Over the last decade, private equity (PE) investment in healthcare has surged, impacting everything from small, private physician practices to major hospital systems. In fact, PE buyouts of physician practices increased by six times from 2012 to 2021. PE’s business model is designed for swift financial returns, with major profits only realized upon sale, which usually happens within five to eight years. This model has sparked debate over its seeming incompatibility with healthcare’s mission to prioritize patient welfare.
PE firms use funds from investors to acquire equity stakes in target companies, which they work with to make “more valuable” and later sell at a profit. The firms use substantial debt to finance their acquisitions. This debt is then placed on the balance sheet of the acquired entity. Next, they look for ways to cut costs rapidly in preparation for a profitable sale. This places pressure on PE firms to prioritize profit margins over long-term stability, even if this means the target entity struggles or goes bankrupt after the firm leaves. This model has substantial repercussions for patient safety and quality of care. A 2023 study published in JAMA by researchers from Harvard Medical School and the University of Chicago found a 25% increase in adverse events in PE-acquired hospitals as compared to non-acquired hospitals. These adverse events included situations such as staffing levels and inconsistent patient safety protocols.
Regulatory bodies at the state and federal levels have begun paying attention and are addressing the issue. A rising number of states have enacted or proposed “mini-HSR” laws—modeled after the federal Hart-Scott-Rodino Act, focusing on any transactions that could lead to the consolidation of healthcare markets. As of today, only Indiana has enacted a law that expressly mentions PE transactions in healthcare. Under Indiana’s mini-HSR Act, effective on July 1, 2024, a transaction involving a PE partnership and a healthcare entity is likely to undergo regulatory review. In comparison, Washington’s mini-HSR Act may require a hospital system owned by a PE firm to ascertain the healthcare assets of other portfolio companies of the same firm. States like California and Massachusetts have proposed similar laws. California’s much-watched Assembly Bill 3129 (AB 3129), would have required a 90-day notice to the Attorney General before concluding any transactions involving PE and healthcare facilities. However, on September 30, 2024, Governor Newsome vetoed this bill, due to its overlap with the Office of Health Care Affordability (OHCA) which already oversees healthcare transactions and can collaborate with the Attorney General if needed. This veto signals a significant win for PE and healthcare stakeholders.
The federal government has also turned its attention to PE’s role in healthcare. The Health Over Wealth Act, introduced by Senator Ed Markey (D-MA) and Representative Pramila Jayapal (D-WA), aims to increase transparency by requiring PE-owned healthcare providers and for-profit healthcare companies to publicly report financial and operational data, including their debt, profits, and any reduction in services or worker benefits as a result of the acquisition. These initiatives come on the coattails of The Corporate Crimes Against Health Care Act of 2024 put forth by Senators Ed Markey (D-MA) and Elizabeth Warren (D-MA). This Act seeks to advance new civil and criminal penalties for for-profit healthcare investors who are found responsible for initiating conditions that result in patient harm.
While PE firms argue they provide proficiency and innovation, studies indicate that these advantages may come at the expense of patient care and accessibility and critics have likened the spread of this detrimental model to a “metastasizing disease.” The question remains: how can we balance the need for investment in efficient healthcare delivery models while maintaining patient health and positive outcomes as a priority? The introduction of state and federal regulations signals a step toward addressing this question. However, with Republican control of both the House and Senate beginning in 2025, restrictive legislation aimed at PE firms may face some considerable setbacks. Nevertheless, the debate over PE in healthcare is far from over and the healthcare industry’s profound transformation under this model will be something to keep an eye on.