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Outpatient Sector Saw the Most Private Equity Investments in 2022

The increase in private equity investments has generated concerns about cost-cutting tactics that adversely impact patient care.

Over 400 private equity firms invested in the healthcare sector in 2022, with outpatient care seeing the most deal activity, according to a report from the Private Equity Stakeholder Project (PESP).

“Private equity firms are drawn to investing in fragmented markets that experience high demand,” Mary Bugbee, report co-author and PESP healthcare researcher, said in a press release.

“They look to invest capital to consolidate small time players into powerhouse companies with bigger shares of the market. Right now, healthcare remains an optimal space for private equity investment because there is permanent demand for healthcare services and many subsectors within the healthcare industry are fragmented and ripe for consolidation.”

In 2022, there were 125 buyouts and 503 add-on acquisitions to 374 platform companies. These deals involved 471 private equity firms and similar types of investors. The most active private equity firm, Webster Equity Partners, completed 22 deals last year.

Private equity investments in 2022 were the second highest on record after 2021 in terms of deal value and count, the report noted.

Acquisition activity involving private equity firms was highest in January, June, and September. The outpatient care sector saw the most activity, with 152 add-ons and 19 buyouts.

Dental care and eye care had the most deals within the outpatient sector. As of 2021, private equity firms owned 27 of the top 30 dental services organizations (DSOs), accounting for 84 percent of practice locations affiliated with the top 30 firms.

Dental companies owned by private equity firms have employed cost-cutting tactics that can hurt patient care, such as encouraging medically unnecessary or expensive procedures and understaffing offices while trying to increase patient volume, according to PESP.

Eye care providers saw 28 add-ons and three buyouts in 2022. Experts have theorized that private equity firms are investing in eye care due to its high volumes, making it a more profitable subsector.

Physical therapy, orthopedics, and podiatry each saw ten or more deals. The demand for orthopedic care in the US has increased due to the aging population, making this subsector attractive to private equity investors. Similarly, the aging population and the growing prevalence of obesity and diabetes have increased the demand for podiatry.

After outpatient care, Medtech had the second-highest number of private equity deals, at 61 add-ons and 22 buyouts. Thirty-five of the deals involved companies specializing in manufacturing medical devices, medical parts, medical equipment, or medical supplies.

According to PESP, regulators should keep an eye on deals in this sector that could boost healthcare costs for hospitals, payers, and patients.

The healthcare administration sector, including management services organizations, consultant groups, and revenue cycle management (RCM) companies, saw 52 add-ons and 12 buyouts in 2022. Private equity deals were especially common among RCM companies, with 18 add-ons and three buyouts.

RCM companies are constantly updating their services and technology, leading to increased hospital demand for RCM services. In turn, the sector has become attractive for private equity investors, which may have led to a rise in aggressive debt collection activity, the report stated.

There were 27 add-ons and three buyouts involving private equity firms among contract research organizations (CROs).

“CROs have become an attractive investment choice for private equity firms because pharmaceutical and life sciences research and development is a fragmented industry with opportunity for consolidation, and because unlike investment in pharmaceutical companies themselves, revenues will not depend on whether a drug makes it to market or not,” PESP researchers wrote.

The behavioral health and home health and hospice sectors also saw private equity deals. There were 24 add-ons and five buyouts in the behavioral health sector, with private equity firms most interested in companies specializing in substance use disorder treatment. There were 12 add-ons of hospice companies and 22 add-ons and three buyouts in the home healthcare space.

As private equity investments grow, PESP recommended that the government expand pre-merger reviews to include all healthcare private equity-backed transactions, regardless of their dollar value. Additionally, the Department of Health and Human Services (HHS) should have review authority over mergers and acquisitions due to the adverse impacts private equity investment could have on care quality and access.

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