Health Care Spending and Investment Opportunities on the Rise

HEALTH CARE SPENDING AND INVESTMENT OPPORTUNITIES ON THE RISE

WEISERMAZARS THOUGHT LEADERSHIP

U.S. HEALTH CARE SYSTEM ON THE CUSP OF CHANGE AS A RESULT OF NEW TECHNOLOGIES COMING INTO THE MARKET.

With so many challenges ahead, investors have ample opportunity to make investments in the sector.

WeiserMazars LLP is an independent member firm of Mazars Group. HEALTH CARE PROVIDERS NEED TO FIGURE OUT HOW TO OPTIMALLY LEVERAGE TECHNOLOGY.

If there’s a T.V. Junkie in your home, you’re familiar with House, the television medical drama that followed Dr. Gregory House as he led a team of top diagnosticians to miraculously solve the most difficult medical cases. Dr. House saved each of his patients’ lives in under 45 minutes—an awesome feat.

Of course this show is fiction, but new technologies are indeed making it easier for real life physicians to develop correct diagnoses—maybe not in 45 minutes—but more quickly than was previously possible. For example, new sensor technology enables a physician to remotely receive real-time information about the heartbeat and blood levels of a patient in a distant location.

“We still have a long way to go, but the U.S. health care system is on the cusp of change as a result of new technologies coming government initiatives and the aging population at a reasonable into the market. Adoption will take some time, but it is a step in cost. Predictive models were non-existent 20 years ago, but the right direction,” says Steven Kops, a Partner in the Financial today they enable physicians to rapidly zero in on a correct Advisory Services Group at WeiserMazars. Kops elaborated that diagnosis. The models use algorithms that analyze hundreds the firm has found itself providing more financial, accounting of data points, which can then make a diagnosis or predict risk and tax due diligence for strategic acquirers and private equity factors. Predictive models take the guesswork out of a diagnosis, firms like Veronis Suhler Stevenson that are seeking to invest in which ultimately saves time, money and, most importantly, lives. the health care space. Predictive tools can change a care outcome for the better and help to bring providers in line with government mandates. Multiple factors are driving this evolution. According to McKinsey Data, health care costs in the U.S. are expected to skyrocket to RCM solutions also play a big role in provider success. Today’s $2.8 trillion in 2014 with $800 billion of those costs to be paid by growing financial pressures on health care organizations the U.S. government. The U.S. government’s health care reform will continue to increase as consumers bear more financial mandate is also a major change catalyst. With the passing of responsibility for their health care. RCM solutions extend the the Patient Protection and Affordable Care Act as well as the capabilities of hospital information systems and are key to HITECH provisions of the Affordable Care Act (ACA) there are improving access to management, responding to health care two immediate changes: in January 2014, all uninsured U.S. consumerism, accelerating cash collection and improving payer citizens will be provided health insurance and providers will be performance. reimbursed based on care outcomes rather than on quantity of service provided. Additionally, the U.S. health care system faces Predictive modeling and RCM systems are just two examples substantial pressure from an aging population. Between 2000 of the tools available to health care providers today. Data and 2050, the number of older people is expected to increase by analytic tools that can give health care providers insights 135 percent, according to the Journal of Epidemiology. What’s into trends, customer preferences, product demand and help more, the population of people 85 and older, a group that is most with cost forecasting, are also gaining momentum. Evidence- likely to need health and long-term care, is projected to increase based health care, which uses current best evidence in making by a whopping 350 percent during that same time period. decisions about the care of individual patients, is also being used increasingly in diagnosis and treatment. Also in use is The good news is that there are technologies available to help longitudinal patient record (LPR) where organizations can create the U.S. health care system meet the challenges it faces going a comprehensive patient record that is accurate, current and forward. However, health care providers need to figure out how available at the point of care. Data provided includes consumer to optimally leverage technology, including predictive models profile, claims history and prescriptions. LPR is built on a cloud- and revenue cycle management systems (RCM), to deal with

WeiserMazars LLP is an independent member firm of Mazars Group. 2 “THERE IS A RUSH AMONG PRIVATE EQUITY FIRMS TO BRING HEALTH CARE INFORMATION AND TECHNOLOGY TO CONSUMERS...” based system, so that it is accessible by any authorized user at clinical outcomes for the patient,” says Kathee Kramm, Chief any time. Operating Officer of AxelaCare, adding that WeiserMazars assists AxelaCare by building strategic partnerships with health “To successfully deploy predictive modeling, evidence-based care provider companies and developing distribution channels medicine, or population health management, health care for medications being administered in the home. providers must have a solid data foundation on which to build. This foundation requires effective data governance, data quality, Meaningful integration of IT into the health care system, will and data management programs that identify and define key require a large amount of capital, which means plenty of data elements, ensure consistency and accuracy, and provide opportunity for all types of investors in the health care sector the infrastructure for data storage and access. WeiserMazars throughout the next decade. helps clients to deploy these programs and to select and implement the technologies that will make them successful,” In fact, growth in health care investing has already begun. says David Hurst, a Principal in the Consulting Services Group at Private equity firms invested $4 billion in 2012 in health and WeiserMazars. medical services companies, which is up from $3.5 billion in 2011, according to Thomson Reuters. These numbers are However, the truth is that while most of these tools are already expected to continue to grow. available for use, not many health care organizations have embraced them due to difficultly with implementation and cost. According to HIMSS EMR Adoption Model, most hospitals are still in the early stages of adoption—with only 1.2 percent having reached Stage 7, the most advanced level of adoption.

This is not to say that all technologies have been shunned - adoption rates are slowly growing. For example, one of the easiest technologies to adopt is electronic health records. In most cases, primary care physicians have converted paper files to electronic medical records and can track a patient’s medical history. In fact, the percentage of private care providers who have adopted EHRs in their practice doubled from 20 percent to 40 percent between 2009 and 2011. Additionally, EHR adoption at hospitals has more than doubled since 2009, increasing from 16 percent to 35 percent — 85 percent of hospitals intend to use it by 2015.

But EHRs are just the tip of the iceberg. Many technologies haven’t even gotten to market yet. “There is a rush among private equity firms to bring health care information and “Private equity firms have traditionally found health care technology to consumers through a box on top of a digital companies to be a fruitful investment. As demand for health television,” notes Ian Adler, a Senior Managing Director with care grows, investors will continue to be bullish on new investment bank Marwood Group. technologies available both domestically and internationally,” says Brian Kinkead, Vice Chairman, Health Care Division of Bank WeiserMazars client, AxelaCare, has received private equity of America Merrill Lynch. capital as part of its development of a state of the art home care technology. “We are changing the paradigm of care in the Indeed, in March, private equity firm The Gores Group acquired patient’s home by marrying technology and home infusion of GE Healthcare Strategic Sourcing from GE Healthcare. The expensive, complicated medications. The result is improved company, now operating under the name Meridian Medical Management, is a provider of electronic billing and medical

WeiserMazars LLP is an independent member firm of Mazars Group. 3 FOREIGN GOVERNMENTS PRIMARILY FACE CHALLENGES FROM PATIENTS DEMANDING A HIGHER LEVEL OF SERVICE.

records outsourcing. In February, CareClarity, a revenue cycle partnerships have formed since the ACA. management solution was bought by Cymetrix, which is owned by private equity firm Riordan Lewis & Haden. All told, there “Passage of the ACA has created new incentives for health care were 141 private equity-backed health care technology deals providers and payers to work together as opposed to what was completed in 2012, according to Pitchbook Data. That’s up from often an adversarial relationship previously. This is evidenced by 69 private equity deals completed in the U.S. in 2011. the large number of ACOs Medicare Advantage Plans in the U.S. We are aware of this because we have assisted clients pursuing “The need for health care IT is going to continue to grow and these opportunities by providing accounting due diligence there will be plenty of opportunity for private equity firms to support, tax advice and operations reviews,” says Vincent Burke, participate. In fact, their participation is a crucial component of a Partner in the Insurance Group at WeiserMazars. “It’s ironic fixing the health care system in the U.S.,” says Kops. because in some ways, the U.S. was behind the curve when it came to health care, but in other ways, the U.S. is really starting Global Challenges, Global Investment Opportunities to embrace new technologies and tools that are putting them at the forefront of health care evolution. Other parts of the world The U.S. certainly has its work cut out for it, but it is far from could benefit from watching how the U.S. adapts to the changing the only country facing significant challenges in the health care health care environment.” sector. Foreign governments primarily face challenges from patients demanding a higher level of service. In many emerging Other programs that can help emerging countries modernize markets, there is demand for increased quality of care, resulting their health care systems include developing bundled payments in expanded health care privatization. to replace fee-for-service reimbursements, thereby reducing medical costs, eliminating costly and unnecessary referrals In general, middle class economies are seeking higher levels from primary care physicians and modifying government of care and better physicians, hospitals and clinics. Solutions oversight with the goal of reducing waste, fraud and abuse. are available, including the establishment of accountable care There is also room in many countries to build state-of-the-art organizations (ACOs), which are already receiving increased clinics in both urban and rural areas where access to health interest in the U.S. ACOs aim to provide well-coordinated, care is virtually non-existent. patient-centered health care with the goal of lower costs and improved health and patient experience. With solutions becoming increasingly available, strategics, private equity firms and venture capital firms are all exploring “What has accelerated the pace of change in health care [in the ways to invest or have a presence in these countries. For U.S.] is the alignment of financial incentives and economics example, through a joint venture with China Merchants Group, along with Care Management Tools that have increased the Cigna now has a presence in Shenzhen, China, while Wellpoint cost effectiveness and clinical quality of diagnostic care being expanded its presence into China through a joint venture with delivered. Pre accountable care organizations (ACOs) we didn’t multiple U.S. health care companies including Premera Blue have the technology to electronically share medical information Cross, in 2008. that could provide clinical data outcomes, along with financial impact,” says Dr. David Shulkin, President of Morristown Private equity firms like The Carlyle Group and TPG (formally Memorial Hospital, President of the Atlantic ACO and Vice known as Texas Pacific Group) have also made investments into President of the Atlantic Health System. emerging health care systems. For example, in August 2012, The Carlyle Group (Nasdaq: CG) acquired a 13.5 percent stake in In January, 106 ACOs were formed to participate in the Medicare Meinian Onehealth Healthcare Co., the largest private provider of shared savings program. About 25 million to 31 million patients preventive health care check-up services in China. in the U.S. now receive care through ACOs and it is estimated that about four million American seniors, or eight percent of the “As the Chinese population matures and becomes increasingly country’s 49 million Medicare members, are now receiving care aware of the importance of preventive care, there is a strong through an ACO. More than 250 of these payer-provider domestic demand for quality preventive check-up services,” says

WeiserMazars LLP is an independent member firm of Mazars Group. 4 “...THE EMERGING MARKETS ARE SEEING CHANGE AS A RESULT OF THE GROWTH OF THE MIDDLE CLASS...”

Janine Feng, managing director of The Carlyle Group.

Other emerging markets are also receiving attention from private equity investors. For example, while the Brazilian government provides its citizens with free health care, the Some of the recent work completed by public system is under-resourced and over-stretched, spurring WeiserMazars for private equity firms a proliferation of private practices. As consumers’ wealth investing in the health care sector: increases, more Brazilians will look to spend their disposable income on private health care. Private equity firms are already *Provided due diligence and determined aware of this trend. In November 2012, The Carlyle Group target company could expand its geographic bought Groupe Qualicorp, a health care brokerage firm, for $445 footprint within a designated period of time. million. *Developed a distribution channel of products India is wrestling with the same problem and private equity to insurers, payers, home care providers, firms are betting that sick people won’t want to continue seeing hospital systems and physicians post family doctors in dingy quarters, but rather take advantage of acquisition. modern health care chains that are sprouting up across the country. Goldman Sachs Group Inc., Warburg Pincus, Sequoia *Recruited “C” suite executives to change Capital and the Government of Singapore Investment Corp. are management infrastructure of a newly just some of the firms that have contributed to the $520 million acquired portfolio company. invested in India’s health care industry in 2012, according to Thomson Reuters. This is quadruple the $137 million invested in *Consulted with private equity firm on 2011. The largest deal in the last year was Apax Partners’ and government changes being implemented, Oppenheimer Fund’s $250 million purchase of Chennai, India- interpreted new rules and regulations for the based Apollo Hospitals in February 2012. firm.

“In general, the emerging markets are seeing change as a result of the growth of the middle class and their expectation of quality health care. As these economies continue to scale up you will continue to see more health care solutions appear and, in turn, more investment opportunity,” says Hurst.

WeiserMazars LLP is an independent member firm of Mazars Group. 5 About the Author Ira Gottlieb has spent over 30 The WeiserMazars LLP Health Care Group assists Private years in the managed care market Equity groups with developing solutions and implementing segment on both the provider changes to their portfolio of health care investments. and payer sides. He delivers We offer market and distribution strategies, creative professional, effective managed reimbursements for products and services, and assist care consulting advisory investors in understanding the business and its drivers, services to national, regional identifying and assessing the key financial risks impacting and local insurance and managed care plans. Mr. Gottlieb’s the proposed investment, analyzing the quality of assets diverse clients include hospitals, hospital systems, and cash flows, and the financial effects of the existing and physicians, multi-specialty groups, ancillary services and prospective tax structures. Private Equity Groups that have healthcare-related portfolio clients. Many of his client relationships extend back over 20 years. Prior to joining WeiserMazars, Mr. Gottlieb was the founder and Chief Executive Officer of Creative Health Concepts (CHC), which he established as a market leader in the healthcare industry.

If you have any questions, please feel free to contact Ira Gottlieb at [email protected] or 212.375.6591.

About WeiserMazars Since 1921, WeiserMazars LLP has provided a unique WeiserMazars’ team of over 100 partners and combination of foresight and experience when fulfilling approximately 700 professionals is based out of six U.S. client needs in accounting, tax and advisory services. offices, Israel and the Cayman Islands. As the independent Named a top U.S. accounting firm byAccounting Today U.S. member firm of the Mazars Group – a prominent in 2012, WeiserMazars’ team of professionals brings international accounting, audit, tax and advisory services technical expertise, industry insight and an integrated, organization with over 14,000 professionals in more than customized approach to dealing with the critical issues and 70 countries on six continents – WeiserMazars represents competitive challenges facing the firm’s clients. Whether clients of all types, including owner-managed businesses, on the local level or internationally, the firm guides clients complex, multi-national organizations and high net worth through their day-to-day operations and works with them individuals in a multitude of industries. to ensure they have the right financial structure in place to meet their business goals.

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WeiserMazars LLP is an independent member firm of Mazars Group.