Unemployment trends have significant ramifications not only for labor market dynamics but the macroeconomy as a whole. Understanding these types of wide-ranging implications of the macroeconomy can help business leaders make more informed investment decisions. 

In this episode of The Corner Series, McGuireWoods’ Geoff Cockrell welcomes two guests, Tim Fry, Healthcare Partner at McGuirewoods, and Alex Chausovsky, Director of Analytics and Consulting at Bundy Group, a boutique industry-focused investment bank.

Tune in to hear Geoff, Tim, and Alex cover the macroeconomic aspects impacting private equity investing in healthcare. Their discussion touches on unemployment trends, including the low unemployment rate in healthcare, inflation and interest rates affecting borrowing costs and investment decisions, and labor market dynamics.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner Geoff Cockrell as he and specialists share real world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at The Corner Series, we try to bring together deal makers and thought leaders all surrounding private equity investing in healthcare. There's a lot to talk about today. I'm thrilled to have two guests, my partner and good friend Tim Fry, who will introduce himself in a second. And Alex Chausovsky from the Bundy Group who is going to bring a kind of macroeconomics view to some healthcare dynamics. But Alex, maybe give a quick introduction of yourself and Bundy Group.

Yeah, thanks Geoff for having me. I appreciate it. So I lead the analytics and consulting practice at Bundy Group. What that involves is doing a lot of public speaking. So I deliver somewhere between 75 and 100 keynotes a year at leading industry trade conferences and shows. And I follow the macroeconomy. I help business leaders understand what's going on in the world around them, and most importantly, what they should be doing based on what's happening. And that can cover everything from inflation and interest rates as it affects their borrowing costs and investment decisions to labor market dynamics, meaning headcount planning and compensation analysis, and everything in between. So I'm excited to talk to you today, and again, thanks for having me on the show.

And Tim, maybe give a quick introduction of yourself and then if you want to launch us into some questions, that'd be great.

Thanks Geoff. And thanks for joining us. Alex Tim Fry, partner in the healthcare group here at McGuireWoods. I'm a regulatory attorney that supports our transactional teams. And candidly and what brings me to the excitement of being a part of this conversation is so much of my job and work with our clients is on physician compensation plans and thinking through from a regulatory perspective how those work and get alignment. But as we're going to be talking with Alex, the labor conditions and the labor market more generally can be difficult and challenging. And so learning from him and having an interaction today for all of you I think will be really interesting and helpful.

Alex, before we dive into physicians, we sit here in January 2024 as we record and unemployment is below 4%. Can you just share with the audience and share with Geoff and I a little bit more about unemployment trends, low unemployment rates and what that maybe is doing in the broader market?

Yeah, I think it's a great place to start, Tim, because it really does have pretty significant ramifications not only to labor market dynamics, but the macro economy as a whole. So if you think back, roughly speaking this time last year, people were expecting the labor market to slow quite dramatically after the fervor that we experienced in 2021 and 2022 when there was a massive, massive disconnect between the number of people actively looking for work and the number of open jobs available. At the kind of peak of that employment crisis, we had a delta of about 7 million positions that just couldn't be filled because there were not the bodies to fill them. Fast-forward to where we are today, that gap has closed but remains quite large. So we currently have just under 9 million open jobs in the United States and about 6.5 million actively looking for work.

So we still have roughly 3 million people gap between supply and demand on the labor force, and that's putting a lot of upside pressure on wages. We see that through the latest available data, wages are still up over 4% year over year, which obviously is a nearly doubling of what we saw pre-pandemic terms. That requires companies to rethink their compensation strategies and certainly allocate more budget to paying their people in order to both attract new talent and retain the folks that they have. And it puts pressure on their bottom line in terms of profitability. How do you effectively raise your employees' compensation while your customers are telling you, "Well, inflation has pulled back significantly and so we're not likely to take any more price increases from you." So you're being squeezed from both sides. So there's wide-ranging implications of all of that going on.

And as I look out towards the rest of 2024, we just got released that Q4 GDP came in above expectations in 2023. Year overall, we're north of 3% growth on GDP. Again, a stark difference relative to the calls for recession that we heard in late 2022 heading into that year. There are pockets of negativity, certainly manufacturing, the tech sector, several other industries, housing market is a great example that because of high interest rates we have seen pull back. But generally speaking, the macroeconomy continues to do really, really well. And so that will continue to keep pressure on getting the headcount that you need, making sure you're right size in terms of your employee and the ability to meet the demand that's out there, depending on the sector. And I believe it's going to keep wage pressure up above the level that it needs to be for the Fed to achieve its 2% inflation target. So my view is actually longer run inflation targets need to be moderated upwards to 3% to 5% range rather than the 2% that they have right now.

And Alex, that's a general comment. In healthcare specifically, unemployment rates are even lower. The pressure seems to be even more intense for a lot of our clients in healthcare. Can you speak to some of those trends and maybe what you're seeing and why?

Yeah, absolutely. So you're absolutely right, the unemployment rate, particularly relating to healthcare is a stark difference relative to the 3.7% overall number, which is that particular segment of the labor market has an unemployment rate of just 1.6% according to the latest data. So it's half of the national number.

And it reflects a lot of different things. It reflects a lot of burnout that happened during the pandemic. It reflects some of the challenges that the education system for doctors and healthcare practitioners faces in the United States in terms of how difficult it is to get some of that accreditation and the licenses required. It reflects the fact that the work itself is extremely difficult and draining on people and emotionally it takes a toll. And it reflects the fact that we have a great need based on some of the demographic trends that are going on. Obviously pre-pandemic, we had 10,000 people retiring every day. Now that we are getting into that middle to ladder stage of the boomer generation retiring, we're now at 12,000 people a day. And those people all require increasing amounts of healthcare, right? So the demand side is only getting stronger while the supply side continues to face those limitations.

I'll give you a couple of examples. So the Bureau of Labor Statistics released a study that looked at the top positions in demand over the next 10 years, and healthcare support is at the top of the list, expected to grow over 15% a year. Healthcare practitioners and technical workers in healthcare expected to grow by 8% year-over-year. You've got the doctors themselves are going to see a lot of growth that's necessary. In terms of actual raw figures, just to give you an example, we need 150,000 medical and health services managers over the next 10 years. We need about 40,000 physician assistants, about 26,000 physician therapist assistants, and the biggest need, nurse practitioners, 118,000. So we're talking about massive numbers. The question is where do those people come from and how do companies effectively compete for the talent that is available out there in limited supply?

And I guess how are you working with founders at Bundy Group or when you're consulting to do that? Is that technology solutions? I know Geoff and I have talked to a lot of clients lately about artificial intelligence and it's a little unclear whether we want to turn that all over and that has its own compliance issues. Is it efficiencies? Is this a transient problem and we have in five to 10 years time a whole bunch of people graduating medical school? I don't think so because of school caps and whatnot, but how do you see that playing out and what are some of the strategies that people are trying to do to make up those shortfalls?

Of course, Bundy Group is a boutique investment bank working on helping business owners with capital raises and both acquisition and sale type of activities. And one of the biggest things that we stress whenever we engage in a transaction environment is the need for a resilient, dependable, and strong team, both at the management level and at the midline management level. So one of the things that I constantly talk about, particularly as it pertains to compensation, is just the drastic changes that have happened over the last few years and the need for them to shift their mindset to realize you have to change and increase, more than you expect, the amount that you allocate towards compensating people. That's the way that you actually get people to join your organization.

Now, there are, of course, other methods. You mentioned some of the technologically driven solutions, but it has to be a combination, in my view, of all of the above. You have to have bigger budgets for compensation to keep physical, actual real life human beings wanting to work for you and staying working for you, the ones that you already have. You have to continue to look for ways to automate whatever processes that you can so that you can create not only redundancy in your business, but also free up some of the capacity of the people you already have to shift their activities to more value add stuff rather than mundane, repetitive tasks that they don't like doing anyway. And it has to be all of the above in order to address the challenges that the industry faces.

And that, the companies that excel at doing that, that can rise head and shoulders above their peers in the industry and just being better in terms of strategic approach to talent acquisition and retention, are going to be trading at premium multiples relative to their peers. When you're talking about the transaction environment, you're going to see better sale offers. You're going to see more interest from prospective buyers, whether that's strategic private equity or anything in between.

So it has to be a concentrated purposeful effort on the part of the senior leadership of every organization to not only dedicate time and resources to addressing this problem, but to commit and own the responsibility for that and not say just, "Oh, well, we have an HR department that's going to take care of that." No, you as the owner, as the CEO, the CFO, you have to be involved in that process because you're the one that controls the resources that can be deployed to address whatever shortcomings your organization might have.

And Geoff, from the deal flow perspective and clients we're working with, it seems that often labor expenses is something raised, it's a concern, it impacts EBITDA, and it almost goes the opposite way in the way of thinking. Geoff, quick question to you, I know you usually host and ask all the questions, but are you seeing a change here in some of the conversations you're having with clients? And then maybe to Alex thereafter to just add as he's working with founders, are they changing their thought process from maybe where it was a decade ago because of these pressures?

Yeah. I'm seeing, to Alex's point, successful businesses actively looking for ways to translate these headwinds into opportunities. Whether that is a provider business where they might be establishing a fellowship program or other mechanisms to draw in talent, there can be a real opportunity if you're able to navigate those headwinds to really create a competitive advantage against competitors. So there's that dynamic.

One of the conversations I have fairly regularly is the topic that we've touched on a little bit of how persistent is this going to be? Some of the dynamics, to Alex's point, I think will be persistent. Others might come back a little bit in the sense of some of the pressures is the disconnect of if you've got upward labor cost pressures, the reimbursement, especially if it's coming from the government, is a boat that doesn't turn very fast, but it's a boat that does turn, and some of the disconnects of labor pressures not translating into reimbursement relief, those may mitigate over time. So I see folks trying to figure out how long is this? And even if there's ongoing pressures, it doesn't necessarily mean that an investment in that business is not going to be successful. It has pricing implications for the modeling, more things that you have to get. But there can be opportunities.

And my addition to that would be to agree with the observations that Geoff made in terms of some of the trends and to kind of validate that the process is, even though it has a bit of a slinky effect, that things do tend to catch up a little bit. And so we've seen change happen in a drastically quicker pace over the last couple of years on the cost basis side in terms of salaries. Now, it is moderating. So if you look at the average wages increases in '21 and in '22 for job changers, they were north of 15% a year. For job stayers, they were somewhere in the 8% range. Those have now come down. So the kind of crazy signing bonuses, the offers of 30% to 50% higher than what you're currently making, we're not seeing that anymore. The realities of doing business have kind of come back into play, and now it is that reimbursement side that Geoff referred to that needs to catch up a little bit.

So we've got kind of a little bit of a normalization of the wage conditions in the labor marketplace overall, and that's certainly true for healthcare as well because the demand side is not as high as it was during the pandemic. Now the government needs to catch up and some of the reimbursement activity has to follow suit. So it is something that those leaders need to continuously pay attention to. That's the element that I really want to stress is that it's not a one and done exercise, and it's not even a once a year exercise, right? You need to look at your profitability and you need to understand it by customer, by service offering type and really pull levers where they're most needed rather than just having this bandaid one fits all approach as it comes to your bottom line.

And Tim, another area where I see a pretty wide differentiation from company to company is in an environment where there is this labor pressure and you're going to have some natural increases in either anxiety or dissatisfaction on the grounds of compensation, it puts immense pressure on how a provider business is dealing with their providers. And businesses that communicate well and really operate in a very transparent way that makes it much easier for them to navigate some of these headwinds. Whereas businesses that are a little bit more authoritarian or have opaque compensation structures or have put in place an apparatus that sets them up as being kind of confrontational or adversarial, those businesses are going to really struggle. And so as provider businesses in particular are thinking about this topic, some of it is kind of structural, but a lot of it is how do you manage people in the midst of this? And there's a wide degree of efficiency at that.

Yeah, and it's funny because everyone knows that people talk, and especially the younger generations, they're so much more openly transparent about their compensation that businesses that have this kind of outdated approach to, "Well, we're going to hold our cards close to our chest, we're going to pay people what we have typically paid people in the past, rather than using current available and accurate market data on a compensation side about what does it actually take to attract and retain talent in this marketplace." It really makes a huge difference.

And if you put yourself in the position of the candidate for just a second, and a company comes to you and say, "Look, we've done some research. We understand that you're below market rate right now, and we want to help make sure that that gets addressed. We can't do it overnight. It's not a light switch that we can flip. We can't just give you 30% more pay, but let's have a conversation about what else do you value? Is there some flexibility of schedule? Is there a few days of additional PTO that we can throw in? Some other benefits that you will find valuable that will bridge the gap between where you are right now and where you need to be from a financial compensation perspective?"

That relationship dynamic changes from this traditional power structure of I'm the boss and I tell you what's going to happen to we're partners. We as an organization are going to ask of you to help us achieve our goals and objectives, but we're also willing to be open and to listen to what you need from us for you to achieve your objectives. That type of partnership is so much stickier, so much more resilient in the face of challenges than the traditional dynamic that the companies that can adopt that, to Geoff's point, are going to be superior to their peers.

Alex, as we start to wind down this conversation, we just talked about adversarial partnerships and whatnot. The other area that has come into maybe more vogue in the last two years is unionization. Whether it's been the Starbucks efforts, Hollywood. And traditionally hospital nurses have unionized, but not a lot of the rest of the healthcare workforce. Is that changing at all? Is there more interest in unions? And is that putting changes on those that are investing in the healthcare space?

Well, I don't have specific insight into the unionization within the healthcare sector particularly, but I can tell you that very visible public efforts where unionization is leading to successful outcomes. For example, the UAW strike that we just saw where they really did get substantial concessions from the likes of GM and Ford and Stellantis, some of the supplier sides. I think that that is encouraging to people to see. And if they are feeling frustrated and cannot get the types of outcomes that they want on their own, they're going to say, "Well, maybe if we were unionized, we would be able to achieve those outcomes better because the collective has more weight and gravitas than the individual."

So I think that my gut feeling tells me that we will see some additional activity with the space. Now, I don't think it's all of a sudden going to be this huge tsunami of unionization, but I do think that, particularly as we think about the difference in generations and the younger folks and their kind of tendency towards collectivism when it comes to action, I would not be surprised at all to see more unionization efforts even within the healthcare sector.

And so maybe as a last question for the investors listening on the call, I think we heard about partnering, making sure platforms think about this, think about that during your diligence process. Is there one other thing that you'd suggest investors be thinking about when they're looking at companies or working with their platforms with respect to labor relations and facing up to a pinched labor market?

At Bundy Group, and I'm fairly recent into the investment banking world, I come from the world of analytics, but one of the things that is critical that I hear my colleague, Clint Bundy, who is the principal of the firm, talk about quite a bit are the four legs of the stool that we really focus on. And that's obviously, the company's got to be profitable, the company's got to have good growth prospects, they've got to have enough scale to where an investor would be interested, and then the core of the team. So two of those legs, in my view, have a direct connection to the talent piece, the profitability element, which we've already discussed, and navigating those dynamics of how do you balance the quality of the service offering that you provide with the costs associated with providing that offering. And then of course, the need to have a strong, reliable team both at the ground level and managing the operation, that's going to be absolutely critical.

So the need again, comes back to not having this be an afterthought. The investors need to look for organizations that are dedicated and purposefully working on this and not just saying that, but they can actually see the deployment of resources to both ends. They can see strategic initiatives when they're talking about management teams. Does HR even have a seat at the table when those critical decisions are being made, or are they again kind of just told what to do with the limited resources, what they have? All of these things have to come together, and the companies that are able to do that will make for a much better investment with much better long-term growth prospects than the ones that are not doing it.

Thanks, Alex. I think we'll wrap it up with that. This is a fascinating topic, and the issue is ever present, and the need to have visibility to the issue and solutions is a real driver of value in the businesses that we see. Thanks a ton for joining. This was a lot of fun.

Thank you guys so much for having me. It's been a blast, and I look forward to being back at some point.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at GCockrell@McGuireWoods.com. We look forward to hearing from you.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.