Healthcare ruling to erase legal uncertainties

The US Supreme Court’s decision on healthcare reform should help drive activity in the sector, according to industry sources including Bain Capital managing director Chris Gordon.

Any day now, the US Supreme Court will deliver its ruling on the constitutionality of The Patient Protection and Affordable Care Act, President Barack Obama’s healthcare reform bill passed into law in 2010.

Uncertainty surrounding the court’s pending decision has caused some potential sellers of healthcare businesses to delay transacting. A ruling one way or the other should help remove uncertainty that has stifled activity in recent weeks.

The decision should come as a relief to healthcare investors: a total of 20 deals worth a combined $997 million have transacted so far this year, compared to 40 deals worth $4.4 billion during the first six months of 2011, according to Dealogic. Overall private equity investment in the US, meanwhile, has remained stable year-over-year, with 296 deals worth $40.3 billion transacting so far this year compared to 334 deals worth $43 billion during the first six months of 2011.

“The sense I get is that nobody wants to definitively commit between now and the decision,” Joel Greenberg, senior corporate partner at law firm Kaye Scholer told sister title Private Equity International.

The main purpose of the healthcare bill is to drive down the cost of healthcare and add an estimated 30 million Americans to the nation’s insurance roster. Whether the court upholds the entire bill, strikes the individual mandate requiring all Americans to purchase some form of health insurance or strikes down the whole bill will have a direct impact on how healthcare companies provide services to patients.


While a decision to uphold the healthcare bill in its entirety is expected to result in a more conducive environment for investing in healthcare than a decision to overturn all or parts of the law, some investors see any decision as a step in the right direction for investment activity.  

The idea that somehow either side of this ruling is going to bring a great deal of certainty to the market is a bit overblown

Chris Gordon

“On the margin, less uncertainty will be a catalyst for more deal flow, but I don’t think it’s going to be an immediate catalyst where suddenly the flood gates open as soon as the ruling comes out,” said Chris Gordon, managing director at Bain Capital and head of the firm’s North American healthcare practice. “The idea that somehow either side of this ruling is going to bring a great deal of certainty to the market is a bit overblown.”

Regardless of which way the Supreme Court votes, the upcoming presidential election will act as a new source of uncertainty for healthcare law in the US, as Republican presidential nominee Mitt Romney has pledged to repeal the healthcare reform bill if elected.

What is certain for private equity firms is the opportunity that exists for companies that drive down the cost of healthcare.

“Everybody knows the US healthcare system needs to provide higher quality, more efficient healthcare for less money,” Gordon said. “So any businesses we look at, we ask ourselves, ‘Is this business part of the solution to that problem?’ And if so, then that feels like a business we could invest in for the long term under a variety of regulatory or political outcomes.”

Joseph Ibrahim, a principal at mid-market investor The Riverside Company responsible for healthcare deal sourcing, has a similar view of opportunities in the sector.

“The types of companies that we’re looking for are driving more efficiency through the healthcare system by providing the same or better outcomes for the patients using the same or fewer resources,” he said. “If you think about those themes, they’re going to work whether the mandate is stricken in its entirety or the Affordable Care Act is overturned.”

Last September, Riverside purchased healthcare services company Avatar International from Veronis Suhler Stevenson. Avatar provides patient surveys and other customisable tools related to patient satisfaction to hospitals and healthcare providers.

“Going forward, patient satisfaction scores are directly tied to provider reimbursement in some segments,” Ibrahim said. “We think over time that’s going to become more and more important to hospitals to not only drive higher revenues but also increase their patient satisfaction.”


While the Supreme Court’s decision on the constitutionality of the healthcare law may not lead to a spike of private equity investment activity in the healthcare sector, it is also unlikely to scare limited partners from investing in the space and negatively impact deal flow, according to Gordon.

“I don’t think there’s anything I see that’s going to create any long term impairments for healthcare deal activity,” he says.

Despite bringing closure to the issue of whether the Affordable Care Act will be upheld, uncertainty surrounding the future of healthcare in the US will continue to exist long after a decision is announced, Gordon said.

“Whichever side of this ruling we get, it’s going to become clear pretty quickly that we’re still in the early innings of the healthcare system evolution and all the real questions will get answers over the coming years.”