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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." 

1 big thing: Tech spend accelerating

Animated illustration of a health cross with 0s and 1s running across, some sequences are highlighted as malware.

Tenex Capital is seeking a buyer for Team Select Home Care, a provider of diversified home care services, multiple sources tell Sarah. 

Why it's the BFD: Team Select trading hands could trigger further investment around an innovative solution that aims to improve care for medically fragile children.

Phoenix-based Team Select (among other things) trains parents and legal guardians to become compensated caregivers of this vulnerable population through the emerging and growing Family CNA Program.

This is a population that has historically lacked access to affordable care and faced reimbursement challenges.

Driving the news: Tenex kicked off a PE-centric sale process for Team Select around a month ago via Cantor Fitzgerald, sources say, with initial bids earlier this month.

The process is marketing about $35 million of pro forma adjusted EBITDA, on about $250 million of revenue, sources say.

Context: Backed by Tenex in October 2017, Team Select provides services that range from Medicare home health to senior living services, across 11 states in the southwestern and central U.S.

The Family CNA Program is its fastest-growing arm.

Between the lines: Five states offer a Family CNA Program today — Arizona, Colorado, Indiana, New Hampshire and Pennsylvania — but there's a big push to implement similar legislation in other states like New Jersey and Texas.

Zoom in: There's growing recognition that such programs address two major problems.

The dearth of caregivers certified to care for medically fragile children contributes to financial and emotional stress as parents are forced to leave their jobs.

High medical costs associated with re-hospitalizations, as medically fragile children in the home receive only 2% of Medicaid spending, per a 2019 Health Affairs study. 

Yes, and: The program is a job creation opportunity for families in need, not unlike self-directed home care, which is also gaining traction. (Recall recent activity around Public Partnerships and Consumer Direct Holdings.)

Tenex and Team Select did not return requests for comment, while Cantor declined to comment. 

2. The BFD: Tenex-backed Team Select in play

Illustration of a child surrounded by medical crosses receding into the distance

State of play: In addition to Team Select, PE-backed pediatric home care companies that play in this CNA program include: 

Varsity Healthcare's April 2019 investment in Angels of Care, though most of the company is straight Medicaid home care. 

Flexpoint Capital Partners' March 2020 investment in MGA Homecare, which is a mix of private duty nursing, the Family CNA program, and in-home therapy. 

Aveanna, the publicly traded diversified home care giant.

3. State of Play: Pediatric home care

Illustration of a person retrieving a newspaper with the headline "State of Play" from a mailbox.

Eyenuk, a Woodland Hills, Calif.-based AI digital health company for eye screening, raised $26m in Series A funding led by AXA IM Alts, joined by T&W Medical A/S, A&C Foelsgaard Alternativer ApS, Kendall Capital Partners and KOFA Healthcare. https://axios.link/3yLwdCw

Rhino Health, a Boston-based developer of a health care-focused data collaboration platform, raised $6.7m in a seed extension round, bringing total funding to $11.7m. Fusion Fund and insider LionBird Ventures co-led the round; Qiming Venture Partners, Maccabi Health Services and insider Arkin Holdings joined. https://www.rhinohealth.com 

Babylon announced plans to divest its Independent Physician Association (IPA) business in California, including Meritage Medical Network. https://www.babylonhealth.com/en-us

RLDatix, a portfolio company of TA Associates and Nordic Capital, acquired Porzio Life Sciences, the life sciences compliance subsidiary of law firm Porzio, Bromberg & Newman. https://axios.link/3TbAkjm

4. Deals o' the day

CirrusMD named former Transcarent chief commercial officer Jamie Hall president and CEO.

GreyMatter named Going Digital CEO Solome Tibebu venture partner.

Bend Health named former Psych Hub chief operating officer Julie Dimoulakis its COO.

Curology named former Revlon president of the Americas Heather Wallace CEO.

5. It's Personnel 

It's Monday. Welcome back, Health Tech readers!

📖 Situational awareness: Axios Pro gathered up reader insight in the Axios Pro Deals Sentiment Report 2022. Give it a read!

✅ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Mickey Meece. Please ask your friends and colleagues to sign up.

October 17, 2022

1 big thing: Tech spend accelerating