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Market-Based Solutions to Vital Economic Issues
Kenan Insight
Feb 10, 2022

Private Equity in Healthcare: What the Experts Want You to Know

During the last decade, private equity (PE) investment in healthcare has grown significantly. With the onset of the COVID-19 pandemic, PE deals in healthcare remained strong – especially in fields most critical to the pandemic response, such as telehealth and healthcare IT. Proponents of PE in healthcare tout its ability to fund innovation and streamline costs, while vocal opponents worry that the quality of care goes down when PE firms get involved in the industry. In this Kenan Insight, we ask two experts to weigh in on private equity in healthcare.

In which sectors have you seen the most activity for PE in healthcare? How has that changed amid the pandemic, if at all?

Mark Zitter: For context, with $100 billion of annual PE healthcare investment, it may be easier to identify sectors where PE is not active. Also, the investment range is so broad that any individual likely only sees part of it.

US Healthcare PE Deal Count by Category

Personally, I’ve experienced a great deal of activity in data services — particularly pharmaceutical data — as well as revenue cycle management, clinical trials support and a variety of novel insurance products and services. There is also action in new primary care-based provider models and medical services delivered in the home. Due to the pandemic, telehealth has been active, both in stand-alone companies and in services that supplement efforts of provider and payer organizations. Recently I’ve seen more companies and investment theses related to specific major trends. These include expectations of continued growth in value-based care and reimbursement, the need to make prescription drugs more affordable for the consumer, price transparency of healthcare services, and the need and demand for mental healthcare. Regardless of the issue addressed, there is an ongoing emphasis on increasing the use of technology to deliver services, analyze data and streamline operations.

Frances Nahas: My experience with PE in healthcare is limited to healthcare IT, so I don’t have much visibility to other parts of the healthcare Industry, but PE has been very active in the healthcare IT space.

How can private capital from PE firms improve healthcare?

Frances Nahas: Ultimately, the opportunities to improve healthcare in the U.S. are tremendous and there are a number of ways private capital can help us do that. I worked in a company that brought visibility and analytical tools to the hospital and pharmacy supply chain. Supply chain management capabilities, while considered basic in many other industries, were lacking in this part of the healthcare market because the existing tools couldn’t manage pharmacy-specific things, such as unit dose drugs or partially-used vials. By building a solution that gave health systems these capabilities for their pharmacies, our customers were ultimately able to decrease their drug costs and improve access to critical drugs – and we were able to do this because of private equity growth capital.

Mark Zitter: The obvious answer is that private capital can fuel the growth of companies that are improving healthcare, and innovative provider and payer models that add value are scaling faster due to this funding. PE capital often is crucial in enabling small firms with big ideas to reach scale, which not only helps those firms and their customers, but sometimes creates a new market.

It’s important to note that PE firms offer much more than just capital. These firms help their portfolio companies grow not only with funding but through business advice, hiring, contacts, diagnostics, systems development, interim executives and more. Of particular importance is assistance with mergers and acquisitions, which often is a key part of a company’s growth strategy. The typical entrepreneur has never acquired a company and is likely to flub it the first time, whereas most PE firms are highly experienced with mergers and succeed with the majority of them.

When you think about PE firms and healthcare, do you believe incentives are aligned (e.g., Medicare Advantage-focused firms growth) or misaligned (e.g., surprise billing)? Why?

Mark Zitter: For better and for worse, healthcare in the U.S. is partially funded, managed and delivered by private companies. Incentives for these companies – whether PE-funded, public or independent – are not well aligned with public needs. Sometimes, and in some ways, they benefit the public and other times they are harmful; often, they are neutral. Private equity firms amplify both the benefits and detriments to the public by providing capital and expertise that accelerate growth and impact. I want to point out, however, that the differences in practices and outcomes between for-profit and nonprofit healthcare companies are minor when taking PE firms out of the picture. Misaligned incentives are a structural aspect of the healthcare system that go well beyond PE activities.

PE firms are particularly good at figuring out ways to make money, and many have rightly been criticized for doing so at the expense of patients, payers and providers. However, PE firms also have expanded services that provide new benefits or existing ones more efficiently.

Frances Nahas: The companies that PE firms invest in are part of a value chain. The PE firm will generate value if the company generates value, and the company will generate value if it delivers value to its customers. So, PE firms are aligned to the end customers – which may be providers, insurance companies, manufacturers, patients or others – of the companies they invest in. Each have their own set of incentives, but those incentives are often not aligned with each other. If we believe PE investment is generating undesirable outcomes or exacerbating issues within the industry, I would posit that those misaligned incentives already existed within the industry for these companies. Ultimately, it is more important to look at the incentives that exist within the industry itself rather than the type of company ownership. We need to reinforce those that deliver the outcomes we want and shift those that deliver undesirable outcome.

Do you see a need for different regulations when it comes to PE and healthcare?

Frances Nahas: I don’t see a need for regulations that target one type of company ownership in the industry over any other. Whether a for-profit company is publicly traded or owned by a family, founder or private equity, there is an incentive to drive value for the shareholders. I would look at the structure, incentives and regulations in the healthcare system itself first.

Let’s take your example of surprise billing above. I’ve experienced surprise billing and studied this as someone who works in the industry. There is not one but many factors that contribute to this happening, including technology and knowledge barriers that make it hard for providers and insurers to make information transparent to patients. Private equity can provide capital for innovative solutions to address these issues.

Mark Zitter: I can envision plenty of regulation that could be helpful, but it wouldn’t specifically target PE firms. As I mentioned above, PE firms operate under the same incentives as other private and not-for-profit organizations, which mostly exacerbate existing problems rather than cause or introduce them. It would also be hard to craft regulation that targets PE excesses while allowing for its benefits. Consider a PE firm that invests in an insurer which then cuts staff, reduces payments to providers, slims benefits, narrows networks and lowers prices. There’s a lot in there to criticize and many constituents would howl, but in a market clamoring for lower prices, others would applaud. We can imagine many other types of examples, but I’d argue that we’re only identifying features of – and often flaws in – our partly investor-owned healthcare system. And because the problem is the system more so than the PE firm, regulation is more likely to succeed if it targets the former than the latter.

What is one thing you wish a layperson knew about PE in healthcare?

Frances Nahas: People often have a negative image of private equity because it’s not as accessible to the average investor in the way the public stock market is. PE investors include institutional investors, such as pension funds, university endowments, foundations and insurance companies. When PE companies create value, these investors and their beneficiaries – who may be teachers, firefighters, students, seniors, charitable organizations, etc. – also benefit. Additionally, a large portion of private equity is growth equity, meaning investors are looking to rapidly deploy capital to drive innovation into a market. I think this reality sometimes gets lost in the public perception of PE.

Mark Zitter: Private equity activity mainly amplifies the best and worst aspects of U.S. healthcare. Many people rail against profit in healthcare, but profit seeking is not the main problem; it’s revenue seeking, which happens just about as much with not-for-profit as with for-profit healthcare organizations.

If Americans want a market-oriented healthcare system – and there’s no serious political traction around the alternative –  they should push for regulation to make the markets work more effectively and efficiently. Such regulations should protect patients rather than incumbent organizations, whether for-profit or not. Curtailing PE involvement in healthcare might reduce some of the excesses we see but would barely dent the main problems our system faces: runaway costs, incomplete coverage, inconsistent quality and poor access for those most in need.

To learn more about PE in healthcare and the impact on patients, be sure to check out the Center of Business of Health’s session on the topic during their UNC Business of Healthcare Conference 2021.

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