From Deals to Disruption: The Financial Forces Reshaping Healthcare in 2025

Speaker A: Foreign. Hey Ian, good to see you and thanks so much for taking the time to join today's Architect Health's the Front Door newsletter.

Speaker B: Great to be with you.

Speaker A: Awesome. So for asynchronous audience, let me share a bit of context. My name is Selhem um Shah and I'm the co founder and CEO of Architect Health. At Architect Health, we improve cost savings and health outcomes for health plans by matching and navigating their members to personalized telehealth apps. As the front door for digital health, we cut through the noise of point solutions so plans know which ones truly add value. In our newsletter series, we interview healthcare executives on their experiences with healthcare innovation, digital health and preventative care. Our goal is to identify pain points in these spaces and paint visions on how to address them, hopefully inspiring changemakers in our industry. Today we are fortunate to have an incredible guest Healthcare M and a expert and personal mentor of mine, Ian Wijaya. Ian Wijaya, uh, is co head of North America Healthcare Lazard and also leads Lazard's North America Healthcare Services practice which he co founded. Ian's practice focus on uh M&A strategic advisory and recapitalization advisory for managed care insurance payers, providers across the continuum of care, PBMs, distributors, payer and provider services companies, healthcare IT, digital health companies and PE firms invested in these areas. Ian is advised on more than $250 billion of corporate finance transactions, including mergers and acquisitions, leveraged buyouts, financial restructurings and UH reorganizations, joint ventures and defense against shareholder activists. Ian has advised on several of the largest and most transformative M and A transactions in healthcare, including three of the largest in recent history. We have 10 questions. Ready to get started Ian?

Speaker B: Ready.

Speaker A: Awesome. So first up, walk us through the core macroeconomics of the healthcare services and healthcare IT industries. How does the current financial climate impact healthcare organizations, investors, entrepreneurs and potentially even the patient?

Speaker B: It's a great question. I think the core macroeconomics of health services and HCIT are complex but can be boiled down to this. Um, historically what you've seen is essentially the supply side of health care, which is clinicians, including physicians, nurses and others, extensivists and then the demand side of health care, which is patients, members, consumers and those who finance it, the managed care, insurance companies, uh, self funded employers, that is it. And what has happened historically is you've seen a bit of an inherent mismatch in incentives between the two, um, around utilization value and outcomes as well as patient experience and provider experience. Um, because one theoretically has the incentive to increase utilization. The other one has an incentive to not. I think that's evolving. And one word for it is value based care. And the way that those macroeconomics have been evolving is this. In many cases the payers, especially the larger ones have been acquiring providers, especially in primary care, um, ambulatory surgery or other ambulatory areas and home health, uh, to do two things. One is to end that mismatch of incentives and align incentives and two is to create more unregulated fee streams. The other piece of this is providers who have become payviders if you will, where those providers have started to take on um, risk. I think as it relates to those in healthcare technology, tech enabled services. The way to think about that macroeconomically is they're essentially derivatives of their end markets. Whether it's payer facing, provider facing or even biopharma facing, provider facing, HCIT being around data integration, uh, patient intake, rcm, revenue cycle management, uh, payer facing, HCIT being around population health management, payment integrity, risk adjustment, et cetera and pharma facing HCIT being around real world evidence, clinical trial recruitment and decentralized clinical trials. But each of them serves that end market and must navigate the macroeconomics of um, the supply side or the demand side.

Speaker A: Super interesting and kind of specifically transitioning to the M and A side. What is the state of healthcare services and healthcare IT M&A activity today? What are the key dynamics that are driving this and what key factors will drive an increase in healthcare services and healthcare IT M&A activity going forward?

Speaker B: Yeah, I think that health services services and healthcare IT M&A activity, transaction volumes are in a bit of a reset from the peak of the Gilded Age of 2021 when Lenno was great and everything went up and to the right. Um, in the context of something like a 12 year um, market bull run. Uh, but we're starting to see green shoots for what I would say is a gradual sector based and company specific recovery in M and A volumes. There a couple things, um, and I think there are a couple things that are driving the dynamics around this reset from 2021, but also recovery towards a new normal. Whether that's capital N, normal, lowercase N new normal. We'll see. Number one is the notion of bid ask spreads between buyers and sellers as the Federal Reserve, if we take a US focused approach, increased interest rates coming out of the pandemic to combat inflation on average, public company multiples came down as did private company and multiples. By defining private market as M and A in Financing and at the same time depending obviously on the sector and the company boards and management teams were evaluating. All right, we're post pandemic, uh, regardless of what our end market did during the pandemic, let's stop, look and listen and see what our forecast is today for this year, next year, in the coming, whatever it is, three, four, five years. And they've had to look at valuation scenarios and say what's the forecast? What do we see as our growth, our paths to profitability and therefore what is our value? And at the same time buyers coming out of the pandemic in this context of greater, of uh, higher interest rates looked at targets and said what's our view on the forecast and what do we think price is relative to value? And I think the bid ask spreads between buyers and sellers were quite wide in 2023. I think by dint of both time, greater macroeconomic clarity and greater sector specific clarity. And obviously the election will be an important signpost for a number of different kinds of companies. We're starting to see M and A dialogues presuming and bid ask spreads starting to narrow. I don't want to say prematurely that they have narrowed, but for certain situations in certain companies and sectors they are starting narrow. And then it's going to be about what price and structure enables a transaction to happen. So if dynamic one around current state of M and A activities, bid ask spreads, Dynamic 2 is cost of capital. And these are all related in some ways. Um, there the way to think about it is elevated interest rates tend to reduce multiples. Um, and the worst is lack of clarity on when elevated interest rates will come down. Slightly better than that is clarity on high, uh, interest rates coming down to a more normalized level. And even better than that is seeing the Fed cutting rates. Because once the Fed cuts rates, it's highly unlikely that they would raise rates. Um, and so really it's about when will the Fed see the data that supports cutting rates. Um, and look, we're probably in the bucket of greater clarity on pathway to reduced interest rates, um, which enables companies to plan. If they can plan, they can forecast. If they can forecast, they can value themselves. And if a company can buy itself an acquirer can price it. So cost to capital is dynamic number two, which I think we're in an improving situation there. And then three is acquire focus on the achievability of the target company forecast there. I would say the uh, broader macroeconomic uncertainty in 2023 created a wider sort of code of dispersion. If you will of potential target company forecasts which made it harder to find a zone of overlap between buyers and sellers on value and therefore price. I think as the macroeconomic picture is starting to come into greater clarity and focus, so can target companies and acquirers dimensionalize forecast synergies and value. And I think on that third bucket which is acquire focus on achievability of target company forecasts. I think we're also seeing uh, more clarity there which I think is enabling of uh, an improving M and A environment, both services and health tech.

Speaker A: That's great. And I'm really curious and just to double click here, you know which subsectors within healthcare are seeing the most activity and why and also the least.

Speaker B: Yeah, great question. Um, I would say uh, from a subsector standpoint we are seeing elevated activity in almost all of them over the past year. And the key differentiation point is less around sector and more about specific company. A and B is what is that positioning of that company to do more either if it's the public company that's independent in the context of say being taken private or um, that plus an M and A or consolidation thesis as a private entity or uh, the midsize or large players saying look, um, we have long term plans to create value in our markets. We have a 5, 10, 15 year view on what it takes to play to win. Um, we have a good sense for what our capabilities are and what our gaps are. And as we look to fill our capability, fill our gaps or supplement our capabilities, we can build it, we can partner or we can acquire. And when you think about building and partnering with building, it's about the time and the amount of capital required to get to Escape Velocity and sometimes it's just not fast enough given the market need and how other competitors are playing there. Uh, from the standpoint of partnering it sounds really good and it can be incredibly value creating as long as you can align incentives economically but also on the governance and have clarity on path, liquidity, et cetera. Um, but controlling the economics really can be a key value driver especially in driving incentives, um, holding folks accountable and achieving milestones. Um, and so I think from M the standpoint of where we'll see activity, I think you're going to see it in value based care, especially in companies that can manage the cost of specialty care as well as in government business, whether it's in Medicare Advantage, managed Medicaid or duals, which is a tremendous opportunity, um, to improve uh, human health, reduce human suffering and create value. Another place would be those in virtual health as companies seek to create a broader set of solutions to address, call it whole person health, um, get operating expense synergies and drive scale. Um, this is especially relevant for businesses that um, can create synergies um, with data and analytics to intercept or create the next best action in impactable health costs. Another area would be companies that we ah, will see consolidation of companies that can drive operating efficiencies um, by automating previously labor intensive functions. And so this can be AI whether generative or not, um, but it can be a range of technological solutions that are essentially using software to automate. And in certain places we may not have you know, the robot telling, telling the doctor exactly what to do but there are certain tasks, whether it's um, a summary of a medical record that can create operating leverage, um, summary of follow ups in revenue cycle management that can increase the yield, the dollars for the provider. But it's really an automating previously labor intensive tasks to drive operating leverage. And then another area where we see likely uh, increased activities in behavioral health, uh, especially as a range of behavioral health MSOs seek to scale, address a broader acuity range, triage acuity on a population specific basis, uh, drive more measurable outcomes. We think that's an area that's ripe for consolidation as well. And so that's just a handful of them that there are others. Um, that's a place where I think we'll see quite uh, a bit of consolidation over the coming year or two.

Speaker A: I totally agree. It almost seems like if you play at the intersection of all of these things then you're the next unicorn.

Speaker B: Uh, you are. Whether it's a unicorn or a Pegasus. Core question then becomes uh, where can you focus and where do you prioritize from an end market and a solution standpoint?

Speaker A: Right. I want to touch upon the robotic doctor point um, in our next question which is obviously you know, the question that everyone is asking these days. With increasing integration of technology, including AI in health care, how do you see traditional health care players adapting to these changes? And what role does M and A play in the verticalization of healthcare technology?

Speaker B: Yeah, great question. And this notion of technology and the um, application of technology to healthcare has been, it's been in some ways a question for decades. Um, but what we've seen with effectively a renaissance in computing power, the application of AI, but also the digitization of healthcare and the ability to take both structured and unstructured data and connect dots that were previously unconnectable by humans alone are simple linear regression Analysis I think has created an enormous uh, promise for the application of technology to healthcare. Um, I think as relates to your question, number one, the way that we are seeing traditional incumbent healthcare players leverage technology is effectively three ways. Number one is self help um, via internal teams. And so whether that's recruiting data scientists or repurposing folks um, for a specific mission and applying technology because they hold the data. Um, many health systems um, outsource rcm but some also do it themselves. Given the uh, strategic importance of RCM to a number of them. I think there um, you've seen folks have a range of outcomes and quality but uh, so number one would be self help and try to build it internally. And the main pro of that is you control the data, um, you have complete control over the people in the mission, um, and there's no inefficiency potentially of interacting with someone externally. Way two is commercially contracting for technology solutions either with the big tech hyperscalers or more specialized HCIT companies with that mission critical healthcare domain knowledge. That's way too um, there. I think it's important to understand sort of signal to noise ratio in healthcare healthcare data and I think you do need healthcare expertise to really divide that signal noise. And then three is companies that are acquiring healthcare technology, um, to then bolt it into their own DNA, um, into the mothership to ensure control over the benefits of that technology. And that technology can either simply create more operating leverage for the entity itself or depending on the company be commercialized and actually generate external revenue streams. I think as it relates to that verticalization of technology, I think ultimately there is no faking health care expertise. I think sort of the old square peg round hole, I've got an app and I can apply it to health care is a challenging one. Uh, I think it really must start from identifying an unmet need in health care and deciding on a clear way to attack that need, which will often involve technology but equally it may also involve a lot of human intervention. And I think we've seen a lot of focus on business models around software versus services as well as tech enabled services in between. Um, from my perspective there is no one right way to do it. It's really about fashioning the right company, the right set of capabilities, the right set of software and services to tackle the problem that you're seeking to tackle in a way that delivers a replicable and scalable ROI that is tangible and attributable to your solution.

Speaker A: That's super helpful. Um, and a great clarification, transitioning slightly I think when we see in the news these large, you know, glamorous deal values of different types of mergers acquisitions, people don't really look past that. They don't really understand what happens after the deal is made. So health care is a complex industry with various stakeholders. What unique challenges do you see in integrating health care companies post merger, especially considering regulatory and patient care considerations, does inherently decrease the likelihood of successful M and A activity within healthcare compared to other industries?

Speaker B: That's another great question. I think post merger integration must be done pre merger to be done right. Um, especially in terms of the degree of planning, uh, the teams who will be whose PNL will be responsible for success, uh, what milestones need to be achieved over the first hundred or 180 days. How does that work? Um, in terms of milestones and progress and key performance indicators over the first year, um, with benchmarks. Um, and so I think one post merger integration successful, uh, to be successful requires pre merger planning. Um, a B is, I think, you know, post merger integration is both art and science. I think it's important for the entities as they're coming together to recognize, especially at the leadership from an integration standpoint to understand that there's a range of outcomes here to uh, hold themselves accountable to uh, hitting milestones, but also to recognize swing factors, mitigate risks as early as possible, um, and have as much visibility on things like supply chain, operating cost, et cetera. Um, so if one is you got to start pre merger and two is there's got to be alignment, um, across both organizations. I'd say three is I think the timeframe is important for post merger integration. I've not done or seen an empirical study on this, but my sense of it is most M and A deals really need to hit escape velocity first year within that first year post acquisition or transaction. Um, and from there you can create a lot of momentum. But that getting that first year right is key. And then, and then lastly I would say is in terms of whether the complexity of post merger integration makes it harder to be successful. I think look like anything important and complex, um, it can be done well as long as the right planning is done and there's alignment between cultures and teams and people. You know that notion of you don't do business with companies, you do business with people at companies. And I think if post merger integration is approached with the same level of seriousness, specificity and care as each company executing on its business plan on a standalone basis, I think that's the foundation for a successful M and A deal.

Speaker A: Awesome. Very cool. Um, pivoting slightly as digital health companies start to seek additional rounds of financing or explore sales. What aspects of quality and value do they need to demonstrate to be investable assets? What is the theoretical bar to meet?

Speaker B: Great question. It's a big question now, especially as both the public and the private capital markets have evolved. I think the most investable digital health companies in 2024 and 2025 will have um, a couple key characteristics. Number one is they need to clearly define their addressable market. It's not good enough for it to be a big one. Theoretically it needs to be clearly defined. Two is that these companies deliver an undeniable and clear hard dollar ROI relative to that unmet market need. Um, and competitor set, um, the sort of me too solution is very difficult um, to get commercial traction and one must be differentiated in the way that they deliver that roi. Three is to have a scaling plan with the right team, um, which includes the right relationships, a go to market strategy that's, that's sensible and a, and a clarity of focus on um, is the goal to get new logos or to more deeply penetrate existing logos? How do we think about cross sell and upsell and importantly how do we think about retention? Um, a customer saved is a customer earned. I'd say the other piece of this that's going to be vital for the most investable digital health companies is um, and look part of this is you just got to get started somewhere. But once you create a bit of momentum, it's showing the ability to convert probabilized pipeline into annual recurring revenue. Um, it's really hard to do. Getting from 0 to 5, 5 to 10, 10 to 20, 20 to 50, 50 to 100 is really difficult. But the ability to sort of two dots create a line to show that ability to convert pipeline into revenue, uh, is incredible focus by investors because it gets to uh, not if, if they build it, if you build it they will come, but rather are they coming? Do they find it compelling and is there a dose response essentially between your commercial efforts and revenue generation? I would say also appropriately leveraging the hyperscaler big tech ecosystem, um, where appropriate, um, you know, not seeking to compete with Amazon or have some product roadmap that competes with those guys? Um, probably makes a lot of sense from the standpoint of being relevant and not being at the risk of being irrelevant in a year or two. Um, another piece of this would be having a product road or solution roadmap that complements those, especially those in the HCIT infrastructure space. Um, so that your Long term viability as a company is clear and that you can play in the sandbox well with the existing infrastructure players. I think Last Dynamics would be uh, financially focused, which is clarity on unit economics at run rate as well as some pathway to delivering more operating leverage over time. You don't need to be profitable tomorrow. And in some cases the right answer is to be burning cash in the first year or two, um, as you scale. But I think having some sense for the pathway to profitability is more important now than it was certainly four years ago and certainly two years ago. Um, and this is because ultimately the investors are taking much more of a back to basics view on what is investable and uh, with incredible clarity on, or seeking incredible clarity on not just what's the valuation that I could exit at, but also what's my pathway to exit. Is this business most likely another private financing and then ipo? Is it a sale to a strategic, is it a potential sale to a sponsor? And so given what happened in the back half of 22 and 2023, around how the IPO markets were essentially closed, M and A volumes came down as interest rates uh, went up. I think investors are incredibly focused on pathway to exit and form a pathway. And so I think those, those characteristics, I said it would be the most investable companies definitely.

Speaker A: And even as an early stage startup, uh, ourselves we are actively thinking about profitability even at this stage, we, which um, I think a couple years ago was kind of lost in the jargon, um, so speaking more so from the patient perspective and given your expertise in this space, how has your view of digital health, specifically as it relates to telehealth apps and virtual first care, changed over time, pre pandemic versus post pandemic. And looking at your crystal ball, what does the future hold in store for these types of solutions?

Speaker B: Yeah, it's a great, good question. I think uh, Digital health started to get its sea legs pre pandemic as you saw that sort of 2015, 2016 IPO cohort as well as the 2018, 2019 IPO cohort. Um, and so sort of health tech, broadly speaking. But digital health as well was really starting to get market recognition because once you have publicly traded entities, you can then think about multiples, EV to revenue, ebitda, whatever it is, based on the business model, which can be helpful to the private markets in looking at what their likely exit is and therefore what price they could, they could underwrite as an investor. And so I think digital Health as it's evolved over the past couple of years. It's, it was born, if you will, in the current state that we understand it to be, um, probably about eight or nine years ago with this IPO cohorts. And then what we found is the pandemic in some ways accelerated or amplified the utilization or adoption of those solutions. Part of it was by necessity, um, given how uh, telehealth and the use of zoom or other remote technologies was required. And so then the question becomes what is the long term run rate utilization of these solutions post pandemic. And I think now that we are, now that we hear post pandemic, I think what investors are focused on is not just the utilization question, call it Q or quantity, but also P, which is the price or the value of those solutions. And I think some of the best digital health solutions that we are seeing are ones which effectively integrate the content with the pipes. Um, a little bit like how you saw happen in Med Surge where you saw a company starting to vertically integrate. They had the pipes, they had the relationships, they had figured out the logistics and how to manage network capital, but then they started selling their own product as well or as you saw it even in telecom with the notion of um, telecom providers starting to own content. And I think some of that is what you're seeing happening. Some of the best players in digital health. And I think the other piece about digital health that will be important is uh, a bit of a tale of two cities. Which is the highest quality ones that have plenty of options or optionality around what to do. They will be able to negotiate for the highest values in the context of say a fundraise or a sale, um, as informed by their batner or their alternatives to a sale or a financing. I think the ones that aren't as high quality will have to navigate, um, and even the high quality ones too will have to navigate things like down rounds, things like how do you think about what's the next step after the current financing? Whether the business is being built for an IPO in 24, 25, 26, whether it's being uh, built for another private financing round to then look around and assess the environment, or whether a strategic or private equity firm, depending on the financial profile of the business, can come over the top of that and convince the owners of the current company that the value creating or the value maximizing outcomes actually a sale. And so I think you'll see a tale of two cities as a function of quality and as of company quality and as a function of the viability of that individual company's strategic alternatives to a sale or a financing.

Speaker A: Very interesting and I think uh, immediate follow up question I have to that is the concept of point solution fatigue has been voiced repeatedly this year by employers, health plans, even patients generally in healthcare. Is there a right or wrong when it comes to specialization of care for targeted populations, but also the choice overload bias and just generally being overwhelmed with the number of solutions. What novel approaches might you recommend to payers, employers and digital health providers combating this problem today?

Speaker B: Yeah, the point solution versus full suite debate is one that uh, has been robust over the past couple decades and I think it continues. My conclusion on that is this, um, there is no replacement for a digital health solution that is the best at what it does or at least that is excellent at what it does. And so there are situations where you have full suite businesses where there's an A solution in one area but a B via solution in another area, um, and an A minus solution in yet another area. I think as they go to market and interact with say large self insured employers or other large players have a greater capacity to interact with a larger number of vendors. I think you may see point solutions win out there. But in other situations where a business has a A plus a minus solutions across the full suite, there's a simplicity for even those larger customers, whether they be self insured employers or payers, to have a broader relationship with that full suite player. Um, because then there are things like uh, benefits from data liquidity or interoperability, um, there are efficiencies from leveraging, um, the initial integration, data integration and that can enable quicker time to value, um, and so I think it really depends on both the customer, big or small, and ultimately the quality of that point solution versus the full suite. The other piece of this I would say is um, and I think this cannot be underestimated is those companies that are able to use, even if they're a point solution or even if they're uh, a full suite provider, is to use their interactions with their customers, whether those be payers, providers or biopharma, to effectively seed future R and D and to figure out where the next best investment is so that they can maximize the relevance of their solution not just today but tomorrow and years to come. Because while there's a huge focus on acquiring new logos, it's also really important to retain those logos given things like LTV to CAC or however you want to mention, effectively the productivity of your salesforce. And so I think that notion of being able to surface R and D ideas and innovations from your existing customers to drive relevance with existing customers but also new customers is key whether you're a point solution or a full suite provider.

Speaker A: I think that's brilliant. I think you've almost started to answer our next question, which is uh, do you have any words of wisdom to entrepreneurs building in digital health today and perhaps even those that have they're trying to retain the customers like you're mentioning and try to innovate with them?

Speaker B: Yeah, my advice would be, and I say this with a lot of humility, um, would be number one is work backwards, um, from a very specific problem that you're looking to solve and create a solution that solves that problem in a really simple and easily articulatable way. So work backwards from a problem and purpose build a solution to that problem. That's one, two is deeply root your solution in healthcare expertise, whether that is clinical, uh, whether that is some other area of healthcare, but it's gotta be rooted in healthcare expertise. It cannot be faked. Three would be play well in the sandbox and figure out how your solution plays well in the existing sandbox with the incumbents as well as with the hyperscalers. And then lastly to your earlier point and to our earlier question that we talked about is make sure that you maximize the relevance of your solution not just today, but tomorrow in the context of figuring out where your next best dollar of R& D is spend.

Speaker A: Awesome. Well, we've zoomed through, we're at our last question. What are you most looking forward to for 2024? What are some changes or trends in healthcare that you are most excited to witness?

Speaker B: I'm really excited to see uh, the promise of the technological enablement of healthcare really play out in 24 and 25. And that may be in the context of businesses executing on existing ah, transactions or entities that they've acquired to become more technologically automated to connect dots around population health management or to more closely integrate payers with providers. Or it may be in the context of um, large incumbents, um, executing on M and A roadmaps and creating new solutions around population health management, engaging government sponsored populations like Medicare Advantage, Medicaid and duals. Or it could also be in businesses focusing and focusing on solving specific problems, uh, and saying okay, rather than doing A, B and C, I'm going to focus on A and I'm going to play to win there, um, and fundamentally creating value and improving patient outcomes. That'd be one. And then two is I think as we get more clarity on interest rates on the openness of the public equity markets. And as BID Ask spreads narrow, I think you're going to see significantly more M and A activity.

Speaker A: Okay, wonderful. Well, yeah, this has been absolutely amazing. Thank you so much for the words of wisdom and insights here. SA.