Even in the midst of significant changes, in large part due to the Affordable Care Act, private equity firms continue to seek out deals in the healthcare sector. Due to consistent demand, an aging population and constant innovation that continue to drive utilization and demand for services, the sector represents a growth opportunity for investors. These are some of the views expressed by William Douglass, Group Head and Managing Director, CIT Corporate Finance, Healthcare, a division of CIT Group Inc., a leading provider of commercial lending and leasing services, in “A Check-Up of the Healthcare Sector”, the latest piece of market intelligence in the award-winning CIT Executive Insights video series.

“Healthcare is a highly fragmented industry, giving private equity firms opportunities to execute roll-up strategies and buy companies at low valuations, to grow those companies and to make them more efficient,” said Douglass. “There has been a surge in activity over recent months with PE firms making smaller acquisitions as a means to consolidate certain industries. On the flip side, given the significant liquidity in the lending and PE markets, the challenge is valuations continue to get pushed higher.”

Overall leveraged buyout (LBO) activity is up, specifically with private equity firms who have felt more comfortable putting their portfolio companies up for sale and other firms bidding to acquire new companies. The home health, specialty pharma, dermatology and anesthesiology sectors in particular have seen such activity recently.

According to Douglass, here are some near-term trends to watch for:

• Post-Acute Services Will See a Rise in Activity: Private equity firms will gain more confidence in making acquisitions of post-acute services, such as home health and hospice care, because of regulatory changes that give more certainty to reimbursement rates over the next few years. The secular trends toward care coordination throughout the healthcare chain are leading to consolidation within the post-acute sector.
• The Affordable Care Act Represents Both Opportunities and Challenges: The increase in the number of people signing up for exchanges, as well as the increase in those covered by Medicaid, represents opportunities. Complying with the act itself will pose a challenge. Providers will be looking at a greater number of insured patients using services, but at the same time there will be more reimbursement pressure, required regulatory compliance, the need to upgrade IT and evolving payment models (bundled payments).
• Regulatory Landscape Poses Challenges to the Sector: Reimbursement pressure and the transition to fee-for-value pose significant challenges. Care providers will have to figure out how to manage care across the chain. Coordination of care and preparing for evolving payment models will be crucial.
• IT Solutions Will Continue to Evolve to Meet Demands of the Healthcare Sector: The evolution of IT in healthcare and the need to invest in it have been driven by several factors. These include requirements by Centers for Medicare & Medicaid Services (CMS) to upgrade to the International Classification of Diseases’ coding for patient diagnosis (to ICD-10), CMS requirements around meaningful use, which require companies to upgrade to electronic health records, and the growing trend of fee-for-value versus fee-for-service, which boosts the need to better capture data to measure clinical outcomes.
• There Is Overall Optimism for the Next Twelve Months: Starting out in the fourth quarter of 2013, the growth rate in healthcare expenditures started to pick up above the more moderated growth levels of the past few years. We believe that improvement in the economy and expanded insurance could once again reignite the growth rate in spending.

CIT Corporate Finance provides lending, leasing and other financial and advisory services to the middle market with a focus on specific industries, including: Aerospace & Defense, Business Services, Communications, Energy, Entertainment, Gaming, Healthcare, Industrials, Information Services & Technology, Restaurants, Retail and Sports & Media.