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December 4, 2018 Video 4 min watch
The complex healthcare market continues to evolve, providing prime investment opportunities for seasoned private equity investors. Watch as we chat with Frazier Healthcare Partners about capitalizing during the industry’s transformation.

Shifting patient expectations are largely reshaping the healthcare market, with patients looking for better care. With increasing costs, patients are rewarding value over volume. New payment models — such as bundled payments and capitation, in which a provider is paid a fixed rate per patient—are also disrupting the traditional fee-for-service model healthcare providers have relied on for decades

While some healthcare providers struggle with shifting revenue streams and providing quality care, Frazier believes both can be improved by adopting technology.

Sensing the opportunity, Frazier Healthcare Partners has approached this market by investing in companies who place value in providing high-quality service and care, ensuring best patient outcomes. Frazier also believes that investment in technology is critical to enable value-based care. “Without access to good data and analytics, making appropriate risk-taking decisions can be difficult and financially catastrophic,” says managing partner Nader Naini. Watch our video and read more at ACG Global Middle Market Growth.

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Full video transcript below:

Frazier Healthcare Partners capitalizes on the transforming healthcare investment market

Duane Fitch: The private equity investment in the healthcare marketplace is really quite spectacular. 2017 had about $83 billion of transactions, so there are a lot of dollars that are looking for meaningful investment in the healthcare space.

Nader Naini: The way we at Frazier Healthcare Partners approach the healthcare market is we first identify long-term trends in the healthcare space, ultimately looking for people that understand those trends and investment thesis that play into those trends. We then go out and proactively look for assets that can serve as a platform to build a company in that space, hopefully, again, improving the quality of healthcare as well as bending the cost curve as we go forward.

Duane Fitch: We see a continuous shift in the fee-for-service versus fee-for-value model. Not only are these models different, they're actually opposite and create different financial incentives for providers to be successful.

Nader Naini: The business model is really changing towards value-based medicine over volume-based medicine. You've seen that in the proliferation of accountable care organizations going from call it 80 in 2011 to over 600 in 2016.

Duane Fitch: We see a lot of healthcare organizations purchasing very expensive mega systems that help with contract adjudication, help posting cash, identification of refunds and all those kinds of things that in the past were either not done very well or were done manually.

Nader Naini: The healthcare industry is woefully underinvested in technology, maybe somewhere in the 1 to 2% of revenues per year. If you compare that, for example, to the financial services industry where they'll invest anywhere from 10 to 12%. So automation, really understanding the business operations, and most importantly in this day and age with the change in how providers will be taking more risk, the ability to have data analytics at your fingertips to really understand your business at a more granular level is going to be absolutely critical.

Some consider threats from Amazon entering the healthcare market, which I think it is a realistic circumstance. However, I think those areas where a company like Amazon will participate in are going to be different than what's going to really transform healthcare.

Duane Fitch: Healthcare is becoming much more like a retail model, where you deliver high quality at lower cost. We see this activity really gaining traction in areas like dentistry, vision, home healthcare, and other areas that are specialized that don't need large inpatient kind of activity and where private equity firms and healthcare providers can create value and create a market distinction by serving those needs in a cost-effective setting.

Accounts receivable is one of the most difficult things to account for in a healthcare environment and therefore a lot of due diligence goes into determining exactly what that value is. The same can be said about professional liability and making sure that whoever is standing in the shoes of the exiting provider understands what they're inheriting on a professional liability standpoint.

Nader Naini: Typical danger spots for healthcare deals are reimbursement, compliance, technology, people, et cetera, and we're constantly figuring out ways to mitigate the risk associated with those. What I've learned over the last 27 years is it all comes back to the people.

Duane Fitch: The transition from the Affordable Care Act to its ultimate replacement, it makes it very difficult for providers and private equity firms to understand what the financial metrics moving forward will be in the industry. High valuation and competition for deals, especially among other private equity firms or even strategic buyers, raises the bar for the private equity firms to achieve their desired objectives.

Nader Naini: If you invest in high-integrity, high-quality, seasoned executives that know a particular market segment and pair that with a trend that is moving over a long period of time in a particular direction, you typically come out with a good investment on the back-end, in addition to the basics, which is reimbursement —again compliance, technology, and making sure that you've developed an infrastructure that can support a larger business.