No other sector has drawn as much attention to itself this year within the private equity landscape as healthcare.
Depending on who you speak to, private equity ownership of healthcare service provider assets is either a recipe for disaster for the underlying portfolio companies or a match made in heaven. The sector has been in the spotlight of regulators, enforcers and legislators, particularly in the US, throughout 2024.
The US is at the centre of this debate because its healthcare expenditure as a percentage of gross domestic product exceeds other high-income countries, according to data from the Peterson Center on Healthcare. The $4.5 trillion healthcare system accounts for more than 17 percent of US GDP – the largest of any sector and the biggest share of the economy for any industrialised country.
The issue has been playing out at both a federal and state level. In Oregon, a bill that would forbid PE and other financial managers from dictating patient treatment or making hiring decisions was narrowly defeated this year. Organisers expect to reintroduce the measure in 2025 and are optimistic about its chances. Indiana’s Republican governor also signed a bill this year requiring the state’s attorney general to review any healthcare mergers valued at $10 million or more. It adds Indiana to a growing list of states giving antitrust enforcers a long leash to sniff around healthcare, including California and New York.
In 2024, there has been no shortage of headlines about the detrimental impact on the quality of care after PE firms have taken over hospitals or care homes. Indeed, as Private Equity International’s May Deep Dive found, there are some alarming numbers to support this view. A 2021 study found that patients in PE-owned nursing homes faced a mortality rate 10 percent higher than that of non-PE-owned homes, while a March study by JAMA, a peer-reviewed journal published by the American Medical Association, found that almost 61 percent of physicians in their sample view PE involvement in healthcare negatively, with many dissatisfied about physician wellbeing, healthcare costs and health equity.
There are clearly benefits that the PE model of ownership can bring to the healthcare sector. “PE capital and institutional knowledge can help practices enhance operational efficiencies, increase negotiating leverage against insurers and grow organically,” one associate professor of medicine told PEI.
Speaking to affiliate title PE Hub in December, David Schwartz, a partner at law firm Bryan Cave Leighton Paisner and a former lead investigative attorney for the FTC, said regulatory scrutiny of PE-backed healthcare deals will likely continue under the Trump administration. Certain red states’ governments in the US may take action to regulate any increase in PE-backed investments in the sector as they seek to protect rural access to healthcare as a priority, Schwartz noted.
Fundraising for healthcare-focused vehicles appears alive and well. PEI data shows that such funds collected around $26.7 billion last year, marking a 91 percent increase on the $14 billion raised the prior year. Healthcare-focused PE funds have also grown in average size, with the average vehicle size nearly doubling last year to $410.5 million from $215.4 million year-on-year.
The key to negotiating upcoming challenges in the sector appears to be engaging with policymakers so they hear fund managers’ points of view, multiple sources have told PEI.
“Firms should avoid being too bashful about telling their many good stories and contextualising any bad stories,” Jason Mulvihill, founder and president at risk management firm Capitol Asset Strategies, told affiliate title Private Funds CFO in July. “If firms engage strategically, with allies, they stand a good chance of prevailing.”
– Carmela Mendoza, Helen de Beer and Alex Lynn contributed to this report
