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What Does Healthcare Reform Mean for Healthcare Investing

I think that this bill, without analyzing every line on every page, will have some positive effect on healthcare investing and finance.

1. The removal of uncertainty is good. Now that there is at least some idea of what the new rules will be, investors, and strategic participants in the business can react. Some of the investment press has already suggested that healthcare will be a good place to be – the WSJ had a pretty good article this morning about winners and losers. Hopefully some of the prospective buyers and sellers of healthcare businesses who have been on the sidelines for awhile will now be back in the game.

2. Healthcare investing, both public and private, has historically been compared to a swinging pendulum. Time the swing right, and you make money. This phenomenon has been reinforced by healthcare entrepreneurs, particularly on the services side, who have a knack for sorting out government regulation and other business impediments. When the government changes the rules, they scramble and figure out how to make money in the new game, and when they pendulum swings, they win.

Of course after the commercial interests have mastered the new rules, the government takes notice of all the money being made, and changes the rules again. The game starts over. Entrepreneurs will look at the new rules and go to work.

I do think that despite the substantial media coverage of healthcare reform over the past year, we should still expect a little bit of the Bill McKay (Robert Redford) moment from “The Candidate” when after he wins the election, he turns to an advisor and says “What do we do now?”.

We have several “what do we do now” questions that need to be answered:

1. With over 20 million potential members joining the Medicaid rolls, how will currently stressed state budgets cover the state Medicaid programs to take care of them? This is one of the ways that the Federal cost of $940 billion is illusory – state budgets are on the hook for expanded healthcare coverage too. If they can’t afford it, they will be calling the Federal government for relief.

2. Who will take care of all the new people who will now have health insurance? We have a critical shortage of primary care physicians and other patient-facing care givers and technicians. Where will they come from? How will we train them? Sounds like a good opportunity for investing in healthcare education and training.

3. How will we handle the claims processing and recordkeeping for all of these people entering the system through Medicaid and the insurance exchanges? Well, this could actually be a bit of good news for big payers or IT outsourcers who already have the systems in place that the government will need. Rather than set up new systems, it would seem to make sense for the government to contract with servicers with existing knowledge.

I’m sure there are many of more of these that we will become aware of in the coming months…

Andy Cowherd is a Managing Director in the Healthcare Group of Peter J. Solomon & Co., a New York-based investment bank. Prior to joining PJSC in 2005, he spent eight years as a general partner of Atlantic Medical Capital, a private equity fund focused on healthcare investments.