Episode 41: Healthcare investing is a lot like dating—so what makes Sam Hendler of Thomas H. Lee Partners swipe right?

"Definitively Speaking" is a definitive healthcare podcast series recorded and produced in Framingham, Massachusetts. To learn more about healthcare commercial intelligence, please visit us at definitivehc.com. Hello and welcome to another episode of "Definitively Speaking," the podcast where we have data-driven conversations on the current state of healthcare. I'm Justin Steinman, Chief Marketing Officer at Definitive Healthcare and your host for this podcast. Thanks to the recent actors and writers strikes in Hollywood the spring, summer, and now fall of 2023, there's a lot more reality TV on the air these days. And perhaps no area of reality TV is hotter than dating shows. Now, if you're wondering why I am talking about dating shows, it's because today's guest sort of lives in a dating show. He's perfectly happily married in his personal life, but you could say he's perpetually living in a professional dating world. Have it got your attention yet? Sam Hendler is the Managing Director for Business Development for Healthcare at TH League. Sam's got a pretty cool job. He gets to go around and meet with all sorts of healthcare companies, big and small, software and hardware, clinical and operational, as he looks for TH League's next great investment. In other words, Sam gets to go on a lot of first, second, and third dates with healthcare companies, as he is looking for companies in which he can invest. And if he does invest in these companies, then in many respects, it's just like he's getting married to them, for better or worse, till death, or IP or acquisition, do them part. Full disclosure here, I've known Sam since we joined the Fantasy Football League way back in 2005. The league's still going on today for those of you who care. And while we're at it, I think it's a league that Sam has never won, and I have won four times. But hey, who's counting? The answer is I am. Before Sam joined TH League in 2022, he spent nearly 20 years working as an investment banker focused on healthcare IT for Harris Williams. So I asked Sam to come on the show today and talk about what it's like being a healthcare investor, how it's different than being a banker, what he's seeing in the world of healthcare, and what excites him most about 2024. Sam, welcome to "Definitively Speaking"

Justin, thanks for having me. I appreciate it. I would like to point out who's first in the league right now, this year.

Season's young, baby. Season's young, there you go. All right, let's get right to it. What's hot in healthcare investing these days?

You know, and look, there are a few areas that are obviously, continue to be very exciting, and I think we've seen some examples of some great transactions earlier this year, right? Think about Thermo Fisher's acquisition of Corevitas, which is really in the pharma data management space. Very exciting. We had a, you know, not to toot our own horn, but had a very successful exit with Nextech, which is a specialty clinical EMR in a couple of different specialties. And then, you also think about the Roper's acquisition of Syntellis, right? Which is, again, around some performance and data and analytics. So I think you're seeing software continues to be a huge trend, but particularly companies with really differentiated access to data and workflow that are, you know, that are helping to move the needle in outcomes.

So people always were talking about data, right? I mean, data was talking about core endemic to healthcare IT. What's hot about data these days? What's new? What's different?

Well, I think part of what's happening is you think about just the explosion of data in healthcare, right? You think back to 2020, there were 2300 exabytes of healthcare data, and that's growing at 36% a year, right? And at the same time, you think about, as you well know, the massively heterogeneous data environment in which so many healthcare providers operate, right? The average hospital system has something like 16 EMRs in their affiliated practices. And so you've got both this explosion of data and then the critical ability to link that data and actually draw insights from it about patient behavior, about clinician behavior, about financial performance at the provider, right? And as you ultimately think about the move towards how do you create a holistic view of a patient, it's incredibly challenging, but obviously incredibly valuable as we move towards more value-based care arrangements.

Let's go back to, you said 16 EMRs in a hospital. How the heck is that possible? I thought it was Epic and Cerner and that's it.

Well, and I think that's largely true inside the four walls of the hospital, with the exception of some clinical specialties sometimes. But even then, there's not always the same version of Epic or the same version of Cerner inside the hospital. And then you think about the affiliated practices, right? So if you've got a, you know, an affiliated ASC or, you know, an anesthesiology practice, you actually need that data coming into the system to help make a better decision for clinical treatment around a patient, right? I mean, think about the business we just exited, Nextech, specialized in dermatology, plastics, but, you know, but highly specialized EMR. So even if those dermatologists are associated with the hospital, they're still running the right EMR for their practice. And then being able to, how do you ingest that data back into a, trying to create a single source of truth around a patient?

So that's actually, you kinda hit to my next question I wanted to go there, which is how do you create that single source of truth? I mean, your next gen derm EMR type company, I'm butchering the name there, so I apologize. How are they connecting into Epic? And if you're investing, should you be investing in interoperability and connectivity?

Well, and that's exactly one of the core themes. We are, you know, you said you wanted talk about where we're trying to go in 2024, and that is absolutely one of our core themes for exactly that reason, because I think it'll be very challenging for the EMRs to solve that themselves. And you need a sort of neutral third party who can be the aggregator, cleanser, and supporter of data, right? I mean, so for example, one of the companies we're invested in currently is a business called Intelligent Medical Objects, which I'm sure you're familiar with, and-

But our listeners aren't, so talk about it.

Yeah, so I'll try to do it justice and give an incredibly oversimplified version of what they do. But simplest level, it effectively functions like a Google search for clinicians. So, you know, if one clinician sees a patient and says, "Oh, that is metastatic breast cancer," and another clinician sees a patient, "That's breast cancer stage four." Those are clinically the same event or the same diagnosis. What IMO will do is will translate whatever term the clinician used to the specific and appropriate ICD 10 and SNOMED codes inside the EMR. So, as you think about the ability for a solution like that to, you know, one of the big themes you also hear about is just this incredible clinician abrasion associated with the utilization of EMRs, which I think we can all agree are a necessary evil for the healthcare IT ecosystem. And this is a way to effectively allow the clinician to better focus on just delivering the care and not having to worry about, did I get the right term, 'cause I'm using Epic today or Cerner tomorrow?

So, you know, hey, I love that term clinical abrasion. I have to file that one away. But, you know, we've been talking about interoperability in healthcare since before I got into it 15, 20 years ago. You know, one of my favorite memories was going to HIMS and everybody going to the interoperability lab, and you know, these people, genius engineers, pulling all-nighters to like be able to send like one electronic medical record from like system A, system B. What's suddenly changed that we now think we can do this?

You know, again, I think part of it is the move towards, so many of the EMRs have now moved towards cloud-based capabilities, right? So, as you get to a more easier format in which to transmit data, right, and the pipes themselves are actually now able to accommodate some of just the file sizes and their standards around fire and other things that are mandating that. At the same time, 60 to 70% of hospitals still send and receive data by fax.

It's unbelievable, unbelievable. So on my last episode, we had Jonathan Bush on, and, you know, we were talking a lot about incentives. And for those people who are listening and follow a common theme, I think incentives are actually really important, particularly when we're sitting here talking around interoperability. You know, what are the incentives of these hospitals and the EMR vendors to drive interoperability? I mean, aren't I better off as a hospital walling everybody into my garden to prevent leakage?

I mean, look, that's certainly a thought. At the same time, you know, one of the big themes, you know, I've been thinking about in healthcare is the increasing consumerization of healthcare, right? And so as we're all paying more personally for our healthcare, we all feel like we should have the right, as we do, to choose where we receive our care. And at the same time, as consumers, and I certainly don't have a medical degree, I know you don't either, right, our ability to judge the quality of care we receive is very poor. We can judge the quality of the experience we have at a hospital or a clinical setting. But the quality of the care is impossible to determine. So you're going to see greater push for, again, hospitals really trying to retain patients, and they're gonna do that by experience. And if you add friction to that, that's gonna make it that much more difficult for a patient to have a good experience. And so there's incentive in terms of trying to keep the patient in the network, but also ultimately making it so that they can go where they wanna go to see the clinician they wanna see. And what they're really trying to do is drive procedure volume into the hospital.

Right, but I'd push back, 'cause I thought there is the quality of care. I know if I feel better or not. I mean, at the end of the day, if I have a positive healthy income, my broken arm feels better, if my heart keeps pumping, and I'm not in pain anymore after having a heart attack, God forbid.

Yeah. I've had a quality outcome.

Right, but, and you know, you say that as a relatively healthy middle-aged guy, sorry to out you like that.

That's true, hey now.

But, you know, but think about, you know, if you've got poly-chronic conditions or it's a far more complex set of chronic things that you need to manage, you don't know that you got it right until you don't have an emergent incident, which is incredibly difficult to prove. And it's been one of the challenges around, as you know, really figuring out how to compensate around value-based care arrangements.

So, how do you compensate around value-based arrangements? You got a bright idea?

No, there are far smarter people than I am trying to figure that out. I'm just looking for the guys who, for the companies that have the software to help people manage around it.

Excellent. So we talked a little bit about what's hot in healthcare investing these days. What's not so hot?

You know, I think what we have seen is there are certain models that are very labor intensive that have put incredible pressure on those operators, right? And thinking about how to staff things appropriately, how to make sure you're even able to get the right clinical staff at the right time, and candidly, you know, at the right price.

So gimme an example of one of those labor intensive things that's not a good investment.

I won't say anything's not a good investment, because if you do it right, there are lots of great ways to make money in healthcare. But as you think about models that are more challenging, there've been a ton of people who've rolled up different clinical specialties, right? And dermatology for example. And that's been a very successful model. The question is, can you continue to bring the right physicians in? Continue to grow the practice, continue to incent the physicians after they've gone from a model where they are the owner operator to now more of an employee. And that's been a challenge for every, you know, as hospitals have tried to acquire more physicians, how do they think about that?

So actually, I'm glad you brought that up. 'Cause clearly one of the big areas for PE has been hospital and IDN consolidation. It's been a very successful model. Why has that been so successful for private equity?

Part of it is ultimately delivering healthcare effectively is done best at scale, right? Because if you've got three docs, do you really need an MRI machine for them? Are they going to generate enough volume for it? If you've got 100 docs, they are going to generate enough volume to make full utilization of an MRI machine or the physical plant of a hospital. And so that's part of the, I think that's really part of why that's worked so well.

Yeah, I mean you could have that MRI machine running 24/7. Me and my mother-in-Law literally got an MRI at 10:30 on a Friday night.

It's incredible. And in fact, you see most of these things are really outta capacity. Met with a very interesting company the other day, to your point around the speed dating, that actually specializes in modular radiology labs. So they will actually put an MRI or an cardiography machine in a trailer and drive it to a site.

Hmm, for scale up for rural healthcare. You know, that's actually a really good idea. 'Cause you get back to some of that volume. If you're out, you know, East Texas or West Texas, where there's not a lot of people, you could theoretically put an MRI machine on the road.

Exactly, right? And to that, actually, I mean what I love about a story like that is it actually gets to one of the themes that we talk about in healthcare. You know, when you I started in HIT, everyone was kind of talking about the triple aim, right? Make sure we get higher quality care, lower cost, and improve patient satisfaction. And that's really kinda now moved almost, I think, to the quintuple aim. 'Cause now we're talking about reduced clinician abrasion in that, and then improving equality and access for patients. And I think that's what gets a lot of us fired up about-

Yeah.

This sector.

Do you see more opportunity for hospital and IDN consolidation, or has that play been run already in the U.S.?

Well, I think hospitals are going to continue to consolidate, right? Particularly as you get to this notion of increased population health requirements and as you move towards more value-based care arrangements. Again, my supposition is scale really matters. And if you're in the Boston market, partners is going to need to control as much of the care, as many of the care settings as possible, because they're going to ultimately be responsible if something goes wrong, or someone does not receive the optimal care in one of the ancillary settings.

Yeah, and so then what about the smaller provider roles? So we're talking like dermatology, do you see there's an opportunity to roll up specialists in the ambulatory, or do you think they're just gonna go straight into the big IDNs?

You know, I think there's always gonna be some percentage of physicians who are going to be, want to and will remain independent. And there's absolutely a role for that in the healthcare ecosystem. It will be asymptotic. My view is, you know, again, probably asymptotic to zero.

Wow.

Or maybe maybe 20%, you know, maybe it's 20%, but it's not going to be, there are always gonna be some independent docs.

I think you may be the first person that's ever used the word asymptotic on "Definitively Speaking." Almost entirely confident in that statement.

I hope I used it correctly.

I have no idea. So, all right, good. Let's talk about the government. How do you interact with the government as a PE investor? I mean, healthcare is heavily regulated, so I have to imagine the government is watching everything you do. But at the same time, the government, in particular, Medicare, is like a customer of many of your healthcare investments. How do you make it all work?

You know, look, it's one of those things where you want to be extraordinarily... It's sort of like keeping a pet tiger.

Okay.

You know, you wanna treat the tiger well, but you always wanna keep your eye on it. But I think there, it's really just making sure we are staying on top of the regulatory environment and how it potentially changes. And we've got people who are experts in doing exactly that, both at, you know, obviously at our management teams who are deeply involved in that day in and day out. And then we also make sure we are doing everything we can to stay abreast of policy.

Yeah, interesting. So I wanna come back and ask a question on behalf of our listeners out there who may be trying to get TH League to invest in their companies. What do you look for in an investment?

Yeah, it's a great question. So I think, first and foremost, for us it's really about can we find a company in a great end-market where there's strong growth with a really differentiated product or solution or approach, and then a great team that's in place that's doing it? So, you know, as we think about some of the core themes that we're investing against in 2024, it's around things like improving operational workflow, right? And as you think about, you know, managing just the whole healthcare staff, right? We talked about the whole theme, and when you talk to operators of hospitals, you know, one of the biggest challenges is how do I get my staffing model right? And is there software out there that can help with that? Or services? And we've, you know, obviously spent time around both of those. If you've got the right data, are there analytical solutions that can help you understand your cost base or which procedures are helping you make more money or less money? And driving clinical outcomes. You know, continue to be very excited about the specialty EMR theme. I think that's relatively insulated from the threat of the Epic and Cerner monolith inside the four walls of the hospital. Revenue cycle management continues to be an area of real interest. And I'm sure we'll talk about AI and how the risk of disintermediation from AI.

So I do wanna talk about AI, but I wanna come back to RCM, revenue cycle management, 'cause you just blew my mind. I mean, revenue cycle management's 50 years old. What the heck's going on? What's new there?

It's not even necessarily that things are new. It's that things are still broken, right? And there are tremendous opportunities to really make a difference in, oh my gosh, helping people, you know, not just submit claims more effectively. But as you think about more complex payment arrangements, making sure that there are tools and technologies out there that can help people do that far more efficiently and effectively than an individual can.

I mean, we just still have not solved revenue cycle management?

We have still not solved revenue cycle management.

That is unbelievable to me.

Nor have we solved interoperability, right? It's-

Yeah, but interoperability feels like more of a technical challenge to me, right? Because you've got all these different systems written in all these different platforms, and they're aging. Whereas, rev cycle's very much like a process, and we solved revenue cycle management in many, many industries, right? For some reason we can't seem to solve it in healthcare.

Right, but I'll, you know, think about another business we're invested in. It's a company called Qventus, which helps optimize the scheduling of operating rooms and blocks. This is something airlines figured out 30 years ago around how to optimize route scheduling.

Right, so why is healthcare so far behind?

You know, I think anytime you talk about technology and getting people to adopt technology, there's a, you know, there's a sort of an obvious, this solves this problem, but there's also a massive change management component of any sort of software adoption and utilization, right? Software's only as good as the people who are using it. So it's as good as the people who develop it, it's only gonna be as effective as the people who are supposed to use it using it the way it's intended to. So, I think there's a massive change. You know, healthcare's been very much an industry that has, we've done it this way, we think this is right, and so we're just gonna keep doing it this way.

All right, so now you mentioned AI. Let's talk about it. Every guest wants to talk to me about AI. Literally almost every guest wants to talk about AI.

I'm sure, I'm sure.

So what's your perspective?

You know, I think my perspective is there are parts of the healthcare IT ecosystem that are absolutely going to be challenged by AI, and you know, where it represents a potential threat to, you know, an exogenous threat to the business model. At the same time, I think as you move closer and closer to the point of clinical care, the risk of displacement from AI goes down meaningfully, because of the concerns around catastrophic failure, right? It's one thing if I use AI and I submit a claim the wrong way. It's very different if I use AI and then don't order a test or make a treatment decision based solely on that basis.

Got it. You just threw another word out there, exogonic, I think, exogenic, Jesus. Exogenous, exogenous.

Exogenous, excuse me, there we go, good lord. Got a lotta words coming at me here, Sam. So let's go back to dating. Everybody loves a good drama story. Tell me about your biggest dating regret professionally, please. The company that got away.

Man, so there have been quite a few, you know, and while I've had the opportunity to be in the THL seat for only 18 months at this point, I fortunately have not had that many that have, I just haven't been there long enough to miss that many. But what I'll tell you about instead, if I could, is one of my, you know, one of my favorite companies I ever worked with as an investment banker, as an advisor, and kind of how that business have worked out. If that's okay.

Sure, that works.

Yeah, so great company I worked with called Milliman Care Guidelines.

I've heard of Milliman, yes.

Represented that in the sale to Hearst way back when. And so for your listeners who don't know, what was great about Milliman Care Guidelines was they were effectively, they had a series of, and this was, you know, 2012, so they had a bunch of doctors who would actually read hundreds and thousands of journal articles every year and use that to establish what was the optimal care path for a specific condition, and then publish those guidelines. It turned out that the payer, they ended up with something like 70% market share amongst U.S. payers who were using these guidelines to help underwrite their medical policy decisions. What happened was then the hospitals started buying it, because, one, it was actually the optimal clinical care, but they needed to understand how the payers were actually deciding to reimburse them for their clinical activity. And I think, to get back to the conversation we were having about incentives, everything in healthcare comes back to that.

Got it, so let's pivot and actually talk about your time as a banker. First off, why'd you leave banking and going into investing?

Yeah, so it's, you know, I obviously had a great experience and run in banking, and I loved the folks I worked with. And I think what what happened was, is I spent more and more time in healthcare IT. To me it became very clear that there were certain businesses that could fit together and actually do something really meaningful in a way that was gonna be better than they could do on their own. And the ability to affect that as an investor is very challenging. The ability to affect that as a banker is zero. And so for me it was, you know, the opportunity to potentially help find some great companies that were doin' some real good for the healthcare ecosystem. And as I talked about it with my wife, she looked at me one day and she said, "Hey, look, when you look back and retire, "do you wanna say like, "'I helped run a great financial services firm?' "Or do you wanna say, "'I helped invest in a couple of healthcare companies "'that actually made a difference for people'"?

Interesting, but you know, I'm surprised to hear you say that bankers couldn't really impact that. 'Cause I always think of bankers as almost matchmakers and arranging marriages between company A and company B.

That's exactly what they try to do. But, you know, if you try to think about, hey, I think company A should buy company B, C, D, and E, if you don't control company A, or own company A, very hard to make that happen.

Got it, so you're much more interested in kind of the rollup and the acquisition and adding all the puzzle pieces together to create something new?

That to me is, that's the intellectual excitement about what my current job is, yeah.

And how's it goin'?

It's goin' great. I mean, I've, you know, I'm having an absolute blast. I work with fantastic people who have, you know, turns out, lots of connections in common over the years, and that's been, so it's been a lot of fun in that respect.

Good, good, good. So I got a couple more questions before I let you get back to all your investing days here. So, I wanna get your perspective on value-based care. I feel like we've been talking about value-based care and the end of fee for service for about as long as I've known you, if not longer.

Yep.

Why are we not there yet?

It's a great question. I mean, I think there are a couple things that are challenging in that respect. One, it's incredibly hard to measure whether or not you're doing it correctly. And if you can't measure it, you can't pay people for it the right way, right? And so if I don't know what I'm trying to solve for, I can't incent the right people in the right way. The fee for service model is, you know, there are lots of people who have incentive for that to stick around. And you add to that a data insufficiency issue. I travel, you know. If I've got a condition and something happens to me when I'm on the road, and that doesn't get transmitted back to my primary doc, they've lost the ability to control the episode, right? Or control that condition. And so, again, how do you compensate and incent people in that respect? You know, I messed up a disc in my neck. I'm old. At one point I had to go get a facet block, and they asked me where my images were. I was like, "Well, don't you have them?" No, no, I was supposed to bring a disk with like my-

Like a CD disk, okay.

Like an actual physical CD disk.

Oh my god.

I don't think you have listeners young enough to not know what that is, but my kids don't. But yeah.

We have a wide age range here on "Definitively Speaking." We do quite well with that type of stuff. You would think those images would be stored in the cloud now, and you'd be able to connect them.

You would think.

All right, so last question here. It's a bit in the weeds, and I'm kinda curious on your thoughts. Healthcare is unique, because there's a level of altruism to it, right? Many businesses are important, all sorts of stuff. But, you know, healthcare at the very end of the day is making people more healthy and improving their quality of life. It is altruistic. You know, I love definitive healthcare, but are we making the world a better place? I'd say, yes, we're providing healthcare commercial intelligence, but I'm not saving anybody's life here, right? And so you've got, you're a healthcare private equity investor. There's a level of altruism. But at the end of the day, private equity is about making money and delivering outsized returns to your investor. I think we would all know that. So how do you balance the altruism of healthcare with the pressure to make money?

This is very deep for a Monday afternoon.

Very deep questioners here.

No, look, I think ultimately healthcare is the ultimate industry where you can actually do well by doing good. And that's, I know, what gets me up in the morning. I know what gets my colleagues up and my peers, and at other firms, too, is that you can find great companies that are really moving the needle for the ecosystem and moving the needle for patients and make money in the process. Again, I think about something like an IMO, it really helps clinicians, it helps patients, it helps, you know, and at the same time it's a great software business that, you know, that does make money. And so I think those are... I don't know that they're necessarily as inconsistent or incompatible goals as it might be in another industry.

And in case my boss is listening, I just wanna go on record that I do love my job and I get fired up every day to come here. And I do think we're making the world a better place. Just had to put that out there.

Understood.

Understood, awesome. Well, Sam, thanks for comin' in, talkin' with me today. This has been a lot of fun.

Awesome, thanks so much for havin' me, Justin.

And for all our listeners out there, thank you for listening, as always, to "Definitively Speaking," a definitive healthcare podcast. Please join me next time for a conversation with Dr. Gail Gazelle, a recognized physician coach, and Assistant Professor of Medicine at Harvard Medical School. Physician burnout is at an all-time high, and Dr. Gazelle has coached hundreds of physicians on how to take a proactive stance in their mental wellbeing. Dr. Gazelle emphasizes that seeking help isn't a sign of failure, but rather a testament to their dedication to themselves and their patients. I hope you'll join me for a very important conversation about the mental health of those people who take care of our health. If you like what you've heard today, please remember to rate, review, and subscribe to the show on Apple Podcasts, Google Podcasts, Spotify, or wherever you get your podcasts. To learn more about how healthcare commercial intelligence can support your business, please follow us on Twitter, @definitivehc, or visit us at definitivehc.com. Until next time, take care, stay healthy, and remember that if you're playing Team Scrabble, you may just us wanna have Sam Hendler on your team.