Private Equity Investments in Healthcare
ANNIKA HESSE
Over the last decade, private equity firm investments in the healthcare sector, specifically, fee-for-service healthcare ventures, have increased significantly. In fact, the estimated annual deal value of private equity acquisitions of healthcare companies rose from $41.5 billion in 2010 to $119.9 billion in 2019, totaling to $750 billion over the last ten years. In 2021, the total disclosed value of private equity investment in healthcare more than doubled globally compared to 2019. This increased interest in the healthcare sector can be attributed to the exponential growth of telehealth and healthcare information technology as a result of COVID-19. Firms have recognized the profitability of these growing sectors within healthcare and are not hesitating to divest from other ventures in order to be a part of the movement towards virtual medicine.
As the presence of private equity firms within the healthcare sector becomes increasingly dominant, its impact on patient care and accessibility of healthcare has come under scrutiny. Some believe that private equity investments in healthcare will improve portfolio companies’ management and operations, ultimately lowering costs and increasing accessibility of healthcare services. Others argue that as inherently profit-seeking entities, private equity firms will have the opposite effect, worsening an already inequitable and fragmented healthcare system. An additional facet of this discussion is how private equity investments are accelerating the transition to telemedicine and the positive and negative impacts of transitioning to a digital approach to medicine.
Broadly speaking, private equity firms are able to break into the healthcare sector by buying out struggling health systems or hospitals and then trying to increase profits. They use a variety of tactics including, merging multiple healthcare practices, reducing staff and partially closing down operations, or focusing on growing a specific aspect of a healthcare practice’s offerings.
Proponents of private equity investments in healthcare cite the value of their networks and strategic partnerships, industry knowledge, and managerial expertise in increasing efficiency of medical practices. This could be beneficial in cases where private equity investments seek to aggregate fragmented providers. By consolidating multiple providers under one umbrella, private equity firms can help facilitate more sophisticated management of physician practices, cost savings that come from group purchasing, and more negotiating power in terms of care contracts. Furthermore, private equity firms provide the capital that smaller healthcare groups might lack, leading to investment in new technologies and innovation for better care and treatment.
These assertions, however, are undercut by the overwhelming amount of quantitative data that supports the sentiment that private equity investments in healthcare will increase patient costs and decrease efficacy of care. A study published in 2021 found a 10% increase in 90-day mortality for Medicare patients admitted to private equity-owned nursing homes, which corresponds to an estimated 20,000 lives lost. The researchers argue that the decrease in quality care is a result of attempts to shrink labor costs, which manifested itself in lower frontline nurse staffing and increased reliance on antipsychotic medications. This combination of reduced staff levels and administration of medications known to have significant side effects is extremely dangerous for older patients and explains the increase in mortality found in the study.
In another sector of healthcare, outpatient services, similar results have been observed. While there has been significantly less concrete research in this sector, incidents reported in the media indicate that private equity investments in outpatient services, specifically dermatology, can result in poorer outcomes. At Advanced Dermatology and Cosmetic Surgery, a private equity backed dermatologist group, dermatologists have complained about a deficit in necessary medicines, encouragement to refer to inhouse physicians, and unsupervised physician assistants performing minor procedures and biopsies. The latter complaint is an issue that has been observed in many private equity-owned outpatient practices. While the majority of procedures performed by physician assistants are safe and effective, some dermatologists have raised concerns that they are performing unnecessary biopsies on geriatric patients who are unlikely to live long enough for skin cancers to develop.
Since private equity firms are inherently driven to maximize their profits, they must rely on cost cutting tactics such as the ones mentioned above. Thus, it is inevitable that private equity acquisitions will result in decreased patient care. In some cases, the economic pressure is even higher when firms leverage debt financing to raise large sums of capital, further shrinking the focus on patient welfare. Although it can be argued that these cost cutting techniques can be mitigated by the implementation of more efficient systems that private equity firms have the capability of devising, we have yet to see consistent examples of this.
It is important to note, though, that the examination above is largely focused on traditional investments made by private equity firms in healthcare. However, as our healthcare system transitions to incorporate digital health, there are additional arguments surrounding the nature of private equity’s involvement in the healthcare field that must be considered.
Digital health or healthtech is the umbrella under which telemedicine, clinical decision support, and artificial intelligence (AI) for drug discovery and remote patient monitoring fall. The demand for digital health services has grown exponentially as a result of the pandemic, and its potential in filling the gaps within the US healthcare system is being realized by digital health companies backed by private equity. For instance, Doctor on Demand, a telemedicine company backed by General Atlantic, connects patients with licensed healthcare professionals virtually and around the clock. Patient reviews applaud the efficiency and convenience of the program. Similarly, digital technology is increasingly being harnessed to help people with wellness and weight loss, something that has become a more pressing issue to 54% of Americans according to Mindshare’s Wellness Revolution Report. For example, Noom, an app that combines technology and a behavioral science-based program to promote weight loss and wellness among its user base, has recently received $540 million in funding from Silver Lake. This PE investment is expected to expand the company’s platform, bringing its services to more places and people.
Due to the profit-seeking nature of private equity firms, private equity investments in traditional forms of healthcare are simply not sustainable. Although, in theory, there are benefits to PE investments in hospitals and nursing homes, the observable effects are overwhelmingly negative with a decrease in patient care being at the forefront. That being said, private equity investments in the emerging sector of digital health have proven to drive innovation and scaling of very useful technology. Ultimately, when considering whether private equity investments in healthcare are viable and good for society, one of the main factors to consider is the nature of the venture they are investing in. However, whether PE firms are investing in traditional healthcare or digital health, one thing is clear: as private equity firms extend their reach into the healthcare industry, their activity must be closely monitored and patients’ best interests should be protected and prioritized.