For the past decade, private equity firms have invested more than $1 trillion into U.S. healthcare. This meteoric rise in corporate investing in healthcare over the past 10 years may now be hitting its first real speed bump.
Last year brought a decline in private equity deals in healthcare for the second year in a row — down 16% from the year before. According to the Private Equity Stakeholder Project, this is partly due to broad economic challenges and staffing shortages. But mostly, according to industry experts, private equity firms are facing increased scrutiny from state and federal regulators.
The recent collapse of Dallas-based Steward Health Care, backed by private equity, has brought even more attention to the sector's risks. In January, The Boston Globe published scathing stories on conditions in the private equity-backed chain's struggling hospitals, such as surgeons buying their own instruments, nurses devising their own mouthwash solution for patients on ventilators and patients eating crackers after meals had run out.
In May, Steward filed for bankruptcy, disclosed $9 billion in debt and announced its intention to sell all of its hospitals. CEO Ralph de la Torre, MD, defied a Congressional subpoena leading to a unanimous Senate vote to hold him in criminal contempt of Congress. In the Senate committee hearing, a former nurse at St. Elizabeth's Medical Center in Boston, testified about patient harm that unfolded in the hospital and its understaffed emergency department.
As private equity in healthcare faces renewed scrutiny, the funds continue to flow. Becker's took a step back to revisit the evolving intersection of private equity and healthcare.
Why did private equity's interest in healthcare boom?
Although recent events have led to heightened scrutiny, private equity's investment in healthcare has steadily grown over the past 15 years.
Estimated annual deal values went from $41.5 billion in 2010 to $119.9 billion in 2019, with more than 3,000 deals between 2019 and 2023. This explosive growth was driven by increases in healthcare spending, uninvested capital already dedicated to private equity funds, and the disruption caused by the COVID-19 pandemic.
According to a study published in Health Management Policy & Innovation, "Within healthcare, the industry's resilient 'recession-proof' growth, high fixed demand, profitable loan restructuring, and the constant evolution and increasing commercialization of healthcare needs all present significant opportunities for value creation and sustainable growth."
With rising healthcare costs, PE firms seized the moment. According to PESA's tracker:
- Approximately 460 U.S. hospitals are owned by private equity firms. That amounts to 8% of all private hospitals and 22% of all proprietary for-profit hospitals.
- At least 26% of private equity-owned hospitals serve rural populations.
- A handful of private equity firms dominate the list of private equity-owned hospitals:
- Apollo Global Management (Lifepoint Health, ScionHealth)
- Equity Group Investments (Ardent Health Services)
- One Equity Partners (Ernest Health)
- GoldenTree Asset Management and Davidson Kempner (Quorum Health)
- Surgery Partners (Bain Capital)
- Webster Equity Partners (Oceans Healthcare)
- Blackstone (TeamHealth)
- KKR (Heartland Dental, BrightSprings Health Services)
- Texas has the most private equity-owned hospitals (97).
- New Mexico has the highest proportion of private equity-owned hospitals (38%).
- Nearly a quarter (22.5%) of private equity-owned facilities are psychiatric hospitals.
Then, in 2023, deals slowed down. Experts expect the same for 2024.
What are PE firms interested in now?
Currently, according to PESA, private equity strategies in healthcare are focused on these areas:
- Outpatient care
- Dental practices
- Physician practices.
- Eye care
- Gastroenterology
- Cardiology
- Oncology
- Medical aesthetics
Advantages and disadvantages of private equity in healthcare
Even with the recent negative publicity about Steward and renewed regulatory challenges, healthcare remains attractive to private investors. As private equity firms navigate the current antitrust era, there are growing concerns over the quality of care when PE takes over. Critics of private equity insist that the quest for profits compromises the mission of providing quality care to patients. But investors insist they'll make healthcare more efficient and innovative.
For years, the rub against private equity has been this perceived lowering of quality in the pursuit of profits. Much has been studied about this claim. In an often-cited study published in JAMA in 2023, researchers determined that patients are "more likely to fall, get new infections, or experience other forms of harm during their stay in a hospital after it is acquired by a private equity firm." The study goes on to report that the private equity acquisition of hospitals, on average, was associated with increased hospital-acquired adverse events.
In an alarming study from the American Antitrust Institute and the Petris Center, research shows a roughly 10% increase in 90-day mortality for Medicare patients admitted to PE-owned nursing homes, corresponding to an estimated 20,000 lives lost.
In addition to quality concerns, other concerns include cost increases for taxpayers and patients — and outright failures. More than 20% of healthcare bankruptcies in 2023 were by PE-backed companies, according to a new report from the Private Equity Stakeholder Project. Other fallout from PE involvement includes staffing shortages, job loss for some healthcare workers and potential strain on medical ethics.
Some advantages to private equity's involvement in healthcare include profit for investors, better management, better insurance reimbursement rates and more investment in innovation. Healthcare costs make up 20% of U.S. GDP and are driving innovation in the field. Private equity firms have been an instrumental part of healthcare innovation for decades. They offer skills and insights in this area that may not be on-hand already in hospitals.
What does the future look like for private equity's interest in healthcare?
The future likely holds increased scrutiny and tighter regulation from both state and federal governments, and the ongoing scandal with Steward will likely keep the spotlight on similar deals. The FTC, HHS and DOJ announced earlier this year a collaborative "inquiry" of corporate investment in healthcare. In June, U.S. Senators Elizabeth Warren and Ed Markey of Massachusetts introduced legislation targeting "corporate greed and private equity abuse" in the healthcare industry.
At the same time, while some political leaders are targeting private equity, others argue that its influence in healthcare is often overstated. According to PitchBook, private equity-backed providers make up less than 4% of the U.S. healthcare provider revenue ecosystem. This suggests that while private equity may face heightened oversight, its overall footprint in the healthcare sector might not be as dominant as critics suggest.