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Zombie Investments: The State of Private Equity in Healthcare
- Private equity (PE) firms are facing challenges in the healthcare services sector due to a confluence of factors including challenges recruiting and retaining physicians, reimbursement headwinds, accelerating labor costs and restrictive antitrust policies.
- Over the past decade, institutional capital poured into healthcare services and physician practice management companies.
- PE-backed physician platforms have found the variability in clinical practices and patient preferences across markets has limited the ability to achieve back-office efficiencies while accelerating labor costs and a challenging reimbursement environment have squeezed margins.
- Acquisition-driven growth strategies for PPMs have proven very risky, requiring high levels of leverage and added integration.
- As a result of several high-profile bankruptcies and a growing level of layoffs, clinic closures and service reductions caused by cash-strapped PE platforms, Lawmakers are increasingly wary of PE’s involvement in healthcare with its focus on profit maximization.
- Finding buyers has become increasingly difficult, leaving PE firms holding onto healthcare assets longer than intended.
- Amidst the turmoil, there are opportunities for innovation and collaboration.
- Opportunities exist within many sectors to “disaggregate” platforms, creating local or regional platforms that can operate more efficiently and responsively.
- By learning from the mistakes of the past and embracing a more sustainable approach, PE can still play a role in shaping the future of healthcare.
- PE firms will need to adapt their strategies by focusing on smaller deals, partnerships with payors and existing health systems, and reducing leverage.
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