Private Equity Investing In Healthcare Continues To Slow

Dive Brief:

• Private equity investing in healthcare services is continuing to fall, highlighting the chilling effect of heightened antitrust scrutiny in the space, according to a new report.
• PE firms announced or closed just below 160 deals in the first quarter, a downward trend “even from 2023’s sluggish pace,” according to a new report by market data research firm PitchBook. The total is down almost a third from the fourth quarter last year.
• Despite the depression, firms have deals in the pipeline that should progress, albeit slowly, the report says. Announcements are expected to trickle in toward the end of this year, with activity picking back up in 2025.

Dive Insight:

News of the ongoing slowdown is likely welcomed by patient advocates and regulators opposed to PE firms ramping up their presence in the healthcare sector, due to concerns the companies raise costs and worsen the quality of care in the pursuit of profits.

That’s despite arguments from private equity proponents that diminished PE investment robs the sector of a valuable source of funding that could help combat perennial access issues.

Despite more sponsors actively looking to deploy capital and a slight improvement in the availability of financing since last year, a number of factors are preventing high PE investment in healthcare, including a discrepancy in the prices buyers are willing to offer and what sellers are asking for, and signs suggesting the Federal Reserve will hold interest rates higher well into the summer, according to PitchBook.

In addition, recent federal and state actions tamping down on anticompetitive activity appear to be dampening the once-rabid pace of deals that have culminated in three-fourths of U.S. physicians becoming a corporate employee.

Along with promulgating stricter guidelines for merger and acquisition reviews, the Federal Trade Commission and Department of Justice (along with the HHS) have launched multiple recent antitrust inquiries, including one into “corporate greed in healthcare.”

Meanwhile, a number of states have moved to curtail PE acquisitions. A new deal review process in California went into effect in April, which, along with delaying deal timelines, also threatens to publicize once-private financial and operational information regarding the companies involved.

Other states have followed California’s lead in enacting new deal reporting thresholds, including Connecticut, Illinois, Indiana, Minnesota, Massachusetts, Nevada, New York, Oregon, and Washington, according to PitchBook.

The regulatory environment is creating “considerable uncertainty” around what deals are subject to review and how strict those processes might be, chilling overall investment, the report says.

Washington and state governments are cracking down amid a growing body of research evincing the harmful effects of PE deals.

According to a 2023 review of existing research, PE investment was closely associated with higher costs for payers and patients, along with harmful effects on healthcare quality. One study published last year found cost increases as high as 32% following PE investment. Another, also from 2023, found nursing homes owned by PE were associated with more than 20,000 additional resident deaths over a 12-year period. 

Overall, the review did not find any consistently beneficial impacts from PE ownership, despite claims from proponents arguing the influx of cash results in faster and more sustainable growth for businesses and better services for patients.

Much of the scrutiny of PE has focused on the firms buying up physician practices and undergoing “roll-ups,” where firms acquire and merge multiple small businesses into one larger company.

Now, firms are having difficulty exiting those investments due to a lack of interested buyers amid the regulatory crackdown, PitchBook found. Physician practices owned by PE firms have also suffered some of the largest healthcare bankruptcies in 2023, including KKR’s Envision Healthcare and American Physician Partners, which is owned by Brown Brothers Harriman Capital Partners. Some market watchers expect the wave of bankruptcies to continue.

However, the argument that antitrust scrutiny will cause provider M&A to stop is undercut by a number of recent deals.

PitchBook cited the M&A appetite of UnitedHealth subsidiary Optum, which has continued snapping up doctor’s offices despite an ongoing DOJ investigation into that very practice. In March, Optum announced a bid to acquire a 3,000-doctor physicians group owned by Steward, the beleagured Massachusetts health system that filed for bankruptcy Monday.

In addition, the fundamental tailwinds driving investments in physician practices, like the aging populating, opportunity to scale, labor turnover and a need for improved access and care quality, remain, according to PitchBook.

“While some provider categories are more or less played out (oncology, nephrology anesthesiology), others still sport a healthy supply of targets (dentistry), lend themselves well to de novo expansion (medspa, veterinary, [applied behavior analysis]), or are in early stages of outpatient migration (cardiovascular, infusion),” the report says.