Need For Efficiency In Health Care Leads To New Deals

Costs in the health care industry are sure to come under intense scrutiny no matter who becomes president, and buyout pros targeting the sector are trying to tailor their investments accordingly.

A common strategy is to find companies whose products and services can help health care providers streamline their operations and boost their efficiency. Recent examples include Apax Partners‘s April purchase of TriZetto Group Inc., a Newport Beach, Calif.-based developer of administrative software for the health care industry, and Water Street Healthcare Partners‘s October acquisition of HealthPlan Holdings Inc., a technology and services provider for managed care companies. Other areas of health care drawing interest from buyout shops include home nursing and dialysis, and low-technology medical products and devices.

“We’re convinced that health care will be under scrutiny to eliminate waste and perceived waste,” especially those companies that rely on reimbursements from Medicare, said Bela Szigethy, co-CEO of The Riverside Company, who recently huddled with his health care team to discuss its strategy in the sector. Riverside, which aims to invest about 15 percent to 20 percent of its fund in health care, is targeting information technology companies, companies that can handle a hospital’s laboratory services and other vital chores, and companies that supply low-technology products and devices.

In February, MTS Health Investors LLC bought HealthHelp Inc. with an eye toward helping managed care companies reduce their imaging and radiation costs by eliminating unnecessary procedures while raising safety and quality standards, said Curtis Lane, senior managing director. “The more you can diagnose things early, the more you can save money for the system,” said Lane, who has been giving presentations to his limited partners on how a McCain or Obama administration could impact health care spending. MTS Health Investors is also interested in home nursing, dialysis, and health care IT, among other sectors.

As a mezzanine and senior lender, Golub Capital is especially interested in health care companies that provide necessary services and products, such as syringes, bags and tubing, as well as ones that help health care providers lower costs, said Stefano Robertson, principal. Last week, it helped to finance MTS Health Investors’s acquisition of DNA Diagnostics Center Inc., a company that provides DNA testing for paternity tests.

Golub Capital is also keeping an eye on reimbursement changes. For example, as of Oct. 1 the Centers for Medicare & Medicaid Services, the federal agency that administers Medicare and works with states to administer Medicaid, stopped paying hospitals for the treatment of “reasonably preventable” errors, such as falls or infections patients get from catheters. Hypothetically, a company that helped a hospital avoid these costs would make for an attractive investment. “If a company has a product that facilitates hospitals and doctors to avoid those types of infections, then that has a strong revenue driver,” Robertson said.

Health care markets that buyout shops are avoiding include nursing homes, because they are primarily reimbursed through Medicaid and because their real estate values are declining; durable medical equipment that hospitals can put off buying; and acute care hospitals, because they are at risk of Medicare cuts while already having razor-thin EBITDA margins.