At our upcoming research symposium exploring the impact of private equity on healthcare, we will be addressing overarching questions, including whether private equity is beneficial or detrimental to healthcare. This commentary seeks to provide a brief overview of why this line of inquiry into private equity exists.
The Center for the Business of Health (CBOH) and Institute for Private Capital (IPC) are co-hosting a new research symposium exploring the impacts of private equity (PE) on the healthcare industry. Private equity firms have continually increased their participation in healthcare over the past few decades. The valuation of private equity deals in the healthcare sector surpassed $100 billion for the first time in 2018, and reached a record year with $151 billion in deals in 2021, this is in stark contrast with the <$2 billion total deal valuations in 2001.1,2 Given the growing presence of PE in healthcare we wanted to explore some of the complex and contentious conversations that surround this trend. Essentially, is private equity good or bad for healthcare? This overarching question will be discussed in-depth at the symposium. However, the general consensus among individuals involved in this space, including those from industry and academia, is that it’s not a simple dichotomous response. Rather, the answer might be something in between the two extremes.
Good, Bad, or Something in Between?
The foundation of most inquiries into private equity and its role in the healthcare sector probe into how PE’s profit-motive and incentives align with patient’s health. While healthcare has preventative and wellness offerings, a large majority of people receiving healthcare products and services are sick and chronically ill individuals. For a more critical framing of this inquiry, “How can PE firms deliver their promised ‘outsized returns’ to investors on the backs of sick patients?”.3 However, just because PE operates in a sector that deals with a vulnerable population does not inherently mean their actions cannot be beneficial to this population.
PE has been found to increase firm value by improving operational efficiency, this could result in more patients being seen in a clinic and removing unnecessary tasks from a clinician’s workflow. There is also strong research supporting that PE promotes innovation4, and innovation in healthcare often means new medications, procedures, and therapies.
While PE has the ability to drive efficiency, promote quick change, increase value, and spawn innovation, these benefits come at a cost. PE has come under scrutiny for taking advantage of patient billing regulations and downsizing clinical staff to save on labor costs. Additionally, the short timeframe PE operates under, usually 3-5 years to produce strong returns and then exit, has also led to criticism that the incentives are not aligned with the long-term health and patient care of the communities PE might be involved in for a brief period.
Another major focus of research concerns PE’s impact on patient outcomes. The research seems to be mixed, and it is likely that many situations where PE is involved are highly context specific. To highlight this, a review in JAMA examining the association between hospital PE acquisition and outcomes among Medicare beneficiaries showed no significant differences between PE and non-PE acquired acute-care hospitals. In fact, PE acquisition was associated with a significantly lower inpatient mortality for patients suffering from an acute heart attack.5 However, a different study examining nursing homes found that patient mortality rates were 10% higher among facilities owned by a PE firm than a non-PE nursing home.6 This suggests that the question of whether private equity is good or bad for healthcare is not a straightforward one and may depend on various contextual factors, indicating that the answer may fall somewhere in the middle.
Healthcare is always in need of new players to help invent the future and to drive change. PE is certainly capable of driving expeditious change, but perhaps certain guardrails are necessary, so the incentives do not become extremely misaligned with the population being served. While PE can drive efficiencies and improvements for certain healthcare settings, it may increase value at the expense of patient outcomes, staff wellbeing (worse patient-staff ratios), or ethical billing practices. One example of regulation pushing PE away from an incentive scheme that may have gone too far was the No Surprises Act (NSA), which established new federal protections against surprise medical bills. The NSA was partially prompted by evidence from private equity backed companies. Per a 2022 CMS report, PE backed firms accounted for 41% of all surprise billing disputes and four of the top ten firms with the most billing disputes were PE backed.7 This example shows PE at times can have incentives that lean too extreme on one end. A silver lining from this incentive misalignment could be, although PE may at times push incentive schemes too far the resulting action prompts fast policy change that otherwise would have never occurred or taken far too long to develop otherwise.
The debate over whether private equity is good or bad for healthcare is complex and contentious. While private equity can drive efficiency, promote innovation, and increase firm value, it can also lead to downsizing and taking advantage of patient billing practices.8 Additionally, the impact on patient outcomes is mixed and seemingly context specific. It is clear more focused insight and inquiry into PE and healthcare is necessary. Ideally, as we convene our new research symposium with industry, policy, and academic experts to discuss the impacts of private equity on healthcare we hope to promote conversations that continue to inform, enrich, and generate new knowledge that improves practice across the healthcare industry.
References
Associate Director, Research, Center for the Business of Health; UNC Kenan-Flagler Business School
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