The Private Equity Bet on Healthcare

A record amount of private equity flooded into the healthcare sector in 2021. This year, investors seem to be proceeding with a little more caution. Even so, the investment is a major development in how healthcare gets financed and the makeup of the sector’s ownership interest. Some are thumbs-up on the healthcare push by private equity firms, arguing that the surge in investment will improve management and operations. Others see the entry of the profit-seeking enterprises as driving up healthcare costs and, especially in the United States, further fracturing an already fragmented healthcare system.

After declining in 2020 as the COVID-19 pandemic swept the world, the total disclosed value of private equity investment in healthcare more than doubled globally last year. It reached $151 billion in 2021 compared with $66 billion in 2020 and $79 billion in pre-pandemic 2019, according to Bain & Company, a Boston management consulting company. At the same time, the number of healthcare deals involving private equity surged from 380 in 2020 to 515 in 2021, Bain reported.

Last year, private equity investment in telehealth, digital health and health information technology “gained a lot of interest, accelerated by COVID-19,” says Jerry Sokol, global head of McDermott Will & Emery's healthcare practice group. The focus is now on how technology “could help improve the healthcare sector.”

Some of the investment is motivated by “the opportunity to aggregate fragmented providers,” such as physician practices, Sokol says. Investment from private equity firms, he says, can help lead to more sophisticated management of physician practices, cost savings that come from group purchasing and more power when it comes to negotiating managed care contracts.

“If they (investors) see an opportunity for improvement, that’s certainly going to pique their interest,” Sokol says. The capital from private equity can also help providers adhere to government rules, take steps to reduce fraud and abuse and improve billing.

“Private equity typically will raise the bar on compliance.”

Maximizing return

But not everyone believes private equity is a boon for the healthcare sector. Private equity investors “exist to make money. They invest in companies that they believe will have a significant return,” argues Elizabeth Mitchell, president and CEO of the Purchaser Business Group on Health. Private equity firms aim, she says, to “increase healthcare costs to maximize return.”

Her organization is a nonprofit coalition of almost 40 private employers and public entities that are major purchasers of healthcare services. Members include companies such as Microsoft and Walmart.

Some private equity-backed staffing companies, for example, tend to utilize surprise billing, which drives up healthcare costs, says Mitchell. Surprise billing is shorthand for patients receiving bills from providers who are out of network even though they were seen in an in-network facility.

Another of Mitchell’s concerns is what she sees as the focus of private equity investment on relatively narrow areas of care (emergency department physicians, for example, or radiologists). Her group wants to see more integrated care, she says, and with private equity undercutting integration, healthcare in the U.S. is “harder to navigate and harder to manage,” Mitchell says.

Ripe for change

A recent survey of leaders of private equity firms by McDermott Will & Emery and WSJ Intelligence, part of The Wall Street Journal, found that 40% of respondents had the most interest in investing in healthcare IT and telehealth in the next three years, followed by 37% interested in partnerships with large health systems. More than 30% were interested in investing in pharmaceuticals and biotechnology, and in physician practice management. “Large health systems have been struggling recently because of the pandemic,” Sokol says, adding that even before the pandemic, “a lot of profitable procedures migrated out of hospital settings.”

The survey respondents said they were most interested in healthcare industry inefficiencies, the expansion of value-based care models and reducing costs. Nearly three-quarters agreed that “the healthcare sector was ripe for structural change prior to the onset of the pandemic, which has accelerated opportunities for investing in new modes of healthcare delivery.”

Mitchell agrees that “there is certainly need for innovation” in healthcare. Some private equity investment leaders have expressed support for value-based care, and Mitchell says “incumbents have failed miserably” when it comes to implementing value-based care models. “It’s not that the incumbents don’t require some disruption.” But she is skeptical that private equity investors will improve the situation.

Findings from a study conducted by researchers at Weill Cornell Medical College might stoke Mitchell’s skepticism. They compared nursing homes owned by private equity firms to those owned by other for-profit entities. Patients who stayed in nursing homes owned by private equity investors had more emergency room visits and hospitalizations, and that drove up Medicare costs for patients from those facilities, according to the results, reported last year in the journal JAMA Health Forum. Residents of private equity-owned nursing homes were 11% more likely to need care at an emergency room and almost 9% more likely to experience a hospitalization. Those services translated into Medicare costs that were 4% higher — $1,080 more per resident — for residents of the private equity-owned nursing homes than those of residents at the other for-profit homes.

The pressure to generate profits for private equity investors could result in a reduction in staff, services, supplies or equipment at those nursing homes, researchers said.

“Our findings indicate that private equity firm-owned facilities offer lower-quality long-term care,” Mark Unruh, M.S., Ph.D., associate professor of population health science at Weill Cornell Medicine, said in a press release. “The majority of revenue that pays for care in nursing facilities comes from public sources. After private equity acquisition, quality of care declines and Medicare spending goes up for residents, and that should be a concern for policymakers.”

Smaller appetite

The largest private equity deal announced in 2021 was the $34 billion investment in Medline, a medical supply company headquartered in Northfield, Illinois. The money came from private equity firms Blackstone, The Carlyle Group and Hellman & Friedman. The second largest of the year was Bain Capital and Hellman & Friedman investing $17 billion in Athenahealth, a health tech company headquartered in Watertown, Massachusetts.

But during the first part of this year, private equity lost some of its appetite for healthcare investment. A report by KPMG found that from the fourth quarter of 2021 until the first quarter of 2022, activity by private equity investors in healthcare fell by as much as 50%. “Deal activity in 2021 was at a feverish pace that was unsustainable,” says Ross Nelson, principal and national healthcare strategy leader for KPMG.

The KPMG report found that private equity companies slowed their investments in hospitals and health systems due to rising labor and supply costs, although interest in healthcare IT and physician practices remained strong. The Russian invasion of Ukraine also was a factor and raised further supply chain concerns. Nelson says the continued switch of patients from traditional Medicare to Medicare Advantage plans “will continue to drive deal activity longer term.” At the same time, for many corporations, “balance sheets remain strong … and (private equity) still has a lot of money to deploy.”

Susan Ladika is an independent journalist in Tampa, Florida, who writes about healthcare and business.