
  • Conversion to investor-owned
  • Regional Systems
  • Independent Standalone Hospitals
  • Approaching systems viewed as most favorable partner with skill, scale, share and resources
  • Develop new regional systems with other independent hospitals
  • Leveraging a competitive partnering process to maximize value of assets and ensure most attractive terms including purchase price, capital commitments, continuity of services
  • Developing specialty service provider in the market – “carving out a niche”

Private Equity and Health Care

Quarterly Deal Volume by Healthcare Service


Labs, MRI, Dialysis


Managed Care

Long Term Care

Physician Groups


Source: Irving Levin.


Private Equity and Health Care

Hospital Mergers & Acquisitions 2002 - 2011




Private Equity and Health Care

Five Largest Hospital Deals of the Past 12 Months




The universe of for-profit hospital management companies is shifting.

Private Equity and Health Care

For-Profit Hospital Management Companies

Financial sponsors are changing their view of hospital management companies in response to the pressures of health care reform. New players are emerging while others are exiting the industry.


Private Equity and Health Care

Significant P/E Investments in the Hospital Sector

($ in Millions)

  • ____________________
  • Formerly Behavioral Healthcare Corp.
  • Date on which Merit, set up as an investment vehicle, bought its first hospital
  • TPG acquired IASIS from JLL in a transaction that valued IASIS at $1.3 billion. TPG owned 74.4% of IASIS post transaction.
  • (4) Blackstone acquired Vanguard in a transaction valued at $1.75 billion. Blackstone owned 66% of Vanguard post transaction.
  • (5) Commitment equals amount of equity invested at transaction.

Private Equity and Health Care

P/E Firms Highly Interested in Hospital Sector

Industry Specific


  • Highly fragmented industry
  • Non-cyclical
  • Large component of GDP
  • Capital intensive
  • Public market valuations low
  • Availability of seasoned mgmt talent
  • Precedent successes (HCA, Triad, etc)
  • Favorable demographics
  • Stable, predictable, growing population
  • Weak economy
  • Low interest rates

Factors Driving Private Equity Investments

Health Care Reform


  • Reduces uncompensated care
  • Demands efficient delivery model
  • Opportunity to effectively assume risk and capture more total healthcare dollars spent
  • Ability to turnaround operations and make acquisitions accretive
  • Efficient debt markets
  • Low-cost of capital
  • Available cash for acquisitions
  • Strong fundraising environment as investors search for alternative to stock market

Private Equity and Health Care

Deterrents to Private Equity

  • Highly regulated industry
  • Reimbursement cuts
  • Decreases in inpatient surgery volumes
  • Uncertainty of Healthcare Reform

New Jersey




Private Equity and Health Care

Evolving Policies at State Governments

  • Commission on Taxpayer Funded Hospital Districts established in March 2011
  • Created to assess and make recommendations on the role of hospitals districts and whether it is in the public’s best interest to have government entities operating hospitals
  • Committee appointed to study a plan to dismantle the University of Medicine and Dentistry of New Jersey and replace it with an enhanced delivery system in Newark
  • For-profit hospital companies have been actively acquiring stand-alone not-for-profits, a trend that is not expected to cease anytime soon, nor one that is necessarily unwelcome by the State government
  • Massachusetts’ unique health insurance model (e.g. RomneyCare) positions it as a testing ground for health care reform readiness strategies
  • Illinois’s Department of Revenue is scrutinizing, and in some instances revoking, hospitals’ property tax exemption due to alleged inadequate charitable care levels

State and local governments are beginning to view for-profit hospitals as a welcome new source of tax revenue.


Sources: Industry publications and periodicals.


Private Equity and Health Care


  • Leverage is a common way to fund acquisitions
  • Healthcare companies issued over 7% of all high yield debt in 2010
  • Vanguard - $1,990 million in three sales since 2010
  • UHS - $1,600 million in 2010
  • Tenet - $1,525 million in two sales since 2009
  • Capella - $500 million in 2010
  • HCA - $4,460 million in four sales since 2009
  • Ardent - $325 million in 2010

Hospitals tend to move through cycles of levering up to make acquisitions, then spend the next few years using their free cash flow to de-lever and create balance sheet capacity for the next round of acquisition growth.


Private Equity and Health Care

Risk: Private vs. Not-for-Profit

  • Not-for-Profits
  • Sources of Funds
  • Intermediate Sanctions
  • Unrelated Business Income Tax (UBIT)
  • Liability-Limiting Statutes
  • For-Profits
  • Liability of Officers & Directors
  • Freedom from labor agreements
  • Both FP and NFP
  • Employment Practices Liability (EPL)
  • Anti-trust risk
  • Government Regulations & Compliance