New sponsors tap into medical outsourcing

A new wave of sponsors is trying to cash in on the popular medical outsourcing segment of healthcare, according to the spring 2016 edition of "Connections in the Middle Market," produced by Buyouts Insider in partnership with global law firm Duane Morris.

About seven in 10 U.S. healthcare companies outsource a portion of their work, according to the report, which cites recent estimates by market research firm IndustryArc. 

Authors of "Connections in the Middle Market" said various factors are driving the medical outsourcing trend, including the rapidly rising healthcare costs, a shortage of well-trained staff in many areas, and an upwelling of new compliance requirements.

"Traditionally, hospitals and other healthcare providers limited the services they were willing to outsource to back-office functions like claims processing and medical billing," the authors wrote. "No longer. Under pressure to provide better care at lower cost, hospitals are delving deeper into outsourced services in areas such as surgical solutions, patient translation services and even off-shore nursing services."

Given this trend, a number of private equity firms are ramping up deal making in medical outsourcing companies, including healthcare management services organizations, which are typically jointly owned by the physicians themselves, according to the report.

The report specifically identified at least 11 growth equity and buyout transactions in the medical outsourcing market since late 2014, sponsored by such firms as Clearview Capital, MTS Health Investors and Sterling Partners.

In discussing his company's attraction to medical outsourcing, Oliver Moses, a senior managing director at private equity shop MTS Health Investors, cited consolidation in the market and the need to reduce overhead.

"Efficiencies in the marketplace aren't necessarily being born inside the large healthcare organizations," Mr. Moses said, according to the report. "More frequently, innovative models of service are being born in smaller companies that are then bringing those services on an outsourced basis to the large payers and large provider groups. At MTS, we look for those companies with innovative models."

Additionally, Kim Vender Moffat, a principal at Sterling Partners, which recently invested in Surgical Solutions, notes in the report that even though the medical outsourcing market has existed for decades, it has particularly gained momentum over the last five or six years, with a lot of mutual success for both healthcare providers and the outsourcers.

"Many large healthcare [providers] are ramping up their outsourcing efforts as the number of companies offering new services proliferates," she said, according to the report. "Overall, hospitals are seeing results both in terms of improved quality and lower costs. That success is helping to fuel even more activity in the space."

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