By Joel Kranc
Ambulatory Surgery Centers (ASCs) are changing the healthcare landscape for millions of Americans in order to provide same-day surgical care, diagnostic care and preventive procedures. The “convenience” of the hospital alternative has grown exponentially, especially during a time when medical procedures were postponed or halted during the peak of the pandemic.
The growth and popularity of these healthcare sites has also attracted the eye of private equity firms looking for revenue-generating businesses to grow. According the House Ways and Means Subcommittee on Oversight, private equity investments in healthcare grew 21% from 2019 to 2020, reaching $66 billion. In a Medicare Payment Advisory Committee report to Congress (quoting a Bain & Company statistic), investments in healthcare providers accounted for 60% of all healthcare-related buyout transactions in 2019, for a total of 96 deals, up from 84 in 2018.
At the Hearing on Examining Private Equity’s Expanded Role in the U.S. Health Care System in March 2021, in his opening remarks U.S. Rep. Bill Pascrell (D-NJ 9th District) said, “Private equity’s expansion into health care is troubling, because private equity’s main focus on profits is often at odds with what is best for patient care. Private equity’s business model involves buying companies, saddling them with mountains of debt, and then squeezing them like oranges for every dollar.”
But is that only part of the picture? Do private equity firms provide a benefit to patients and ASCs with their investments?
The counter argument
“ASCs are a great alternative to in-patients for cost-burden purposes,” notes Jason Madden, managing director at Accordion. “They relieve the [high] costs that might be placed on a hospital, it reduces average length of stay, and if you require a less extreme procedure, the ASC is the great alternative to manage the right care more cost effectively.”
He says the structure is designed so that business and medical decisions are made separately, as well as a physician council to govern and it “helps to have some rigour to have the business side offset the clinical side and strike a nice balance,” he adds. “It’s important to look at the economics of healthcare and not just the clinical side of it. It helps drive growth, and innovation, and quality of care. If you correlate quality of care with economic gain, then you start to see alignment. I don’t think the risks associated with becoming profit-oriented are dangerous to the field.”
Consolidation, one of PE’s strategies for revenue growth, allows those firms to lower costs and take advantage of scale. The MedPAC report says PE owners, in an effort to increase efficiency, for example, may consolidate back-office services, such as scheduling, coding and billing, as well as payroll. “An infusion of capital from PE investors may support investment in information technology to centralize quality measurement, reporting, and marketing at more favorable vendor pricing. PE capital may also allow practices to move to common electronic health records and potentially improve clinical workflow,” the report states.
Sean Hartzell, associate principal with ECG Management Consultants, says PE will often invest in and develop a platform for providing management services so that the ASC can be more effective and efficient on the back-end operations. “That’s the value proposition,” he explains, “making sure you have repeatable processes, policies, and procedures.
“I look at private equity investment not as a bad thing but potentially a good thing,” adds Hartzell, “for both the physicians and the ASCs because the ASC and its owners will receive professional management, as well as the ability to bring in some thoughts for other industries to help move and innovate healthcare.”
There are challenges of developing the corporate structure so that one overarching entity can negotiate rates for revenue, as well as supplies, for multiple ASCs to be able to negotiate on their behalf. Also, adds Hartzell, PE has the ability, given their investment horizons, to help focus ASCs on making sure they are growing and opening access more broadly. “One of the things that we’ve seen is ASCs have great outcomes, and have a different patient and physician experience – and so being able to increase access for those experiences are really important components for growth. PE investments help with those components by providing an added level of professionalism to the ASCs.”
Does PE in anyway harm the care provided by ASCs?
“Enhancing productivity doesn’t have to be at the expense of quality of care,” says Madden, “and good investors know that.” He adds that the business of healthcare does not mean a compromise on the quality of healthcare, as any business operator can make a bad decision, and it’s not because PE is involved that there is any undo harm being created in the ASC itself.
Hartzell adds that physicians often talk about getting more time and working with their patients. “To the extent that a PE firm can come in and add professional management, and take some of the administrative burdens off the physician owners, that’s a good thing. And the physicians don’t get pushed out of the ASC governance, they are just bringing people in that have a different experience to manage and help evolve the firm.”
The other side of the coin
Every story has two sides. Given that PE firms have limited investment horizons and a desire to maximize profit with an exit strategy in mind, there are other voices that feel quite differently. The MedPAC report says that concerns about the potentially harmful effects of PE investment include:
- PE-owned firms may put pressure to achieve high returns on investment at the expense of investing in quality and safety
- The focus on increasing procedures may lead to inappropriate services and reduced quality
- Care may be delivered by non-physician practitioners such as physician assistants without adequate supervision
Other concerns relate directly to PEs ability to make deals or investments that can often be unreported and unregulated. Heavy debt loads could lead to bankruptcy and affect access to patient care, and the potential for anticompetitiveness within the healthcare market.
The trends for investors may be changing, however. KPMG reported the total number of healthcare M&A transactions declined by 34% in the first quarter of 2022 compared to the last quarter of 2021. Private equity transactions fell by half and deals involving strategic buyers fell 13%.
The overall decline can be attributed to a rush to complete transactions in 2021, the desire to beat tax deadlines, high multiples, and rising interest rates and inflation. Still, strong demand, acquisitions and consolidation are driving the sector. PE investors will continue to seek out investments with high revenue potential. How it trickles down to the everyday consumer of healthcare services is yet to be fully realized.
