Value-based reimbursement: Implications for LTPAC facilities and the ‘make, buy or sell’ decisions

The following is the first of three articles in a series:

Nearly all the healthcare leaders we speak with — whether from skilled nursing, long-term post-acute care, med-device, healthcare IT, hospital systems or pharma/bio-tech — are expressing one common theme: an urgent need to proactively respond to a rapidly changing reimbursement, regulatory and technological environment. To address this need, they are spending considerably more time assessing the costs and benefits of incremental investments in organic growth opportunities versus the potential of selling, merging or acquiring.

We believe the move from volume to value demands that healthcare organizations eassess internal capabilities and the breadth and depth of changes required to address this structural shift within the healthcare reimbursement system, as well as their ability to organically meet growth objectives.

The explosion of new technologies, products, partnerships and methods, many of which represent a major expense to healthcare providers, is causing the “make, buy and sell” decisions to garner more attention in the C-suite than ever before.

Mergers, acquisitions and divestitures are on the rise.

The internal conversation among healthcare providers is beginning to center on whether to allocate an increasing percentage of profits toward capital investment in order to ensure long term viability (The Make Decision), to acquire a company which has already made the requisite investments (The Buy Decision) or, alternatively, to merge or sell the company, thereby shifting the cost of these investments to others (the Sell Decision).

The move to value-based operations is spawning a significant increase in mergers, acquisitions and divestitures, in lieu of a decision to invest material resources in pursuit of organic expansion.

Citing a Capital One Healthcare Survey, “The plurality (41 percent) of healthcare executives said buying or merging with a business is their preferred growth strategy for next year. When it comes to growth, second to merging and buying, was revitalizing and updating existing offerings, with 30 percent of executives stating this [M&A] is a top growth strategy for them. That’s up from 21 percent over last year.”¹

According to Deloitte’s 2019 US and Global Health Care Industry Outlook, “Clinical innovations, patient preferences, and government program payment policies are prompting hospitals to shift certain services to alternative points of care and even to virtual environments that benefit from a cost and access perspective. It will be imperative for stakeholders across the health care ecosystem to collaborate around a whole-life approach to funding and delivering sustainable care.”

“Aging and growing populations, greater prevalence of chronic diseases, and exponential advances in innovative, but costly, digital technologies continue to increase health care demand and expenditures.”²

The above is being met with a plethora of innovations, many requiring substantial time and capital commitments. We see most of these innovations centering on three top themes:

• Virtual Care Applications —Treating people outside the facility.
• Patient Centric Solutions —Treat the patient not the illness.
• Wellness vs. Illness —Keeping people out of the treatment facility.

Clearly, the owners of every health services entity must evaluate how to fund these expenditures and how to keep pace with changes within the industry — but when faced with large and /or long-term capital commitments — this decision is even more complex and important.

Long-term and post-acute care operators, and the healthcare industry at large, are faced with critical investment decisions that may very well determine if businesses within the industry will remain relevant:

• Do we reduce distributions or raise capital to fund these capital investments, resulting in equity dilution and/or additional debt load?
• Do we merge with another company and lower our risk and capital outlay via economies of scale?
• Do we sell all or some of the business now and let the purchaser assume the risk and expense of the capital outlays required to stay a viable entity?
• Do we acquire other entities that have already make the requisite investments and leverage from their experiences or perhaps acquire to gain scale so that future capital investments can be spread over a larger revenue base?

Let’s start a discussion. Please share your thoughts.

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Scott Waxler is managing director of LockeBridge Capital Partners, a leading middle market M&A advisory and investment banking firm with strong credentials in medical device, healthcare IT, healthcare facilities, and services and pharma/biotech.  Scott has won numerous prestigious awards including the M&A Advisor’s Deal Maker of the Year Award. For more information about Scott visit Scott Waxler Bio.