Paul Keckley, the mind behind the esteemed healthcare-centric The Keckley Report, recently posed a question in his weekly column: Is private equity a cure or a curse for healthcare?
It’s likely a mix of both. However, one certainty remains: private equity is set to be a persistent force in U.S. healthcare and may become more pervasive as investors turn to cutting-edge technologies such as artificial intelligence to meet patient needs while enhancing returns.
First, let’s examine some drawbacks of private equity in the healthcare sector.
Private equity outfits often carry a reputation for compromising care quality and patient safety while driving up costs. Peer-reviewed and industry-sponsored studies alike have consistently shown such negative outcomes.
“This issue has sparked debate and tension over whether these entities pressure medical clinics to cut costs and deliver minimal care,” said Dr. Ronald Razmi, former cardiologist and co-founder of Zoi Capital, which invests in AI healthcare solutions.
Referencing the Journal of American Medicine, Razmi noted, “[A] study published in JAMA in December 2023 suggests that the quality of care deteriorates after a hospital is acquired by a PE firm, likely due to cost-cutting pressures.”
In Pennsylvania, for instance, lawmakers have proposed legislation to ban private equity and other for-profit entities from purchasing hospitals to combat the rise of healthcare deserts in the state.
This initiative followed the closure of two facilities by private equity-owned Crozer Health in Pennsylvania, which legislators described as creating a “maternal care desert.”
Increased Regulation on the Horizon
One potential remedy for bad behavior in the private equity sector may be stricter regulation.
Although private equity firms might not welcome increased scrutiny, it is likely on the rise as the federal government ramps up oversight of the healthcare industry overall and as private equity’s influence grows.
For example, the Federal Trade Commission recently lost a case when a federal judge in Texas dismissed a landmark antitrust suit against private equity group Welsh Carson Anderson & Stowe.
In that case, WCAS was accused of stifling competition and raising prices for anesthesiology services in Texas through its U.S. Anesthesia Partners platform, in which it holds a 23% stake.
The private equity sector may collectively exhale after this favorable ruling, but it doesn’t mean scrutiny will disappear, especially if poor practices are noted by both regulators and lawmakers.
“Regulators and elected officials will vilify bad actors,” Keckley stated concerning general partners who make investment decisions. “Media scrutiny of specific PE funds and their general partners will intensify as PE public reporting regulations begin.”
Public Awareness and Concern
According to Keckley, patients generally remain unaware or choose not to concern themselves with who operates their local healthcare facilities. Their primary focus is on the affordability of care.
However, if cost-cutting compromises patient safety, private equity groups could face mounting dissatisfaction from the public alongside increasing scrutiny from regulators and lawmakers.
“If PE-backed solutions prioritize easy gains at the cost of patient safety and affordability without regulatory oversight, they will incur public discontent from those they neglect,” Keckley said.
Thus, it benefits private equity groups to run their businesses responsibly. “Some manage this better than others,” he added.
Ample Funds, Strategic Investments
Private equity has $2.49 trillion ready for investment, according to S&P Global Market Intelligence as of July 2023. About 26% of these funds have been unutilized for over four years, awaiting deployment, Keckley estimates.
There’s little doubt that advances in technology, particularly AI, will continue to attract private equity interest, strengthening their foothold in the healthcare sector.
“AI aims to improve healthcare systems, making operations more efficient and enhancing patient outcomes,” said Dr. Michael Everest, founder of Residents Medical, a Los Angeles-based organization dedicated to helping medical students secure residency placements. “The high potential returns on investments in AI technology are why so many private equity firms are drawn to healthcare.”
