Private Equity in Healthcare Is Under A Microscope, So What’s Next?

New data points to "harmful impacts"

The latest study in a growing body of literature on private equity in healthcare links investments in healthcare to higher costs to patients and payers. The study recently published in The BMJ analyzed 55 previous academic research studies for a systemic review of private equity's impact on healthcare outcomes, including quality of care and costs to patients.

Researchers from several universities, including the University of Chicago and Columbia University, found that private equity acquisitions in every studied healthcare setting have increased in prevalence, and those investments were most closely associated with up to a 32 percent increase in costs for payers and patients.

Private equity ownership of medical settings was also associated with mixed to harmful effects on care quality.

Previous analyses have studied private equity's impact on specific areas of healthcare. For example, data published by the American Antitrust Institute earlier this year found private equity acquisitions of physician practices led to price increases between 4 percent and 16 percent. Meanwhile, a 2021 study showed lower quality of care at nursing homes following a private equity investment.

The newest study is considered the first systematic review of global private equity ownership trends in healthcare settings.

"Over the last few decades, private equity activity in healthcare has exploded, with financial institutions buying up hospitals, nursing homes and fertility clinics — pretty much every area of healthcare," Joseph Dov Bruch, PhD, the study's senior author and assistant professor of public health sciences at UChicago, said in a statement. "News reports have highlighted increasing investment by private equity and a number of studies have set out to examine the phenomenon, but until now there has been no large systematic review of global private equity activity in healthcare. This study is intended to fill that gap."

The study did not identify any consistently beneficial impacts of private equity ownership in healthcare and, therefore, no "clear indications that private equity makes healthcare more efficient by reducing administrative burden, streamlining processes or offering technology advances."

However, Bruch et al. acknowledged in the study that the outcomes captured by the review were short-term impacts of private equity ownership. The jury is still out on how private equity will impact healthcare operations, costs, and clinical outcomes in the future.

"Private equity has been made to be a bogeyman," said Bruch. "It certainly is an important financial actor growing in activity, and evidence suggests it should raise important concerns for patients, but it is a symptom of a health system that is becoming increasingly financialized."

Lawmakers debate private equity in healthcare

Congress is concerned about the cost of healthcare. The Office of the Actuary at CMS recently projected national healthcare spending growth to accelerate to reach $7.2 trillion in less than a decade. The growth can be attributed to increasing prices across hospital and physician services, and taxpayers will also pay the price for growing Medicare and Medicaid spending.

Research has linked price hikes to consolidation in healthcare, and when the topic of healthcare mergers and acquisitions comes up lately, private equity is on the tip of everyone's tongue.

In June, the Senate Finance Committee held a hearing on consolidation and corporate ownership in healthcare. Lawmakers and industry experts discussed how consolidation and corporatization impact healthcare costs and quality.

"In the simplest terms, private equity typically entails a group of investors buying a stake in a company in order to increase its financial value by restructuring or changing the business practices of the target company," Senator Ron Wyden (D-OR) said in a statement on the hearing.

"While all of those terms sound like a whole lot of word salad to an American family working every day to pay the bills, the Finance Committee is holding this hearing to examine whether these practices are hotwiring our health care system to favor mega-corporations at the expense of patients and taxpayers."

More recently, lawmakers from both sides of the aisle talked about private equity ownership during a markup session of several healthcare bills. The Wall Street Journal reported earlier this month that Democratic lawmakers are seeking more information on private equity's role in healthcare, but efforts to increase transparency of provider ownership have stalled in the face of Republican opposition.

"It's impossible to talk about transparency in the healthcare system without talking about private equity, which isn't addressed in this legislation," Representative Richard Neal (D-MA) said regarding the Health Care Price Transparency Act of 2023 (HR 4822).

"Its unchecked expansion across the industry has been tied to poor patient outcomes: higher mortality rates in nursing homes, hospital bankruptcies and closures, surprise medical billing, and Medicare fraud. Patients have no indication of how PE ownership affects their care, nor can regulators conduct proper oversight."

But lawmakers are still unsure about what is behind rising healthcare costs. Concerns remain about government oversight and competition in healthcare, which industry leaders agree is lacking, leading to higher prices and limited access to care.

"Competition is what bends the cost curve and takes away the desire of private equity to chase excess profits," Representative David Schweikert (R-AZ) said.

What drives private equity investments

There's a buzz around private equity in healthcare right now. But whether policy and regulation will come down on investments remains to be seen. In the meantime, private equity entities continue to invest in various areas of healthcare.

"There’s definitely still volume and interest,” Jim Clayton, private equity national co-leader at BDO, recently told RevCycleIntelligence. “And it’s not going to slow down anytime soon.”

Clayton sees future investments in “roll-up” deals in which private equity firms aggregate providers, such as specialists, urgent care centers, and nursing homes, to realize cost efficiencies and scale. There is a lot of opportunity to increase efficiencies within healthcare, especially on the administrative side. And private equity firms can see a sizeable return on investment by helping to streamline the revenue cycle.

“One of the biggest levers they can move is cash flow by optimizing revenue cycle,” Clayton explained. “I’ve seen some of these roll-ups where providers are on three or four different platforms, and just by consolidating to one and standardizing operations, particularly through automation, firms have significantly improved cash flow.”

That being said, healthcare is still a relatively new market for most private equity firms. These investors do not always understand the revenue cycle—a highly specific function in healthcare that does not operate like a typical business.

“It takes longer to flip a healthcare investment than some other industries,” Clayton states. “The difference between getting paid 22 days later and 42 days later is a huge cash flow issue, and some investors don’t get how providers bill for $100 and only get $75 back from payers. It has taken private equity a while to understand the mathematics behind healthcare.”

Payer contracting and revenue cycle lags are some of the reasons why roll-ups have underperformed. However, private equity is learning, and there is still a lot of “dry powder” in the market for investors, according to Clayton.

“Healthcare is an underutilized pipeline for them,” Clayton said. “And through limited investment opportunities in other markets, they are starting to look more at healthcare. Healthcare also may not be the biggest return on investment, but they get more predictability from deals because the industry is more recession-proof than others. People will always need healthcare.”

There is still appetite from providers, too. Providers have to jump through hoops to access capital from traditional markets. Private equity provides a more accessible avenue, Clayton explained.

What providers should know about PE investment

Private equity investment is a good option for providers in the growth mindset. This is where private equity firms and providers may align since Clayton is currently seeing private equity focus more on top-line growth versus bottom-line profitability.

Industries go through this cycle with private equity investments, Clayton explained. “In most cases, they are growing market share, and once they get that, they optimize cost structure and increase profitability.”

Providers can more easily access capital through private equity investment during this cycle. But Clayton warns providers that private equity comes with its own unique challenges.

“Private equity investment comes with a lot of expectations,” Clayton explained. “The detailed reporting, analysis, and forecasting level means providers need to step up their games than if they had a traditional investor. You don’t necessarily have to upgrade your internal staff and operations as quickly.”

Clayton recommends that providers should do their homework before finalizing a deal. Providers should understand their true cost structure. Having a financial expert crunch the numbers for an organization is key and oftentimes an underutilized resource.

“You'd rather find out where you might be able to improve your numbers before somebody approaches you versus them finding it when you already have a deal table. You might have to take a purchase price reduction,” Clayton stated.

There will be plenty of investment opportunities for growing or wannabe-growing provider organizations. Research and regulations are running behind private equity investments, so private equity firms and providers can satisfy their appetites. But how these investments will impact outcomes like access, quality, and cost are still up in the air.