By Jack Bailey, Managing Director and Co-Founder, Bailey Southwell & Co.
Recent Acquisition Activity
The flurry of activity over the last year, with a $1+ billion transaction seemingly announced every quarter, has been dizzying for many to track and understand. Many have wondered why large private equity firms continue to show significant interest in acquiring workers’ comp services businesses.
Trends At The Payer Level
The ongoing interest from private equity has been driven by trends at the payer level. With nearly 50% of 2017 net workers’ comp premiums being written by only ten payers, these large payers have a significant effect on the development of the workers’ comp services industry.
Traditionally, payers selected vendors at the local level, but over time found this method to be sub-optimal for cost containment and standardization of service quality. That is leading to payers increasingly selecting national vendors who can standardize service across regions. As part of this vendor selection process and ongoing vendor evaluation, payers have become laser-focused on several key areas of vendor service:
- National Coverage
Questions: Can you serve our claims throughout the United States? At a minimum, can you provide comprehensive geographic coverage in a large region?
Background: Payers often split the US into a few regions and have a panel of one to three vendors for each region.
- Comprehensive Service Suite
Question: What additional services can you provide?
Background: Payers will often look to expand their service activities with their highest-performing vendors. For example, if a payer enjoys a successful nurse case management relationship with a vendor, the payer may look to expand the relationship to include additional services such as bill review and independent medical exams.
- Emphasis on IT Security
Questions: What protections do you have in place to ensure there are no breaches of protected health information? What certifications do you have (i.e., HITRUST, SOC 2 Type II, etc.)?
Background: Recent breaches have made IT security a top priority for payers.
- Stringent Quality Assurance
Questions: What processes do you have integrated into your workflow to ensure that a high level of service quality is delivered? What certifications do you have (i.e., URAC)?
Background: Payers will often have an internal quality assurance process in place to sample vendor work quality on a regular basis ensuring quality standards continue to be met.
Why This Is Attractive to Private Equity
These payer vendor selection dynamics have reshaped the landscape for service providers and made the space attractive to private equity for several reasons:
- Favorable Environment for Large Vendors
With vendor panel consolidation and increasing payer requirements, larger players are often at an advantage when competing for business; over time they will win business that once was held by smaller, regional players.
- Customer Requirements Favoring Roll-Up Strategy
Even the largest services providers often see a need to fill geographic gaps in coverage or make strategic moves into new service lines being requested by both existing and potential customers. This plays into the skill set of any private equity investor comfortable executing a roll-up strategy. From private equity’s point of view, roll-ups create cross-selling opportunities and boost the profit the private equity firm will make when it sells the large workers’ comp service firm for a premium over what it paid for the component parts.
What Does All This Mean for Business Owners In Workers’ Comp Services?
I will delve into this topic in next week’s column.
About Jack Bailey
Jack Bailey is a Managing Director and Co-Founder of Bailey Southwell & Co., a Nashville headquartered investment banking firm focused on the healthcare and tech-enabled services industries.
With over 20 years of middle market deal experience, Jack has worked on over 75 sell-side, buy-side, and capital raising transactions for both public and private companies. He has a focus on the payer services industry with the majority of his experience working with founder-led companies in the workers’ comp industry.
Jack’s depth of experience and extensive network has enabled him to provide ideas, solutions, and processes that result in exemplary outcomes for Bailey Southwell clients.
Jack received his J.D. from Vanderbilt Law School and served as Corporate and Securities Counsel in a national law firm and in a Fortune 500 company. He holds his Series 79, 62, and 63 securities registrations and is registered with StillPoint Capital, member of FINRA/SIPC.
About Bailey Southwell & Co.
Headquartered in Nashville, Tennessee, Bailey Southwell & Co. is a partner-owned investment bank focused on small and mid-size healthcare and tech-enabled services businesses. We provide customized M&A advisory solutions for middle market change of control transactions and growth capital raises and have closed over 200 transactions since 2005. We also manage BSC Capital Partners, a co-investment fund supporting high-growth healthcare and technology companies with flexible capital and strategic insights to accelerate growth. View our website for further information: www.baileysouthwell.com.