Private equity and healthcare: a bitter pill to swallow?

Over the years, physicians, medical associations and government officials have rung alarm bells regarding the commodification of healthcare in the US. In the first quarter of this year, Washington’s scrutiny has intensified, with federal agencies launching a public inquiry and a senate probe into healthcare investments made by the world’s largest private equity firms.

In March, the Federal Trade Commission, the Department of Justice’s Antitrust Division and the US Department of Health and Human Services jointly hosted a public workshop on the role of private equity investment in healthcare markets. It featured remarks from agency officials as well as panels of economists, academics and healthcare workers.

On the same day, the agencies launched a public inquiry seeking a request for information (RFI) and comment on the effects of private equity-backed transactions in healthcare. The RFI is expected to inform regulators’ enforcement priorities and future regulations. The agencies are also reviewing private equity acquisitions of health providers as part of antitrust laws.

FTC chair Lina Khan said in the workshop three extractive PE practices are front of mind for the agency: the “short-term, high-risk and low-consequence ownership that can encourage a flip-and-strip approach”, aggressive roll-ups that can “consolidate power and undermine competition”, and firms “buying up significant stakes in rival firms that compete within the same industry”.

She noted that over the last two years, the FTC has heard an outpouring of concern from healthcare practitioners on the impact of PE investment. “A common theme across comments is that growing financialisation in the healthcare industry can force medical professionals to subordinate their medical judgment to corporate decision-makers’ profit motives at the expense of patient health.”

Eileen Appelbaum, co-director of the Center for Economic and Policy Research, also said in the workshop that healthcare in the US “is being transformed from a social good into a commodity that can be bought, sold and sold again for private gain”.

Other discussions focused on the opaque and complex ownership structure of PE-backed businesses, which makes it difficult to know who is in charge, where the money is going and the effect on patients and providers. Another concern is how some firms will falsely inflate charges to obtain higher Medicare payments and sidestep anti-trust review.

Some may argue they are right to be concerned. Private equity’s relationship with healthcare is a complex one, marred by incidences of struggling patient-facing care facilities and headlines in the general press decrying the asset class as an irresponsible, profit-focused owner. However, while significant, these issues do not show the entire picture.

The state of the US

The US is at the centre of this debate. It spends far more on healthcare expenditure as percentage of gross domestic product than other high-income countries, according to data from the Peterson Center on Healthcare. The $4.5 trillion system accounts for more than 17 percent of US GDP – the largest of any sector and the biggest share of the economy for any industrialised country.

The US healthcare sector has several features that make it appealing for PE firms. First, healthcare will always be needed, thus demand and revenue remain steady regardless of the state of the economy. Second, the US has an ageing population with increasing need for care. Third, bills are mostly paid by third parties in the form of private insurance or government programmes, which insulates providers from patients’ financial inadequacy and allows them to charge higher prices. Fourth, the industry is highly fragmented, which creates opportunities for consolidation, while best practices have been slow to develop.

“Given the sheer volume and scale of the healthcare economy, what you can achieve by tweaking things in the billing environment alone can be very lucrative,” a US healthcare strategy leader tells Private Equity International.

“When you turn the knobs here or there… there’s such real-time feedback on it. You can see returns pretty quickly by making changes to the care delivery model or billing practices. There’s a lot of food on the table. But those changes do not necessarily translate to better or improved care, and can sometimes inflate the system’s total spend.”

Attractive valuations in the healthcare sector and low interest rates before 2022 drew more entrants into the space, according to Chris Solomon, general partner and director of capital markets at Welsh, Carson, Anderson & Stowe. “Given the unique opportunity many investors saw in healthcare, more firms began actively pursuing investments in the space.”

He notes, however, that investing in healthcare is “extremely complicated” and requires unique skill sets, including providing high-quality patient care, meeting the distinct needs of healthcare employees and maintaining a strong back-office ecosystem.

The figures highlight the significance of PE healthcare funding in the US. Announced deal value in 2023 came in at around $29 billion, according to Bain & Co’s latest global PE healthcare report. That compares with about $14 billion apiece for Europe and Asia healthcare deals. Deal activity within the healthcare service provider segment slowed last year due to inflation and rising labour costs, although specialities such as oncology, orthopaedics and cardiology “remained insulated from broader healthcare and macroeconomic pressures”, the report notes.

Others do not find healthcare service providers attractive and would rather invest in other segments including life sciences, pharmaceuticals and healthcare technology. According to Bain’s report, biopharma accounted for a quarter of deal activity and more than 50 percent of deal value in North America last year.

Eric Liu, head of North American PE and co-head of healthcare at EQT, notes three reasons why his firm avoids healthcare service providers: high customer concentration, high public relations risk and low profit margins. He says while other firms have made money in this sector, these risks are “just not worth it”, particularly for larger private equity firms. Mid-market firms can do more with roll-ups and delivering better clinical outcomes, he adds.

Similarly, a venture investor notes that “fixing healthcare” for them means betting more on precision healthcare, behavioural health and AI applied to genetics and healthcare data, rather than backing service providers and hospital systems. “Private equity can fix a lot of problems. It increases efficiency. But I think it all gets eaten up in their profits.”

Meanwhile, a North American pension investor tells PEI that the organisation takes a cautious approach on any investments that could potentially conflict with the interests of its members. As such, it has a relatively limited exposure to patient-facing segments of healthcare.

Insuring the future

What role do insurance companies play in the future of PE-backed healthcare?

Insurers are pivotal to the success of PE firms’ healthcare investments. In the US, most patients pay for healthcare services through private providers, commercial insurance or government plans. There are 77.9 million people enrolled in Medicaid and 66.9 million on Medicare as of December, according to the Centers for Medicare & Medicaid Services.

Jonathan Blum, principal deputy administrator and chief operating officer at CMS, said in a Federal Trade Commission workshop in March that the organisation has historically taken a quiet view on healthcare consolidation. However, it has realised that this trend has increased costs for government plans. “We have to… ensure we’re being strong stewards to the Medicare [and] Medicaid programmes,” Blum said. CMS has developed a few key strategies to achieve this, including sharing more data with other parties to ensure consolidations won’t affect the quality of care and setting stronger standards for overseeing healthcare facilities, he added.

The significant role the government plays as both the key regulator and largest customer for many healthcare provider businesses is one of the main reasons that EQT shuns investments in that sub-sector in the US. According to Eric Liu, head of private equity North America and global co-head of healthcare, EQT’s healthcare investments in the US are mainly focused on medical devices, life science tools, healthcare IT and outsourcing services to the pharmaceutical industry. “The government is the largest customer, typically, for most healthcare service providers,” Liu tells PEI.

Government reimbursement rates for healthcare haven’t changed significantly over the past few decades, leaving healthcare service providers to struggle with the growing inflationary pressure, according to Adam Brown, a practising emergency physician and founder of the healthcare growth strategy firm ABIG Health.

Commercial insurers, on the other hand, have benefited from rising premium costs and flat reimbursement rates offered to physicians and other healthcare workers, Brown says. The consolidation of private insurers has inevitably affected PE firms’ operational behaviour in healthcare, he adds.

“There are things that PE does… that can be bad for patient care,” says Brown. “Cutting staff, dropping physician or nursing salaries is not always the right answer. But you can’t have an argument about the ‘badness’ of PE without also looking at where the revenues come from in the first place.”

Making a good investment

“There’s an increasingly big role for private equity in the healthcare market,” says Arvin Abraham, a partner in Goodwin’s private equity group. “It’s both a source of funding and of spurring on efficiency in healthcare businesses, and a source of innovation.”

Jane Zhu, associate professor of medicine in the General Internal Medicine and Geriatrics division at the Oregon Health & Science University, meanwhile says PE’s capital investments can be advantageous – and even critical – to a healthcare entity.

“Given how complex the practice environment is these days, PE capital and institutional knowledge can help practices enhance operational efficiencies, increase negotiating leverage against insurers and grow organically,” Zhu says. “However, PE’s short-term investment horizons, significant financial leverage and primary obligation to investors may not align with – and sometimes directly conflicts – [the] broader goals of the health system.”

The US healthcare strategy leader echoes the latter sentiment. “On the whole, the needs of the healthcare industry and the goals of private equity are often misaligned, almost at odds with one another.

“Private equity’s primary goal is to generate returns for investors on short timelines, typically aiming for returns within a few years. That short-term focus inherently leads to decisions that prioritise changes and developments that generate quick and easy financial gain. This is often prioritised over the long-term sustainability and quality of care developments that the US healthcare system needs.”

As such, there’s been a lot of scrutiny from Centers for Medicare & Medicaid Services (CMS), where they recognise players are coming into certain markets and trying to up code on services and bills, attempting to wrangle more dollars out of the system, the strategy leader adds.

To ask whether private equity is a good or a bad owner is to ask the wrong question, says Henry Elphick, deputy chair of the European Healthcare Investor Association. “It depends when. It depends how and who. And it depends on what the firm does with the business.”

Elphick cites analysis from the Care Quality Commission – the independent regulator of health and social care in England – which shows that the occupancy rates and fees that firms charge are demonstrably higher if the business is rated ‘good’ or ‘outstanding’. “Therefore, you have zero financial incentive to strip cost out and deliver a bad service. Zero. Precisely the opposite. It is fundamentally against the interests of private equity to deliver a poor-quality service.”

For Welsh Carson, a long-term mindset and a focus on partnership investing and high-quality care are key ingredients in its healthcare deals, which account for about half the firm’s portfolio.

That means building partnerships with healthcare systems and physicians for as long as several decades, according to Edward Sobol, a general partner in Welsh Carson’s healthcare group. An example is the firm’s investment in United Surgical Partners International, an operator of short-stay, multispeciality surgical facilities that it acquired in 2007 in a public-to-private transaction. The firm invested in USPI across two funds for almost 20 years before its full exit to US-based hospital operator Tenet Healthcare in 2015.

“It’s ultimately a relationship between the clinician and the patient,” Sobol says. “If you get that right and you’re more a partner to them and supporting them with back-end infrastructure and investing behind that quality of clinical care to deliver great patient outcomes, everything else works out.”

Is it all bad news?

Proponents of PE involvement in healthcare services argue that the benefits include improved efficiency while cutting costs, bettering healthcare delivery through new technologies and taking best practices seen in other markets and applying them locally.

KKR’s investment in hospital and healthcare facility operator HCA is a positive example, according to a person familiar with the transaction. KKR was part of a consortium that acquired HCA in a take-private transaction in 2006.

Under its ownership, HCA improved the quality of patient care, according to CMS data. The business also saw significant growth across revenues, patient visits, number of facilities and employees over KKR’s investment period. By the time KKR fully exited its position in HCA in March 2017, it had a return of approximately 5.3x realised gross MOIC.

However, current evidence of both the advantages and disadvantages of PE investment is mixed at best. A February report from the American Investment Council found that PE investment in urgent care centres improves access in rural communities across America. In these typically underserved communities where service closures are common, the AIC notes, PE firms are filling a gap by investing in urgent care providers.

Private equity has invested $15 billion in more than 250 urgent care clinics in the US as of 2020, according to the report: “Many of these private equity-backed urgent care centres have opened more locations in rural America – a part of the country that faces extensive barriers to critical and, at times, lifesaving healthcare services. More than 130 rural hospitals have closed nationwide from 2010 to 2021, and in 2023, 65 percent of rural areas experienced a shortage of primary care physicians. Private equity investments in urgent care centres help get rural patients the care they need over shorter distances while also not overwhelming the limited number of hospitals in these areas.”

In addition, under PE ownership, these clinics are folded into larger practices that can expand access to different regions while also reducing operating costs, the report notes.

Private equity investment may also allow healthcare practitioners to spend more time caring for patients and less time on administrative responsibilities. According to the Medicare Payment Advisory Commission, medical providers note that private equity can “improve quality of care because physicians no longer need to focus on running a business”.

Yet, critiques of private equity ownership of healthcare providers are mounting. A key issue: PE’s short-term financial focus is fundamentally at odds with the clinical care model. What’s more, the abundance of data on private equity ownership of patient-facing facilities paints a bleak picture.

In 2021, a study that analysed Medicare data for a sample of more than 7 million patients over the period 2005-17 found that patients going to a PE-owned nursing home faced significantly increased short-term mortality rates. On average, the patient mortality rate during a nursing home stay and the subsequent 90 days is 10 percent higher at facilities owned by private equity firms than at ‘skilled’ nursing facilities.

A Drexel Law Review paper published in June last year proposes banning PE ownership of nursing homes altogether as the most effective measure of mitigating its harmful impact on patient care.

Authors of the paper, which builds on the perspectives of speakers at a conference on private equity in healthcare held at the Drexel University Thomas R Kline School of Law in April 2022, note that a more adequate payment system for nursing homes would “likely attract corporate owners who are more committed to quality care than private equity firms”.

The article also cites previous research findings that show PE ownership of nursing homes led to negative outcomes, including increased use of psychotics, setting higher prices for services due to vertical integration and charging inflated rents to the nursing home manager via sale-leaseback transactions.

Meanwhile, a study published in March 2024 by JAMA, a peer-reviewed journal published by the American Medical Association, sought to find out whether private equity acquisition has a detrimental effect on physicians, practices and patients. The study found that 60.8 percent of physicians in their sample view private equity involvement in healthcare negatively, with many voicing concerns regarding physician wellbeing, healthcare costs and health equity. Only 10.5 percent, or 55 respondents, view private equity ownership as positive or somewhat positive.

Fifty-two percent, meanwhile, view PE ownership as worse or much worse compared with independent ownership, while 49 percent view PE ownership as worse or much worse compared with not-for-profit hospital or health system ownership. In addition, PE-employed physicians report lower professional satisfaction, autonomy and likelihood of staying with their employer. Survey respondents included actively practising physicians from the American College of Physicians Internal Medicine Insider Research Panel.

Drew Maloney, president and chief executive of the AIC, which lobbies on behalf of the US PE industry, tells PEI that some “biased, agenda-driven groups focus only on anecdotes”. The reality, he says, “is that private equity has a strong record of investing in healthcare facilities and programmes across America that improve lives. More firms need to clearly communicate how their responsible management strategy and investment helps patients and providers, and delivers ground-breaking medical innovation.”

He adds: “Washington regulators need to take a fair look at the industry’s strong record of investing in healthcare across our nation. Without private equity, local communities would have fewer urgent care facilities, medical devices and life-changing medical discoveries, and more government spending.”

What’s the harm?

Three big-name PE firms have found themselves the subject of a Senate probe into emergency room care

In April, a US Senate committee led by Senator Gary Peters of Michigan asked Apollo Global Management, Blackstone and KKR for information on how they run or staff hospital emergency departments. This probe was designed to see if private equity’s management of a large share of the nation’s emergency rooms has harmed patients.

The companies being investigated are US Acute Care Solutions and Lifepoint Health, which are backed by Apollo; Envision Healthcare, formerly owned by KKR; and Blackstone-owned TeamHealth.

According to the information requests, Peters’ staff conducted interviews with more than 40 emergency medicine physicians who raised “substantial concerns about patient safety and care, emergency department staffing, the corporate practice of medicine, restrictive contracting practices, physician clinical independence, unlawful retaliatory actions, improper billing, and anticompetitive practices at private equity-owned hospitals and private equity-owned contract management groups”.

Peters wrote in his letters to the firms that he was “concerned that our nation’s largest emergency medicine staffing companies may be engaging in cost-saving measures at the expense of patient safety and care”.

“I am pressing these companies and their private equity owners for needed transparency so that we better understand how their business practices could be affecting patient safety, quality care and physicians’ abilities to exercise independent judgment in providing patient care.”

A spokesperson for Apollo tells PEI the firm “continues to welcome all discussions with the senators regarding our funds’ investing track record in the healthcare space”.

Blackstone and TeamHealth, meanwhile, are still reviewing the contents of the senator’s letter: “As a matter of practice, TeamHealth has not balance billed patients in its 44-year history, keeping patients out of the middle of any dispute with an insurer for underpayment. The top priority for TeamHealth and our clinicians is always delivering high-quality, safe patient care. We look forward to engaging with the Committee and demonstrating our uncompromised commitment to our clinicians and communities.”

KKR notes: “We have nearly five decades of experience investing in companies to help them grow and innovate. In the healthcare sector, focusing on quality of care for patients and supporting those who deliver it has always been a priority. We are reviewing Senator Peters’ letter and look forward to providing our perspective on the important role that private capital plays in improving healthcare in the US.”

The road ahead

As the heat from Washington ratchets up, what can healthcare-focused PE firms do more or better?

Adam Brown, a practising emergency physician and founder of the healthcare growth strategy firm ABIG Health, thinks the proficiency of private equity firms in navigating regulatory complexities is a crucial determinant of future success in the industry. “It is a heavily regulated environment where those regulations have, in some ways, granted winners and losers in the system,” Brown tells PEI.

Some private equity managers think the growing scrutiny is good news: Welsh Carson’s Solomon and Sobol say increasing attention from regulators may help those not meeting expectations to align with industry standards. However, the partners also believe that the overbroad targeting of PE healthcare investors is misguided and will hurt healthcare companies that need capital to support the delivery of quality care.

Welsh Carson is one of several PE firms, including the Carlyle Group, Cerberus Capital Management and Leonard Green, that were highlighted in the FTC workshop and are being questioned for practices in their healthcare investments.

A mid-market PE firm that has investments in healthcare services providers tells PEI that regulations shouldn’t be a concern for those committed to ethical investment practices.

“For us, [regulation] means there is a well-defined, disciplined way of conducting oneself,” a spokesperson for the firm notes. “If you understand what that is and you believe that’s an appropriate way to conduct yourself anyways, then it’s really not that big of a deal.”

Like any other industry, there are good and bad players in PE, according to OHSU’s Zhu, who also co-authored the JAMA study. “The good players may try to align profit maximisation with larger, societal goals, or at least try to minimise harm.

“The trouble arises when the bad players – supported by highly leveraged structures that allow them to mitigate downside risk – are expected to engage in self-governance. This is an impossible task without some level of transparency and oversight, and without revisiting the current misalignment between what investors see as highly profitable and what actually drives better health, or better value in healthcare.”

For private equity firms under the spotlight, silence does little to address what are likely to be regulators’ biggest concerns, industry practitioners note. With more accountability and oversight being sought, firms need to act urgently and demonstrate how they are a positive force in healthcare.

Hannah Zhang contributed to this report