Private equity in health care continues to grow
Click Here to Manage Email Alerts
Key takeaways:
- Private equity firms target health care because it is seen as a more stable investment.
- Research on patient outcomes has shown mixed results, but some PE-owned hospitals have become more efficient by cutting costs and increasing revenue.
Private equity has had a long involvement with and continues to stay active in the business of health care.
In a panel discussion at the University of Pennsylvania’s Leonard Davis Institute of Health Economics, Rachel M. Werner, MD, PhD, executive director at the institute, said the number of private equity deals in health care has increased from 325 in 2010 to more than 1,000 in 2021.
Image: Adobe Stock
“Private equity firms have invested nearly $1 trillion through thousands of deals to acquire hospitals and specialized practices in the last decade alone,” she said.
The driving force behind these deals, according to Sabrina T. Howell, PhD, associate professor of finance at New York University Stern School of Business, is the concentration of money in the health care sector.
“In 2021, U.S. health expenditures were 18% of GDP,” she said. “At the same time, the private equity industry has grown dramatically over the past couple of decades.”
According to Howell, the value of the portfolio companies owned by private equity leveraged buyout funds was more than $2.6 trillion in 2021. More than half of those investments were in the U.S. Howell said private equity in health care has increased more than 10 times between 2004 and 2021, when investments topped $150 billion.
Factors on both the health care and equity sides are contributing to the surge of deals, Howell said.
“Many health care providers are welcoming new capital sources as they’re facing financial pressures due to higher costs and lower reimbursements, particularly after COVID-19 started,” she said. “They are pressured to get funding to upgrade technologies or expand, and it’s getting harder for smaller, independent companies to get loans from traditional sources.”
Howell said physicians are becoming more interested in selling their practices as they struggle to compete in an increasingly consolidated industry.
An aging population that will drive steady demand for health care is one of the key incentives for private equity in these deals, Howell said.
“Demand is historically fairly stable in health care, so this sector becomes more resilient to downturns and thus can be a really helpful part of a larger portfolio, the other parts of which might be more cyclical,” she said.
One of the biggest questions about private equity in health care is how it affects patient care. In his research, Atul Gupta, PhD, assistant professor of health care management at the Wharton School at the University of Pennsylvania, said the impact of private equity ownership in nursing homes on patients has not overall been positive, but it does not mean all private equity ownership is bad.
“There’s a lot more that needs to be done to fully understand the effects of private equity ownership,” he said. “It’s very important to keep in mind that private equity firms are not inherently evil. They just have higher-powered financial incentives, and they’ll respond to those incentives.”
Ryan McDevitt, PhD, professor of economics at Duke University, said it will be important for future research to look at each kind of provider specifically because how a private equity acquisition affects each business will likely vary across sectors. Research on acute care hospitals has shown that hospitals acquired by private equity firms had become more efficient.
“There’s not widespread financial instability after the PE acquisition,” he said. “On average, these hospitals actually improve their financial performance after being acquired by a PE fund, and they do that by both reducing costs and increasing revenue.”
He said it is common for these hospitals to shift their focus to more lucrative inpatient services, and they are quicker to adopt technology-intensive services, which can be more profitable.
“Most notably, we don’t find any evidence of significant reductions in the most unprofitable service lines,” McDevitt said. “It’s not like they’re cannibalizing the stuff that’s not making a lot of money. ... We see this in addition to what they’ve already been doing.”
Brian Powers, MD, MBA, vice president of clinical strategy at Humana, said it has been hard to really know the impact of private equity on health care. However, research in the last 5 to 10 years has revealed some concerns.
“We’ve seen pockets of concern around poor outcomes for our Medicare, Medicaid or commercial beneficiaries or maybe higher cost without a commensurate increase in quality,” he said. “But there may also be pockets where that is less of a concern. For us, it’s about staying aware of the cost and quality impacts at a system level.”
One of the biggest potential benefits of private equity in health care is access to growth capital, Powers said. Things such as investing in technology and scaling a business can be expensive, and private equity can help.
“Traditional sources of capital, whether it’s public markets or private debt markets, create some capacity constraints that growth capital might overcome,” Powers said. “That’s one dimension of potential benefit that I don’t think is necessarily discussed that often, and we probably need to do a little bit more work to quantify the benefits specifically.”
Collapse
Gupta A, et al. Examining private equity in health care. University of Pennsylvania’s Leonard Davis Institute of Health Economics. March 3, 2023 (virtual meeting).
Read more about
Click Here to Manage Email Alerts