What Obamacare dismantling could mean for PE

The private equity community will continue to flock to healthcare regardless of how the Affordable Care Act is modified or whether it is replaced, several sources told Buyouts.

But as the House debates Speaker Paul Ryan’s recently introduced American Health Care Act, experts say the proposed changes to Obamacare, if passed, would create even more opportunity and risk across different pockets of the industry.

The AHA, the first public draft of the Republican healthcare plan, would end Medicaid’s entitlement structure and replace it with a fixed, per-capita system. Obamacare’s penalty for those not having health insurance would be dropped, but those who opt out of insurance for two-plus months will pay a fee when they try to buy a new plan.

Among other things, the subsidy system would be tied to an individual’s age and not income, and it would mean big tax cuts for medical-device makers and insurers.

Medicare appears safe

Richard Zall, a partner and the chairman of the healthcare department at Proskauer, told Buyouts that while many industry operators and associations view the GOP plan as regressive overall — since it will reduce coverage for poor and low-income working people who need it — Medicare benefits appear to be largely protected. 

“Medicaid is probably the biggest area of vulnerability,” Zall said, identifying long-term care, nursing homes and, in some instances, home health as potentially hurt.

“If [Medicaid] moves to block grants, what’s that going to do? That’s an area that I’ve seen people worry about the investment implications if there’s a real restructuring,” he said.

In addition, the commercial marketplace, especially the employer-based insurance market, isn’t going to be affected significantly, he said. So investor interest in the physician-services, care-management and technology-enabled-service sectors serving the commercial market ought to all remain in vogue, he said.

Adam Rogers, who as a DLA Piper partner focuses on healthcare transactional, regulatory and litigation matters, said that if what’s currently proposed winds up being pushed through, and that results in significantly more uninsured patients or more people who opt to buy only catastrophic coverage, more self-pay options like urgent care could see an uptick in activity.

At the same time, consumer-driven healthcare plays will also be put into greater focus as individuals take on a larger portion of cost, Rogers said.  

Zall agreed, noting that from an investment perspective, one potentially attractive outgrowth of the GOP plan would be the expansion of health saving accounts.

“Companies that offer services or products that consumers can purchase directly on a discretionary basis may get better traction as consumers might have a little more tax-advantaged money to spend,” Zall said. “The PE community is very selective and looks for the niche business opportunities where the customer base has money in their pocket.”

From a credit standpoint, this week’s GOP announcement also doesn’t change the feasibility to finance sponsor-backed deals in the sector, Fitch Ratings senior director Britton Costa said. For example, the ability of debt-ridden hospital operator Community Health to price $2.2 billion of high-yield bonds earlier this week illustrated that debt capital markets remain liquid, Costa said.

‘Cost headwinds’

“Looking at the long-term factors, we think the volume winds are pretty hard to change and the cost headwinds are pretty real,” Costa said. The analyst added: “To the extent that all of this noise and uncertainty does weigh on public companies, it could create more opportunities in the private markets.”

As the lower-middle-market universe tends to be a little more sheltered from larger, macro concerns, a flight to private capital in the past five or six years has set the stage for numerous lenders to enter the market, said Matthew Evans, a managing director on the healthcare team at Monroe Capital, a lower-mid-market lender.

“There’s a lot of capital chasing the same deals, including both regional and national banks, leverage-focused lenders and other vehicles,” Evans said.

“Given the volatility and lower overall yield expectations in both public and private equity, the private debt market has become more appealing of an asset class,” he added

To be sure, the proposed changes to Obamacare remain very preliminary.

“There’s likely to be some changes, if not significant changes, but this probably is not going to be where things land before all is said and done,” Rogers said. “When the Congressional Budget Office scorecard comes back, if it looks like it will be more expensive and/or cut millions from being covered, in all likelihood it will impact the ability of getting votes to push this through.” 

Action Item: The proposed House bill: http://bit.ly/2mZ83Oq

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