January 13, 2016
Interviewed by: David Snow
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The Consolidation of Healthcare

Consolidation is a continuing trend in the healthcare sectorboth on the payer and provider side says Chris Harris, managing director and head of the healthcare investment practice at private equity firm FFL Partners.

Consolidation is a continuing trend in the healthcare sectorboth on the payer and provider side says Chris Harris, managing director and head of the healthcare investment practice at private equity firm FFL Partners.

The Consolidation of Healthcare
With Chris Harris of FFL Partners

David Snow, Privcap: Today, we’re joined by Chris Harris of FFL. Chris, welcome to Privcap. Thanks for being here.

Chris Harris, FFL Partners: Thanks for having me.

Snow: Why don’t we start with the investment themes within healthcare that are of particular interest to FFL? How does your firm come up with themes? What kind of research does it do? Does it select a theme first and then go out looking for companies? Or is it reverse engineering? How do you approach it?

Harris: It’s a little bit of both. We have a process we call our “seed process,” where we go out and…come up with investment theses before bankers present opportunities. Really, there’s a range of ways we come up with those—reading, meeting with other colleagues in the space and a number of metrics we look at to come up with those. Then, through the seed process, we’ll develop. We’ll harvest that seed through to go find opportunities proactively ahead of processes. In an ideal world, that leads to an investment and it also allows us to be more proactive and move faster when there are intermediated opportunities.

An example of that: we did this in optical retail about four years ago. As an investment team, we came up with optical retail as a really interesting investment thesis. Then, through that, we harvested that seed and it resulted in a proactive, proprietary investment. Many of those seed efforts don’t result in an investment, but that’s how we do a lot of our sourcing at FFL.

Snow: What are the really interesting themes you’re seeing now, specifically within healthcare?

Harris: On the provider side—doctors, a lot of consolidation. You’ve seen consolidation within the payers and you’re seeing more of it today. Providers are needing to consolidate. Being a provider in healthcare is more difficult than it was five or 10 years ago. You have ICD 10. You have lots of HIPAA requirements, and doctors are finding they’re spending less and less time seeing patients. Consolidation, either with hospital systems or with larger provider networks, makes a tremendous amount of sense. We’re seeing more activity there across provider models—everything from anesthesia to dermatology, optical, dental—both investments for us.

Also, this impending shift away from fee-for-service toward capitated, risk-based contracts is coming. The government has announced that 50% of Medicare and Medicaid payments will be risk-based by 2018. So, you see more provider models shifting toward a combined fee-for-service and capitated risk-sharing model. We see a lot of both provider models, but also interesting technology solutions associated with those. Those are the two themes we’re seeing a lot in healthcare today.

Snow: So, what does deal flow look like for your firm within those two ideas?

Harris: It’s competitive everywhere these days. We’re needing to be more nimble and a bit more creative in what you look at. On the provider, on the first one, coming up with a differentiated point of view on a space and looking where other people aren’t seems to be a core thesis of ours today. If it’s obvious to everybody, it’s trading for a price that doesn’t make sense. So, we’ve tried to be a bit contrarian on the provider side.

On the shift from fee-for-service toward the risk-based models, there’s a lot of wait-and-see on the sell side. You have “population health,” which is the buzz phrase these days, and every company at HIMS this year seemed to be a population-health business. I think it’s a little bit unclear. The jury’s out. We’re probably in the second inning of that transition, so I think sellers—if they’re not getting the valuations that the public companies are trading at—are waiting and seeing how that all comes out.

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