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A group of private equity professionals discussed what's on the radar for the healthcare M&A market in 2008 at The Deal's Healthcare Dealmaking Symposium Wednesday morning. Moderated by Michael J. Kaplan, a managing director with Standard & Poor's corporate ratings healthcare team, the panelists looked at managed care, the distress among hospitals and what's on the reform front. "I'm quite optimistic about healthcare over the next 12 months," said Jonathan Korngold, a managing director at General Atlantic LLC. "The debt slowdown is a welcome respite for us; over the next 12 to 18 months, there's going to be some great opportunities."
Nevertheless, both Korngold and Zilkha found good reasons to be cautious. "[Valuations] are still pretty scary," Korngold commented. "The prices still haven't reset in healthcare." Zilkha added: "We look at the current environment with some trepidation, due to the fiscal challenges faced by the government in regards to healthcare."
The panel also spent a considerable amount of time discussing hospitals, a sector that is facing significant challenges from a number of directions.  "We believe that hospitals are good long-term plays, if you invest in the right hospital system," said Benjamin B. Edmands, managing director at CCMP Capital. However, hospital investments face some competitive challenges relative to non-for-profit health systems, according to Zilkha. "Eighty-five percent of hospitals are not-for-profit; the downside of that is that they have no concept on return on capital. It's challenging to compete against people who have no concept of return on capital. [Additionally] hospitals are basically the health insurance of last resort for millions of uninsured. The upside is that if some form of universal coverage is passed this burden on hospitals would be relieved. Although, we think [hospitals] are likely to end up paying for it some other way." In regards to managed care, Edmands thinks that "managed care did a good job. Who knows where healthcare costs would be if they hadn't done things to control costs? We've had five years of unbelievable growth [in managed care]. We're always going to have these down cycles, and they're going to have to find creative ways to grow." KKR's Zilkha commented that major healthcare reform is likely due to the significant fiscal demands of paying the needs of the aging baby boomers and rising healthcare costs. "At some point the arithmatic is going to overwhelm the inertia," Zilkha commented. However he added that he sees managed care as part of the likely solution. "If the regulatory framework and societal/political will are are there for managed care to control costs, then they'll do so - or the government will just have to take over. My feeling is that [managed care will] be part of the solution." As for future investments, Edmands said that "the changes [in healthcare dealmaking] going forward are not going to be as severe as in the past. We're at an apex, a peak right now, in terms of healthcare as an investment space. The next wave is going to be investors trying to solve the dilemma where healthcare is growing, but is eating up increasingly large parts of revenues." "The fundamental underlying premise [for new investments] has to be you're making the system better. In the past people have made money effectively arbitraging anomalies in the reimbursement system. In this environment if you're not on the side of the angels, you're not going to get far," said Zilkha. Korngold added that successful plays "have to be a component of the solution; it has to improve quality and reduce costs. The way to play it is to have the macro-theme of high quality and don't overpay." - George White See more stories from The Deal's Healthcare Dealmaking Symposium CategoriesComments Deal Video
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As for me I haven't mentioned any changes in our health care system. But I hope thay are expected.
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