It is well known that private equity has significantly increased its presence in the healthcare sector, acquiring hospitals, doctor’s offices and other providers. These acquisitions have come under scrutiny following the bankruptcies of numerous health systems like Steward Health Care and Prospect Medical Holdings. But a new report of the Private Equity Stakeholder Project (PESP) details a lesser-known private equity strategy: joint ventures with nonprofit health systems.
PESP is a non-profit organization that aims to bring transparency and accountability to the private equity industry. The organization explains in the report that joint ventures occur when two or more parties create a single business together for profit. Usually, the parties “each contribute something to the business, including capital, labor, assets, skills, experience or knowledge, and generally, a joint venture involves an agreement to form a joint venture, some form of joint control, and a means of sharing profits and losses,” the report states.
Private equity firms seek joint ventures because they allow them to expand into new markets, while benefiting from the reputation and relationships associated with nonprofit health systems. Joint ventures also allow private equity firms to share financial risk with nonprofit partners and continue to grow through partnerships that may have different regulatory requirements than traditional acquisitions.
PESP found that more than 500 healthcare facilities currently operate through nonprofit and private equity joint ventures. This is likely an undercount because this number is based only on publicly identifiable arrangements. These joint ventures include hospitals, inpatient rehabilitation centers, hospice care, home health care, behavioral health care, ambulatory surgery centers, urgent care and other providers.
Additionally, 21.4% of privately owned hospitals are owned through joint venture agreements with nonprofit health systems.
“The private equity model in health care is evolving,” Jim Baker, executive director of PESP, said in a statement. “Our research shows how private equity is increasingly relying on joint ventures with nonprofits to expand its presence in the healthcare sector. These deals have received far less attention than traditional private equity buyouts, even though they are becoming more common in hospitals and other healthcare sectors.”
The report also examines case studies of joint ventures with Lifepoint Health, Compassus, Ardent Health Services and Ascension. Researchers found that Lifepoint – which is owned by private equity firm Apollo Global Management – owns 61% of its hospitals through joint ventures with nonprofits and other healthcare providers.
Additionally, PESP noted that IRS rules governing partnerships between nonprofit and for-profit health care organizations are outdated, dating back to 1998 and 2004, before the rise of large, privately funded health care companies.
“Health care business models do not stand still, nor should oversight frameworks stand still,” Baker said. “Policymakers need to fully understand how these partnerships are structured, how they operate, and whether current oversight reflects the current realities of private equity healthcare acquisition strategies.
The report provides several federal and state policy recommendations focused on these joint ventures, including updated tax guidance, expanded reviews of transactions, and ongoing reporting after transactions close.
Photo: Andriy Onufriyenko, Getty Images
