Pharmacy benefit management companies and others that help manage costs out of the system also should benefit and should see more deals, Sweat said. While managed care as a whole, and especially Medicare Advantage plans, face tougher medicine in the reform law and a general hostility from Congress and the Obama Administration, Sweat said, Medicaid managed care plans stand to benefit from the swelling of the Medicaid rolls that the reform law will bring, so that might be another sector for deals.
Citigroup's King said hospital companies are examining whether they have to make acquisitions of home-health or skilled-nursing businesses to expand their continuum of care in response to the greater focus on readmission rates.
Timothy Sullivan, a founder and managing director of Madison Dearborn Partners, a private equity firm, cautioned that there's still a lot of uncertainty about reform itself. For one thing, there are thousands of pages of regulations that need to be written to implement reform, to fill in the blanks that Congress left, Sullivan said. Moreover, down the road, there will be cost reform to pair with this year's coverage reform, he said. To survive in an environment where volume goes up but the price per unit goes down, Sullivan said, “People are going to have to get better at what they do.”
Sullivan's firm, therefore, is looking for providers who are able to provide high-quality care while still cutting costs, and also companies that can help providers pull off that high-wire act.
HCA's announcement a week ago that it would make an initial public offering of shares, the third in the company's history, is another sign of rebound in the markets, King said. He noted that about $100 billion of equity in healthcare companies has been pulled from public markets in the last five years through leveraged buyouts and company stock buybacks. As a result, many institutional investors have a lower percentage of their money in healthcare than the sector's percentage of the economy would suggest they should have, King said. That need to rebalance their holdings, along with HCA's new offering, could translate into a lot of institutional interest in the hospital sector as a whole, he said.
Investor-owned healthcare companies need investors on the debt side as well as equity, as there is a lot of debt coming due in the coming years from leveraged buyouts and acquisitions made between 2005 and 2007, said Sweat of Raymond James. Moody's Investors Service reported this week that facility-based healthcare companies have $42 billion in bank credit facilities and bonds coming due by the end of 2014. The heat really picks up in 2012, when $11.4 billion is due, followed by $11.9 billion the next year and $15.2 billion in 2014, according to Moody's.
Refinancing has been going on since last year. And as the debt markets continue to loosen, most of the companies shouldn't face too much difficulty in handling these maturities, although there is concern that all these refinancings and the higher government debts around the world could push up rates eventually, Sweat noted.
The companies that are refinancing debt issued during the height of the boom are paying a stiff insurance premium to guarantee their funding, both in higher rates and in more restrictive covenants that could limit a company's ability to act, Madison Dearborn's Sullivan said. Well-run privately held companies with good operating cash flow should consider whether they need to pay that premium or whether they can take the risk that they can knock out those maturities with an IPO in a few years, he said.