Navigating healthcare

Like many of our peers, we have a lot of skin in the healthcare game, so we’ve been watching government efforts to reform healthcare with keen interest ever since Massachusetts instituted its reform package in 2006.

Since then, Riverside has built a healthcare specialisation consisting of industry and investment experts. That team has helped us successfully navigate the sector as we’ve surpassed 40 lifetime healthcare investments. We’re relying upon them more than ever in the face of the new legislation.

On the face of it, the national healthcare reform bill delivers more than 30 million customers to the system and could increase usage among millions of others. That is presumably a good thing for insurers, providers of all stripes, medical device manufacturers, researchers and drug companies. Of course, the reality is much more complex.

We firmly believe there will be winners and losers among this multifarious group of healthcare companies, but that’s about where our conviction ends.

Between exchanges and mandates, the insurance provisions are complicated. Overall, while they will lead to many more insured Americans, they might reduce the number of players in the industry, as small insurers could lack the scale required to compete and some large insurers may decide against taking Medicare clients due to lower managed care payments. There is considerable disagreement about the effects of the changes, even among experts. Further muddying the waters, these provisions are being legally challenged and not planned for implementation until 2014.

Joseph Ibrahim

The large expansion of Medicaid and Medicare will indeed send more users into the system, but margins will be under severe pressure every step of the way. We expect the government entitlements to hold providers to higher standards in terms of performance, rates charged and reporting.

The more stringent cost provisions will affect every segment of the healthcare industry, and likely cut into profits of insurers, pharmaceutical companies and medical device manufacturers. This will deliver more clients, but likely slimmer margins, and possibly fewer choices and less demand due to tighter cost controls and compliance requirements. It’s a mixed and messy bag.

As we continue to make healthcare investments and look to the future, we see opportunity in all this change. We anticipate new opportunities for entrepreneurial companies that provide IT and other solutions to help providers and governments control costs and eliminate fraud and waste. We also expect a shortfall in terms of providers, so we anticipate opportunities for new providers to flourish, provided they are adaptable to a changing system.

All of backing and forthing, inning and outing and upping and downing that led to this bill is a stark reminder that healthcare in the U.S. is a regulated and highly imperfect industry. And this bill doesn’t fully or directly address what remains a huge concern – the increasing costs of providing quality healthcare to Americans. Hence, the risk of further changes remains high. It is not an industry for those without the capacity to understand the resulting intricacies nor is it one for the faint of heart.

We are sure of one more thing:  It’s a new world for healthcare, and we’ll adapt our investment strategy if necessary. But it remains a large and growing percentage of GDP and one where companies of the small size and innovative ilk in which we like to invest can outperform. As longtime healthcare investors who remain in it for the long run, we look forward to the challenge.

Joseph Ibrahim is a principal in healthcare origination and Harvey Sigelbaum is a senior advisor at Riverside Company.