Polsinelli Attorney: Expand Access to Capital for Hospice, Health Care Providers

Private equity in health care has come under fire in recent years, but the regulatory environment leaves few other options for raising capital.

This is according to Bobby Guy, an M&A attorney and shareholder in the law firm Polsinelli. Guy posits that regulation of publicly traded markets have pushed business owners towards private equity and reduced transparency when it comes to corporate funding.

Hospice News sat down with Guy to discuss his views on private equity in health care and what should happen next when it comes to investment in home health and hospice.

Advertisement
Bobby Guy, attorney and shareholder, Polsinelli Law Firm

Do you expect a rebound in private equity health care transactions in the coming year?

There are multiple private equity funds whose model is built for health care. This is the industry they specialize in, and it’s critical to them that they continue moving forward in health care acquisitions and sales. So yes, this next year, with the change of administration and with the economy going the direction that it’s going, we will see a fair amount of private equity activity in health care.

I think it will pick up versus the last year or two, and I can tell you that we’re seeing that right now in our own practice health care deals are happening. We’re really busy on lots of health care deals right now.

Advertisement

Can you say a little bit of how we got here in terms of widespread PE investment in health care?

The question should not be whether PE is good or bad for health care. The question should be, “How are we going to fund health care?” That’s the real question.

There are four types of equity in the world that you can use to grow companies. The first type is public market equity. The second is private equity, which is everything from you and me putting our own money into starting a company, to private equity funds, to venture funds, all sorts of private money that goes in. The third type is government equity, which is when the government basically creates or funds a company. The fourth is nonprofit equity, basically charitable fundraising.

Those are the only four ways you can raise money. We had a fundamental shift in the United States in 2001 and 2002 right after Enron and Worldcom and the scandals that happened. The country saw the fraud that happened in the late 90s and early 2000s. Those were the headlines, and Congress passed a law called Sarbanes-Oxley that became effective in the summer of 2002.

Sarbanes Oxley made it much harder for companies to go public, and it made it much more expensive for companies to stay public, and it significantly increased the personal risk to officers of public companies. That has had a long term effect over the last 22 years, and that effect has been that companies are not going public anymore. We’ve dramatically reduced the number of public companies.

So what’s happened is now you only have three types of equity left. You’re either going to do it with private equity, with government equity or with nonprofit equity. If you take private equity out of the equation, you only have two left, and that’s government dollars and nonprofit dollars. It’s going to take a lot of money to continue to grow and advance in health care and to lead the world in health care technology, and the only way you can do that is by having public or private money available to do it.

So when you look at this time period, what’s happened is the government is now saying private equity is a problem in health care, but the government has created essentially a private equity monopoly over fundraising for growing companies, whether in health care or any other.

Unless we just want government equity or nonprofit equity, the better choice is to allow private equity and bring back public equity also, so that we have more options and more money and more transparency out there, not less.

A lot of the government’s complaints about private equity are actually that it doesn’t have the same reporting obligations and the same transparency as the government used to get with public companies. But the reason you have a private equity industry is because the government drove everyone off of the public markets.

How would you go about bringing back those public markets like you suggested? What would that involve or look like?

We’re at a very unique time when all of the stars have aligned, and it’s now possible again, probably for the first time in 20 to 25 years. Regardless of your politics, this is something President Trump would support, because he follows Wall Street very closely. It’s something that Wall Street would support, because it creates the opportunity for them to create new public companies, which is very profitable for them.

Private equity would support it, because over the last 20 years, private equity has basically grown so many companies that the next step is to take them public. But nobody really wants to go public.

All of the health care authorities, the state regulators, for example, and then [the U.S. Centers for Medicare & Medicaid Services (CMS)], they should all be supporting because they want the sort of data that they can get when you have a public company. That’s what they’re all asking for. The [U.S. Securities & Exchange Commission (SEC)] would support this, because this is public information, and the SEC wants transparency. You can try to push transparency to private equity, but one of the solutions, as you do that, is to try to bring more companies public.

We were very loose with public company creation in the 1980s and 1990s, and it was probably too easy. We over-corrected in 2002 and made it far too hard. Now we need to swing the pendulum back to the middle. The stars have aligned so that almost all interests — from the current the new administration to private industry to the American middle class and to health care authorities — would support this because it creates the transparency that that that the authorities are looking for with companies, and it facilitates the wealth creation opportunity that the American public is looking for with a diversified stock market and new companies.

Are there risks associated with that?

If you’re looking for a bad situation to prove a point, you’ll always be able to find one.

If we create more public companies in the U.S., there are a number of good things that can happen. But the argument will then shift back and say, “Well, look, this public company isn’t doing right by health care, or this private equity fund is not doing right by health care.” That will happen.

The difference is that a public company will be publishing information about what it’s doing, and it’s much more subject to regulation and to input from regulators and from the public, and as well as having to answer to shareholders about what it’s doing. 

And the question here that we have to ask is how we fund health care. Continuing to keep up with a rapidly changing health care environment costs lots of money, and that means that we need the markets to be able to provide it. That means it’s either going to be public or it’s going to be private, because the government and nonprofits are not going to be able to pay for all this. We’ve got to find more ways to get capital into health care. 

We’ve been talking about health care writ large. How would you drill this down specifically to the home health and hospice space?

When you look at home health and hospice, there has been a lot of private equity investment in this space, and there’s been a fair amount of criticism of it. But this space is one of the most innovative spaces in health care right now, because we’re moving from facility-based health care in many cases to home-based health care. It’s going to take dollars to do that.

So what happens is there’s got to be a lot of new investment dollars coming into home health and hospice for us to grow this sector and for us to innovate in this sector. There’s a huge amount of demand in home health and hospice, but you can’t grow that with just government and nonprofit dollars. And since we’ve made public dollars unavailable, private equity dollars are the only dollars that are available. And it doesn’t matter what you think of them, that is the situation that we as a country have created.

Companies featured in this article: