What is private equity in healthcare?

In recent years, private equity companies have boosted their involvement in healthcare. While they are focused on increasing profits, many people are concerned that this will have an adverse effect on patient care.

Companies that invest in privately held enterprises are known as private equity firms. While many companies invest in startups and small businesses, a rising number of companies are putting their money into the healthcare sector.

Since 2015, healthcare investments have more than quadrupled. As a result, private equity companies already hold around 25% of hospitals in the United States, and this number is expected to continue to rise.

The hazards and advantages of this are still being debated. The purpose of private equity companies investing in or purchasing hospitals, medical practices, or health systems is to simplify operations and increase profits.

Critics fear that this would compel health-care institutions to prioritize money over patients.

Learn more about private equity in healthcare, including how it works, who it impacts, and the benefits and disadvantages.

Important facts

private equity in healthcare

Over the last two decades, private equity companies have become more involved in the healthcare sector.

The following are some facts and figures:

  • There were 42 private equity acquisitions to buy hospitals or hospital systems between 2003 and 2017. There were 282 hospitals impacted in 36 states.
  • Investments in healthcare by private equity surged from $23.1 billion in 2015 to $78.9 billion in 2019.
  • According to projections, healthcare spending will grow at a rate of 5.5 percent each year through 2027.

What is healthcare private equity?

Private equity firms aggregate funds from a variety of sources. This enables them to amass vast quantities of money that they may invest.

They invest this money in businesses — or shares in firms — and then try to grow the value of those enterprises. The businesses are subsequently sold, and the proceeds are returned to the investors.

Private equity firms frequently purchase failing health systems or hospitals in the healthcare sector. They then attempt to boost earnings.

The following are some of the strategies employed by these businesses:

  • merging multiple healthcare practices
  • reducing staff
  • closing down portions of a hospital or healthcare practice’s operations
  • focusing on growing a specific aspect of a healthcare practice’s offerings
  • renegotiating reimbursement rates with insurers

Why it happens

To make money, private equity firms invest in health systems.

Health practices and providers must be willing to sell in order for this to happen. This can occur if:

  • a hospital or other health practice is struggling to make money
  • complying with regulations is difficult
  • a practice owner is retiring
  • a hospital offers an innovative service or product but needs financial support

What impact does it have on patients?

Private equity agreements have a wide range of repercussions on people. While there is no solid evidence that it improves or degrades treatment, many people are concerned that it may put money before of patients.

In some circumstances, a persistent desire to make money might degrade the quality of treatment.

According to a working paper published in 2021, nursing facilities managed by private equity firms had a 10% higher fatality rate among Medicare patients. It also revealed a decrease in time spent with residents, fewer employees, and inferior staff quality and training.

Despite the decreased quality of care, these nursing facilities were linked to a rise in Medicare costs supported by taxpayers.

Supporters of private equity in healthcare, on the other hand, claim that simplifying procedures and raising profitability might drive new technology investment. This might encourage more innovation, which could lead to better patient results.

Who does it affect most? 

Each private equity deal has a different target — and consequently, different impacts.

They can affect varied groups of people, including:

  • Patients: The impact of private equity on patients varies greatly. Costs can increase, and some people may have more difficulty accessing care.
  • Communities: Private equity investments can shift the balance of healthcare available in a community. For example, if a firm consolidates a health system, this may mean closing hospitals or medical practices.
  • Staff: Healthcare staff may find that their roles shift. Some may lose their jobs, while others may get promotions.
  • Practice and hospital owners: When private equity firms take over, business owners may retain ownership. Then, when the business sells, they could receive a portion of the profits.
  • Competitors: Private equity firms aim to make health systems more competitive. This may mean that other healthcare providers lose patients and revenue.
  • Investors: The goal of private equity investments is to generate profits for investors. In many cases, the annual return is 20–30%. But if the deal fails, investors can lose money.

The advantages and disadvantages

A private equity deal’s precise impact is determined by the company it buys, the changes it makes, and other factors.

The following are some of the possible advantages of private equity in healthcare:

  • profit for investors
  • better management
  • closely following hospital guidelines
  • better insurance reimbursement rates

Some potential drawbacks include:

  • a decline in patient care
  • cost increases for both taxpayers and patients
  • staffing shortages
  • the possibility for upcoding — when a person is recorded as being sicker than they are
  • job loss for some healthcare workers
  • possibly placing a strain on medical ethics

Conclusion

Private equity firms are increasingly engaging in healthcare in the United States. While advocates contend that it boosts innovation, others worry that it harms hospitals and lowers treatment quality.

Private equity businesses are prohibited from harming patients in order to make a profit under healthcare rules and legislation. This provides some protection, and in some situations, greater treatment might result in more revenue.