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The Impact of Private Equity Investment on Healthcare…It’s Complicated-The HSB Blog 11/18/22

Our Take:

Healthcare providers are in an everlasting quest to increase profit margins and find new sources of funding to ensure financial solvency while providing the highest quality of care possible. Over the last several years, private equity (PE) firms have increasingly been investing in healthcare to help fill the funding gap. Yet this has not been without controversy and to varying effect.

While the investment from these firms has helped many deal with the financial strains brought on by COVID and declining reimbursement, addressing many of these strictly from a business standpoint can have less favorable outcomes on patient care. For example, while PE firms are often a resource for the business acumen needed to transform organizations, capital and technology, many opponents argue that the tools they use to help increase efficiency or productivity may hurt health outcomes. In the face of this debate are calls for Federal and State regulators like CMS and HHS, to increase regulatory oversight and hold PE firms accountable for business practices that may adversely impact the care of patients.

Key Takeaways:

● 46% of health system & physician group finance leaders reported their organizations were behind their 2022 revenue goals (R1 RCM survey)

● Healthcare providers are increasingly turning to investment from private equity firms to fund their value-based care services, creating an informal industry

● Anywhere from 53% to 68% of the nation’s hospitals will end 2022 with their operations in the red versus the 34% reported in 2019 (Kaufman Hall)

● Private equity investment has grown dramatically over the past decade from $41.5 billion in 2010 to $119.9 billion in 2019 (American Antitrust Institute)

The Problem:

Since as early as the late 1970’s the rising cost of healthcare has forced the government and others to look at methods to control spending. Following the expansion of care through Medicare and Medicaid in the late 1960’s healthcare costs rose rapidly, due in part to increasing demand due to the expansion of care. Ever since the sustained double-digit increases in healthcare costs of 1967-1984 (when they ranged from 10.2%-15.9% per year) the cost of healthcare and it’s impact on the Federal budget has been a national issue and cost-saving has been a significant concern of the healthcare industry. For example, during that period healthcare costs went from 6% of GDP to 10% of GDP. Beginning in the late 1980’s and early 1990’s a number of efforts were made in both the public and private sectors to rein in healthcare costs. In the early 1990’s health insurance companies tried to control costs through the use of health maintenance organizations, however due to the lack of fully integrated provider networks and the lack of patient choice, led to the failure of HMOs. In 2007, the Institute for Healthcare Improvement (IHI) launched what has come to be known as “the Triple Aim” which as noted by the Commonwealth Fund “was designed to help health care organizations improve the health of a population patients’ experience of care (including quality, access, and reliability) while lowering—or at least reducing the rate of increase in—the per capita cost of care.” Given the unsustainable rate of increase in healthcare costs, the Triple Aim, along with the passage of the Affordable Care Act under President Obama, helped institutionalize the idea of cost containment in healthcare. As a result of these changes (and others) hospitals have been under increasing pressure in terms of reimbursement and revenues. These pressures have been particularly acute on the revenue side, as both public and private insurers have tried to decrease utilization of expensive inpatient hospital resources.

As noted in the American Hospital Association Trendwatch Chartbook, from 2007 to 2018, the hospital payment shortfall relative to costs for Medicare has gone from $21.5B to $56.9B in 2018. Similarly, the hospital payment shortfall relative to costs from 2007 to 2018 has gone from $10.4B to $19.7B, despite a number of states expanding Medicaid under the Affordable Care Act. Along those lines, according to a survey of health system and physician group finance leaders by R1 RCM, 46% of respondents reported their organizations were behind their 2022 revenue goals. In addition, as a result of the supply chain shortages and great resignation many providers experienced during the pandemic, rising supply costs and workforce shortages have further squeezed provider profits. Not surprisingly faced with such a difficult environment providers have looked to cut costs, increase revenues, and boost operations. In addition, a number are eagerly welcoming investment from PE firms eager to attempt to take advantage of demographic shifts in population which they expect will increase demand for care. With ample cash to pour into many providers, many PE funds believe they can reduce administrative costs and waste through scale efficiencies.

The Backdrop:

PE firms have made aggressive forays into the healthcare industry over the past several decades, and investment does not seem to be slowing down. For example, according to a report from the American Antitrust Institute, from 2010 to 2019 PE investments in healthcare increased at a compound annual growth rate of almost 13% from $41.5 billion to $119.9 billion. This raises numerous questions about the future, the role these investors play in the industry and how to weigh and balance both the positive and negative effects. While there have been a number of high profile cases where private equity investments have led to negative consequences, the answer is actually a little bit more nuanced than that and not all investments or investors can be lumped together.

For example, as noted in a January 2019 article in JAMA, “these investments may also benefit patients and bring more efficiency to a system burdened with waste. More research, and likely thoughtful regulation, are needed to preserve the positive effects of private equity in health care while mitigating the negative ones.” There have been successes as well as failures that both sides can point to.

The financial windfall provided by PE firms can greatly assist in expanding the acquired hospital’s operations. In May 2021 Health Affairs published a study entitled “Private Equity Investments In Health Care: An Overview Of Hospital And Health System Leveraged Buyouts, 2003–17” which found that hospitals that were acquired by PE firms had larger bed sizes, more patient discharges, and a greater number of medical staff positions and higher operating margins. In addition, PE investment can help providers become more profitable through acquisition, and give them greater access to more resources to invest in resources like IT to succeed in value-based care. According to an article published by the Kenan Institute of Private Enterprise, many PE firms bring increased visibility and analytical tools to their acquired care providers that help them grow. This includes business consulting, systems development, increased supply chain management capabilities, and assistance with mergers and other acquisitions. As the industry consolidates and non-traditional players like Amazon and Walmart enter care delivery, resources from PE can help build provider networks and increase market share.

On the other hand, critics point out that PE’s business model is, at its core, fundamentally incompatible with the mission of the healthcare industry. They note that PE companies typically try to deliver at least a 20% to 30% return in profits over a three to seven year investment horizon according to an article by America’s Health Insurance Plans. In contrast, healthcare providers often point to the moral imperative as the driving force of their efforts and not profitability. They note that providers operate with the intention of preventing or treating poor health throughout a patient’s life, sometimes without regard to a patient’s ability to pay for such services. Critics point out that health outcomes are often poorer under privately owned care providers. They argue that you have to look no further than the senior care industry, which the PE industry heavily invested in. According to a study from the National Bureau of Economic Research, they saw a 10% increase in mortality among Medicare patients privately owned nursing homes along with other declines in other measures of patient wellbeing including lower patient mobility, higher prescription of antipsychotic medication, and increased reported pain intensity.

In addition to the issue of quality of care, a number of academic journals have raised the issue of increased consolidation and market power in healthcare resulting from PE investment. For example, a study from the Journal of Medical Economics posits that PE investment increases market consolidation, places pressure on hospitals to increase revenues through overutilization of services and upcoding, and puts greater scrutiny on doctors to ensure financially viable decision making while exposing them to certain policies like gag orders and noncompete agreements that may harm their future career prospects. Many argue that the focus on short-term revenue and market consolidation effectively undermines competition in the healthcare industry, destabilizing markets in the pursuit of financial arbitrage. Through overutilization of care and upcoding, patients are subject to unnecessary treatments and higher than expected medical bills as they are charged for services they did not use or didn’t need to begin with.

PE investors point to the dire financial straits of many providers and that patients would receive no care at all if they did not step in. For example, as noted in a September 2022 article in Fierce Healthcare, “anywhere from 53% to 68% of the nation’s hospitals will end 2022 with their operations in the red versus the 34% reported in 2019, according to new industry projections released Thursday by Kaufman Hall on behalf of the American Hospital Association (AHA).” In addition, a recent article in the Journal of Healthcare Management Science noted that on average, “21 hospitals [have closed] annually between 2010 and 2015, with 47 closures in 2019 alone. [This] trend of closures has accelerated as hospitals have experienced financial hardship during the COVID-19 pandemic, and it is likely that even more hospitals will close in the near future.” In addition to a number of other effects, they found “when faced with increased demand due to such closure, remaining hospitals in the market tend to respond by a ‘speed-up’ behavior: they increase their service speed and spend less time per patient (on average), instead of accommodating the additional demand by reducing their bed idle times. Speed-up behavior can harm care quality, as it entails cutting some necessary and value-added care steps.” Clearly, if the alternative to taking PE money to sustain operations is closure, those consequences are not ideal either.

Given these choices, in some cases it has been up to the government to step in to ensure that, intentional or not, care and pricing are not adversely affected. For example in 2020 the No Surprises Act was passed which provided legal protections against surprise medical bills for patients who get emergency care from out-of-network providers and curbed predatory billing practices. These protections included the establishment of an independent dispute resolution process to negotiate out-of-network payment costs, an appeal process patients can use to fight against certain decisions on the behalf of their health plans, and mandating good faith estimates of medical services for uninsured patients (some of which are the subject of continuing litigation). Although this is an important step to curbing excessive billing that privately owned care providers engage in, critics continue to argue that more needs to be done to fight against what they view as predatory business practices.


While clearly the implications of PE investment in healthcare are the subject of raging debate, there can be no doubt that in an industry which routinely estimates the cost of waste in healthcare that “[ranges} from $760 billion to $935 billion, accounting for approximately 25% of total US health care spending,” increased efficiency is warranted. While many studies have indicated the connection between poor health outcomes and care providers that are owned by PE firms, given the unsustainable pace of healthcare spending, healthcare needs to be operated more like a business going forward. With various new business models and an increasing number of non-traditional new players entering the field, care delivery has got to get more consumer friendly and effective.

Moreover, medical staff at successful PE health centers may not agree with these assessments as PE has been shown to help increase charge-to-cost ratios and operating margins, leading to higher pay and job security that comes with profitability as noted in an article from JAMA. During a time when revenues are low following the pandemic for most hospital systems, PE can provide an essential lifeline for struggling healthcare organizations in need of stimulus, introduce new, potentially effective operating practices, and prevent employees from losing their jobs.

In addition, clearly the government must play a more active role in setting the guard rails. While the authors were referring strictly to hospital closures, in their study, their recommendation that "close monitoring of market competition can also mitigate the adverse effects…for the rest of the delivery system. This is especially important in light of recent increases in vertical integration, and other similar activities that might negatively impact the healthcare sector.” This is important in terms of PE investment as well as their caution that “policymakers should be aware of the complex nature of these policies, and note that enacting them may also result in unintended consequences such as hospitals being incentivized to reduce the system capacity.”

While many critics have pointed to consolidation of the industry and market power, this is happening among both payers and providers as well as naturally, hence PE firms may be enabling those in less robust financial conditions to secure their place in a consolidating market. Moreover, as noted in “Private Investments in Healthcare: What CFOs Need to Know”, hospitals or other healthcare organizations have to be willing to sell. They note that “top factors for an organization being willing to sell are: 1) a health system is struggling financially overall; 2) it has an innovative product or service but needs financial assistance to boost it; 3) the health system has a difficult time meeting compliance requirements; 4) or the practice owner or partner is retiring.” Hence without PE funding they would need to seek other means to address these issues, not all of which would be attractive either. When you add to this the additional investment in technology required to support AI and data analytics required for effective value-based care, this situation only intensifies. Regardless of the source of capital, healthcare will become more of a business and have to become more efficient and responsive in order to rein in unsustainable cost growth and meet the demands of modern consumers.

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