Private equity’s investment in healthcare has increased rapidly over the past decade, and this is now drawing attention from regulators. Signifying this increased scrutiny is a joint Request for Information (RFI) issued in March by the Department of Justice’s (DOJ) Antitrust Division, Federal Trade Commission (FTC), and Department of Health and Human Services (HHS) seeking comments from the public on “private-equity and other corporations’ increasing control over health care”. (Access the RFI here.) While the RFI has made headlines, it is part of a broader regulatory effort to evaluate private equity’s role as a major player in healthcare. This post summarizes some of those efforts and the concerns among regulators over private equity investment in healthcare that regulators are seeking to address.

Private Equity Investment

Private equity’s investment in healthcare has increased drastically over the last decade. While exact numbers aren’t available, reliable estimates point to a one hundred and eighty-nine percent (189%) increase in annual private equity deal value in the healthcare industry from 2010 to 2019,[1] with the number of reported deals increasing from 352 in 2010 to 937 in 2020.[2] These investments in the industry are wide ranging and include everything from hospitals and physician practices to specialty facilities and managed care plans.[3] This investment, driven in part by the increasingly complex regulatory environment for healthcare delivery and reimbursement, has engendered speculation and studies on the effect private equity has on the pricing and quality of healthcare services. A concern among regulators is that private equity is making healthcare more expensive and less effective, and this concern is the driving force behind the actions described below.

The DOJ, FTC, and HHS RFI

On March 5, 2024, the DOJ’s Antitrust Division, FTC, and HHS jointly released an RFI seeking “public comment regarding the effects of transactions involving health care providers…and facilities, conducted by private equity funds or other alternative asset managers.”[4] The RFI states that the agencies are “concerned that some transactions may generate profits for [private equity firms] at the expense of patients’ health, workers’ safety, quality of care, and affordable health care for patients and taxpayers.” 

The RFI specifically seeks feedback on the following: (1) transactions that do not meet the Hart-Scott-Rodino threshold for antitrust review; (2) the effects of consolidation within the healthcare industry; (3) the claimed business objectives for transactions; (4) what types of transactions are most associated with adverse outcomes; and (5) what actions the agencies should consider taking.

In conjunction with the release of the RFI the FTC hosted a virtual workshop to examine the role of private equity investment in health care markets.[5] The workshop highlighted some practices that regulators are focusing on and what actions they may take to address them. Among the identified practices and concerns are the following:

• “Flip and Strip” Transactions: Private equity acquisitions using large amounts of debt, with the goal of increasing profits quickly and reselling for a gain a few years later.
• “Roll-Up” Transactions: The use of a series of smaller transactions to avoid antitrust review while consolidating market share. This practice was specifically addressed in new merger guidelines released by the FTC at the end of 2023, which direct agencies to consider the cumulative effect of a series of acquisitions.[6]
• Common Ownership and Interlocking Directorates: Purchases of ownership stakes in competitors within the same industry or having directors serve simultaneously on the boards of competing entities.
• Profit Extracting Practices: Enacting cost cutting measures to increase profits. Decreasing staffing levels was highlighted numerous times during the workshop as a special cause for concern.
• Corporate Practice of Medicine: A concern that medical professionals feel beholden to private equity owners and are being pressured away from making decisions based solely on their medical judgement.
• Ownership Transparency: HHS is working to ensure that regulators have a full view into the ownership structures of healthcare entities.
• Reimbursement Standards: HHS may take action to ensure government reimbursement of healthcare goods and services is tied to quality standards.

State Oversight of Healthcare Transactions

In addition to potential federal actions, an increasing number of states have passed laws proving greater oversight of healthcare transactions. In general, these state laws require prior notice of transactions involving healthcare entities and give the state’s attorney general office either an explicit approval right over the transaction or authority to review the proposed transaction prior to closing.[7] Additionally, these laws typically require the disclosure of upstream and indirect owners of the parties to the transaction.

As of April 1, 2024, California, Connecticut, Illinois, Indiana, Massachusetts, Minnesota, Nevada, New York, Oregon, Rhode Island, and Washington have enacted versions of these laws. While state regulatory responses have thus far primarily gained traction among states controlled by Democrats, a growing bipartisan concern regarding private equity in healthcare could see similar laws enacted in more states in the coming years.[8]

NAIC

At the 2024 Spring National Meeting of the National Association of Commissioners (NAIC), the Health Innovations Working Group heard presentations about the role of private equity in health care.[9] The presenters highlighted many of the same concerns raised at the FTC workshop, but also acknowledged that complex insurance rules have led some providers to sell to private equity firms.

Presenters suggested that state insurance regulators should take action to support antitrust enforcement, ensure greater transparency within the healthcare industry, specifically around ownership and prices, and provide greater support to healthcare providers looking to participate in value-based care initiatives. The NAIC took no concrete actions regarding the issue at their Spring National Meeting but may take some actions moving forward.

Conclusion

Private equity’s role in healthcare is likely to continue to be subject to increasing scrutiny and further regulatory action. Consequently, private equity firms and their affiliated healthcare organizations should be prepared to respond to new regulatory requirements. 

[1] Richard Scheffler, Laura Alexander, James Godwin. “Soaring Private Equity Investment in the Healthcare Sector: Consolidation Accelerated, Competition Undermined, and Patients at Risk” American Antitrust Institute. May 18, 2021.

[2] Id. The numbers only reflect deals that were reported. The actual numbers are likely greater.

[3] Maanasa Kona “Private Equity in Health Care Trends & Impact” Georgetown University, Center on Health Insurance Reforms March 17, 2024.

[4] https://content.govdelivery.com/attachments/USDOJOPA/2024/03/05/file_attachments/2803589/DOJ-FTC-HHS%20HCC%20RFI%20-%2003.04.24%20-%20FINAL.pdf

[5] “Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care” March 5, 2024. https://www.ftc.gov/news-events/news/press-releases/2024/02/ftc-host-virtual-workshop-private-equity-health-care

[6] Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission. December 18, 2023. https://www.ftc.gov/system/files/ftc_gov/pdf/P234000-NEW-MERGER-GUIDELINES.pdf

[7] See, Cal. Health & Saf. Code § 127500; Conn. Gen. Stat. § 19a-486i; 740 Ill. Comp. Stat. 10/7.2a; IC §§ 25-1-8.5-1 – 25-1-8.5-5; Mass. Gen. Laws Ch. 6D § 13; Minn. Stat. § 145D.02; R.I. Gen. Laws § 23-17.14; Wash. Rev. Code § 19.390.

[8] “Senator Markey Leads Colleagues in Bipartisan Investigation into the Role of Private Equity in Restricting Access to Methadone Treatment for Opiod Use Disorder.” Accessed at: https://www.markey.senate.gov/news/press-releases/senator-markey-leads-colleagues-in-bipartisan-investigation-into-the-role-of-private-equity-in-restricting-access-to-methadone-treatment-for-opioid-use-disorder

[9] Minutes of Health Innovations (B) Working Group March 17, 2024 Meeting. Accessed at: https://content.naic.org/sites/default/files/national_meeting/HInn%20Min%203.17.pdf