By Eagan Kemp
Public Citizen, March 21, 2023
Introduction: Private Equity Companies Seek Big Profits in Health Care
In general, the private equity industry’s business model poses risks to the long-term sustainability of entities that the industry acquires. That is, in large part, because private equity purchases are typically financed with debt that is immediately transferred onto the books of the businesses acquired, thus leaving the acquired entities with debt burdens to manage.
Meanwhile, private equity investors seek outsize returns on an accelerated timeline, generally aiming to exit investments in three-to-five years with returns of 20%-to-30% per year.1 This objective induces them to take short-sighted steps to supercharge profits or otherwise wring capital out of the assets they acquire.
The risks posed by private equity investments in health care are particularly acute. After all, the services health care providers offer can spell the difference between life and death. Private equity has targeted segments of the health care industry since at least the 1990s, with many predictable outcomes. Among them, shocking lapses in safety have occurred, prices have risen faster than at non-private equity acquired entities and patients have been subjected to price gouging schemes.
The conflict between providers’ obligations to provide the best care and private equity investors’ insatiable appetites for maximized provides is clear. “You can’t serve two masters,” a doctor who previously worked for private equity-owned U.S. Dermatology Partners told Bloomberg. “You can’t serve patients and investors.”2
Private equity continues to move rapidly into health care. Investments rose sharply throughout the first two decades of this century, and continue to rise.3 Since the end of the financial crisis in 2009, acquisitions have steadily climbed, particularly in the last five years, according to figures published by Bain & Co., a private equity firm. [Figure 1]
The particular profitability of health care was also noted by Bain. While the rate of return for private equity in health care was approximately 18% between 2000 and 2009 (compared with 16% for all other industries), returns for 2010-2021 were significantly higher, at around 27% (compared with 21% for all other industries in those years).4 Many of the highest profile deals in the past decade have concerned hospitals, but the private equity industry has been acquiring physician practices and making incursions into other health care sectors at a rapid pace.
Private equity’s incursion into the health care sector has helped to drive two ongoing health care trends: increased consolidation and increased for-profit ownership. Researchers using a different data source than collected by Bain found that between 2000 and 2018 private equity investments in health care increased by a factor of 20.5 Those investments have only increased since then, with the number of health care deals in 2020 and 2021 being the highest in the past decade.6
Unlike acquisitions of hospitals, which typically occur under a public spotlight, the private equity industry’s acquisitions of physician practices and other health care business lines often occur with little or no disclosure or public scrutiny. This absence of transparency hinders the ability of regulators and watchdogs to monitor the effects of private equity ownership.
Though not all acquisitions are required to be reported, industry experts and watchdogs are able to piece together a picture of private equity activity through news releases, accounts in the trade press and other sources. More recently, private equity firms have increased their acquisitions so rapidly that the Private Equity Stakeholder Project (PESP), which monitors such activity, began attempting to track acquisitions consistently. Recent months’ activities show that private equity firms are increasing their holdings in specialty hospitals and chains, including behavioral health and gastroenterology, as well as buying up more diagnostic imaging and radiology practices.7
This report tabulates what we know about the latest incursions of private equity into health care.
Download the complete 26 pg. report (as a PDF file) from the Public Citizen website at https://www.citizen.org…
- Heather Perlberg, How Private Equity Is Ruining American Health Care, BLOOMBERG (May 20, 2020), https://bloom.bg/3Y04dFw.
- BAIN & COMPANY, GLOBAL HEALTHCARE PRIVATE EQUITY AND M&A REPORT 2022, 2022, https://bit.ly/3JfBdFx.
- Anaeze C. Offodile II et al., Private Equity Investments in Health Care: An Overview Of Hospital And Health System Leveraged Buyouts, 2003–17, 40 HEALTH AFFAIRS 719, 719 (2021).
- Ryan Prete, PE Healthcare Investments Mature in an Uncertain Year for Health, PITCHBOOK (January 14, 2022), https://bit.ly/3XCGcEu.
- Private Equity Health Care Acquisitions – August 2022, PRIVATE EQUITY STAKEHOLDER PROJECT (January 26, 2023), https://bit.ly/3HxtYre.