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The Role Of Private Equity Investment In Healthcare

Investment by private equity in the healthcare sector has exploded over the last decade.  That trend was certainly on the path to continue in 2020 when the COVID-19 pandemic brought everything to a screeching halt.  March, April and part of May saw private equity investment in healthcare come to almost a standstill.   Although the volume of transactions certainly slowed in the first half of 2020 in the wake of COVID-19, activity picked up in Q3 and continued into Q4.  COVID-19 notwithstanding, by all accounts, it appears that private equity investment in the healthcare sector is poised to continue and remain strong well into 2021.

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Q3 2020 hedge fund letters, conferences and more

Private Equity Firms And The American Healthcare

But with this rush of activity has come sharp criticism.  In May 2020, Bloomberg Businessweek published an article on “How Private Equity is Ruining American Health Care.” The article focuses on California Skin Institute, which took out a loan from Goldman Sachs Group Inc. that eventually could convert to an equity stake.  According to the article, this “made perfect sense within the logic of the U.S. health-care system, which has seen Wall Street investors invade its every corner, engineering medical practices and hospitals to maximize profits as if they were little different from grocery store.  At the center of this story are private equity firms.”

In June 2020, Senators Sherrod Brown (D-OH), Bernie Sanders (D-VT) and Elizabeth Warren (D-MA) issued a letter to the U.S. Government Accountability Office (GAO) requesting the study of for-profit Institutional Review Boards (IRBs) that review clinical research proposals for the protection of participant rights and compliance with ethical standards. The focus of the letter was on the consolidation of IRBs by two for profit companies, WCG Clinical and Advarra.  According to the letter, “[b]oth IRBs are owned by private equity investors, raising questions about whether they are under pressure to reduce costs and ramp up profits, trends that often accompany private equity’s entry into a market.”  In August 2020, the GAO agreed to do the requested investigation.

And, to add to the mix, the California General Assembly took up Senate Bill 977, which would have required a health care system, private equity group or hedge fund to provide written notice to, and obtain the written consent of, the California Attorney General prior to a change of control or acquisition transaction between the entity and a health care facility or provider, including a physician practice.  The bill died at the end of the 2020 legislative session without the General Assembly voting on the bill.  The question remains whether the bill will gain new life this year.

The Impact Of PE On The Healthcare Delivery System

What these critics of private equity are missing, however, are the positive transformations that private equity investment in healthcare often brings to bear: the focus on enhanced patient care, quality outcomes, standardized protocols and improved compliance.  Having worked with numerous private equity firms and their portfolio companies, the impact of private equity investment on the healthcare delivery system has several common themes:

  • A shift in patient care, where appropriate, from the inpatient hospital setting to the outpatient setting;
  • A new focus on the patient experience as central to the overall care delivery model;
  • Capital investment in technologies, care delivery models and ancillary services lines;
  • Implementation of standardized clinical protocols derived from best practices across all affiliated clinicians;
  • The addition of professional administrative staff and standardization of back-office functions;
  • Implementation of vendor contracting strategies, including strategies for contracting with managed care companies and other third-party payors;
  • Enhanced regulatory compliance, including a comprehensive compliance program, ongoing training and monitoring.

So, what’s missing from the picture painted by critics?  Excessive cost-cutting and a focus on profitability at the expense of patient care.  In fact, in a 2019 EY-Parthenon survey of health care company founders and executives with direct experience of private equity investment in their physician practice enterprises, 90% of those surveyed rated their experience as positive overall, with over 80% of those surveyed highly likely to consider a private equity partner in the future.  In addition, private equity investors were credited with improving management, clinical metrics and compliance systems, with 65% of those surveyed agreeing that private equity investment improved their organization’s regulatory compliance.

The Benefits Of PE Investments

And, although the American Medical Association’s (AMA) 2019 whitepaper on corporate investors cautions its members of certain risks with private equity investment, including loss of autonomy in decision-making and an emphasis on profit and financial goals, it also acknowledges certain benefits: These include access to capital for practice expenses and expansions, potentially fewer administrative burdens and centralized resources for functions such as IT, marketing or human resources. The AMA “maintains a leadership role that is … supportive of all physicians …, including practice arrangements involving corporate investors.”

Without an in-depth understanding of private equity investment in healthcare, critics may be unfairly assuming that private equity investors seek cost-cutting at the expense of patient care.  And what they may be missing is the investment in technology, ancillary services, standardized protocols and other resources that private equity investment almost always brings to bear.  The result is that physicians are allowed to devote their time to the delivery of quality patient care. Is that investment one worth criticizing?  Or is it one worth defending?


About The Author

Angela Humphreys is Chair of the Healthcare Practice of Bass, Berry & Sims, ranked the third largest healthcare law firm in the country by the American Health Law Association, and Co-Chair of the firm’s Healthcare Private Equity Team. With more than 20 years of experience, she counsels private equity firms and national healthcare organizations on mergers and acquisitions and investments in the healthcare sector. She can be reached at ahumphreys@bassberry.com.

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