PE Healthcare Services Investments are Struggling – Can a Strategic Procurement Approach to Rising Input Costs Help?

Macroeconomic Environment

The current macroeconomic environment is proving to be challenging for Healthcare Services Private Equity. Deal volume (both platforms and add-ons) has seen a significant slowdown in 2023, reflecting the challenges in the current environment. Exits are attracting lower valuations and debt financing for new deals is also creating challenging headwinds.

Rising Input Costs

At the same time, the investments themselves are facing significant margin pressures from an increase in key input costs like labor, pharmaceuticals, and medical equipment and supplies. To compound margin pressures, reimbursements rates have not kept pace with rising costs. Additionally, demand for non-critical medical services is also softening. Finally, the current inflationary environment, with its tighter monetary policy is significantly impacting debt servicing requirements.

Strategic Procurement Approach

We, at Treya Partners, have worked with numerous PE backed medical services platforms (in various sub-sectors including eye-care, dermatology, acute care, respiratory and infusion therapy, skilled nursing, and correctional services), and based on these experiences believe that there is a meaningful opportunity for these companies to utilize a strategic procurement approach to drive down key input costs. While there is typically some procurement synergy capture as platforms grow through acquisitions, these efforts tend to be limited to basic contract/price “cherry-picking” for common spend areas. We recommend that companies consider utilizing the conceptual framework below (which we have successfully used with numerous healthcare platforms) to identify and tackle their rising input costs.

Procurement Value Creation

We believe key elements of a successful cost-reduction effort should include upfront comprehensive data collection (spend-level, unit-level, and contracts), category prioritization, robust category strategy development, comprehensive identification of category specific savings levers, and utilization of benchmark-based negotiations. These efforts can be conducted in-house or with the help of a third party with experience in these spend areas.