The United States’ healthcare market is one of the largest in the world, with 4.9 trillion dollars in health spending accounting for 17.6% of the country’s Gross Domestic Product in 2023. As the market grows, so does acceptance of the idea that healthcare presents an essential and everlasting commercial opportunity—people will always need healthcare, thus money will always be spent on it. Investors increasingly aim to take advantage, which has given rise to concerns and regulatory efforts surrounding private equity (PE) investments in the industry. This article will discuss the burgeoning prevalence of those investments, including their impact on the healthcare system and the cautionary measures investors can take to remain compliant with existing and forthcoming legislation.
What is private equity?
Today, the capital markets supply more money to companies and households in the United States than banks do. Capital markets are the foundation of our economy, divided into public and private markets. Public markets allow for securities exchange between corporations and members of the general population. Individuals purchase shares in companies that enable them to buy, sell, or trade on a stock exchange, such as the New York Stock Exchange (NYSE) and Nasdaq. Public market investments favor individuals because they generally require less capital up front and present lower risks. However, they offer a lower return on investment.
Alternatively, private markets allow investment professionals to exchange capital for equity in privately traded offerings. Private market investments require more initial investment capital and offer the opportunity to receive higher returns but come with higher risks. Venture capital and PE investments dominate the private markets. Venture capital institutions invest in early-stage companies, also known as “startups,” providing them with the backing they need to fulfill their market potential. PE firms pool money from private parties as contributions to a fund. Capital donors are typically institutional (e.g., insurance plans, mutual funds, pensions, endowments) or accredited investors, like high income and net worth individuals. PE firms use money from these funds and debt takeovers to invest in mature companies suffering from a business deficit. The goal is to remedy operational or revenue inefficiency, resituate the organization’s cash flow, and sell the company within 3-7 years to make a profit on a quick turnaround. This “buy-to-sell” strategy has become mountingly controversial due to its impact on companies across industries. While it has the power to usher in process and performance improvements, it usually entails cost-cutting to maximize profits and a diminished focus on quality.
How do private equity investments impact the healthcare industry?
PE deals in the healthcare industry have increased exponentially in recent years. In 2001, 92 PE funds were dedicated to making healthcare investments. That number nearly quadrupled twenty years later, with 358 funds focused solely on healthcare by 2021. The size of deals has seen an even more significant increase: from 2001 to 2021, the value of global PE buyouts in healthcare grew from $2B to $151B, a 7,450% increase. That number has remained relatively stable despite economic fluctuations and the COVID-19 pandemic, with aggregate deal value in 2024 being the second highest on record.
PE investors are attracted to the healthcare industry because of the market’s size, trends, and need for improvement. Yashaswini Singh, a researcher at the Bloomberg School of Public Health at Johns Hopkins University, argues that “private equity is but one symptom of a larger trend in the corporatization of medicine in the United States.” The modern economy is increasingly cognizant of healthcare as a lucrative commercial vehicle, normalizing investors’ treatment of endeavors in healthcare like endeavors in other markets. If healthcare is a commercial vehicle, it is one with a vacant driver’s seat, as evidenced by persistent health disparity across the country. Despite spending more per capita on healthcare, standard measures of overall health outcomes in the US are consistently worse than in other wealthy countries.
The short-term nature of PE investments makes it hard to measure their effects. Still, their tangible impact on the healthcare industry is conclusively established by what limited research is available. PE acquisitions are associated with up to a 32% increase in costs for patients and payers in every studied healthcare setting. PE-acquired hospitals see a substantial increase in charge-to-cost ratios (charged amount versus the actual cost of the medical expense), including a $407 increase in total charge per inpatient day. Operators, on the other hand, save money. PE-acquired hospitals save $432 per discharge compared to non-acquired facilities.
Payoffs in care costs can lead to sacrifices in quality. Centers for Medicare and Medicaid Services (CMS) uses a star rating system to synthesize a hospital’s performance in areas reflective of quality, including mortality, safety, readmission, patient experience, and timely and effective care. When 2023 ratings were collated, PE-backed facilities performed worse across the board, receiving 4.5% more 1-star ratings and 10.3% less 5-star ratings than the national average. Patients at hospitals absorbed by PE experience more complications, falls, and bloodstream infections. At PE-owned nursing homes, patients are subject to higher mortality rates and a greater likelihood of being placed on antipsychotic depressants. This has physical and mental wellbeing implications but reflects PE’s focus on maximizing profits: sedated patients less frequently require therapy, reducing staffing needs.
In addition to costs and quality of care, PE also poses a risk to healthy market competition (because of consolidation, or “rolling-up,” which involves bringing smaller companies under the umbrella of a larger one) and stable care landscapes (due to oversaturation of investments in certain regions). Nevertheless, PE has the power to make positive changes. PE investments fund research and development for new drugs, devices, and technologies, expand access to care, and can lead to more efficient healthcare businesses.
How are private equity investments in healthcare regulated?
Public market transactions are subject to heightened rules, restrictions, and oversight by federal agencies like the Securities and Exchange Commission (SEC) and non-governmental regulatory departments like the Financial Industry Regulatory Authority (FINRA) because individuals’ money is in play. Although the SEC supervises private market transactions, it takes a more hands-off approach, assuming that private investors are professionals with a better understanding of their transactions. Further, federal antitrust entities do not review many PE transactions because they fall below the mandatory reporting thresholds.
Despite all this, the federal government remains committed to safeguarding the healthcare system from PE activity. In January of this year, the Senate Budget Committee and the US Department of Health and Human Services (HHS) released relevant reports. Both discuss issues with consolidation and anticompetition as PE investments in healthcare accelerate, as well as problematic emphasis on financial gains rather than quality of care, insufficient staffing, and poor patient experiences. The reports were generated to inform the government’s efforts toward reforming healthcare transactions.
In the beginning of 2024, a federal district court dismissed the FTC’s case against Welsh, Carson, Anderson & Stowe, a PE firm accused of unlawfully consolidating anesthesiology practices in Texas. After this minor setback, the government rebounded in terms of regulatory efforts directed at serial acquisitions in healthcare. In partial response to the bankruptcy of Steward Health Care, a multi-state hospital system owned by PE firm Cerberus Capital Management, two bills were introduced in Congress. First, the Corporate Crimes Against Healthcare Act was introduced in June and proposed criminalizing corporate exploitation of healthcare entities resulting in patients’ deaths. The Act would allow the government to rescind PE executives’ salaries if an acquired healthcare organization experienced avoidable financial difficulties, and would increase requirements around public reporting of economic data and managerial changes. Second, introduced in July, the Health Over Wealth Act proposed increased transparency requirements from PE firms that own healthcare facilities. The Act would require licensure by the Department of HHS before PE firms could invest in healthcare and setting up escrow to provide facilities with financial security in the event of disruptions.
Along with the federal government, numerous state legislatures took action last year against unfit conduct involving private healthcare investments. Four states passed successful bills providing enhanced governance over healthcare mergers and acquisitions, including increased notice and reporting requirements encouraging transparency across transactions. Six others introduced legislation. Already this year, bills were reintroduced in California and passed in Massachusetts.
What is the forecast for private equity investments in healthcare?
There is no indication that PE investments in the healthcare industry will slow in 2025. Early evaluations demonstrate quite the opposite—market recuperation that should promote transactional activity in the coming months. PE investors should approach deals flexibly, allocating time for reporting and pre-clearance petitions, funds to accommodate increased compliance costs, and mental fortitude to avoid roll-ups and pursue allowable strategies. While existing legislation makes progress in driving transparency around private healthcare investments, there is still room for improvement in passing laws that give federal and state agencies power to intervene. Investors in this space should be prepared to adapt to changing regulations under the new federal administration and state legislatures that continue to take this problem seriously.