During this session, Felicia Gerber Perlman, McDermott partner and global head of the Firm’s Business Restructuring Practice Group, and Olivia Mauro Guthorn, managing director at Apollo Global Management, explored the challenges facing the healthcare industry today and shared strategies for value investing in light of those challenges.
Top takeaways included:
During a discussion about the impact of wage inflation, it was noted that labor costs are the single biggest focus for current healthcare investments. In response to how to decide when increased labor costs present an opportunity for value investing, the panelists explained that core labor inflation is sticky but wage inflation based on staffing shortages and demand for contract labor could improve with increases in supply or decreases in demand. Additionally, a potential recession could be good for wage inflation that was driven by staffing shortages by increasing the number of workers looking for employment. It was also suggested that healthcare sectors reliant on labor could see an improvement in labor costs relative to the market in a recession.
When talking about shifts in the care model following the pandemic, the panelists noted that COVID-19 accelerated certain trends evident in pre-pandemic healthcare (e.g., shifting care out of emergency rooms and into urgent care clinics), but it’s too early to tell which changes will be permanent. Non-COVID-19 utilization across subspecialties has been weak without clear indications as to the cause. This creates an interesting value investing opportunity for underutilized subspecialties and the potential for high returns when demand for services returns, however, it is difficult to predict when demand will increase and which subspecialties will see those impacts first.
At one point, the panelists touched on the No Surprises Act and whether it would result in value investing opportunities for any particular sectors. Their conclusion? The act is currently more of a headwind than an opportunity for investment. Industry participants have been surprised with how difficult the arbitration process has been, which has impacted the ability of care providers to get cash in the door for services rendered. This has also caused challenges for certain care providers with high concentrations of private payors because there is no clear investment thesis on creating value by investing in providers with exposure to this issue