The US Supreme Court’s decision to uphold The Patient Protection and Affordable Care Act, President Barack Obama’s healthcare reform bill passed into law in 2010, removes widespread uncertainty surrounding the future of US healthcare that has stalled dealmaking in the sector.
“I think upholding it is best for a dealmaking environment,” principal at Frazier Healthcare Ben Magnano told Private Equity International. “It sets the ground rules. Whether it’s a physician, entrepreneur or investor, everyone has been complaining about the fact that nobody knows the rules of the game.”
The court’s ruling settles the dispute of whether an individual mandate forcing Americans to buy health insurance is unconstitutional, an unresolved issue up until Thursday that had caused investors to delay transacting in recent weeks.
“Nobody wants to definitively commit between now and the decision,” Joel Greenberg, senior corporate partner at law firm Kaye Scholer, told Private Equity International in a previous interview.
With the ruling, the US government will be able to impose a tax on Americans who don’t purchase some form of health insurance.
One reason the decision could lead to increased opportunities in healthcare has to do with the Affordable Care Act’s endorsement of healthcare information technology.
“Many of the information technology companies have developed new solutions to offer insurance in a way that is easy to purchase through these new exchanges that are going to be built, so that’s a major opportunity,” said Bill Bernstein, chair of the healthcare division at law firm Manatt Phelps & Phillips. “Some of the companies are the system integration companies, but there are lots of smaller companies who have developed interesting capabilities to support the coverage expansion provisions of the law.”
The Supreme Court’s decision should come as a relief to healthcare investors who have seen deal activity slow in 2012. A total of 20 deals worth a combined $997 million have transacted so far this year, compared to 40 deals worth $4.4 billion during the first six months of 2011, according to Dealogic. Overall private equity investment in the US, meanwhile, has remained stable year-over-year, with 296 deals worth $40.3 billion transacting so far this year compared to 334 deals worth $43 billion during the first six months of 2011.
Still, for some investors in the sector, the cost of reforming the US healthcare system will be a burden on private equity.
“It raises taxes that are going to add to the national debt, and all of that is not good for investing,” said Lester Knight, co-chairman of RoundTable Healthcare Partners. “About 60 percent of our portfolio is medical device companies that are going to get, starting 1 January, a 2.2 percent tax on our sales. It’s not good policy. It’s not a good law.”
Other private equity investors who specialise in healthcare don’t see the Supreme Court’s ruling as having a significant impact on investment opportunities.
“It’s not whether or not [the law] is constitutional but whether or not the mandate works, and I don’t believe it has any shot at working,” said senior managing director at MTS Healthcare Curtis Lane. “I would love to see a real mandate and I would love to see a national insurance market where everybody goes into it and buys it.”
Despite bringing closure to the issue of whether the Affordable Care Act would be upheld, uncertainty surrounding the future of healthcare in the US will continue to exist, as Republican presidential nominee Mitt Romney has pledged to repeal the healthcare reform bill if elected in November.
“I know the debate over this law has been divisive,” President Obama said in remarks following the Supreme Court’s announcement Thursday. “It should be pretty clear by now that I didn’t do this because it was good politics.”