In May, Dallas-based HealthCap, a boutique private equity firm specializing in healthcare, merged with The Cirrus Group, also based in Dallas, and one of the nation’s biggest medical building developers.
In June, HealthCap provided the funding to create Atlanta-based Restora Healthcare Holdings to purchase Trillium Specialty Hospitals of Phoenix, Ariz., as a foundation to become a major player in long-term acute care hospitals (LTAC). The deal involved buying Trillium’s real estate.
According to HealthCap’s managing partner Jason Dodd, those two deals were absolutely linked.
“We were able to solve a total transaction because of Cirrus. Neither (HealthCap nor Cirrus) would have been able to look at that deal alone,” he said.
When the firms merged, Bill Hutchison, chief executive officer of The Cirrus Group, said, “In this very dynamic healthcare industry, you are either adapting or you are dying.”
Hutchison oversaw nearly 100 medical developments in 14 states, including hospitals, clinics, surgery centers and post-acute care facilities. As a HealthCap partner, Hutchison and his Cirrus colleagues brought invaluable expertise to the Restora deal.
The merger illustrates how consolidation of healthcare players extends far beyond hospital-physician consolidation and accountable care organization formation. Size matters.
Dodd said HealthCap intends to capitalize on underperforming niche delivery models. The company likes businesses in their infancy, or those that are changing because of demographics or reimbursement changes.
For example, HealthCap last week announced a significant investment in Urgent Care for Kids, an after-hours pediatric care company with facilities in Colleyville and Keller. The niche firm plans to open five to seven more clinics in the next two years.
The company also likes the chaotic nature of healthcare.
“Any business in healthcare is tough. It is a constantly evolving industry,” Dodd said. “There are always choppy waters. That’s why we like it. There is constant pressure from Washington to control costs. The monumental effect of the Affordable Care Act is a once-in-a-career situation.”
“Medicare has wiped out whole industries with the stroke of a pen,” he said. “We do enough diligence. Medicare is not stupid. It may be behind from a timing perspective, but eventually payers correct the system. They all figure it out. Any model with too large of a margin is at risk. There’s always something to be fearful of (in healthcare investment).”
With 10,000 Americans turning 65 every day, HealthCap sees opportunity in caring for the elderly, especially those with highly acute medical needs.
Dodd said HealthCap intends to add LTAC beds once the Medicare moratorium, imposed in 2007, is lifted at the end of the year. HealthCap also targets senior-housing businesses, including assisted living.
More broadly, Dodd predicts that healthcare will favor models that deliver care at the lowest cost. He is bullish on retail medicine –such as in-store clinics, freestanding emergency departments and urgent-care clinics—because it clearly provides cheaper care. Dodd also points out that the nation has too few beds for behavioral health services.
He notes Dallas is a highly competitive market. He believes the healthcare systems are struggling to deliver charity care –”and Parkland’s problems are not helping any.” Dallas County has the second-highest uninsured rate of any large U.S. county, trailing only Miami. Dodd said others around the nation do not appreciate how that handicaps healthcare delivery.
Steve Jacob is editor of D Healthcare Daily and author of the new book Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors and Skyrocketing Costs Are Taking Us. He can be reached at firstname.lastname@example.org.