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A Veteran's View Of The Modern Health by H. Lee Murphy
Friday, June 29, 2018

One of the leading advisors and dealmakers in the health care industry around Chicago over the past two decades has been Ejaz Elahi, 55, who recently rejoined investment adviser Dresner Partners as a managing partner after six years away. An immigrant from Pakistan who came to the U.S. at 18, Elahi's wide-ranging career has included stops at Citicorp and Smith Barney as well as such consulting firms as Deloitte, PricewaterhouseCoopers and BDO. With most of those names he was aligned with large-client advisory work, but at Dresner, where he previously toiled from 2005 to 2012, he returns to the middle market.

An edited interview follows.

See full interview here:  

http://www.chicagobusiness.com/article/20180614/NEWS03/180619924/a-veterans-view-of-chicagos-modern-health-care-economy

Crain's: We've seen a lot of hospital mergers in recent years. Are they working?

Alahi: In two hospital systems coming together they will tell you they want economies of scale and clinical integration. Those are very conventional ideas, but they are producing very mixed results. In reality, scale can mean that these institutions are bulking up in search of a counterweight to the big insurance companies, allowing them to negotiate better contracts. In Chicago, the largest insurer, Blue Cross, dominates 60 percent of the market, with United Healthcare and Aetna trailing. So hospitals here essentially have to face off against one large insurer.

You work with private equity investors. Where is that money going now?

Alahi: Much of that money is flowing into physician practices. A good example is the nearly $1.5 billion that Ares Management put into DuPage Medical last year. DuPage has developed a large ambulatory network around Chicago, much to the surprise of hospitals, and has the potential to expand into new markets. There could be more deals like this one, with the stated goal of going large and going national.

Where else is money being invested?

Health care providers are looking for improving outcomes while reducing costs, so you'll see more investment in new technologies that provide connectivity between patients and doctors. There will be a search for anything that reduces the cost of care for chronic conditions like diabetes, obesity and cardiology. Investors from firms like Fairview Capital will be putting money into technologies that manage these conditions better. The money is flowing toward innovation.

Less money is likely to be flowing toward new hospital construction going forward?

Go back 30 years and a lot of money was going into building buildings, which resulted in a large base of what we call stranded assets--anything with a market value or book value requiring debt service. Tax-exempt debt is still cheap and plentiful today, but the big construction binge for acute-care hospitals seems to be coming to an end. A lot of replacement hospitals were constructed in the last 20 or 30 years. That trend is running out of steam while ambulatory care centers are still being erected. We may be only in the early to middle-stage of the ambulatory care cycle at this point.

Have some hospital systems grown so big via acquisition that they've simply run out of targets. Northwestern Medicine would seem an obvious example.

With its deal for Centegra in McHenry County, a challenged system, Northwestern has consolidated the east-west corridor away from Chicago very nicely on the strength of earlier acquisitions of Kishwaukee and Cadence. Some of their markets now seem overbedded, and I would suggest there are very few targets left for them.

Retail health care is now available in malls and CVS stores everywhere. Will we see an entrepreneur figure out how to do a retail health chain a la Starbucks?

Retail health is still experimental, but is very much in vogue among investors, all of whom want to capitalize on that trend somehow. A branded chain of health centers, like coffee shops, could well be possible someday.