Private Equity in Healthcare: A Comprehensive Guide

Private equity in healthcare refers to financial firms strategically acquiring stakes in healthcare companies. This encompasses a range of providers throughout the sector, from clinical practices to device manufacturers. As a result, private equity acquisition affects more than the potential for returns.

This article seeks to provide insights into how private equity (PE) impacts investors, providers, patients, regulations, and wider market behavior. Rather than focus on single countries or regions, it offers a global overview. Importantly, we’ve taken an analytical and informative approach, ensuring that entrepreneurs and stakeholders evaluating healthcare investment opportunities can make well-informed decisions.

Understanding Private Equity in Healthcare

PE involves investment firms acquiring whole or significant stakes in healthcare organizations. Some of these may be general partner vs limited partner situations, others may be established corporations. The firm will then make operational, leadership, or structural adjustments over a period of years to enhance the value of the portfolio company before exiting the investment. Typically, these transactions will go through stages of due diligence, deal structuring, acquisition, and operational integration, with each strategically aligned with the PE firm’s goals. There are certain types of healthcare business firms commonly seek to acquire, including hospitals, outpatient clinics, specialty practices, and device manufacturers.

Motivations for Private Equity Firms Investing in Healthcare

The healthcare industry is an attractive proposition for private equity firms, as the essential nature of health services combined with certain demographic trends—such as aging populations—can result in relatively predictable cash flows. Specific sectors within healthcare have also been seeing increased activity, including dermatology, home care, and fertility. These can make good individual PE prospects or roll-ups. Financially speaking, healthcare acquisitions offer distinct incentives by being less susceptible to economic cycles, alongside generating good return-on-investment from operational improvements.

Common Private Equity Strategies in the Sector

The primary PE strategies in healthcare are:

• Buy-and-build models – This involves acquiring smaller practices and consolidating them. For instance, a firm might acquire a range of device manufacturers, benefitting from economies of scale, such as shared supply chains.
• Operational improvement – Firms will make adjustments to an acquisition to cut costs and increase efficiency. For example, updating an acquired clinic’s technology to reduce administration and human error.
• Exit strategies – Firms exit healthcare acquisitions through IPOs, resales to other firms, or recapitalization. For instance, if the firm has boosted an acquisition’s brand sufficiently during the holding period, an IPO may help maximize returns.

Impact on Healthcare Providers

PE strategies can have a significant impact on acquired healthcare providers. Clinicians can find they have less autonomy as PE firms’ objectives influence decision-making and physicians’ roles can change from ownership to employment, affecting their income and independence. Operational optimization can also involve staff changes and workflow adjustments, with more pressure on stakeholders to increase profitability. There may be a loss of control, too, as firms align acquired companies with funds’ cultural values. This can be especially evident in specialties like ophthalmology and emergency medicine, where greater resource availability may be tempered by pressure to meet financial targets. 

Impact on Patient Outcomes and Experience

Alongside effects on providers, there have been some concerns raised by healthcare professionals and academics on the impact private equity acquisitions have on patients. These tend to revolve around the possible trade-offs between cost-efficiency and the quality of care delivered. Certainly, some PE-acquired organizations can implement technological improvements and care coordination that enhance the overall patient experience. At the same time, there are risks that efficiency measures that minimize time providers spend with patients could affect patient outcomes, while supply chain exclusivity to boost economies of scale might compromise patient access to more diverse treatment options.

Legal and Regulatory Landscape

While legal and regulatory frameworks surrounding PE in healthcare vary by jurisdiction, there is increasing scrutiny in most locations. These range from state-level efforts in the U.S. to monitor these types of investments, to registration limitations such as those in Germany that require shareholders in certain medical treatment facilities to be care service providers themselves. This reflects growing public concern regarding financial influence on healthcare. Additionally, scrutiny into potential antitrust issues and greater disclosure obligations are emerging, with the Federal Trade Commission (FTC) in the U.S. and similar bodies worldwide increasing investigations into healthcare acquisitions.

Risks and Criticisms of Private Equity in Healthcare

The key concerns about private equity in healthcare focus on the potential for short-term profit motives to negatively impact access to and quality of care. Surprise billing and prioritization of high-margin services have also been cited in criticisms. This is compounded by academic analyses, such as those produced by Harvard Medical School surrounding elevated rates of infections and post-procedural complications in PE-backed facilities. Beyond this, the prioritization of profits and raising value over patient care can lead to ethical and reputational risks for PE firms, acquired entities, and individual physicians.

Global Trends and Regional Considerations

PE in healthcare varies considerably in different global markets. It’s most prevalent in North America, largely due to market size, regulatory environment, and investor engagement. Indeed, growth in North America continues to rise. In Europe and Asia, the regulatory landscape is more fragmented and faces greater levels of public scrutiny, which can slow deal flow. While growth in Europe is steady, it is currently declining in Asia. In many ways, the complexity of regulatory landscapes shapes the attractiveness of healthcare sectors, with stricter requirements potentially extending timelines, which delays returns.

Case Examples and Transaction Models

To understand typical private equity healthcare transactions, it can be helpful to consider a generic example. For instance, a PE firm might acquire a chain of outpatient specialty clinics via a leveraged buyout. From here, it implements upgrades in technology and standardizes management, boosting operational efficiency. Across a period of years, the profitability and brand reputation grow, meeting predetermined success metrics. The firm then proceeds to exit via an IPO, dividing returns among investors.

Due Diligence and Risk Assessment for Investors

Before engaging in healthcare deals, prospective investors should perform thorough due diligence into a range of legal, financial, and operational aspects of target acquisitions—from compliance with industry regulations to clinical governance structures. These evaluations can highlight potential red flags, such as outstanding legal disputes, inaccurate or inconsistent financial statements, and poor performance metrics, among others. Engaging third-party consultants, like legal counsel, compliance experts, and financial auditors provides important objectivity and expertise to evaluations.

Role of Private Equity Attorneys

Legal advisors play a vital role in healthcare sector PE transactions, guiding firms and acquisitions alike through regulatory compliance matters, deal structuring, and contract negotiations, among other matters. Private equity attorneys are particularly important in cross-border healthcare acquisitions, as healthcare laws, licensing requirements, data privacy rules, and structuring regulations vary between jurisdictions. They not only streamline processes but also safeguard parties from unnecessary risks.

Future Outlook for Private Equity in Healthcare

Looking to the future, PE in healthcare is expected to evolve alongside continued regulatory and policy changes across international jurisdictions, with firms developing strategies to comply with frameworks and leverage fresh market opportunities. Investors are also likely to engage with projected trends, particularly related to emerging technology—such as telehealth and AI diagnostics—and specialisms in rising demand, like behavioral health. While these opportunities can be cause for optimism, this should be tempered with a certain amount of caution, particularly as stricter regulation and tighter scrutiny may impose constraints on some potential deals.

FAQs

What is private equity in healthcare?

Private equity in healthcare involves investment firms acquiring ownership or control of healthcare-related businesses to gain financial returns.

Why are private equity firms investing in healthcare?

The sector’s resilience, aging populations, and potential for operational improvements are attractive to investors.

Does private equity ownership affect patient care?

Studies suggest it can influence positive efficiency changes alongside concerns related to reduced care quality or increased costs.

Are private equity investments in healthcare regulated?

Yes, but the degree of regulation varies widely by jurisdiction, with oversight increasing in many regions.

What types of healthcare businesses are typically acquired by private equity firms?

These include multi-specialty medical practices, surgical centers, behavioral health clinics, and diagnostic laboratories.

References

FTC. (2024, March 5). Federal Trade Commission, the Department of Justice and the Department of Health and Human Services Launch Cross-Government Inquiry on Impact of Corporate Greed in Health Care. Federal Trade Commission News. https://www.ftc.gov/news-events/news/press-releases/2024/03/federal-trade-commission-department-justice-department-health-human-services-launch-cross-government#:~:text=The%20Federal%20Trade%20Commission%2C%20the,Scott-Rodino%20Antitrust%20Improvements%20Act.

Miller, J. (2023, December 26). What Happens When Private Equity Takes Over a Hospital. Harvard Business News. https://hms.harvard.edu/news/what-happens-when-private-equity-takes-over-hospital

Farr, E. (2024, November 19). Healthcare executives expect more IPOs and corporate dealmaking in 2025. Reuters. https://www.reuters.com/business/healthcare-pharmaceuticals/healthcare-executives-expect-more-ipos-corporate-dealmaking-2025-2024-11-19/