In recent months, federal and state lawmakers have been increase their surveillance the role of private equity in health care consolidation and pricing. Policymakers are concerned about PE ownership structures that they say prioritize returns over patient outcomes, particularly in the consolidation of medical practices and in some specialty platforms.
A PE investor – Matthew Bennett, partner at Invidia Capital Management – believes this oversight is now an enduring feature that private equity firms will need to continue to manage rather than a short-term political cycle. In his view, the companies best positioned to succeed in the healthcare industry will be those that focus on improving health outcomes and reducing costs rather than relying solely on consolidation-driven financial engineering.
Private equity firms are moving away from recruiting doctors, Bennett pointed out. There is growing skepticism about these deals, in which private equity firms buy multiple medical practices and consolidate them into one large organization.
“Typically, when private equity serves as a middleman between the patient and the doctor, that’s going to be a bad thing. We don’t want to be sitting between a doctor and a patient telling a doctor what to do. That’s where other private equity firms have gotten into trouble – when they build large, multi-state doctor companies that are dependent on buying other doctor companies in other states,” he explained.
Many of these medical practice consolidations struggled because they overextended and had difficulty successfully integrating the practices they purchased, Bennett said. And many private equity funds that exploit this type of stacking have failed to demonstrate that they improve the quality of care or reduce costs.
The PE investment community as a whole is retreating from this strategy, and valuations in this healthcare segment have fallen to historic lows, Bennett said.
He noted that investors are becoming more selective, favoring companies that can prove they are improving care rather than simply generating returns. Bennett said the companies that are succeeding are those that have figured out how to use technology to eliminate inefficiencies in care and reduce waste.
As for some health care categories he’s bullish on, Bennett believes private equity investors have plenty of opportunity in the retail health and low-acuity care sector, as well as health care business services such as interoperability platforms and infrastructure solutions for enrollment, billing and records management. He also believes that the EP can play a greater role in pharmaceutical innovation by investing in faster drug development and clinical trials.
Despite the growing scrutiny, Bennett says healthcare remains one of PE’s most sustainable opportunities, particularly for companies that can demonstrate measurable improvements in care delivery and patient health.
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