Novel treatments and expansion of rural facilities are among the benefits of investment, private equity experts say
By Nate Birt
Public critiques of private equity engagement in U.S. health care overlook fundamental social and financial benefits of these investments, according to industry experts. Private equity invested $206 billion across American health care in 2021 alone and has unlocked lifesaving treatments, such as mRNA vaccines to treat COVID-19, in addition to doors to capital that would otherwise be closed.
“An area we see a lot of investment in is life sciences,” says Jamal Hagler, vice president of research at the Washington, D.C.-based American Investment Council. The council is the leading research and advocacy group for the private equity and private credit industries. “That is very capital-intensive. Risk capital needs to be used in order to develop these technologies.”
He points to Moderna, a company that spent years leveraging private equity funding to develop what became the mRNA technology behind its coronavirus vaccine.
Private equity health care data compiled by the Investment Council and PitchBook tell a compelling story. Over the past decade, private equity has invested $280 billion in more than 1,800 life sciences and medical devices businesses. More than 250 deals in 2020 infused private equity resources into outpatient clinics such as urgent care centers.
“Private equity means fuel for innovation to us,” adds Shar Martin, CEO of cardiovascular device-maker Cordis, in a video interview distributed by the Investment Council. Private equity firm Hellman & Friedman has helped fund the health care company. “It allows us to build new products on a time horizon that we would not have if we were a public company today.”
Policymakers and the general public sometimes paint private equity with a broad and less-than-favorable brush. The reality is quite the contrary, the Investment Council’s Hagler says.
“Look at the increased access that has come from the capital coming in and private equity firms being willing to expand facilities in areas that are traditionally underserved,” Hagler points out. For example, a few years ago, private equity financing made it possible to expand the number of urgent care facilities available to rural communities in Appalachia.
Publicly available data illustrate these benefits. In a new study analyzing trends at 578 private equity-acquired medical practices specializing in dermatology, gastroenterology and ophthalmology, researchers found “spending, new and unique patient volume, and total encounters increased differentially compared with controls.” The research appears in the Sept. 2, 2022, edition of JAMA Health Forum.
The drivers behind spending increases and patient volume are unclear, the researchers note. Factors behind heightened spending could include more intensive billing or higher negotiated service prices after a private equity acquisition. Increased marketing and expanded clinic hours could help explain higher patient volumes.
The future looks bright for private equity investment in health care, Hagler says. It “can help us all live longer, or fight whatever’s coming in the future with mRNA vaccines or other sorts of innovative therapies,” he says. “One of our members a few years ago helped to develop a peanut allergy remedy. Things like that are always going to be developed, and I think private equity’s going to play an essential role in that.”
Three key benefits of private equity investment in medical practices — technological advancement, expansion of facilities and economies of scale — stand out to Michael Kroin, a founder and managing partner at Chicago-based Physician Growth Partners. The company represents physicians seeking private equity investment and helps them navigate the landscape, get the best valuation and find financial partners that are the best cultural fit and the best positioned to help doctors achieve their goals and succession plans. The company has closed more than 35 deals since its inception in 2018.
“At the end of the day, they’re basically partnering with an organization for the rest of their career,” Kroin explains. That means keen strategic thinking and an eye toward maintaining excellent patient care — delivered in a way that preserves doctors’ voices, decision making and patient scheduling — is essential. The Physician Growth Partners model enables physicians to achieve those objectives through a combination of strategic consulting and competition among private equity firms vying to work with physician groups seeking funding.
Technology upgrades are a top benefit of the best private equity-physician partnerships because they can improve patient outcomes, Kroin says. Often, doctors approaching the end of their career aren’t willing to invest $500,000 in new lasers or other equipment. Unlocking capital with private equity can provide enhanced service and continuity of operations for future physicians.
Another benefit, expansion of facilities, has come into play for Kroin’s firm as they support a group in Texas focused on bringing medical specialists into historically underserved rural markets.
“They’re seeking a private equity investment to say, ‘We’ve figured out a model to provide access to specialists where, historically, you’d have to drive 100 miles to get to a hospital. … Now, we just need capital to accelerate,’” Kroin explains.
The third benefit, economies of scale, comes about with the kinds of administrative and procurement support at which the best private equity firms excel. For example, back-end support can help doctors bill and secure for services provided, and it can also help secure the lowest-cost supplies while maintaining positive patient outcomes, Kroin says.
Taken together, these private equity benefits can provide modern medical practices and independent doctors with leverage to negotiate with hospitals and insurance payers, both of which have historically held the bargaining power. What’s more, doctors can maintain their focus on running and growing a successful practice to remain competitive in an increasingly complex marketplace.
“There are a lot of these groups that structure contracts with autonomy to the provider to make the decisions,” Kroin says of private equity. “They are there to support and empower.”
