Private equity firms with holdings in a variety of healthcare subsectors could be in for a shock.
In March, the Supreme Court heard arguments on The Patient Protection and Affordable Care Act of 2010, which is intended to drive down costs and add an estimated 30 million Americans to the nation’s insurance roster. Among the reforms are slowdowns on Medicare and Medicaid reimbursements, which many private equity-backed healthcare providers rely on for earnings. A ruling that will determine whether the law will remain in effect is expected in June.
Firms have spent the last two years operating under the assumption that the reforms were permanent, which has altered fund managers’ investment theses for the sector, sources said.
However, that all may change if the court finds the law – or parts of the law – unconstitutional. Many of the court’s more conservative justices were openly sceptical of the law, according to reports.
Until there is a ruling, sources say they expect fund managers to stay away from investments affected by what one GP referred to as “the taint of smaller reimbursements”. Even so, in an industry as broad as healthcare, uncertainty about whether reform will be upheld doesn’t translate into a dearth of opportunity.
“On the margins, I think very often people say ‘healthcare reform’ and think it’s somehow ‘healthcare remade overnight’. The reality from our perspective is that [although] healthcare reform [is] attention grabbing, implementation of it tends to be incremental in nature,” said Oliver Moses of MTS Healthcare.
The law’s impact has already been seen in the earnings of private equity backed healthcare providers. Morningstar analyst Michael Waterhouse’s prediction that the law would subdue Hospital Corporation of America’s top line was borne out in HCA’s third quarter report, which saw an increase in admissions but a decline in revenue.
“A few years ago, people could buy and sell hospitals and not think anything of it,” said healthcare private equity specialist Ira Coleman of McDermott Will & Emery. “Government reimbursement always plays a part in healthcare investing, because they are almost always the largest payer. So if the largest payer says ‘we’re paying less for a certain type of service’ the private equity industry talks about that.”
Private Equity International takes a closer look into private equity’s stake in the Supreme Court ruling in the April issue.