Election Impact on the Business of Health Care

Jacques Mulder, EY Global Health Sector Leader
Jacques Mulder, EY Global Health Sector Leader
Jacques Mulder, EY Global Health Sector Leader
Jacques Mulder, EY Global Health Sector Leader

Tax reform, a border adjustment tax, immigration restrictions and a loosening of the Dodd-Frank financial regulations have global implications for business and investment, according to Richard Clarke, former president and CEO, Healthcare Financial Management Association and current board member, Mercy Health Ministry.

“Capital allocations, mergers and acquisition (M&A) opportunities and challenges to global supply chains are among the issues up for consideration,” said Clarke, who moderated an afternoon panel on "Election Impact on the Business of Health Care" with three banking and investment professionals.

First, Clarke asked the panelists to talk about the investment opportunities and risks in an unsettled U.S. political climate where immigration restrictions, a border tax and financial deregulation are on the table in Washington.

“There is always regulatory and political change,” said Karthic Jayaraman, managing director, The Carlyle Group, a private investment firm based in London with health care holdings in the U.S. and other parts of the world. “We take the long view and believe you have to deal with that uncertainty in making investment decisions.”

Noting that changes to U.S. policies will have an impact on health care companies in Europe and Asia, Jayaraman said tax reform would change the financial equations for investors like his group. “We look for companies with a degree of specialization,” said Jayaraman.  “But only companies with differentiated products or services can cross borders successfully.  We look for businesses that can be efficient providers or innovators. But what matters the most is having a leadership team that can manage in a world of global uncertainty.”

While U.S. health care businesses will continue to attract capital due to demographics, political risk is a growing concern for investors, according to Brian Kinkead, vice chairman, Global Healthcare Group, Bank of America Merrill Lynch, which provides investment banking and advisory services to clients, including hospitals, managed care companies and other providers in the U.S. as well as a company in Germany.

“With the high level of polarization in Congress, the GOP might push a program through now, only to have the Democrats overturn it [if] they come back into power,” Kinkead said. “Legislation used to be bipartisan, and you could be reasonably confident as an investor that the basic foundation would be in place. Now, it is a challenge to determine where to invest in health care at the right valuation.” 

A U.S. tariff on imported medical devices or drug products is a concern for investors, said Jacques Mulder, global health sector leader, EY, a professional services firm that provides accounting, tax and valuation services to clients worldwide. But he pointed out that the $175 billion spent on pharmaceutical products is only a small percentage of the $3 trillion U.S. health care market. “A tariff might not be as frightening as one might expect,” he said. “Tax reform could help for-profit entities, which a move toward deregulation could also free up time and capital for nonprofits, which have extensive reporting requirements.”

Lending, inflation and rates

Health care investors are also paying attention to the availability of loans to finance mergers and acquisitions and new product and service lines, said the panelists. “Dodd-Frank restricted the ability of banks to make loans, and we have not seen many highly leveraged transactions,” said Kinkead. “Regulatory relief will help finance more transactions down the road.”

Unlike those in the U.S., European companies may be facing stricter financial regulations, said Jayaraman. “That could result in reduced lending capacity in the European Union (EU) compared with the U.S. That could affect the ability of companies to get new projects off the ground.”

Mulder said there could also be shifts in the global flow of capital that are not based simply on geographic issues. “Traditionally, for-profit organizations seek to increase their risk pool, and buy non-profits to achieve additional scale. But now, we are also seeing the inverse – non-profits making acquisitions – in reaction to the cost and availability of loans.”

Finally, Clarke asked the panelists about potential opportunities in the health care markets.  Kinkead said investors feel comfortable about managed care companies serving the Medicare Advantage market, as that program for seniors has received bipartisan support in Washington.

Mulder said investors should also take a close look at innovative medical technology companies. “We are embracing the science of outcomes, and new products and devices can reduce risks and improve the delivery of care,” he said. “In the undeveloped world, technology can provide people with remote access to physicians and other services.”

Noting that the Carlyle Group likes to “hedge its bets” by building a varied investment portfolio, Jayaraman said diversification is also a major theme for many health care companies. “We are seeing U.S. provider companies investing in European markets,” he said. “As a result, we expect to see more global health care companies in the future.”

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