Appetite Remains Strong for Private Equity Investment in Health Care

Despite headwinds, private equity (PE) continues to make strong inroads into health care. PE investment will remain a significant force for the foreseeable future, which represents both an opportunity and a challenge for health systems.

Although some see PE as an unwelcome intrusion that complicates physician alignment and service line growth, forward-thinking health systems are leveraging PE partnerships to build out ambulatory surgery centers (ASCs), expand behavioral health services and offer innovations that traditional providers often overlook or have trouble executing.

This year’s McGuireWoods Annual Healthcare Private Equity and Finance Conference centered on how the current macroeconomic environment has led to strategic changes for PE funds, from their approach to workforce and physician alignment, to where they focus on growth. The event drew over 1,000 professionals from PE and investment banking and C-level executives from health care systems.

PE firms pursue potential despite negative perceptions

The PE sector continues to battle negative perceptions tied to equity participation in health care. Situations such as the Steward Health debacle draw scrutiny from the FTC and Congress, and states increasingly show interest in regulating health care transactions and pricing. After the conference, and in response to the Steward Health issue, a Massachusetts senator introduced legislation that calls for civil fines and even jail time for provider executives that “loot” health care organizations and cause patient harm.

But as one conference participant summed it up: “The villainization of private equity in health care is an oversimplification of the issue.”

There are certainly pockets of investment that have created more access points as well as heightened the bar of care in specific markets and specialty areas. For example, a recent study reveals that PE ownership of fertility clinics increased both access and adherence to medical best practices.

Some tried and true strategies remain viable in the PE space, with surgery center profit pool sharing being the most discussed. Ongoing focus on specialties well on their way in terms of outpatient shift continues—namely orthopedics and gastroenterology.

The most noteworthy effort underway is pushing cardiovascular services to other sites of care. Although it is expected to take 15 to 20 years for PE to fully realize this trend, investors are steadfast that it can and will be done. In addition to CV, there is continued emphasis on infusion centers for cancer, gastroenterology and neurological conditions, as well as behavioral health treatment centers offering neuromodulation or ketamine treatments. That suggests any procedural space is a way for PE to exploit cracks in legacy provider offerings, particularly via newly minted facilities and profit-sharing options.

Interest rate challenges remain a hot topic

Persistently higher interest rates slowed PE dealmaking over most of 2023, carrying into 2024. Results of this pressure have shown up in various ways:

• Physician practice management platforms have moved from the traditional medical group roll-up strategy toward a more nuanced approach, combining smaller practices with additional denovo growth through new clinic or ASC builds and direct provider hiring.
• Organic growth is now the preferred norm, surpassing continued scale via acquisition.
• Cash position has become the most prevalent indicator of valuation and speed of dealmaking for medical practices being acquired. This has been compounded by the Change Healthcare cyberattack, which left many smaller, independent groups in a difficult cash position.

Ultimately, a bifurcation of opinion was on display among conference participants related to interest rate pressure—one view being that rates will not drop significantly for the foreseeable future, meaning it’s time to act on the multiples that can be achieved today. The other camp has investors holding out hope for lower rates and improved valuations. The general feeling from the conference is that a majority fall into the latter group.

In addition to cost of capital, participants noted workforce issues as the second most significant challenge, especially generational differences in the workforce. These challenges are playing out in real time between tenured and new physicians in PE-backed medical groups. As seasoned partners near retirement, they are awaiting higher valuations and PE exits to maximize their payouts, often at the expense of junior colleagues. Younger physicians increasingly indicate more interest in personal well-being, time off and other nonfinancial benefits. This divide, coupled with general physician shortages across specialties, results in more practices converting from MDs to advanced practitioner models. The introduction of Gen Zers into the workforce adds additional wrinkles, forcing PE operators to redefine their approach to physician and clinician alignment.

Health systems must closely examine PE options

Sg2 does not see private equity exiting health care. Despite some bad actors, many PE firms are making money in health care and pushing innovative solutions that improve outcomes. Health systems can view PE as a competitor, a partner or both. Either way, it is essential for health systems to maintain an open mind and closely examine all options when considering partnerships with PE firms.