Healthy choices? (Nashville Post)

Market upheaval means size matters more than before in one of Nashville’s top industries. But more than ever before, so does true innovation.

The generosity of financial markets is often directly tied to the stability – or at least, the perceived stability – of specific industries. Unfortunately, as 2011’s wildly fluctuating stock markets have reflected, there’s been a marked absence of stability in most sectors. Health care, one of Music City’s defining industries, has not been immune.

The Post recently caught up with some Leadership Health Care members who were part of a delegation sent to Wall Street to learn about the state of health care finance. As one observer quoted Robert Teitelman, editor-in-chief of The Deal, the environment can be summed up as such: “Uncertainty seems to be the mantra of the moment. And this is nowhere more profound than in the health care industry. The ground is literally shaking with all the change – real and potential.”

Capital markets are in flux, health care reform looms nebulously somewhere on the horizon, and credit markets have become, as one observer succinctly put it, “puckered.” Most of the sources we spoke to for this story agreed that the general mood on Wall Street is at best guarded, if not downright pessimistic.

But that sentiment is not shared across the board. As is often the case, those with capital to spend see downtimes as a tremendous opportunity – though exactly where they are allocating that cash has changed in recent years.

According to Trey Crabb, president of Nashville’s Health Strategy partners, a “bifurcation” of the credit markets is occurring. Larger companies with the reputation for credibility and quality will have an easier time raising capital and increasing leverage if they so choose. Meanwhile, smaller companies that represent a greater risk to private-equity players in uncertain times will likely have a much more difficult time raising capital without tossing in some equity.

“There has been a substantial shift in the availability of credit for smaller, middle-market health care companies since the financial crisis of 2008,” Crabb says. “Banks have returned to lending on similar multiples of cash flow, as was the case leading up to 2008 – up to 6.0x – but have not returned to doing so for smaller companies […] These smaller companies are only able to obtain loans on their cash flow of around 3.0x.”

Crabb is concerned about the effect that this trend is having on the corporate playing field. The disparity between the ammunition available to large and small companies puts the latter at a disadvantage “both for transactions completed via acquisition as well as for weathering down markets.”

On teaming up and tech

This difficulty in raising capital by smaller companies could in turn lead to a stifling of innovation, which often bubbles up from the sector’s nimbler minnows. But some observers say there is some measure of a rebound in the offing.

“After the credit crisis of 2008-2009 and the passage of the Affordable Care Act in 2010, the debt markets reopened for health care companies,” says attorney Rob Harris of Waller Lansden Dortch & Davis. “We saw banks and other debt investors react positively to the reduction of uncertainty in the health care industry that passage of the Act brought. And health care companies sought to take advantage of historically low interest rates by refinancing debt and financing new acquisitions.”

Another move available to companies looking to grow without having to raise capital for large-scale acquisitions is the strategic partnership, which a number of industry watchers say are likely increase in popularity over the next few years. Several Middle Tennessee health care companies have entered into such deals, including LifePoint Hospitals, which early this year hooked up with the not-for-profit Duke University. In these cases, both entities can benefit from what the other provides.

“For tax-exempt providers, these arrangements offer much-needed capital that can help finance new service lines and information technology mandated by health care reform,” Waller Lansden attorneys Beth Connor Guest and Brian R. Browder said in an article recently published in The Deal. “For their part, the investor-owned companies gain important access to new markets and critical mass.”

Tweaking existing models has long been a hallmark of Nashville health care. All the while, the region’s start-up community remains vibrant. New and established health care IT companies are experiencing a significant boost in profile and funding thanks to meaningful use regulations and HITECH funding, which has come with the most recent advent of health care reform.

All observers we spoke to agreed: While the markets are currently so volatile it hurts, there will be a serious premium placed on companies that aid in the efficiency and quality of health care. These ventures can range from those involved in the electronic health record space – a number of which are profiled in this issue’s Tech 25 list – to those in revenue cycle management or broader health data analytics companies.

There is, as one observer put it, an “old guard” in Nashville, but those seeking to make billions of dollars the way Tommy Frist and his father did it will probably be disappointed. That duo and their peers made their money pioneering for-profit hospitals; the many who followed their example also have cashed in.

But the general consensus is that Nashville needs to again become a hub of true health care innovation in these volatile times. For them, and for Middle Tennessee as a whole, that would be the healthiest choice.