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Sean Cunningham: Private Equity represents best opportunity for smaller undercapitalized healthcare providers

Private equity deals in healthcare, in the United States, has more than doubled over the past 10 years and with projected spending, the growth trend will continue. For 2020 – 2027, national health spending is projected to average 5.7 percent up from 4.8 percent in 2019, and will reach nearly $6.0 trillion in 2027. Healthcare as a percentage of GDP will increase to 19.4 percent from 17.8 percent today. For the most part, healthcare is seen as a more balanced investment, insulated from recessionary pressures primarily due to the aging population and demand for services that will drive increased spending over the next decade.

While there have been numerous Private equity mega – deals, most notably Envision Healthcare ( $ 9 billion), Athenahealth ($5.7 billion), Curo Health Services( $1.4 Billion), there is a subset of highly fragmented mid cap companies operating on a much smaller scale outside the large healthcare networks formed through years of acquisition and consolidation.

Smaller fragmented providers face a number of challenges including increased competition and pressure from large healthcare conglomerates, erosion of profitability due to “ fee for service bundling”, liquidity issues related to prepayment review, setoffs of overpayments, rising wages and costs and need for incremental capital investment to keep up with rapidly changing technology and needs for continued investment. Many of these firms become financially distressed and look to restructure in traditional ways of closing facilities, consolidating locations, downsizing which in some cases leads to a need to restructure through a chapter 11 process.

Healthcare in the United States is continuing to transform and will continue to change with the biggest challenges being an aging population, as well as cost and upwards of 13 percent of population without any coverage. Private equity investors will continue to play a critical role with opportunities in many areas to provide needed capital and investment in diagnostic imaging, outpatient dialysis, mental health, physical therapy, surgery centers, medical transportation, drug and alcohol treatment facilities, urology, orthopedic services, gastroenterology, physician group practices and other sub specialties.

Mr. Cunningham’s Select Healthcare Advisory Experience
ChemRX – Provided strategic advice and alternatives to Senior Lenders of ChemRX, a provider of prescription and non-prescription drugs, medications, durable medical equipment items and surgical supplies to approximately 60,000 patients in New York and New Jersey. ChemRx was sold to PharMerica as “stalking horse” bidder in a chapter 11, 363 sale.

Elements Behavioral Health – Provided operational analysis and advice to First Lien lender of Elements Behavioral Health, an operator of healthcare centers treating mental health disorders, substance abuse, eating disorders and trauma. The company was ultimately sold in 2018 through Chapter 11, 363 sale.

DSI Renal Care – Provided financial advice and alternatives to holders of approximately $300 million of Senior Debt Securities of DSI Renal Care, a nationwide chain of 100 outpatient dialysis centers. The company was restructured through a combination of modifications to terms of debt facility, coupled with additional equity contribution from the company’s owners. With 18 months of restructuring the Company was sold to Davita Heath for approximately $700 million resulting in 100 percent recovery to lenders.

Publicly traded provider of Diagnostic Imaging Services – Represented one of the largest providers of diagnostic imaging services in the United States, in identifying cost synergies that would result in acquisition/ merger of one it’s largest regional competitors.

Privately held east coast provider of laboratory services – Served as Interim Chief Operating Officer of Long Island headquartered leader in urologic pathology assisting in combining operating facilities and rightsizing cost structure. The company was later sold to a strategic partner.

Rural Metro Ambulance – Advised the Lenders in debt restructuring negotiations with one of the largest providers of emergency medical transportation and Fire department services to municipalities in the country. The company was ultimately sold in 2015.