Paul Keckley, author of the highly respected healthcare-focused The Keckley Report, recently asked in his weekly column whether private equity is the solution or the problem in healthcare.
It may well be a combination of both. But one thing for sure is that private equity is very likely to remain a significant presence in U.S. healthcare and could become even more ubiquitous as investors look to new technology, including artificial intelligence, to aid in patient needs at the same time as boosting their returns.
First, though, some of the not-so-good side of private equity in healthcare.
Private equity players can have a reputation for decreasing the quality of care and patient safety at the same time as increasing costs. Peer-reviewed studies, as well as industry-sponsored ones, have consistently established such a causal relationship.
“This has been a source of debate and tension as to whether these entities lean on medical clinics to cut corners and provide bare-bone care to lower costs,” Dr. Ronald Razmi, a former cardiologist and co-founder of Zoi Capital, which focuses on investing in AI healthcare tech solutions, said.
Citing the Journal of American Medicine, Razmi added, “[A] study published in JAMA in December 2023 indicates that the quality of care suffers after a hospital is acquired by a PE firm, presumably from the pressure to cut costs.”
In Pennsylvania, for example, lawmakers have pushed for legislation seeking to ban private equity groups, as well as other for-profit entities, from buying hospitals in a bid to curtail the rise of healthcare deserts in the state.
Such a move came after private equity-owned Crozer Health closed two facilities in Pennsylvania, leading to what state legislators called a “maternal care desert.”
Regulation on the up and up
The solution to bad actors in the private equity space may be through increased regulation.
Private equity may not welcome the spotlight. However, such increased regulation is likely to be a factor as the federal government steps up its oversight of the healthcare industry as a whole and as private equity likely increases its presence.
The Federal Trade Commission, for example, recently lost a case when a federal judge in Texas dismissed what would have been a landmark antitrust case against private equity group Welsh Carson Anderson & Stowe.
In that case, WCAS was alleged to have suppressed competition and driven up prices for anesthesiology services in the state through its U.S. Anesthesia Partners platform, something it owns a 23% stake in.
The private equity landscape may be forgiven, therefore, for breathing a collective sigh of relief that such a landmark ruling fell this time in its favor. But it doesn’t mean the scrutiny is going to go away, especially if there is poor behavior seen by both regulators and legislators.
“Bad actors will be vilified by regulators and elected officials,” Keckley said about firms’ general partners who make investment decisions. “Media scrutiny of specific PE funds and their GPs will intensify as PE public reporting regulations commence.”
Does the public care?
Patients generally are either oblivious to or choose not to inform themselves of who is running their local care facilities, Keckley adds. What matters to them is the affordability of such care.
But, if corners are cut at the expense of patient safety, private equity groups could face increasing discontent from the general public on top of the growing scrutiny from regulators and legislators.
“To the extent PE-backed solutions cherry-pick the system’s low-hanging fruit at the expense of patient safety and affordability sans any regulatory restriction, they’ll breed public discontent from those they choose to ignore,” Keckley said.
It would, therefore, behoove such private equity groups to operate their businesses in a socially responsible way. “Some do it better than others,” he said.
Lots of dry powder, where to invest?
Private equity has $2.49 trillion ready to invest, S&P Global Market Intelligence Global reported in July 2023. About 26% of its dry powder is more than four years old, waiting to be deployed, Keckley estimates.
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There appears to be little doubt that advances in technology, particularly through AI solutions, will continue to be of interest to private equity groups, furthering their lock on involvement in the healthcare sector.
“AI aims to advance healthcare systems, making operations more efficient and enhancing patient outcomes,” Dr. Michael Everest, founder of Residents Medical, a Los Angeles-based organization designed to help medical students find residency programs, said. “The likelihood of high returns on investments with technology like AI is the reason so many private equity firms are choosing healthcare.”
