Healthcare Rx Podcast - Episode 3

 

 

 

 

 

 

 

Christopher: Thank you. Thank you for those kind introductions. Is my mic on? Can you all hear me? Okay. Well, first of all, let me just step back and say thank you for this invitation. I can personally attest to BDO, Joe Burke and his team in DC and Scott Hendon in Dallas and multiple other offices. Love the partnership. You all do a great job. Thank you for carving out time during the most hectic week of the year here in San Francisco to just kind of calm down, meet friends, and talk about the big picture as it applies to us. So thank you. 

 

Second thing is, I'm on the panel with two lawyers but they're not really lawyers [laughter], they're business lawyers [laughter] but I thought that was interesting. Two lawyers and one MD. So again, honored to be here. 

 

Now, it's funny, on the first page of the handout that y'all have, it says, "Make no mistake about it, disruption is the new normal in healthcare," or something like that. I mean, if there was never-- if there was ever a truer statement, I don't know what it is. It is so exciting to be able to wake up in the morning and y'all might watch Bloomberg or CNBC, and you see these mega stories and these mega potential vertical integrations, like a CVS-Aetna, take place-- maybe not take place, but the lawyers and the regulators decide ultimately. But how exciting. 

 

I mean, for years, we just encountered horizontal integration after horizontal integration with company A, which was exactly like company B, coming together and taking incredible market share. And name the last time the consumer benefited from a mega, horizontal merger. Right? 

 

And the regulators have fortunately been very careful about approving horizontal integrations. These mega payer mergers over the last several years didn't go through, two of whom I'm sure you can remember. And yeah, won't say whether that's good or bad, but it's exciting when you have vertical integrations along the supply chain, along the continuative care take place. So disruption is truly the new normal in healthcare. It was an apt first sentence in the first page of this brochure, but those are my introductory comments. 

 

Let me just finally get to the question here and mention population health. I've been an investor in Lumeris, which is class number one population health services company. Karen, wonderful job. You talked a little bit about population health. But it is the megatrend-- I give a lot of talks on healthcare and private equity and just the trends. And you follow the reimbursement trends, but you have to talk about population health. 

 

There are companies out there doing it very well. Proud of what the company I mentioned is doing. There are other companies doing a great job. But we're following the megatrends, but we're also trying to stay diversified. In our fund, we basically look at anything that touches healthcare and life sciences except for biotech, pure biotech, pure therapeutics. But we want to be diversified and follow the megatrends around reimbursement. And I can't think of one larger than pop health. So there's my long answer.

 

 

Bert: Yeah. I think that we're a generalist firm. We're from New Mountain Capital. We have a lot of capital under management, with actively managing a little over $10 billion. But we're a growth-oriented firm and for our investors we try to find places in the market where we can both drive returns and do it by driving growth, as opposed to classic buyout of leverage and what have you. So that brings you around pretty rapidly to health as a sector. 

 

We're probably about 30% today of our fund invested in healthcare. And we have both providers, for example, dental services, some emergency room services. Our biggest focus from around the growth point, and I think it goes to what Dr. DeSalvo says, is a thesis around really focusing on meeting the patient where the patient resides, and then really going in and enabling the workflows so that change can happen. 

 

Our fundamental perspective is that in order for this change to occur, interoperability, alternative site, delivery of service, better quality, lower cost, it's not a rip and replace. It will not actually be sort of a Silicon Valley genius who figures this out. It's actually going into these very, very deeply rooted workflows in automating them, transforming them, bringing them together, and then sort of repositioning to point the way the models come together. So that's how we think about it. 

 

So I think we do, as we underwrite our investment, and we only get rewarded if we actually create a lot of value for our investors by creating a lot of value in the healthcare system as a purely private player. And the way we see doing that is exactly by addressing these macro trends with a long-term view. We're not trying to do it today, tomorrow, the next day. We have a long hold period. We're not afraid to invest a lot of capital. We don't take on a lot of debt. So we really drive serious growth over the long haul, but I think this is absolutely the fundamental thesis we invest on.

 

 

Ira: Well, I sit in a unique position on this panel because I don't have to put my money on the line and I get to say, "Hey, that's a great idea. We'll paper it up." And then if it doesn't work out we go, "Oh, sorry. We'll take it apart now and then do it all over again." So—

 

Christopher: You'll find somebody to sue.

 

Ira: Yeah. It's a great position to be in. Right? So what we're seeing-- last year we closed out the year as the most active healthcare law firm in the world with 57 large transactions in the healthcare private equity space alone. So we see it, and it's very interesting to see the changes and I want to pick up on Bert's comment. We're not seeing these transformational, "Hey, let's go in and change everything. Rip it apart and build it up." It's the incremental and it's the best ideas sometimes don't win. It's the ideas that can be actualized win. 

 

So yesterday we had a panel on digitalized health and we had some folks from Kaiser Permanente Ventures there, and what did they say? She was talking about-- before they make an investment, they'll have the nurses on the floor kind of walk through it and say, "Is this something you guys will use?" Why? Because they don't have any time. There's no extra time to figure something out. Or even if it's the newest, coolest toy or whatever it is, and everybody agrees the end results are great, if you can't drive it through the system, it's not going to happen. 

 

So what we see is a lot of the consumerization. Everybody's carrying around little supercomputers in their pocket, even at some of the lower ends of the socioeconomic spectrum, and that's changing a lot of things, and then now with the belief that others outside the healthcare space can add a heck of a lot of value. 

 

So do I think Amazon can solve some of the issues that Karen was pointing out better than the way a healthcare system is traditionally doing it, like Atul Gawandes' medical hot-spotting, go into the place in Camden, New Jersey and deliver the food and make sure the services are going? Yeah.

 

When you break it down and you say the way the US healthcare system works, you have these patients that have all kinds of issues, and what are we doing? We're having our sickest people go visit seven different doctors' offices. They don't remember when the appointments are. It's really set up to be convenient for the doctor, not for the patient. So maybe sending somebody in with a backpack full of electronics and doing all the pre-services for them and then doing a face-time visit is much more effective.

 

Who's better at doing that? You don't have to be a healthcare company to do that, you just have to be smart at logistics and getting people on the ground. So we're seeing a lot of innovation around that. Problem is it's a long way to go. 

 

So what are we seeing our private equity clients do? It's a lot on the physicians' strategies, the roll-ups. We're seeing a tremendous amount of energy around, what I would call, physician practice management 2.0. And I know we work with the wonderful folks at BDO on doing the work in doing a lot of these roll-ups. And we think they are going to be different than the ones in the late '90s and early 2000s that didn't work out. And we think that they're driven on the right things now, rather than the kind of poof deals and you'll make a lot of money when the company goes public. 

 

This is much more of the type of care that you need to give the type of interfacing with the patient in a digital way, and the health systems in a digital way, and being able to accept risk in doing that, that the smaller physician groups just can't do at that scale.

 

 

 

 

Bert: I mean these are really big macro trends. I think everyone is trying to understand what's called the “Amazon Impact”. And from our point of view, as we're doing our underwriting, it's a major new entrant into the market. And I think even the quality of the thinking out there, among the bankers and the consultants and all, I think it's still kind of coming to rest. It's good but everyone's still scratching their heads. 

 

I think the way we think about it a little bit, and maybe this is more of an investment perspective than the kind of the care necessarily perspective, is that we kind of see the world really breaking between, let's call it, consumers of healthcare products and services and patients. 

 

So on the patient side, you have really high acuity needs, very seriously ill patients needing some sort of specialty. And then you have others that are consumers that can really have consumer-directed care, can access products and services that are much less critical to their long-term health. 

 

So we look at that as a fundamental divide. We think Amazon makes the point there. We also think that Amazon really reinforces the point of alternative site, post-acute, outside the hospital setting for care, because now that supply chain to get access to at least the products is just going to be that much more robust. Because they move in the pharma, that will increase, and that's a whole different question of how it is or is not disruptive to the sort of the pharmacy side. 

 

I think on the integration of CVS-Aetna, this is a very interesting first move among, let's call it, the transformation of the payers. So you can also think about what Optum's doing more generally in building services, having providers, etc. So these are very significant, very positive changes to the total landscape. As we look at it, we continue to look at, say, both of these, in the same way as, "Are we investing behind those fundamental businesses that will drive lower cost, better care, more direct contact with the patient where the patients resides over a long-term to kind of be comfortable with our underwriting terms?"

 

 

Christopher: You know what's interesting about this slide is the 47% of folks who think moderate or-- what does it say? Yes, moderate impact about CVS-Aetna merger, and again, vertical integration, exciting. I actually don't really get that merger. I don't get it. 

 

I get when United buys physician groups and includes physicians in the play, but I don't get the CVS-Aetna thing as much. But I still love tectonic changes, and I love it when multi-billion-dollar entities that are doing okay in this new healthcare environment, and who will be around for a while and who are very cash rich and innovative, are thinking out of the box. It bodes well for private equity portfolios and just the acquisition of the liquidity cycle, so it's exciting from that front.

 

Let me just mention something quickly, a follow-on to Ira's comments. Because it was interesting when we had the panelist call - gosh, it seemed like a while ago - and we were asked just about revolutionary investing and revolutionary technologies, growth investors, and we're looking at a lot of incremental innovations versus revolutionary innovations. We're not venture capitalists. So it's more incrementalism versus revolution in terms of our overall investment MO. 

 

But I will tell you that, in the spirit of being diversified, kind of my initial comments, what we want to do is we want to find great services platforms that aren't necessarily the most exciting. They're cash flowing, but they're not the most exciting, they're not the most technologically innovative. But we like to inject technology into those business models, create hybrid technology-enabled services platforms - we call them TES platforms - where you're actually touching the end user somehow - the patient, the customer - and you can price based on customer service. So there's a real differentiation, a real angle there potentially. 

 

But, where the technology-- maybe it interfaces with the end user, but the technology is really behind the scenes. It's in the back office. It lets the business scale. It lets the margins eventually expand, do some moderate, or serious, operating leverage, and of course those margins will eventually determine the exit multiples. 

 

So these combination hybrid technology-enabled services business, it's about as technological as we get, about as revolutionary as we get, but I just want to put it in context of just how we're just trying to stay out on the innovation curve without getting our skis out too far ahead of us.

 

 

Ira: Oh, absolutely. And I think they're going to be-- continue to be more empowered. And I'll go further, I think, than even Bert did on what Amazon can do. Because I don't think it's just the product side, I do think it's the service side, as well. 

 

I just moved into an apartment in New York and we had to get some TVs hung on a wall, right, because that's what you do now, you don't put them in big armoires anymore. Right? So we went on Amazon, got Amazon home services to come for $150 bucks, they put them up, buried the wires in there. 

 

Would I do a house call with the Columbia Presbyterian Hospital doctor that was set up by Amazon? Absolutely. Absolutely. Would everybody do that? I don 't know, but I think that the breakdown, that the better way to deliver services they have. And it's not just product. 

 

So I wouldn't put it, "It's got to come in a box. It's got to be delivered by a drone." I think people who you talk to who work on the Amazon services side enjoy it. They like the freedom. They like using technology to set their schedule the way they want. I think there's an incredible medical workforce that doesn't want to conform to the standard business hours that can be of service. I think people will do that. I think we have technology out there with the MDLIVEs of the world and the Teladocs, and it's part of the health plans now. 

 

The benefits are out there, but the problem is 90 percent of companies that have them, only 10 percent of the population are availing themselves to that. So, to me, it shows that disconnect, there's just tremendous opportunity to help.

 

 

Christopher: And let me just say on the consumerism side, the “patient-ism” side or the “employee-ism” side is about as close as we get to consumerism. I mean, the consumer will be empowered in many ways. Great comments. 

 

We're looking at this from a patient perspective, from an employee perspective. And hopefully, the employers continue to push this through their intermediaries in concepts around primary care, around direct primary care, around payer disintermediation. Again, looking at this from the patient perspective, the customer service perspective, there's a revolution going on, not only in primary care and specialty care around PPM version 2.0, kind of like web 2.0, where it's just a more robust business model. The bottom line matters, and those bottom lines can be quite nice.

 

But looking at this from a patient perspective, primary care and whether or not you're rolling up "primary care physicians," you're contracting directly with patients through employers. That is very exciting. 

 

And again, kind of like population health is a megatrend, also looking at ways to disintermediate a third party and look at providers touching directly those patients and those employees, is an absolute megatrend, too, and very exciting in a robust area of investment interest for us.

 

 

Christopher: You've got to be cognizant, you've got to be aware of the public policy ramifications, obviously. But we're trying to look three to five years out in our typical investment, but even farther out, in terms of how we're building our investment theses, how we're generally, strategically trying to allocate capital on a fund-by-fund basis. And investors will tell you, "We're strategically thinking 25 percent in this subsector, 25 percent in that, etc.," but things are opportunistic. 

 

I mean, you can't be too doctrinaire about where you need to deploy in capital. You've got to listen to the market, listen to the network, and look at things on an ad hoc basis sometimes. But the policy is critical. We've mentioned some trends that had been forged by pressure on policy-makers, not an oxymoron, pressure on policy-makers. 

 

But we're not changing our overall investment thesis because of the headline risk that we see from DC. I think during our pre-panel call, somebody said that we're not as day-to-day vacillating because of policy-changes as you might think, we're betting on bigger trends.

 

 

Bert: I think I agree completely with Chris. I mean, we're all-- they own an asset for five years and then there's going to be a natural second owner that's going to want it for another five years. You're really looking all the time out of eight to 10-year trends. So you're kind of investing behind that at least in our world. I think the things that break it down that are-- the greatest risk is where you take on a reimbursement risk. That's where you have the pressure on policymakers potentially bringing in the most, and things can change there and so you have to be super careful. 

 

And I can say almost every time we have a business that's got reimbursement to it, we have great, interesting experiences. We kind of usually underwrite them in a way that we know what we're doing so it works out fine, but it's always a little bit of a rocky ride. 

 

I think the other two areas, though, that we think a lot about are at-risk more and more, this model being an at-risk model. So getting behind all the businesses that enable providers to be at-risk is going to be part of the future, so we like to think of that catch of the data that brings you to systems, that brings you lowering costs, that brings you to specialization. 

 

And then the other thing, longer term, is what the American version of single payer ultimately looks like. We will be through this administration in a heartbeat and who knows what comes next? It may be the same, it may be different, and even if it's the same it may be different. 

 

You have a couple of states out here, one big one that I think we're actually sitting in right now, that would say single payer is where we ought to go. But that's the beginning of the discussion, what does a single payer look like? Is it really a big version of Medicare Advantage? Is that the way it really works? How does that play out? So we're thinking all the time about those trends as well and trying to just be fundamental to what enables any of those outcomes, and I think then we can feel kind of good about creating real value.

 

Christopher: Yeah, I tend to agree. The common thing I would say is since '86 we've been volatile. Nobody knows, it's been, "What's happening next? What's happening next?" We concentrate on it now. But if you remember over the last few years, we were talking about whether the Supreme Court was going to knock out ACA, we were talking about whether congressional changes were going to significantly affect it. 

 

So I would say that the private equity community and the healthcare-invested community, for the most part, is comfortable with being uncomfortable, of not knowing the exact direction but really zeroing in on the-- we're not going to place major bets on businesses that have outsized reimbursements, that they're not bending the cost-curve, that they're not doing those things that are better for the patient, that take out administrative headaches and costs, and things like that. You're not seeing those big bets on out-of-network-type ventures and entities anymore that you saw maybe four or five years ago. 

 

So maybe the only thing that's close is if somebody's really got scale in a particular niche and they control some of the reimbursement because it's a lot of private pay that you'll see some of that. 

 

But otherwise, we're just seeing the fundamentals of being-- really bending the cost curve, doing a better job demonstrating, making data-driven decisions that you can basically share transparently with the patient, whether you're doing it now or you're going to do it in the future. And those are going to be the businesses that people are investing in, that full trade, five and 10 years from now.

 

Steven: What role does cross-border transactions play in your, or your clients', diversification strategies? This is a multi-level question. That's the first part of it. And second of all, are any of you investing there or any of your clients investing there? And if not, what other regions are your clients looking for, or yourselves looking for investment opportunities in? So, Ira, maybe you could kick off that.
 

Ira: Sure. So, our Shanghai office brought 140 people to this conference, just on healthcare services investment, both inbound and outbound. It's been pretty amazing. We thought we'd have 10. We had to redo the room size twice. 

 

What are they are talking about is what I would call scratching the surface of what we're doing here, but really fundamentally building the healthcare services business in certain areas in China. And it's amazing. The managing partner, my China office, one of the highest paid lawyers in Shanghai - I know this because we did data reports on it, right - when he had the flu, he was standing on line to receive his healthcare services on the streets of Shanghai with 50 people in front of him. And that's the way care is delivered. 

 

He didn't think there was anything wrong with waiting two and a half hours. It would never fly in the US, so I think there are tremendous elements of a differentiated system in the making there. So, we're seeing a lot of that. In the UK and Pan-Europe, we're doing a lot of deals with German private equity funds. We're very interested in US healthcare. 

 

We also did some work with UK private equity and family offices, very interested in making US healthcare investments. First time we've seen that in a while. Bert's firm actually was a possible co-investor on a deal that we bid on for a national urgent care platform, which the UK likes that model. At least these investors, they like that model; it's very familiar to them and they think it's got a lot of legs, so they want to move and bring it to the US, and Canada, and Mexico.

 

 

Bert: From our point of view, we're a domestically-focused fund so we kind of see it from three angles. One, we are getting in-bound inquiries around some of our companies from China-based investors which has been a bit of surprise, and enterprises, real estate conglomerates wanting to think about acquiring healthcare assets, for example. So, I can't say there's a lot of traction there, but it's been interesting inbound. 

 

Secondly, where we really see the leverage still, and this is maybe just more of an old-school model but new to healthcare, we're seeing the cost arbitrage becoming an important part of the delivery model, particularly as we move into some of the things that Chris was mentioning, and I had mentioned as well, which is around robotic process cross-automation, automating the workflows. You can start to then leverage lower-cost labor, off-site labor, offshore labor. So, that, we're seeing as a driver of the cost curve kind of a bending down. 

 

And I'd say that the third where we see it, is we have three different distribution businesses around Healthcare One that's sort of an alternative site, pure play to really the home that's leveraging device-enabled therapies in the home which is a large US player. We're now seeing opportunities to move that, at least North into Canada. We're looking at potentially some European opportunities, a little different model there, but that's in early days. 

 

We're also, another company that we own that's the largest distributor of contact lenses in the country, thinking about looking at some new ways to-- but those are sort of those more logistics business, where you're leveraging technology and enablement and know-how. So, we're very early days, I would say, on that. We don't see the need to invest too much behind that in order to drive what we need to drive, but that's kind of a little bit maybe of who we are as a firm.

 

 

Christopher: Well, there's plenty of opportunity in our country, so we're also domestically focused. Let me say a couple of things. I'll just mention what we're doing at Johns Hopkins globally. We've got 27 or so partnerships around the world where we're basically working with sovereign governments, ministries of health, very large entities/companies, like Saudi Aramco. 

 

Interestingly enough, when we hand shook and struck our deal with Aramco at Hopkins, about four or five years ago, I'd asked folks about Saudi Aramco, it wasn't as understood or even recognized by name as it is now but everybody, of course, knows of an Aramco and their plans to grow and to potentially go public. But we basically partner with these entities, and we really focus on-- and this is a sliver of my time, obviously, PE is the focus, but it's so exciting what's happening globally in the Middle East, which is talk about an exciting healthcare infrastructure, lots of services, IPOs, lots of growth along most subsector dimensions. 

 

But we're also heavy in South America. We manage healthcare facilities and work with ministries of health and large companies like Salud Pacifico in Peru, the largest payer and provider in that flourishing country. I mean, exciting stuff. 

 

We just ground-broke in Panama, which is Panama City, Panama, not Panama City, Florida, Panama City, Panama, which is marketing as the Dubai of Latin America, using Copa Airlines as kind of the Emirates Airlines gold standard bring in folks, reverse medical tourism. And we're helping work with those hospitals in Panama City. We're going to ground break on another one in a very nice suburb called Costa Del Este. Again, upgrading quality, accrediting, certifying, and just helping, utilizing Johns Hopkins' administrators and clinicians who are the world's best, upgrading the clinical care, upgrading the quality, managing costs appropriately but really changing the healthcare landscape. 

 

So you know the Vegas commercial, "What happens in Vegas stays in Vegas," our adage is really, "What happens globally is very exciting, but it's highly relevant to what's happening within our borders." So I get to see what we're doing around the world and seeing the trends around population health in countries that-- and some of these countries I've mentioned, they're-- it's a hegemony. I mean, you can get things done through ministries of health. When the Minister of Health says, "I want to implement this software platform in this acute care setting," it's done. And it's like a mini-laboratory. And you can see the effect of using it on user interface, and physician engagement, patient engagement, outcomes, and compliance. And you can use that data for other projects in those countries, but you can also see the utility or non-utility of that data and apply those opportunities here in the States in private and public portfolio companies. So it's really exciting. It's an honor to be helping in that regard. It was my international comment. 

 

And then, on the PE side though, in terms of international, what happens -and we kind of intimated this- is the fact that we grow our companies domestically and eventually there are international opportunities to move into a specific country with a specific solution, or service, or product, and grow enterprise value that way, versus us directly deploying capital in those foreign environments.

 

Ira: I just would give one comment to that that we're seeing which is - to pick up on Chris's comment - wealthy people all over the world are acting very similar. They act very similar. They buy the same brands. They stay in the same hotels. We're pretty boring. 

 

So when they're going to look at healthcare on a global basis- when you have a brand, like a Johns Hopkins or a Mayo Clinic or the like, they'll gravitate towards that if you brand it the right way, and we're seeing that. And we think that's a driver of some of the international deals that we're doing in places. And companies like Steward Health Care are pushing that as well. Internationally, we're seeing that.

 

Christopher: You see, that's a great comment, and your comment on Amazon, Amazon services. We all know if you listed all the verticals or all the sectors in the American economy that need an injection of customer service-- I mean, healthcare is great. I'm not here maligning our system. It's the best system in the world and we see this globally. We've got a lot of things we can improve on.

 

But the service dimension, I mean, expectations versus reality, huge opportunity. But if you can create customer service platforms-- and it's not rocket science. I mean, it's not-- this is basic blocking and tackling. 

 

We're in a very nice branded hotel. This hotel is known for training employees at just obsessively around customer service. Well, apply that to healthcare. You can do that internationally, you can do that domestically. So not a lot of technology necessarily there but huge opportunities to improve everybody's perspective, the provider, even the payer, and of course the patient.