Health Tech: Child care scoop

Approximately 45% of health care providers accelerated software investments over the past year with more expected to boost tech spend in the wake of immense cost pressures, a new report by Bain & Co and KLAS Research shows.

Why it matters: While debt market chaos weighs on large-scale dealmaking, the long-term opportunity for private equity investors focused on health tech will remain robust, Eric Berger, a partner at Bain, tells Sarah.

• “There’s this rising sense of FOMO amongst CMOs,” Berger says, noting the limited ability to keep up with the proliferation of potentially high-value tech companies.
• The implication: Tech companies with demonstrable ROI will continue to command demand and value, he says, bifurcating winners and losers.

Context: Health systems have faced a deteriorating macro environment over the last two years, starting with COVID-related challenges and eventually inflationary and labor issues.

• On average, labor expenses are up 16% and non-labor expenses are up 10% across the hospital industry. Berger says health systems and workforces “are reaching their breaking point.”
• Almost 80% of providers say labor shortages, inflation concerns, or specific organizational situations (like M&A or leadership changes) are top catalysts sparking new investments.

By the numbers: 95% of providers expect to make new software investments over the next year, but health systems are responding in diverging ways.

• Roughly 35% expect to spend more than usual on tech because of the environment and market disruption, while about 30% are likely to reduce spending.
• Whereas some view tech as an offensive lever that can improve workforce productivity, retention or clinical outcomes, Berger says those pulling back think about tech spend as a cost center. Or they may be so financially strained it’s simply not an option.

Zoom in: The No. 1 strategic priority for health tech spend is revenue cycle management, the report shows, followed by security and privacy, patient intake/flow, clinical systems, and telehealth.

Of note: Big tech — Amazon, Microsoft, Google, Oracle, Apple and Salesforce — have minimal to no position across providers’ top four priorities (e.g. in RCM) for the coming year, the report notes.

Between the lines: Private equity MOICs and IRRs in health care IT have historically outperformed other sectors during economic turbulence, the report shows. But today’s high inflation and labor dynamics are unlike any the industry has gone through before, Berger cautions.

• During the last high inflation environment of the early 1980s, for example, private equity didn’t have near the scale it does today.
• “How will health care investments with very large reimbursement exposure trickle to vendors in a world of 7%-10% inflation? We don’t have the data to know what will happen.”

The bottom line: Berger likens the environment to the iconic scene from Steven Spielberg’s “Jaws” — where all the health systems are in a little boat and saying, “We’re going to need a bigger boat.”