James Forbes on Reform and Baby Boomer-Driven Investment Opportunities in Health Care

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Ultimately, the health care reform legislation passed in 2010 will not be repealed, and it is opening up new opportunities for investment in the health sector. The law may be controversial, but it expands coverage to millions of people who could not previously obtain or afford it, James D. Forbes, Global Principal Investments Executive at Bank of America Merrill Lynch, told the audience during his keynote at the University of Miami Global Business Forum, held Jan. 12–14, 2011.

“If you are now giving insurance to 30-plus million people, you are not going to repeal that effort,” he said. “That’s the political reality.” And in that reality, private equity investors see exciting possibilities for lucrative new business prospects — something he said health care reform is already fomenting.

James D. Forbes, Global Principal Investments   Executive, Bank of America Merrill Lynch

The law will transform at least 36 million more Americans into medical services customers as they gain access to health insurance. Industry experts expect to see several short-term surges in demand, particularly for family practitioners; the number of primary care physicians practicing in the U.S. is far from sufficient to serve those 36 million additional patients, Forbes observed. New ways of meeting that demand will earn investment.

Forbes also noted that half of those new clients will be enrolled in Medicaid, which will bring business opportunities to companies offering managed care to Medicaid recipients. “You’ll have 14 to 15 million people that are going to be entering these programs in 2014,” he estimated. He believes acute care companies will also eventually benefit.

But the newly insured are only part of the health care investment boon that Forbes sees. There’s also the 74 million baby boomers out there, the oldest of whom will turn 65 this year. The boomers will likely intensify the “great utilization” of Medicare that has occurred since 1965. As a result, he sees good investment potential in home care, medical information and medical device companies. Forbes cited studies indicating that once people turn 65, they typically consume two and a half to three times more health care services than they consumed at younger ages, in part because they have more chronic conditions.

During the next decade, there will be significant opportunities for companies that target the 5 percent of the American population that is responsible for 49.5 percent of all health care expenditures, according to 2009 statistics. “These are people that, by and large, have multiple conditions, diabetes, hypertension, heart disease, etcetera,” he told the audience.

A system “that truly manages the care of a population” will be needed to address that 5 percent. He sees significant room for improvement in managed care. “If I can find the person in this room that has an idea about that, come and see me after this meeting, because I really think that’s the opportunity here going forward,” Forbes said. And the money for all this investment? Forbes believes there is plenty available, noting that private equity firms hold about $480 billion in uninvested funds. Banks and other lenders would be able to channel at least another $800 billion into corporate ventures across sectors, he said, so some of that money could very well end up financing new health care businesses.

Also, most venture capital firms are currently underweighted in the health care sector, having placed 15 percent or less of their investments there in recent years. “Overall, the industry is approaching 18 percent of GDP, and by most measures it’s supposed to get up to 25 percent of GDP, if you believe the Government Accounting Office estimates, in 15 years,” Forbes said.

The sector’s 4 percent growth rate last year was the lowest in 50 years, which may augur an upswing, especially given all the new customers out there. Forbes speculated that insurers had a “cooling effect” on health industry growth when they hit their customers with higher deductibles. For example, about 25 percent of policies now have $500 deductibles or more; only 2 percent did in 2000.

Slow growth in recent years also means that publicly traded health care firms have been devalued and thus may be more affordable. The total value of buyouts of health care companies dropped from $79 billion in 2006 to $17 billion in 2008, but then rebounded to $33 billion in 2010. Forbes anticipates “a lot of buyout activity over the next few years,” though not necessarily enough to reach the 2006 mark. “You’ve seen certain valuations of certain public companies drop dramatically, and that creates opportunities. So now you can buy companies at a more reasonable price,” he said. Forbes predicted at least one major health sector buyout this year in the $5 billion range.

Most private equity firms view the changes brought about by health care reform as a “tremendous opportunity,” Forbes said. “Because anytime you have such dislocation it creates opportunity.” Even some of the industry’s dislocated players stand to win, because they may have chances to sell their firms that didn’t exist before passage of the legislation. “You have people who started health care companies who are now saying, ‘The outlook of health care reform is not good for my industry, I want to be the seller of a company,’” Forbes said.

Forbes advised investors to prepare for divisions in the pharmaceutical industry, as well, as some branded drugs begin to disappear. “My belief is the big pharma companies are going to continue to shrink,” he said.