The Gold Rush: Private Equity Brings Capital, Seeks Profit, in Health Care

P​rivate equity investment in health care has more than tripled over the past decade, and despite a shift to value-based care and uncertainty over the 2020 elections, interest isn’t abating. “Private equity sees lots of opportunity in health care,” says Ben Isgur, the leader of PwC’s Health Research Institute. “There are still a lot of physician practices that are small and fragmented, and investment is needed” for such things as front office operations and marketing.

In 2009, there were 229 deals in health care involving private equity buyers or sellers. In 2017, there were 672 such deals, and for this year, the number is projected to jump to 747, according to PwC.

Private equity investors are expected to make 747 deals this year that involve health care entities.

Pitchfork, the financial data firm, reports that the value of the private equity deals totaled more than $100 billion in 2018. The largest deal last year was KKR’s $9.9 billion acquisition of Envision Healthcare, a physician staffing company that supplies doctors for emergency department and runs outpatient surgery centers.

Two other major deals in 2018 involved Humana, which joined with private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe to acquire Kindred Healthcare and Curo Health Services. Humana acquired a 40% stake in a part of Kindred called Kindred at Home, which sells home health, hospice, and community care. It also acquired 40% of Curo, a hospice operator. The two deals together had a total value of $5.5 billion.

Some payers and providers “are looking for an opportunity to expand their footprint with someone who will bring in some capital,” Isgur says. “It’s a marriage of convenience.”

Amber McGraw Walsh, chair of the health care department at the law firm McGuireWoods, headquartered in Richmond, Va., says interest in the health care sector remains strong among private equity investors of all sizes. They are investing in a variety of physician practices, including primary care, women’s health, urology, and ophthalmology. But Walsh sees possible pressure on profits because of increases in labor costs and technology investment and some downward pressure on conventional fee-for-service revenues. “The most astute [firms] think about value-based purchasing and how to transform companies so the focus is on reducing costs and still being profitable,” she says.

But the marriage between physicians and health care is hardly trouble free and not without critics. Many see the trend as contrary to health care’s social purpose and injecting too much profit motive into the sector. One example they point to is Hahnemann University Hospital in Philadelphia, which served the city’s low-income residents for more than 150 years before closing its doors this summer, a year after being acquired by Paladin Healthcare, a private equity firm (see “Residencies for Sale” on page 9).

In a recent piece for the Harvard Business Review, Commonwealth Fund President David Blumenthal and two colleagues acknowledged that private equity can provide independent physicians an alternative to selling their practices to hospitals and provide capital for coping with administrative overhead. But they also noted that the investor strategy sometimes seems to be to increase revenues by “price gouging patients when they are most vulnerable.” Isgur says some physician groups are wary that private equity ownership will mean losing autonomy. As for potential investors, Isgur says they may not fully appreciate all the regulatory constraints in health care.

Meanwhile, a congressional investigation has cast a shadow on private equity’s surge into health care. In September, the House Energy and Commerce Committee launched an investigation into private equity firms and the “surprise billing” of patients who in an emergency or other circumstance get care from an out-of-network provider.

In announcing the investigation, the committee requested documents from KKR, Blackstone Group, and Welsh, Carson, Anderson & Stowe, and said the companies’ ownership of physician staffing and emergency transport companies are a major source of surprise billing. Blackstone owns TeamHealth, a physician staffing company, and KKR owns Global Medical Response, an air ambulance company, as well as Envision.

Next year’s presidential election could also put a damper on private equity investment in health care. The public option and Medicare-for-all plans proposed by Democrats could “throw some uncertainty into the merger and acquisition mix for health care services,” says Jeff Swearingen, co-founder and managing director of Edgemont Partners, a health care investment banking firm based in New York.

The fight with Congress has created the impression that “private equity-backed health care is resistant to important changes,” Walsh says. “Many private equity investors want to be in really good dialogue with payers. All have to have a seat at the table together.”