Private equity investments play a major part in financing healthcare in the U.S., with a particular surge after the COVID-19 pandemic. As independent practices struggled financially and acknowledged vulnerabilities in areas like operations and management during that time, they began seeking alternative models of ownership on the way to recovery.³

What Is Private Equity?

The practice of investing in PE funds in exchange for a full or majority stake in private businesses gained momentum in the 1970s and 1980s. These “pooled” funds provided a new way for accredited investors to finance private companies, or purchase public companies and make them private, then resell or “flip” them in three to seven years for substantial profit. Depending on the negotiated terms of the business and PE firm, seasoned, new, or struggling companies might undergo restructuring to strengthen their operations and management, enabling them to better withstand financial uncertainty. With private equity businesses could raise capital without taking out bank loans or selling their stocks on a restrictive public market. Investors had the benefit of high returns and certain tax incentives, and PE firms made money through management and performance fees from the investment fund, typically 2% of total assets and a 20% cut of proceeds.^4,5

The Drivers of Private Equity

Consolidation: Healthcare is a growing industry and a competitive one. With an increasing demand for services across the U.S., and in an aging population, care has been delivered more quickly and at a higher frequency in recent years, especially by large corporate entities. PE firms are drawn to the fragmented nature of healthcare and its community-oriented delivery structure, and there are plenty of service outlets that spell profit potential. Investors have the assets to spend and move quickly to specific geographic areas or across multiple specialties to buy out physician practices, hospitals, and health systems. Investors gain increasing market power through consolidation, purchasing these “platforms,” then buying more practices, known as “roll-ups” or “add-on acquisitions.”⁵

Physician Benefits: A PE firm may be an attractive option for physicians, especially for those who desire to grow their business or update their technology yet struggle to accumulate enough capital to do so. Running an independent practice and remaining autonomous means added costs associated with labor and technology, supplies, liability insurance, and compliance. Added are the physical and psychological challenges inherent in overwork and administrative tasks, and the uncertainties of an unpredictable healthcare market.⁵ A private equity firm will pay owners a generous price to acquire their practices, sometimes up to 12 times their actual monetary value.⁶ Physician shareholders may see multimillion-dollar payouts as well as substantial payouts in the future, each time the practice is sold and resold to investors.⁷

A PE firm can drive revenue to practices by building scale and asserting a degree of control over management structure and processes, thereby enabling greater operational efficiencies and more technological and innovative expansion. They can pinpoint the contributors of an underperforming practice and improve business functions, effectively bringing more value to investors and helping them stay competitive in the market. PEs firms can help cut labor costs and negotiate insurance prices,⁵ and ease the burdens of billing, scheduling, insurance paperwork, and vendor hiring, giving physicians more room to focus on medicine.² Many firms will bring in executives to help lead on the business side, leaving clinical authority and decision-making solely to the physician.⁸

Minimal Regulation and Good Tax Benefits: A lack of federal regulation of private equity in healthcare enables firms to consolidate and expand at minimal risk and with little oversight. PE transactions are not transparent, and around 90% are exempt from federal regulatory review as they fall under the Federal Trade Commission’s threshold for reporting, at $111.4 million. PE firms make relatively small transactions across multiple fragmented services and facilities, avoiding steep investments that would accompany larger acquisitions. Investors have the additional benefit of tax incentives, as their profits are taxed at a low capital gains rate.^5,7

Targeted Areas

Private equity investments have penetrated just about every sector in healthcare, from emergency departments and anesthesia, nursing homes, and even segments of health IT and revenue cycle billing.⁵ Medical groups with the highest potential for profits are traditional targets, though investors have also developed an eye for size, expanding to networks and areas with large patient populations, in order to maintain a control over the market and optimize care quality scores.⁸ PE firms have a focus as well on primary care and value-based care. And as AI technology and healthcare IT advance further, buyouts in these areas are also projected to grow.⁹ The following are some of the more targeted specialties of PE investors today:

Quality of Care, Cost, and Utilization

No PE firm will manage a healthcare entity in the same way, and the level of PE control over operations varies by negotiated deal.² However, prioritization of a short-term consolidation and quick profit through high patient growth naturally invites questions from both physicians and patients, particularly about how these acquisitions affect quality of care and access, costs and spending, and utilization of services and treatments. Because there is little regulation over acquisitions and mergers across the healthcare market there is, at present, limited research on these fronts.⁵

One study on quality of care for 21 million Medicare beneficiaries found that in PE-acquired entities, inpatient mortality rates were lower, as were 30-day mortality rates for patients suffering acute myocardial infarctions. Another study of PE-acquired hospitals from 2005 to 2017 revealed improvements in quality measures related to processes, compared to nonacquired hospitals. However, when one hospital group was omitted from the study in 2020, quality metrics dropped, even in acquired hospitals. This suggests that most of the previous high scores may have been attributed to that hospital group. A follow-up study in 2021 found that acquired community hospitals saw a small drop in patient experience scores.⁵

Quality of care includes affordable cost. The growing influence of private equity in targeted markets effectively reduces competition from private practices, giving PE firms greater leverage in negotiating higher prices with insurers. Those prices are passed on to patients in the form of higher premiums, rising medical bills, and increased out-of-pocket costs. A recent study showed that areas where a single private equity firm owned over 30% of one or more physician specialties, price increases were 1.5 to three times higher than in all other markets. Private practices unable to compete with PE expansion are sometimes forced to close certain service lines of business, or their entire business, which reduces care access for some populations.^3,5

The priority of a PE acquisition to control costs and maximize revenues may mean staffing cuts as well as an overutilization of healthcare services, leading to lower-value care.⁵ Some PE firms replace those in high-level clinical positions, such as anesthesiologists, with less-credentialed candidates like CRNAs, in order to pay a lower salary.¹⁵ Research also suggests that staffing decisions at PE-acquired nursing homes led to high rates of patient and staff deaths during the COVID-19 pandemic. President Biden relayed in a statement that 200,000 residents and staff members had died from the virus during a two-year period.² Another study linked both nursing homes and dialysis centers to both poor patient outcomes and higher Medicare spending.¹⁵

Physicians might endure added pressure to meet utilization goals, practicing higher risk coding (or upcoding) and favoring use of PE-owned labs.⁸ They may order a greater number of higher-cost procedures and services that could result in claims alleging such treatments were medically unnecessary, or even harmful.²

Looking Ahead

The trend of PE acquisition in the healthcare marketplace is likely to continue, and critics argue for more reform regarding transparency and regulation surrounding these deals. They propose policies that would require both buyers and sellers to report their acquisition deals to the FTC, and advocate lowering the $111.4 million reporting threshold.⁶ As PE firms consolidate and expand it is worth observing the impacts of any enacted policies on today’s healthcare.

ProAssurance will continue to monitor related developments. We also encourage you to reach out to your Business Development representative with any questions.