What Is on Investors’ Minds in 2022?

Private equity investment in healthcare reached record highs in 2021, and all signs point to continued robust activity this year. As healthcare investors consider their next move in today’s fast-moving deal market, there are myriad issues and opportunities at the top of their agenda.

Hot Investment Sectors in 2022
While deal activity is strong across virtually all sectors of the healthcare ecosystem, certain areas stand out as particularly attractive for private equity investment in 2022.

Healthcare IT: Deals were up significantly in 2021 compared to 2020 and previous years. The COVID-19 pandemic highlighted inefficiencies in the healthcare system and dramatically accelerated tech adoption across the industry. The exponential growth of telehealth appears set to continue, as providers leverage virtual care to deliver better preventative care, secure greater access to their patients, and gather more data. Investors are also interested in a more diverse range of health IT applications than in the past. Previous deals often centered on electronic medical records technology and other practice management solutions, but investor appetite is now growing for workflow solutions, administrative software, and anything and everything related to digital engagement.

Physician practice management (PPM): Deal activity in this space will likely continue apace in 2022. The past year saw many transactions in established PPM markets (such as ophthalmology and dermatology), but newer specialties (such as orthopedics, cardiology, and neurology) have also seen a recent uptick in PPM transactions.

Value-based care: Investors are focused on value-based care and for good reason. An aging population means that Medicare enrollment is forecast to rise sharply in the coming decade. This trend is prompting the creation of new care models that seek to align providers and payors on the provision of high-quality care at lower costs. Several significant value-based care transactions took place in 2020 and 2021, and more deals are on the horizon for 2022. Investors are exploring untapped regional opportunities that address narrow geographic populations and/or narrow demographic populations.

Pharmaceutical services and life sciences tools/diagnostics: These products and services are in the spotlight thanks to rapidly evolving technology, substantial tailwinds throughout the COVID-19 pandemic, and long-term secular trends.

Behavioral health services: Not surprisingly, demand for these services has grown exponentially during the pandemic. Simultaneously, the widespread adoption of telehealth and other digital health applications during COVID-19 has allowed providers to pivot toward integrated care models that leverage the scalability of virtual and hybrid care delivery. Investor interest is high across various subsectors of behavioral health, including outpatient mental health, substance abuse treatment, and autism therapy.

Tackling Today’s Healthcare Challenges
Healthcare investors are paying close attention to the biggest challenges facing the healthcare system today: clinician burnout, labor shortages, and wage inflation. These issues are shaping the way deals are done and are focusing attention on areas ripe for innovation.

Wage inflation in healthcare is at an all-time high. The post-acute space in particular is struggling with unprecedented competition for hourly employees. Investors are taking these constraints into account when evaluating potential deals. In addition to carefully modeling wage inflation, they are placing more scrutiny on whether the local market has a sufficient labor pool to support the target business. Markets that appear promising from a white space perspective may in fact be a poor investment if there is no talent available to hire.

Investors are also homing in on healthcare businesses’ infrastructure around employment and retention. Common questions may include:

• What technology does the organization use for recruitment, training and retention?
• How does the organization think about bonus structures and other incentive programs?
• Is the organization a preferred employer? 

While these issues have always been part of the investment equation, they have taken on new prominence in today’s hypercompetitive labor market. A company’s ability to recruit and retain necessary talent will be a key differentiator in the 2022 deal market.

These labor-related pressures on the healthcare system also present opportunities for fresh solutions and new market entrants. Private equity investors are prioritizing companies and technologies with the potential to drive workflow efficiencies and alleviate provider burden. In addition to widespread issues of clinician burnout, especially amid the demands of an ongoing pandemic, the physician labor pool is shrinking as more doctors reach retirement age. This dearth of providers only exacerbates administrative burden, further contributing to clinician burnout and turnover in a constrained labor market.

These trends are significant drivers of investors’ current interest in health IT deals. Investors are eager to support technology that helps physicians and other providers optimize their time, such as back-office extenders, virtual care tools, workflow management technology, and population analytics tools. While past innovation has focused heavily on improving the clinical side of healthcare, there is ample opportunity to automate administrative processes such as credentialing, continuing education, and compliance (all of which too often still occur on paper and demand clinician labor for non-clinical tasks).

Similarly, provider burnout is a driver of investors’ interest in value-based care, as many value-based models have the powerful potential to reduce physician burden and allow clinicians to operate at the top of their licenses.

While the ongoing COVID-19 pandemic means continued uncertainty, the pace of innovation across the healthcare ecosystem remains strong, and private equity investors are seeking opportunities to help tackle today’s most pressing challenges. In light of these persistent trends, expect 2022 to be another dynamic year for healthcare investment, innovation, and growth. 

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Fred Levenson is a partner and co-head of McDermott Will & Emery’s Private Equity Practice Group, and a practice area leader for the Healthcare Private Equity Practice. He provides legal counsel to clients on a broad range of corporate counseling and sophisticated domestic and international transactions. He focuses primarily on private equity, domestic and international mergers, acquisitions and divestitures, venture capital investments and financings, private and public offerings of equity and debt securities, restructurings, joint ventures, strategic alliances, and real estate acquisitions and financings.