SMB Healthcare PE

Healthcare SMB acquisitions and Healthcare mid-market PE.

Tweets about business strategy, science, and disrupting healthcare.

[SMB Healthcare PE @roblarson]

7 questions on healthcare private equity deal environment!

A media department reached out this morning with questions about the current deal environment. My answers below:

1. What do private equity investors find attractive about the healthcare space?
- Most importantly, it’s a profitable market driven by underlying regulatory barriers to competition. That’s why dental practices rarely fail, while retail stores fail all the time.
- In addition, you have a third party payment mechanism that separates the decision maker from the payer, resulting in healthcare spending that persistently grows at a faster rate than the overall economy.
- Finally, you have economic inefficiencies all over in healthcare, so there are lots of economic rewards for those who can fix problems in the current system.

2. What are the drawbacks and risks of investing in healthcare right now?
- The biggest issue *right now* is that there is regulatory and payment uncertainty given some of the statements and predictions that have been made about the DOGE effort and its potential impact on Medicaid and Medicare. That uncertainty is having a chilling effect on investment activity.
- More generally, healthcare investors must always be careful with any impact they are having on patient outcomes and wellbeing. Otherwise you risk causing real harm to people (not to mention the headline risk and bottom line impacts that follow). Healthcare solutions that aren't well thought-through can have unintended consequences that are bad for everyone, especially the customer.

3. How is the Trump administration, and the sweeping changes they have already begun to make, expected to impact this sector, if at all?
- Nobody knows for sure, but there is talk about significant cuts to fraud, waste, and abuse in Medicaid and potentially Medicare. The numbers that are being mentioned are large enough to suggest that “waste” might be interpreted broadly. And regardless of the type of cuts or how warranted they may be, that is potentially substantial industry revenue that might get pulled from the sector, which will have an impact.
- In addition, there have been talks of potential healthcare regulatory changes such as PBM reform, FDA reform and/or resource availability, and potential restrictions on DTC pharma advertising, all of which would impact current business models.
- On top of that you have other potential broader policy changes such as increased tariffs (which impact med tech, equipment and supplies companies, but also impact healthcare providers’ supplies costs), M&A regulations, immigration (which may impact staffing), and M&A regulations.

4. What do valuation multiples for healthcare deals look like? And how has that changed/is it expected to change?
- Valuation multiples range widely right now – we’ve seen multiples in the single digits for either lower-quality or retail-heavy assets, and multiples in the 20’s for high-quality assets. There has been more of a focus on high-quality assets on the part of buyers, so that middle-tier and lower-quality assets aren’t getting as high multiples now as they did a few years ago, while the highest quality assets are trading at very high prices.

5. What does the opportunity set look like in the middle-market specifically?
- The middle-market’s relationship to the top end of the market is similar to previous years, except that you are seeing more middle market investors emerge and more middle-market investors are showing a willingness to extend down into the lower end of the market in their search for deals.

6. There is a huge backlog of deals that has resulted from the dearth of M&A activity in recent years. Will healthcare deals comprise a significant number of the M&A deals expected to come to market?
- Investment bankers are predicting that it will. And even though I don’t think I’ve ever heard an investment banker forecast that the deal market is not going to be stronger next quarter than the current quarter, I suspect they are correct. Certainly there are a lot of healthcare assets in portfolio companies that need to be sold, and LPs are asking for their money to be returned before investing in a new fund, all of which suggests that deals are going to heat up compared to recent levels. We have also seen a lot of requests for sellside work, which suggests a good number of assets coming to market later this year.

7. What is the impact of AI on the healthcare sector and is it changing the way PE firms look at companies in this space?
- So far it is mostly a “future” thing, though we have seen AI show up in tech-enabled services such as imaging/radiology and in helping data companies pull insights out of unstructured data such as physician notes and discussions. Increasingly it’s expected to play a bigger role in other tech-enabled services such as revenue cycle management and other business process automation.
- Down the road, there is potential for a significant impact in the healthcare software space, as software functionality becomes easier to copy and reverse engineer with AI developer tools, leading to a proliferation of software vendors, and driving downward pressure on both pricing and future development costs. Barriers to switching such as network effects, switching costs, and the mission-criticality of the software, along with barriers to functionality copying such as proprietary data and partnerships will protect against such effects, and we expect investors to increasingly focus on those attributes when evaluating healthcare IT opportunities as a result.

[SMB Healthcare PE @roblarson]

@SellersCounsel @ryanraysr great game! hope you enjoyed it despite the rain.

[SMB Healthcare PE @roblarson]

@nikitabier unfortunately he has never shown that he really cares about the deficit.

at least not while president. he cared while campaigning but not after he got in office.

[SMB Healthcare PE @roblarson]

@dvasishtha I have the opposite problem - microsoft office changes EHR to HER every. single. time. Every office app.

you would think over time it would notice that I change it back every time. but no. no learning there.

[SMB Healthcare PE @roblarson]

@tomaspueyo @dylan_heagy lets do it for the Lone Star Tick, please.

[SMB Healthcare PE @roblarson]

@SMB_Attorney lethal injection is the worst way to carry out executions.

Bringing back firing squads would be much more humane.

[SMB Healthcare PE @roblarson]

Yes, there was definitely abuse in many cases.

However: the new skin substitute technologies are amazing. Human placental tissues, autologous skin cells, stem cell signals, 3D bioprinting - they work incredibly well.

In many cases, the choice for elderly & diabetic patients with non-healing wounds is between either providing these advanced (and expensive) skin substitutes - or amputating the limb (when you're lucky enough that the wound is on a place that CAN be amputated - sometimes that's not possible).

after the reimbursement fix this year, advanced wound treatment isn't typically an option, leading to more amputations and wounds that will never heal (and can be fatal).

The grift was when they were giving these treatments to patients who were going to die anyway. But there were also legitimate cases where grandmothers were able to survive much longer, and with both legs, because of these advanced treatments.

[SMB Healthcare PE @roblarson]

@grok Create an image of what the world would look like if I were in charge, based on my tweets.

[Bobby Fijan @bobbyfijan]

“Create an image of what the world would look like if I were in charge, based on my tweets.”

[SMB Healthcare PE @roblarson]

Who has no money? The mentally disabled? We can pay for them via taxes.

The able bodied able-to-work? They can get a job (even a "low-skilled" job) and make a little money, which at that point will be enough money.

There will still be jobs for humans because humans will always be different than AI/robots, even if the AI/robots are overall better and more productive. But the areas where people are *different* than AI will become highly compensated.

[SMB Healthcare PE @roblarson]

@hustlin_heev Don't do sleep training if you can avoid it. I've done a 180 on it. I now believe it causes trauma to babies.

Just let them sleep in the same room as you. People did that for thousands of years, it's how babies instinctively feel safe.

[SMB Healthcare PE @roblarson]

This is brilliant

[Anthony DiGiorgio, DO, MHA @DrDiGiorgio]

Imagine the government creates a prepaid food program, lets call it "Foodcare," only available to a certain population.

The Foodcare beneficiaries pay a little for their coverage, but the government also taxes everyone else to fund Foodcare.

Those taxes make it so that Foodcare beneficiaries get $3 in food for every $1 they paid in. In fact, Foodcare beneficiares are so powerful a voting block, that the federal government will borrow large sums of money just to ensure the Foodcare beneficiaries continue to have access to all the kinds of food they want. Lawmakers make sure they maintain that subsidy so Foodcare beneficiaries can get three times the amount of food as they paid for.

Meanwhile, Foodcare doesn't pay chefs or restaurants very well, but they need to stay open for Foodcare customers. If they don't allow Foodcare customers, they lose the ability to take walk-in patrons. So they calculate that they need to charge private customers a lot more so that Foodcare customers can eat off the same menu. Giving everyone Foodcare prices would put everyone out of business, so the private paying customrrs need to further subsidize Foodcare.

Of course, Foodcare is popular! Foodcare beneficiaries are getting steak and lobster, subsidized by private paying customers through higher taxes and higher prices.

"Let's give Foodcare to everyone!" they say.

But wait...

It's a mathematical impossibility for everyone to get subsidized access to food. Some people are going to pay for a whole lot of food they don't eat in order for others to eat more than they paid for. That's just basic math.

So Foodcare is going to need to pay chefs and restaurants a lot more. To keep from going broke, it's going to need to strictly limit what people can order on the menu.

"No more steak or lobster," the waiter says. "The approval process for those takes months. Government bureaucrats need to authorize every item you order. Would you like some gruel instead?"

Now, all of a sudden, Foodcare isn't so popular...

[SMB Healthcare PE @roblarson]

When we can start producing goods and services at ultra low costs due to autonomy and intelligent robots, then everyone will be able to access those goods and services.

At that point we will all be wealthy.

Most people get hung up on income/money. But that's just a proxy for goods and services.

It doesn't matter whether it's accomplished by people's income going up or by the price of everything else dropping. The availability of goods and services IS the wealth.

[SMB Healthcare PE @roblarson]

@irentdumpsters Same advice for healthcare practices?

Can be high ticket but seems like same principle would apply?

[SMB Healthcare PE @roblarson]

@WilsonCompanies lfg

[SMB Healthcare PE @roblarson]

Interesting - so I guess that would be more a limit on the value derived from the training data than on the compute / processing power.

Doubtless they have oceans of spurious correlations in the dataset they're using already, so it's not a new problem. But it's an interesting thought experiment how that will impact scaling laws going forward.

[SMB Healthcare PE @roblarson]

@BillDA you gave it access to your current email account?

I have not yet been brave enough to take that step.

I created a new gmail account for my agents. maybe someday!

[SMB Healthcare PE @roblarson]

@wil_da_beast630 Sean Miller made the smartest move in sports, coming off a compromised reputation. Over the next decade, Texas will become a consistently dominant powerhouse in basketball and he will get the credit.

[SMB Healthcare PE @roblarson]

1. Make FDA approval optional. It's a stamp of approval and a vote of confidence from a high authority. Good to have. But (a) other private sector bodies will be allowed to provide similar similar optional stamps of approval also, to compete with the FDA. and (b) let manufacturers sell any drug without FDA approval, they just have to disclose it and disclose the risks. Prescribers and informed patients can choose to accept the risks if they judge it to be worth it.

2. Price transparency + market forces: healthcare providers must disclose cash prices on their website for simple/straightforward visits/services/procedures, which are available to anyone (1) paying cash without insurance, or (2) paying cash for pre-deductible care. After deductible, you can charge more to the insurance companies, whatever you can negotiate with them. But cash visits get the disclosed cash prices. (goal is to make it act more like a market). Of course, complications may lead to higher prices, but it should be possible to price-shop for straightforward care. (vs. today's non-market where most doctors and most patients have no idea what the price of the procedure will be.) Along with this, encourage high-deductible plans with HSAs and price-shopping members.

3. abolish cartel-like protectionary regulations:
- CON laws
- CPOM laws
- bans on physician-owned hospitals
...all gone.

4. remove restrictions on types of insurance you can sell. If someone wants to buy a catastrophic-only insurance plan, and pay for all routine stuff with cash, they should be allowed to do so.

5. allow non-licensed care providers to provide care, but they have to disclose upfront, in big letters on the front page of their website + every advertisement + at their front desk + on business card (NOT in the fine print - make it obvious) that they are not licensed. [note: this one will be the most controversial with doctors b/c it will bring down bring down doctor salaries along with the cost of care]. Getting a med school slot, and later a residency slot, will be valuable for advertising your expertise. But there will be alternate options for training for lower-cost care that does not have the stamp of approval of these bodies. There will be a spectrum of higher-cost, licensed care, and lower-cost unlicensed care. It won't be prohibited, but must be disclosed.

Do these 5 things and watch the healthcare industry completely transform over the next decade.
- cost of care will drop
- access to care will go up.
- the healthcare industry will finally start behaving like a market.
- doctors who are good businessmen will flourish
- doctors who aren't will struggle
- disruptive technologies will finally find a home in healthcare markets which will further drop costs.

[SMB Healthcare PE @roblarson]

@ClintFiore Three amigos
Tommy boy
Shawshank redemption
Moneyball
Groundhog day

[SMB Healthcare PE @roblarson]

@jamesonhaslam Been a long time since Randy and Curt!

Good luck to you guys in the playoffs!