Playgon Games Inc. (TSX.V:DEAL / OTC: PLGNF) is Targeting the Fastest Growing Segment of the Online Casino Gaming Market

Over the last year, we’ve seen not only the utter decimation of revenues and activity within the doors of land-based casinos, but also a mass exodus of players towards online gaming to fulfil their desires.

People are still playing their favourite casino games… except now they no longer need to be in the casino to do it.

According to Martin Calesund, CEO of the +$22B company Evolution Gaming:

“(The) online evolution has just started.”

According to recent industry metrics, the global online gambling market is expected to reach more than US$92.9 billion in 2023—nearly double the ~US$52.9 billion it is currently. [1]

Back in June of 2020 (when the global health crisis was still in its earlier stages), Calesund added to this thought, boldly stating:

“In the future to come, I think 50-70% of casino will be online.” [2]

The shift has been swift and very significant, as online gambling thrived and land-based casinos struggled mightily through 2020 to today. Mobile gaming made significant strides in 2020, notching $79.5 billion, and accounting for a whopping 71% of all app revenues on both the Google Play and Apple App Store combined. [3]

In Atlantic City, all but one casino (which we’ll get to in a second), lost significant revenue. The biggest dropoff came for Harrah’s, which declined 46.8% over the year. [4]

Resorts, Caesars, Tropicana, Borgata, Hard Rock, and Ocean… ALL saw their revenues drop by double-digit percentages.

The one casino that emerged from the bunch was Golden Nugget—it saw its revenues increase nearly 10% over their 2019 numbers.

How did Golden Nugget beat the odds?

The answer is right there in the full name of the stock is Golden Nugget Online Gaming (NASDAQ:GNOG).

That’s right… Golden Nugget is focused on online casino and sports betting.

It wasn’t just in Atlantic City that the company took wins. When they released their Q3 earnings in late October, they showed that their Net revenue was up 92% year-over-year (YoY) to $25.9 million, while Operating income was also increased 92% YoY to $8.2 million.

Since prior to the COVID-19 lockdowns taking full effect, GNOG stock has gone from a low of $9.26 per share to a high of $26.24 in late December—a rise of 183% in just over 9 months. Market researchers have pegged the global online gambling market to grow from $53.7 billion in 2019 to +$95 billion by the end of 2025 at a CAGR of 13.2%. [5]

The industry can no longer afford to deny that Evolution Gaming’s Martin Calesund is right.

The online evolution has begun!

We’ve identified the best equipped provider of a proprietary market-ready and device-agnostic platform that’s perfectly designed to facilitate the transition of these massive casinos into the online age…

One that’s succeeded in developing not only one of the fastest, most-convenient ways to play, but has done so with the World’s ONLY Live-Dealer mobile app gaming experience with LIVE video streaming of their dealers from a studio in Las Vegas.

Meet Playgon Games Inc. (TSX.V:DEAL / OTC: PLGNF) an innovator focused on developing digital content for the iGaming market, through a mobile-first philosophy with live dealer technology.

Platinum Profile: Playgon Games Inc. (TSX.V:DEAL / OTC: PLGNF)

Playgon provides a multi-tenant gateway that allows online operators the ability to offer their customers innovative iGaming software solutions.

What makes Playgon’s platform most unique for players is its design and feel.

CEO Darcy Krogh recently stated: “We are bringing a very unique mobile live dealer product to the market. We anticipate our business will scale quickly once we receive the final approvals to service our customers.”

Not only does the company provide the World’s ONLY Live Dealer mobile-app experience, but it does so vertically, meaning that players can comfortably play one-handed.

It’s also VERY fast. As a core feature of the design the software was geared towards speed as an integral part of the extremely popular table games of baccarat, roulette and blackjack (NOTE: More on the game of baccarat below).

Through the Playgon platform, hands can be played extremely fast, with up to 8 tables playing at once on one screen.

AN ALLURING BUSINESS MODEL

Playgon’s current software platform involves Live Dealer Casino and E-Table games which through a seamless integration at the operator level allows customer access without having to share or compromise any sensitive customer data.

And the business model is ideal for garnering more and more clients to onboard the software.

This turnkey solution is FREE to incorporate into an established casino’s offerings. Playgon has very wisely made this available, with the upside coming through revenue percentages of player loss on every game played.

As players bounce between casino operators, they are still playing re-skinned Playgon games. By providing the software, Playgon spends next to nothing on marketing, while capitalizing on the upside from newly acquired players.

As a true business to business (B2B) digital content provider, Playgon’s products are ideal turn-key solutions for online casinos, sportsbook operators, land-based operators, media groups, and big database companies.

Its cutting-edge technology and operational best practices make Playgon the best possible partner for online casinos looking to the future. Playgon also employs a global strategy, uniquely positioning it to take advantage of the sizable market in Europe and Asia.

BOOSTING BACCARAT’S BANKROLL POTENTIAL

While the popularity of baccarat continues to grow in the west, it’s common knowledge within the industry that James Bond’s favourite card game is the most profitable casino card game on the planet. This is because in Asian markets, players mostly stay away from slot machines, while VIP baccarat accounts for roughly 70% of casino revenue shares, followed by mass-market baccarat. [6]

Today’s casino gaming market is steadily growing in Asia, with industry experts in the region estimating the Asian live casino market to be 10x the size of its European counterpart.

Playgon’s team knows this, and has wisely designed itself towards this trend— and has developed a way to unlock baccarat’s enormous potential—having the game played online.

Why? Because in a traditional casino setting, games such as Baccarat and Roulette are not scalable because they can only serve a fixed number of players at a time.

In contrast, the majority of games can support a limitless number of players betting at the same time, while bearing none of the other overhead costs a traditional casino would have to bear (i.e. free drinks to players, casino maintenance expense, etc.).

Under Playgon’s business model, the Live Dealer salary becomes a fixed cost which can be leveraged across hundreds of potential concurrent players instead of just a few players at a traditional casino table.

Given the speed at which hands of baccarat are played is already a significant bonus to casino profitability. Now when the hands are dealt, bets are handled, payouts are paid and all other actions are done electronically. It’s fast, smooth, and profitable.

With their ability to maintain a whopping 8 tables on one screen at the same time, brick-and-mortar casinos just can’t compete with the speed of play of the Playgon Games Inc. (TSX.V:DEAL / OTC: PLGNF) baccarat experience.

And baccarat is a game that’s VERY familiar to those within the company. Playgon Interactive Founder, Guido Ganschow wrote the first live dealer software used in Asia—leading software sales to over 200 different casinos, many of which still use the software today.

LIVE DEALER GAMING—LIVE FROM VEGAS^TM!

Playgon Games Inc. (TSX.V:DEAL / OTC: PLGNF) is looking to capitalize on the Live Dealer Casino market, which represented 30% of the total online casino gaming market in 2019—or $5 billion. [7]

The company’sscalability results in a far more attractive business model than any land-based casino can offer. By integrating augmented reality, tactically adjusting bonuses and payouts, and optimizing player- dealer communication, Playgon’s offering is more immersive than the experience at a brick & mortar casino.

The platform’s Live Casino offering brings the brick & mortar casino experience to a user’s phone, computer, or other streaming device. Contrary to typical digital casino games which feature no physical human interaction, Live Casino is 100% focused on seamless interaction between gamblers playing from all over the world.

Live Casino is the fastest growing segment within online casino, with an annual growth rate of 32% between 2014 and 2018 and is expected to reach $8 billion by 2023. [8]

Mobile online gaming continues to be a key factor in the development of the global iGaming market. Currently, over 70% of Live Dealer casino revenues stem from mobile devices.

Playgon’s Live Dealers are streamed live from a studio in Las Vegas—click here for an example video

Players can interact in real time with the dealers and other players in real time 24 hours a day, 7 days a week—all complimented by augmented reality that further enhances the experience.

And, due to the overwhelmingly positive feedback from Operators, Playgon has already increased the size of their Live from Vegas studio and doubled their table capacity.

Playgon is taking live-dealer casino games to the next level, bringing cutting-edge handheld features and functionality to the mobile generation of gambling enthusiasts who have long been demanding a world-class gambling experience on their phone.

THE PLAYGON ADVANTAGE

Playgon has centralized its offerings to be as convenient and comfortable as possible to play.

Its advantages are unique, including

One Touch + One handed play.

Currently over 70% of Live Dealer casino revenues stem from mobile devices. Based on analytics provided by ScientiaMobile.com [9], Playgon has determined its focus solely on a Portrait-first orientation of its platforms.

Mobile users predominantly prefer this orientation by significant numbers:

• iOS = 97%
• Android = 89%

In fact, according to ScientiaMobile, only 22% of people flip their smartphone from portrait to landscape orientation.

HD Streaming

The Playgon experience is driven by High Definition content from a streaming studio Live from Las Vegas—delivering the user a truly live feel and presence.

Mobile First Approach

Most legacy technology is developed for desktop and not for mobile, making it inefficient for user interface (UI) and user experience (UX).

Playgon’s platform has been designed with a mobile first approach in mind. This focus enhances player UI and UX.

But despite having portrait-orientated mobile as its flagship offering, Playgon’s platforms entail Progressive Web App (PWA) technology, that’s device agnostic, and designed to handle every type of user, every browser, and play on every device.

It’s this portability that works to Playgon’s advantage, in particular when it comes to the potential for white labeling the service to work in conjunction with competitors; Operators don’t need to displace other providers to integrate Playgon’s Live Dealer games.

Playgon offers proprietary technology, which is cloud based and built for robustness, scalability, speed of play, to derive the maximum bets per hour that equates to more revenue. Ultimately, the platform and games are designed to attract the most sought-after player; the discerning, higher-value, returning player to maximize life time value.

Management & Board with Exceptional Experience

Darcy Krogh – President, Chief Executive Officer & Director of Playgon Games Inc

Involved the space for 21 years, Krogh began in iGaming by co-founding Chartwell Technology in 1999, a publicly traded technology company specializing in the development of games, gaming systems, and entertainment content focused in Europe. He served as a Director and was a key member of the management team, staying on after the company was sold to Amaya in 2011 for CAD$25 million. He served as VP Business Development with Amaya until July 2015 where he assisted with the divestiture of its B2B asset portfolio for $150m to Nyx Gaming Group. In April 2016 he exited NYX Gaming to start up a new venture, Playgon Games Inc.

Guido Ganschow – President & Director of Playgon Interactive

Playgon Interactive Founder Ganschow has created real-time Live-Dealer platforms for 12+ years, having served as Co-Founder and Creative Director for a Macau Casino Consortium, and successfully creating and establishing Live Dealer platform businesses in Asia and Europe between 2008 and 2014. In 2016 he started Playgon Interactive with a mandate to develop a next generation live dealer product for real money and social applications. Over his career, Ganschow has executed commercial partnerships, sales, and integration of the Live-Dealer solutions with major global gaming brands including Ho Gaming Group, Chartwell Technology and Amaya Gaming Group.

James Penturn – Executive Chairman of the Board

Penturn has decades of experience providing strategic advice and leadership to management teams of knowledge based businesses to successfully market and sell their services, to structure and syndicate investments, and to raise equity and debt instruments. He is the President of SpectraLegal Limited in the United Kingdom, a specialist provider of funding solutions for law firms. He is also a member of the strategic advisory committee of Generation Three Family Partners, an international multifamily office that he co-founded. He has been a director of several Canadian publicly listed companies where he sat on executive, audit, governance and compensation committees. Penturn has over 30 years’ experience in merchant banking, real property and strategic advisory services as both a principal and agent.

Steve Baker – Chief Operating Officer

Baker is the former VP Operations for Shaw Communications and has been involved in a number of major growth products including video streaming and home entertainment. He has helped the company grow sales revenue from $300 million to $2.8 billion. He’s also overseen new product rollouts and M&A activities.

7 Key Highlights to Remember for Playgon Games Inc. (TSX.V:DEAL / OTC: PLGNF)

1. Fully Developed Platform ready to launch with multiple tier-1 operators
2. Mobile Driven Strategy drastically improves user experience relative to competitors’ desktop-first approach
3. Diversified Risk through leveraging technology across real money and social gaming markets
4. Live Dealer is the fastest-growing vertical within the online casino business
5. Global Industry Growth in iGaming has been projected to increase at a yearly CAGR between 10-15%
6. Experienced Management team in technology and iGaming industries
7. Industry Convergence terrestrial gaming industry’s movement to digital has been super-charged with the recent global health crisis.

[1] https://www.msn.com/en-us/money/topstocks/golden-nugget-online-gaming-stock-may-see-2420-before-2440/ar-BB1d0pEu

[2] https://www.gamblinginsider.com/news/9366/evolution-gaming-ceo-50-70-of-casino-revenue-will-be-online-in-the-future

[3] https://www.tweaktown.com/news/77100/mobile-gaming-made-79-5-billion-in-2020-71-of-total-app-revenues/index.html

[4] https://journalstar.com/news/national/a-record-year-for-nj-sports-betting-casinos-not-so-much/article_498a2a09-3e72-53ae-9a39-931c99dcc9ca.html

[5] https://www.globenewswire.com/news-release/2020/04/13/2015187/0/en/The-Global-Online-Gambling-Market-is-expected-to-grow-from-USD-53-686-56-Million-in-2019-to-USD-95-023-13-Million-by-the-end-of-2025-at-a-Compound-Annual-Growth-Rate-CAGR-of-9-98.html

[6] https://www.quora.com/Which-game-does-a-casino-generate-the-most-revenue-from-in-terms-of-quarterly-or-annual-revenue-Im-not-asking-about-odds-per-game-I-have-heard-the-answer-is-slots?share=1

[7] Source: H2 Gaming Consultants (https://h2gc.com)

[8] Source: H2 Gaming Consultants (https://h2gc.com)

[9] https://www.scientiamobile.com/

DISCLAIMER:

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The global battery market size was valued at USD 108.4 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 14.1% from 2020 to 2027. The market growth is attributed to high demand from the automotive application. The automotive application includes rechargeable batteries used in non-rechargeable batteries and electric vehicles. The increasing popularity of consumer electronics on a global scale is projected to result in the usage of the lithium-ion battery as a product type over the forecast period. High demand for portable electronics, including LCD displays, smartphones, tablets, and wearable devices such as fitness bands, is boosting the market growth. The market is expected to observe substantial growth on account of technological advancements in terms of enhanced efficiency, cost-effectiveness, and product innovation. Strict emission norms by the government authorities of developed countries, such as the United States and the United Kingdom, coupled with growing attention towards fuel efficiency, are expected to drive battery demand.

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The U.S. battery market size was valued at USD 10.49 billion in 2019. The U.S. government has been cheering stakeholders for both renewable industry and Electric Vehicles (EVs), resulting in an improved demand for battery energy storage systems (BESS), mainly led by Li-ion batteries. The adoption of EVs is rising at a high rate across the country. The U.S. is one of the leading countries in global electric vehicle sales, along with other countries such as Canada, which has already begun transforming its transportation infrastructure for electric vehicles.

Decreasing fossil fuel reserves, along with promising government initiatives and high CO2 emissions, are expected to propel market growth in the next few years. Key non-rechargeable batteries are extensively used in children’s toys, light beacons, remote controls, watches, and electronic keys. These are expected to observe a loss of stake to rechargeable batteries on account of efficiency and enhanced lifespan.

Developing markets of Africa and the Asia Pacific are expected to boost battery demand in electric bicycle applications and storage applications such as the leveling of load in renewable sources of energy like the wind and solar. Growing aircraft and automobile manufacturing in developing nations of APAC, including China and India, is expected to provide enormous potential for market growth.

Growing technological advancements in battery technologies have amplified the usage of various battery-operated equipment across the world. Hybrid Electric Vehicles (HEV) are equipped with the countless features that consume a significant amount of battery power. These features include a GPS navigation system, power windows, display that give information about the battery charge level, and air-conditioning systems.

While the announcement of a COVID-19 vaccine and its disbursement at the end of 2020 was certainly a light at the end of the tunnel for the public and the embattled health care industry, hospitals and health care systems know the journey to recovery is far from over. Communities continue to see virus surges and hospitals face capacity concerns. Health care organizations must take a realistic look toward the future and begin preparing for what could be several challenging months before the pandemic’s impact is behind us. From addressing patient care and pricing needs to understanding regulatory challenges and new investment and acquisition opportunities, 2021 could be a year of fits and starts. Those organizations that plan for change and remain nimble will lead the way.

Is there a light at the end of the tunnel?

The health care industry’s response to COVID 19 has been one of resilience, persistence and commitment, especially by front-line caregivers. The pandemic has significantly shifted industry trends and accelerated the pace of change. As a result, leadership is being forced to reevaluate strategic plans to determine and evaluate how best to deliver care going forward.

Kaufman Hall’s December 2020 National Hospital Flash Report indicates that operationally, and financially, November was a challenging month for hospitals and health systems nationwide. Margins and volumes fell, revenues flattened, and expenses rose as states moved to retighten social distancing guidelines. Margins have been down consistently since the start of the pandemic, but have fluctuated from month to month. Even with mass vaccine distribution on the horizon, the report predicts that “October’s downturn likely will continue as COVID-19 rates rise throughout the fall and winter. Hospital and health system leaders are bracing for difficult months ahead, as the combined forces of the pandemic and seasonal flu drive many individuals, and local and state governments to recommit to stricter preventive measures, causing many to delay nonurgent procedures and outpatient care. The result will exacerbate volume declines and could further destabilize hospitals financially, with a potential return to the significant losses seen in March and April.”

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To date, Department of Health and Human Services (HHS) has distributed approximately $109 billion of the $175 billion allocated to the Provider Relief Fund (CARES Act) as of mid-November, according to data released by the department. In an effort to provide additional relief, Congress voted, in December, to appropriate additional dollars to the provider relief package and changed the rules (yet again) with respect to how lost revenue is recognized.

Understanding the financial reporting and compliance requirements associated with CARES funding will continue to be important in 2021.

While it is unclear what impact and lasting influence the pandemic will have on delivery of care from a financial perspective, one thing is certain, telemedicine is not going away and has arguably had the most profound impact to the health care industry in 2020. With claims up 3,000% year-to-date over the same period the prior year, it is clear that continued investment in telemedicine and related technology will be important.

Health Catalyst reports that with the shift to telehealth, providers are entering a new business landscape as COVID-19 has broken down barriers between traditional providers and more modern telehealth and disruptive care delivery companies. In the article titled, Six Strategies to Navigate COVID-19 Financial Recovery for Health Systems, Health Catalyst reports that health care’s new competitors fall into three main buckets:

1. Telehealth-only providers: Companies like MDLive and Teladoc use real physicians and offer a variety of specialties and focus a significant portion of their business on working with insurance providers and self-funded health plans to provide subscriptions.
2. Direct primary care: The direct primary care companies include Go Forward, Crossover Health and One Medical. Go Forward is similar to a modern subscription concierge practice. Crossover Health partners with employers like Apple, Microsoft and Amazon to deliver care directly to employees. One Medical is a modern concierge practice that charges an annual fee and bills fee for service.
3. Large corporations: Amazon, Walmart and CVS Health are entering the health care space. Amazon offers a virtual care program for their employees as well as in-home deliveries and more. They announced a partnership with Crossover Health in July to pilot employee health clinics near large centers. Walmart has opened care clinics and a virtual care system and CVS continues to build their hubs.

“Teledoc, Doctor on Demand, Go Forward and Crossover Health have business models that overlook coding, CPT codes and modifiers, and other procedures traditional organizations must follow … Amazon, Walmart and CVS Health have traditional, straightforward pricing and are redirecting care away from the traditional system into their own care delivery system,” according to the article.

As large corporations and other providers increase competition for patients, they will compete with traditional provider organizations for patients. According to a survey, 79% of primary care physicians have experienced some form of burnout and four out of five employed physicians say their health systems employers are not doing anything to combat it. With a loss of clinicians, comes loss of revenue. The disruptive care delivery companies are introducing new models of care that appeals to clinicians because they “offer less hassle,” with no coding and documenting for quality measures and the like. There’s often less stress due to lower patient volumes, and with a lot of the concierge practices and even telehealth, clinicians can somewhat choose how much volume they want, as well as more flexibility.

The pandemic is not over, and no one can anticipate what the next 12 to 24 months will bring and how it will affect health care providers. Leadership and front-line caregivers will need to continue to be resilient, persistent and quick to respond.

PRICE TRANSPARENCY

Price transparency: Why this, why now?

On Nov. 15, 2019, Centers for Medicare and Medicaid Services finalized rules requiring all hospitals to make publicly available and produce annually a machine-readable file of standard charges that includes gross charges, negotiated charges, a self-pay walk-in rate, and minimum and maximum negotiated charge for all services. In addition, CMS defined a list of 300 services whose discounted cash prices, payer-specific negotiated charges, and de-identified minimum and maximum negotiated charges must be made publicly available in a searchable, consumer-friendly format.

CMS will be monitoring compliance with methods that include evaluation of complaints made by individuals or entities, review of analysis of noncompliance by individuals or entities, and audits of hospitals’ websites. If a hospital is noncompliant, CMS may take steps ranging from a written warning notice to imposition of penalties up to $300 per day and publicizing it.

In an era of rising health care costs and diverse consumer buying preferences, the need for price transparency has taken on increasing importance.

There are many factors driving this demand with expenditures being one of them. U.S. health care expenditures and rates of inflation continue to lead the world and dominate federal expenditures. U.S. health care spending grew 4% to $3.8 trillion in 2019, which equates to $11,582 per person, according to an analysis by CMS’ Office of the Actuary released Dec. 16, 2020. This compares to 4.7% growth in 2018 and is similar to industry averages of 4.5% annual rates. The Society for Human Resource Management (SHRM) reports that “large employers project that their health benefits costs will rise 5.3% in 2021, although COVID-19 expenses are fueling uncertainty about overall expenses. The group’s 2021 Large Employers’ Health Strategy and Plan Design Survey was conducted in May and June 2020, and it captured responses from 122 large employers offering coverage to more than 9.2 million employees and dependents. Seventy-seven percent of the respondents each has more than 10,000 employees.”

SHRM reports that premiums and employees’ out-of-pocket costs are estimated to reach $14,769 per employee, up $197 from 2019. Total costs are projected to rise to an average of just over $15,500 in 2021. The pricing transparency rules are meant to provide patients the information they need to make educated care decisions and reduce cost. President Donald Trump, whose administration proposed the rules, is quoted as saying, “We believe the American people have a right to know the price of services before they go to visit a doctor.”

The American Hospital Association, Association of American Medical Colleges, Children’s Hospital Association and Federation of American Hospitals have issued statements on behalf of hospital systems indicating that they believe these rules will increase confusion because they do not achieve the goal of providing patients with out-of-pocket cost information, accelerates anticompetitive behavior among health insurers, and stymies innovation in value-based care delivery models.

While the pricing transparency rules may be a step in the right direction, we remain skeptical that these rules alone will enable patients to know the prices of services before receiving treatment. Pricing in the health care ecosystem will likely remain opaque until we have greater data interoperability between payers, providers and patients.

According to an article published by Healthcare Financial Management Association (HFMA), written by Kevin Shears and Chris Sukenik, the new rules and general market trends have six important implications for providers:

1. Increased pricing visibility will expose substantial price variations among providers. This creates a need for hospitals and health systems to focus on defining and communicating their consumer value proposition. News stories will likely present providers in a negative light across major metro markets. Health systems will need to focus on sharpening and delivering on their value propositions for consumers, including individuals and employers.
2. Health systems will need to deploy strategic pricing to maintain and strengthen their market
   position. Health systems will have to develop a more nuanced pricing strategy to address the issue of significant price variability among providers in their area and ensure continued success in an increasingly value-focused market.
3. Providers will experience unit rate compression, and most of this rate movement will be price
   declines. With the veil of negotiated rates lifted, health plans will be able to show how their payment rates compare with those of competing health plans in the market. As a result, health systems with rates above the market average, will be under pressure to accept lower prices during negotiations and will likely experience unit rate compression.
4. Providers should prepare for expanded efforts to implement reference pricing. Given the impact of COVID-19 on the economy, employers will grow increasingly willing to pursue reference pricing strategies as part of business recovery plans to control health care costs.
5. Highly profitable commercial volume and market share will shift, likely from higher-priced
   organizations to lower-priced ones. With commercial lives shrinking as a share of population in most markets nationally, largely because of the COVID-19 crisis, the competition for commercial lives has become more intense. Market shifts in commercial volume from higher-priced to lower-priced health systems will deteriorate the financial performance of health systems on the wrong side of the volume shifts.
6. Centers of excellence strategies will become an important vector for volume growth. Publicly available pricing data will accelerate the development and adoption of COE programs. The organizations that win with COE strategies will likely do so by engaging clinical leadership to quickly gain experience in developing bundled payments, developing the foundational cost and quality analytics to demonstrate and communicate results, aligning benefit design with the COE program, and cultivating strong business relationships with leading employers and health plans.

These new rules have significant and far-reaching implications for all health care systems, and after initial implementation, ongoing monitoring and analysis of these six areas will continue to be critical as organizations evaluate and make decisions about their delivery models and related pricing.

DEAL FLOW

Solid health care provider deal flow will persist as healthtech grows

2020 has been a solid year for health care services investment from both financial buyers, e.g., private equity, and strategic or corporate buyers. Despite the global pandemic putting a halt to most deal flow during the summer, 2020 capped off a 10-year run, post-global financial crisis that saw $822 billion invested into health care service providers across 11,054 deals, according to PitchBook data. Private equity-backed deals accounted for 28% of dollars invested ($231 billion), and 48% of total deal volume (5,355 deals). Corporate deal activity, such as CVS acquiring Aetna, accounted for the balance.

Since the end of the global financial crisis, private equity’s deal activity within health care service providers has increased in total, and private equity’s proportion of deal flow relative to corporate activity has increased from approximately 40% to 60% over time.

We expect private equity investors will continue to show moderate growth in capital deployed and strong growth in deal count in the near term.

Consolidation has led many private equity investors to move downstream and evaluate smaller deals as they search for opportunities to bring synergies and value to more providers. Particularly in the aftermath of the COVID-19-related public health emergency, many independent providers experienced financially lean periods and have become motivated sellers.

The pandemic also pulled forward interest in health care technology as millions of patients and thousands of physicians used virtual health services for the first time. So while the opportunity for investment in physical service providers will eventually decline as the sector consolidates, the door will open to health care technology investment.

Historically, health care has underinvested in (nonmedical) innovation relative to other sectors, particularly financial services, which is also highly regulated. Health care venture capital and corporate mergers and acquisitions investment in health tech post-global financial crisis represented 6% of annual sector revenue compared to the 62% the financial services sector had similarly invested in fintech.

Patients are demanding the same customized, on-demand experience for their health care that they receive in most other aspects of their lives. Companies and investors that can deliver that experience will be positioned to capture significant long-term tailwinds.

As of this writing, we are uncertain how the regulatory environment may change with the Biden administration. Vice President Kamala Harris and incoming Health and Human Services Secretary Xavier Becerra have histories of health care mergers and acquisitions scrutiny during their separate tenures as attorneys general of California. Time will tell what effect the administration may have on the overall health care M&A environment.

REGULATORY

Legislative and regulatory outlook for health care

Health care has long been an industry heavily affected by legislation and regulation. As we look forward to the first quarter of 2021 and beyond, we continue to expect that to be true. In 2020, the industry saw nearly $200 billion in stimulus payments to help provide some relief from the financial effects of the pandemic. However, with the speed of the rollout, it did present challenges to many of our clients when determining how to meet the terms and conditions of the Provider Relief Fund grant. With the passage of the Consolidated Appropriations Act, 2021, some of those challenges subsided.

What did the Consolidated Appropriations Act, 2021 (the Act) do and how will it affect 2021 for the health care ecosystem? From a challenges perspective the Act mainly provided two things: one, the Act, yet again, changed the calculation of “lost revenue;” however, in this round the changes are largely beneficial to allow for an actual budget calculation rather than a strict year over year methodology. Two, it provided an opportunity for providers that are parent organizations with subsidiaries that received targeted distributions to allocate those distributions to other eligible health care providers within the organization. The Act also provided for many of what is referred to as the “Medicare extenders.” An example of this would be eliminating the Disproportionate Share Hospital cuts.

For many recipients of the Provider Relief Funds, the change to the determination of lost revenue and the flexibility to allocate targeted distributions as well as the Medicare extenders will allow for them to enter 2021 with a bit more financial certainty. Many providers found themselves in a predicament when the calculation of lost revenue was defined for calendar year 2019 versus calendar year 2020. As shown below, through November 2020, many providers had growth in revenues rather than reductions. Many factors contributed to growth in 2020 by providers. However, despite the growth, the providers were not growing as fast as they had budgeted, which then provided profitability concerns as the budgeted revenues drove decisions around expenditures, many of which were fixed.

As shown in the chart, while the average provider grew revenue year over year (adjusted for Provider Relief Funding), they experienced a shortfall relative to the budget of 2.3%. Given the operational leverage typically present in providers, which was exacerbated by prohibitions on nonemergent or elective procedures, this caused expenses per adjusted discharge to exceed budget by 15.9% on average.

In addition to the stability provided by the Provider Relief Fund, many health care providers with large investment balances saw a year of growth within their investment portfolios as well as increased philanthropic activities. With the stability and more financial certainty, we expect most health care providers to continue with the majority of their planned expenditures.

The $1.4 trillion government funding bill, which was passed alongside the Act, also included legislation aimed to protect patients from so-called “surprise billing” for emergency services and other instances in which a patient is unknowingly treated by an out-of-network provider. The “No Surprises Act” would cap patients’ out-of-pocket responsibility for emergency care to what they would pay for in-network services. Providers are also unable to bill out of network for planned procedures unless the patient gives explicit consent. Billing disputes for covered procedures would be handled in arbitration. One key change is the No Surprises Act forbids arbiters to consider Medicare and Medicaid rates or the provider’s billed charges when ruling for the amount the insurer should pay the provider. The patient cannot pay more than the in-network rate and is not involved in the arbitration process.

The No Surprises Act will likely reduce total patient responsibility for care and may reduce total revenues for certain providers. Payers will not be able to reference the generally low rates of Medicare or Medicaid in arbitration, but nor will they have to disclose pharmacy benefit manager relationships and rebate structures, which previously proposed bills called for. It remains to be seen whether this legislation will fundamentally change how care is provided and the viability of certain provider business models, or if it is simply step one of a much larger change to the regulatory and legislative environment. However, we also note the pandemic has caused some to consider their physical footprint versus their digital presence.

CYBERSECURITY

Reported breaches continue to rise

Cybersecurity and data protection continue to be a point of concern within the health care industry. Over the last few quarters in 2020, we have seen an increase in the number of hacking incidents as attackers continue to leverage the pandemic for their own benefit. Although many organizations claim to have a sophisticated cybersecurity program, attackers continue to gain access to patient financial and medical information. If proper protocols are in place, why do the attacks continue? RSM security and privacy risk professionals state two ways cybercriminals break into health care organizations:

1. Remote workers exposing the organization to phishing emails, ransomware and vulnerable storage locations
2. Third-party vendors and partners transferring the organization’s data insecurely from system to system

As a result, there has been a significant increase in the number of individuals affected by health care data breaches within the past five months. For example, in the month of September 2020, there were over 9 million individuals affected by 87 data breaches (an increase of 373% compared to September 2019) reported to the Office of Civil Rights. Further, 68% of the total breaches reported to the OCR during 2020 were related to a hacking/information technology incident affecting 23 million individuals.

The 2020 NetDiligence Cyber Claims Study indicates that attackers are shifting their preference to small and midsized organizations, which explains the increase in breach reports within the health care industry over the past five months.

This shift in focus leaves the health care industry vulnerable to exploitations during a time where most organizations are cutting their IT budgets and resources in response to the pandemic.

According to Black Book Research, 88% of providers revealed that lack of budget was the major obstacle to properly securing and protecting health information, up from 68% in 2019. Eighty-two percent of hospital chief information officers in inpatient facilities under 150 staffed beds and 90% of practice administrators collectively state they are not even close to spending an adequate amount on protecting patient records from a data breach.

According to the 2020 NetDiligence Cyber Claims Study, a data breach on average costs small to midsize organizations $276,000 (per claim) in lost business income and $26,000 in recovery expenses alone. It is important for health care organizations to evaluate their exposure to cyberrisks. Reduced IT budgets and resources are contributing to an increase in attacks and incident costs. While most large organizations would seem to be the prime target for attackers, small to midsize organizations have experienced the most attacks, contributing to over 98% of the study’s claims. It is no longer a matter of “if” but “when” health care organizations will be the target of a cyberattack, and to ignore such a risk will prove to be extremely costly.

In assessing the overall cost/benefit of investing in a robust cybersecurity program, health care organizations should evaluate the costs to address a breach, which includes the following:

1. Cyber incident costs: costs associated with investigating the incident (averaging about $123,000 per claim)
2. Service costs: costs associated with hiring breach counsel, forensics, notifications, credit monitoring and public relations (averaging about $78,000 per claim)
3. Legal costs: costs associated with lawsuit defense, lawsuit settlement, regulatory action defense and regulatory fines (averaging about $401,000 per claim)

In the coming months, we expect these costs and the reported number of attacks to continue to rise. As a result, health care organizations must be diligent and increase their focus on data security over patient information and the systems they use to treat them.

Sources:

1. https://rsmus.com/what-we-do/industries/health-care/industry-outlook-health-care.html