April 6, 2015
Interviewed by: David Snow
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How the ACA is Changing Healthcare Investing

A longtime healthcare investor describes the vast changes to the market as a result of the Affordable Care Act, and what these mean for private equity. Topics include the move from fee-for-service to value-based models, how PE is playing the increased Medicaid enrollments, and consolidation in the behavioral healthcare space.

A longtime healthcare investor describes the vast changes to the market as a result of the Affordable Care Act, and what these mean for private equity. Topics include the move from fee-for-service to value-based models, how PE is playing the increased Medicaid enrollments, and consolidation in the behavioral healthcare space.

How the ACA Is Changing Healthcare Investing
With Joseph Ibrahim of Spindletop Capital

David Snow, Privcap: Today we’re joined by Joseph Ibrahim of Spindletop Capital. Joseph, welcome to Privcap. Thanks for being here.

Joseph Ibrahim, Spindletop Capital: Thanks, I appreciate the opportunity to be here.

Snow: You are a healthcare investor and a private equity investor who invests specifically in the healthcare opportunity. Obviously that’s a big part of the world, and a big opportunity, so I’d love to hear your analysis of what’s going on the market right now. Before we get into the specifics of what is driving your interest in healthcare today, maybe you can set the stage and talk about the general importance of healthcare and the overall economy, and why it’s such a big hunting ground for private equity.

Ibrahim: Sure. Healthcare represents 18% of the GDP spend—that’s about a $3trillion spend annually. And that spend is rising at somewhere between 3% and 4% per year. Looking at it another way, consumers of healthcare spend about $9,200 every year in healthcare expenditures. So, it’s a big market opportunity and it’s rapidly evolving.

Snow: Of course, private equity thrives where there is change and disruption and a need for capital. Talk about the Affordable Care Act. How big a deal is that? How is that going to change the healthcare opportunity for private equity investors?

Ibrahim: In the past, healthcare providers were reimbursed on a feeforservice basis. The Affordable Care Act has shifted that type of payment. Now, providers are taking more risk and assuming more risk.

Snow: What are some other ways the ACA is changing the healthcare system that might be of interest to private equity investors?

Ibrahim: Now, providers are managing patient populations instead of individual procedures. It’s not a volume-based reimbursement; it’s more value-based and holistic. How can providers utilize fewer resources to deliver the same care with the same or better outcomes? That’s the first shift.

The second shift is around Medicaid. About 20 million new enrollees are eligible for Medicaid now than prior to the enactment of the Affordable Care Act. The expansion of Medicaid—dealing with that patient population—is a very interesting area for investment because it’s new for healthcare private equity investors.

The third driver of change as a result of the Affordable Care Act is the rise of high-deductible healthcare plans. A high-deductible healthcare plan means that the patient responsibility percentage of the spend has increased. They’re looking at the outcomes of the providers that could deliver that care. It’s selecting the provider based on cost of care, the outcomes published by that provider and the physician, and total patient satisfaction—metrics that are out there and reportable. They’re thinking about healthcare delivery in a more of a retail-consumer driven model than ever before.

Snow: I want to ask you about some things you are excited about today, but first, can we learn a bit more about Spindletop?

Ibrahim: Spindletop Capital is a healthcare-focused private equity fund. Our primary LP is the Duncan family. [They are] a family office, permanent capital, with $20 billion of capital available.

Snow: What stage of investment are you looking at?

Ibrahim: We primarily invest in growth and lower, middle-market buyout—both healthcare services and healthcare products.

Snow: You’ve set forth some of the big changes in the healthcare landscape. From a private equity investor’s perspective, what are some plays that are exciting to you, where you could take advantage of some of this change?

Ibrahim: As a result of the Affordable Care Act, providers are taking more risk and managing more risk for themselves. There’s a lot of consolidation going on by different providers in different segments. Hospitals are consolidating and acquiring physician practices. Physician groups are consolidating in order to become larger. The reason for this is two-fold. They’re trying to lower their operating expenses and they’re also trying to increase their market density.

Snow: You mentioned there are now so many more people in Medicaid. What kinds of services do they now have access to and how might that spell an opportunity for private equity?

Ibrahim: Now, you have 20 million more Medicaid-eligible patients available. Also, behind that, the Mental Health Parity Act mandated that every employer that provides group health coverage also must be required to provide mentalhealth benefits as well. So, for the first time, you’ve got coverage for the mentalhealth benefit and now you have this increased number of Medicaid-eligible patients. We’re seeing a lot of activity in behavioralhealth consolidation. Behavioral health is a very fragmented segment.

Snow: What are some examples of behavioral healthcare?

Ibrahim: Some of the areas in behavioral healthcare that are increasing in terms of private equity interest are substance abuse, residential treatment centers that cover a variety of different mental health conditions.

It’s a highly-fragmented business—a momandpop business, generally. So we’re seeing a lot of activity in healthcare, private equity building platforms, professionalizing that segment.

Snow: You were also involved in an association called The Healthcare Private Equity Association. What is that and what is its mission?

Ibrahim: The Healthcare Private Equity Association is an association with 50 members [who] are healthcare private equity investors. Those investors represent $500 billion of capital, about 400 portfolio companies and about 500 healthcare investment professionals.

Ibrahim: The mission of the Healthcare Private Equity Association is to increase our member engagement and also to provide proprietary content on behalf of our members.

Snow: Final question for you. You’ve invested in a number of different cycles in healthcare. What makes you most excited about being an investor in the healthcare opportunity today?

Ibrahim: It’s a real exciting segment. It represents almost 20% of our GDP and there are lots of different ways to play healthcare. Then, in addition to that, healthcare is always evolving. We’ve seen payment changes, structural changes with the Affordable Care Act. We see different changes in terms of how providers are taking more risk. The rise of consumer-driven healthcare—for us, this is very exciting and there are lots of opportunities.

Snow: Have you seen this degree of disruption in the past or are the changed from technology and the ACA unprecedented?

Ibrahim: These are unprecedented. It’s structurally changing how healthcare is reimbursed and delivered. We’re moving from a fee-for-service model to a value-based model. We are moving from employer-mandated and driven healthcare to consumerism, and I think there’s a lot of opportunity in how that plays out over time.

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