Private Equity in Healthcare
Over the past decade, private equity investors have shown a
particular interest in acquiring or investing in various healthcare
providers and services. This includes physician practices across
multiple sub-specialties, home healthcare providers, behavioral
healthcare clinics, skilled nursing facilities, urgent care
clinics, and other specialty clinics. This trend is driven by the
attractive returns that healthcare investments have generated,
fueled by factors such as a fragmented market, industry growth due
to an aging population, technological advancements, and evolving
healthcare needs.
Overall, the increasing dominance of private equity in
healthcare is a testament to the sector’s robust growth
potential and the strategic opportunities it offers for investment
and value creation. However, this trend also raises questions about
the implications for patient care, costs, and the overall structure
of the healthcare industry, which stakeholders must carefully
consider. The focus on attractive returns promised by healthcare
investments, along with a breakdown of factors such as market
fragmentation, demographic shifts, technological advancements, and
evolving healthcare needs, offers a comprehensive understanding of
why private equity firms are drawn to this sector.
According to S&P Capital IQ, the percentage of healthcare
providers and services acquisitions with private equity involvement
increased from 16 percent in 2013 to 27 percent in 2021 and 2022
before dropping slightly to 25 percent in 2023.
Private Equity’s Play in Healthcare and Why Providers Are
Interested
The healthcare sector’s appeal to private equity investors
stems from its fragmented nature and the opportunities it presents
for achieving scale, enhancing efficiency, and reducing costs, all
while potentially improving the quality of patient care.
On the physician practice side, private equity seeks to
consolidate multiple physician practices to create a larger entity.
The typical approach involves acquiring a large
“platform” physician practice, followed by a series of
smaller “add-on” acquisitions to achieve scale. This
strategy enables private equity investors to derive value through
several key elements:
- Leveraging scale to negotiate more favorable reimbursement
contracts with insurance providers; - Reducing overhead costs through consolidation of back office
and administrative functions and negotiating better terms with
suppliers; - Improving efficiencies through standardization of staffing
ratios, enhancing revenue cycle management to increase collection
rates and faster collection cycles, and leveraging the expertise of
an experienced management team; - Investing capital to upgrade infrastructure, providing
additional patient access, and expanding ancillary revenue
streams.
Likewise, healthcare providers are increasingly interested in
collaborating with private equity firms. In many cases, the
motivations for providers may be similar to the reasons for
entering a transaction with a private equity investor, including
access to capital, the reduction of administrative responsibilities
for the physicians allowing more time for patient care, and an
improved bargaining power with payers and vendors. Private equity
buyouts frequently offer providers an opportunity to retain partial
ownership, allowing them an initial cash payout, diminished risk
compared to operating independently, and the potential to share in
the financial rewards of any subsequent transactions.
Private equity can also accelerate the transition to value-based
care by injecting capital investments in data analytics and care
coordination initiatives. Private equity capital can unlock
potential technological advancements, such as interoperable
electronic medical records systems and artificial intelligence,
which can drive better workflows, patient access, and care
coordination. These innovations can help providers reduce the cost
of care, avoid duplicative services, and improve population health
management.
Despite the growing trend of private equity investments in the
healthcare sector, there are significant obstacles that challenge
this continued expansion.
Increasing Scrutiny From Regulatory Agencies
On March 5, 2024, the Federal Trade Commission (FTC) hosted a
virtual workshop titled “Private Capital, Public Impact: An
FTC Workshop on Private Equity in Health Care.” The workshop
brought together prominent figures, including FTC Chair Lina M.
Khan, Department of Justice (DOJ) Assistant Attorney General
Jonathan Kanter, Health & Human Services (HHS) Inspector
General Christi Grimm, and Centers for Medicare & Medicaid
Services (CMS) COO Jonathan Blum, among others, to discuss the
impact of the increasing role of private equity in healthcare.
The workshop emphasized the need for competition, transparency,
and protection of community interests in healthcare. A significant
concern raised during the discussions was the mismatch between the
short-term investment horizon of private equity firms and the
inherently long-term commitment required for healthcare provision.
The discussion cited examples in which healthcare providers faced
financial difficulties or even closures after being acquired by
private equity, illustrating the potential risks of prioritizing
profit over patient care. The panelists repeatedly referred to
private equity as “corporate profiteering in healthcare”
and accused private equity investors of “reducing healthcare
to a spreadsheet.”
FTC Chair Khan specifically noted that private equity roll-ups
have historically escaped much of the agency’s scrutiny due to
the disparate nature of the acquisitions. This strategy has allowed
private equity investors to consolidate into large entities that,
in the FTC’s view, have stifled competition. These comments
suggest a heightened degree of scrutiny from the regulatory
agencies going forward.
A related discussion took place on April 3, 2024, during a U.S.
Senate Committee hearing titled “When Health Care Becomes
Wealth Care: How Corporate Greed Puts Patient Care and Health
Workers at Risk.” The discussion centered around private
equity’s tendency to reduce overhead costs to boost profits and
how these practices can potentially negatively impact the quality
of patient care. Senator Elizabeth Warren warned that “when
private equity gets hold of healthcare providers, it is literally a
matter of life and death,” pointing to the dire consequences
of prioritizing financial returns over quality of care.
Looking Ahead: Navigating the Future of Private Equity in
Healthcare
As the healthcare landscape continues to evolve, the role of
private equity in this sector is a subject that will persistently
attract both interest and controversy. The trajectory of private
equity’s role in healthcare will be influenced by several key
considerations:
- Impact on Healthcare Quality and Access: There
is a growing concern among stakeholders about the potential impact
of private equity investments on the quality of healthcare services
and patient access. While some argue that private equity can bring
about much-needed efficiency and innovation, others worry that the
profit-driven nature of such investments might compromise patient
care and access, especially in underserved communities. - Regulatory Oversight and Transparency: Recent
activities, such as the FTC workshop and various congressional
hearings, underscore the trend towards increased regulatory
oversight and scrutiny of private equity transactions in
healthcare. - Impact on Investment Strategies: The
increasing regulatory focus may lead private equity firms to adapt
their investment strategies in healthcare to focus on a more
long-term approach. This reevaluation seems imperative as the
traditional short-term exit strategies of private equity, typically
spanning three to five years, clash with the demand for longer-term
commitment in healthcare investments. A viable path forward might
involve a shift towards investments that are more closely aligned
with the goals of improving healthcare delivery and patient
outcomes, such as value-based care.
In conclusion, the future of private equity investment in
healthcare is likely to be characterized by a more cautious
approach, with a greater emphasis on regulatory compliance,
transparency, and the alignment of investment activities with the
broader goals of healthcare improvement. Reflecting on the insights
from the FTC workshop and Senate Committee hearings, it is clear
that private equity firms will need to navigate this landscape with
a mindset that prioritizes long-term impact over immediate
financial gains.
About Ankura Transaction Advisory Services
Investors, regulators, and auditors demand transparency and
enhanced governance on the valuation of assets, investments, and
transactions. At the same time, governments around the world are
increasing the regulatory standards around what is considered valid
and admissible. Obtaining accurate and reliable valuations requires
a trusted advisor who can deliver an independent, objective, and
unbiased view.
Clients depend upon Ankura to provide insightful and thorough
valuations that support strategic and informed decision-making. We
offer a full range of transaction advisory and valuation services
from valuing complex and intangible assets in a proposed
transaction, conducting financial due diligence and quality of
earnings analyses to delivering expert testimony and fairness
opinions.
Healthcare Transaction and Valuation Advisory
In the current, fast-changing healthcare and life sciences
environment, participants are presented with an unprecedented
number of growth opportunities. However, given the highly regulated
nature of these industries, participants must also mitigate
enterprise and reputational risk.
Ankura has a specialized valuation and transaction advisory team
attuned to the unique considerations of the healthcare and life
sciences industries. Our professionals provide a full range of
valuation and transaction advisory services to help our clients
pursue growth while navigating a dynamic regulatory and business
environment. Clients leverage our insightful and thorough analyses
to enable informed business decisions concerning merger and
acquisition (M&A), regulatory compliance, tax compliance,
divestitures, joint ventures, financial reporting, litigation
support, compensation, and other critical motivations.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.