Private equity firms are showing great interest in buying workers' comp services firms, and that will likely persist for four reasons.
What’s with all the investor interest in workers’ comp services? There are several dozen private equity (PE) firms looking hard at the workers' comp services business today, with many pursuing acquisitions of companies large and small. While their approaches, priorities and goals may differ slightly, there are several reasons why their attention will likely persist for some time.
First, there are a lot more investment firms out there these days than five or 10 years ago, with a lot more capital to invest. That means lots of smart people with big bank accounts are looking to park millions of dollars, which means there’s a lot of competition for attractive companies.
Second, some comp services companies have gotten pretty big, with earnings in the tens of millions of dollars and revenues north of $200 million. Finding potential targets, conducting due diligence and going through the deal process takes about the same amount of time and staff if it is a $50 million or $350 million deal. Obviously, PE firms would rather do a couple or three large deals than a bunch of smaller ones as it’s a lot less work on the front end, and a lot less to manage and oversee after the deal is done. And PE firms just seem to like companies with more revenue.
Third, what used to be considered a problem -- the regulatory risk associated with a workers’ comp company -- is now seen as a strength when compared to a non-work comp healthcare firm. Investors see the 51 regulatory bodies affecting workers' comp as creating far less risk than the single regulator driving Medicare, Medicaid and most health insurance programs. Investors don’t know what’s going to come out of CMS as reform is implemented, so PE firms are hedging their bets by going where, in a worst-case scenario, they’re going to get hurt in one or two big states.
Fourth, there are a lot of inefficiencies, stodgy business practices and just plain poorly run sectors of the workers' comp business. PE firms make a lot of money by stripping out inefficiencies, delivering better performance, streamlining workflows and processes, removing cost and delivering more value. Anyone who’s spent any time at all in work comp knows that there are a plethora of opportunities out there to do all of these.
Bill processing, analytically driven medical management, intelligent utilization review, provider clinics, complex case services, IMEs/peer review and chronic pain management and addiction services are just a few sectors where there’s a ton of opportunity.
Interestingly, no PE firm has yet taken advantage of the biggest opportunity in workers’ comp. That opportunity is to buy a comp carrier/TPA, rationalize the claims and medical management process, write workers' comp insurance and make huge profits by controlling medical costs and delivering much better outcomes. The investment executives I’ve spoken with about this seem to be afraid of the risk; what if they do it wrong, or get a bunch of bad claims, or whatever?
To which I respond: You can’t do it any worse than many of the current comp carriers, so what are you waiting for?