I’m thinking the investment community’s current obsession with workers’ comp is not going to end anytime soon.
For several months I’ve been saying investors will move away from work comp when the next new thing comes along. As one who spends waaaay too much time perched on the bleeding edge, I’ve learned to revisit my assumptions and question my firmly-held views more often and more deeply. Here’s what’s causing the re-think.
First, market forces.
The Affordable Care Act has already caused huge changes in the US healthcare industry; medical homes, ACOs, tech adoption, provider-payer partnerships, accelerated consolidation of health care providers and payers, new reimbursement models. Those changes are driven in large part by the need to prepare for a very different competitive dynamic. That different competitive dynamic, coupled with the growing influence of HHS due to the aging population (more Medicare folks) and Medicaid expansion and the rollout (deeply flawed as it is) of the mandate, makes investors very nervous.
Investors wake up in the middle of the night in a cold sweat with visions of some HHS staffer writing a regulation that kills their entire business plan/profit. With so much riding on ACA implementation, and so much budgetary pressure on entitlements (Medicare and Medicaid specifically), entities who focus on health care investing are looking to diversify, to spread the risk into industries that, while not too different from the overall health care market, are protected from the regulatory risk present in Medicare, Medicaid, and ACA-regulated businesses.
KKR’s purchase of Mitchell International last month is evidence of just such a move.
So, that’s the logic. What about evidence?
- Last week I spent an hour talking with a sovereign wealth fund from a very wealthy Asian country about all things workers comp. The capital these guys have dwarfs even the largest PE firm; just the fact that they’re looking into comp tells you a lot about the visibility of our tiny little industry.
- A couple of very big transactions are going to close this fall, and when they do they’ll grab a lot of attention. That will generate even more interest, and the snowball will keep rolling.
- At least two more mid-sized transactions are in the works; while they likely won’t close – or perhaps hit any radars – for a few more months, when they do they’ll likely generate more buzz.
- There are also several smaller deals likely to close before the comp conference; while no one outside the industry will pay any attention, the transactions will keep owners thinking about selling and potential buyers looking for acquisitions.
Which brings me to a somewhat-related topic; Aetna’s purchase of Coventry Healthcare. Sources indicate Coventry’s work comp business was, if not an afterthought, more of a “nice to have” part of the transaction.
A few hundred million in free cash flow is very much “nice to have”.
As mother Aetna has begun to absorb Coventry, there’s a growing awareness in the huge brick headquarters that the Coventry WC business has two really nice features; it is NOT ACA-related (see above), and it is fee-based, not risk-based.
If anything, I’d expect Aetna to invest in work comp and other non-ACA business. There are a lot of rumors circulating about potential transactions involving various work comp service/tech companies. As of now, they’re just rumors, but I would not be surprised if CEO Mark Bertolini et al decided to get just a bit more involved in the comp space.
What does this mean for you?
Long ignored by the rest of the world, we’re now the prettiest girl at the dance. Or, if not the prettiest, perhaps the most desirable.