In recent years, private equity (PE) firms have increasingly invested in healthcare providers. Recent regulatory and economic challenges have spurred providers to partner with PE-backed platforms due to their ability to offer administrative, financial, and clinical support, allowing physicians to focus on care delivery. These investors also offer resources and expertise to help physician partners transition to value-based reimbursement models, which many providers struggle to achieve independently.
Between 2019 and 2023 in the U.S., there were approximately 3,300 PE deals representing investments of close to $47 billion for providers.1 By some estimates, close to 400 hospitals are PE-owned, which represents approximately 9% of all private hospitals and 30% of all for-profit hospitals in the U.S.2
The growing concentration of PE-owned healthcare entities has prompted escalating levels of interest from government regulators. Specifically, the government has begun questioning PE owners’ post-acquisition business practices—particularly the managing of their portfolio companies—and alleging that PE involvement in the management of their portfolio companies can lead to operating changes that prioritize profits over patient outcomes.
Recent Department of Justice (DOJ) settlements involving PE firms show that the government considers the following factors to be indicative of active oversight, and therefore can hold the PE firm liable for the actions of its portfolio companies:
Echoing this, the Department of Health and Human Services (HHS) Office of the Inspector General (OIG) suggested in its new published guidance that "healthcare entities, including their investors and governing bodies, should carefully scrutinize their operations and incentive structures” and “[a]n understanding of the laws applicable to the healthcare industry and the role of an effective compliance program is particularly important for investors that provide management services or a significant amount of operational oversight for and control in a healthcare entity."3
The DOJ, Federal Trade Commission (FTC), and HHS recently launched a cross-government inquiry into the effects of PE ownership in healthcare. The initiative seeks to gather information on transactions that may not typically undergo antitrust scrutiny but—in the government’s view—could still potentially adversely impact patient health, worker safety, and the overall quality of care.4 The DOJ, FTC, and HHS also launched an online portal for the public to report “potentially unfair and anticompetitive healthcare practices.”5
Further, many states are adopting legislation to impose additional regulatory oversight of PE transactions in healthcare. For example, in May 2024, California proposed a bill requiring PE groups and hedge funds to obtain consent from the California attorney general prior to transacting with healthcare facilities or provider groups. The bill also places limitations on certain management services arrangements between PE groups/hedge funds, and physician practices.6
Once the government opens an inquiry, its focus may also shift to theories regarding coding and billing practices; overpayments; and healthcare fraud, waste, and abuse (FWA), all of which may implicate the False Claims Act (FCA).
To mitigate the risks described above, PE firms should be prepared to conduct rigorous diligence using data analysis, benchmarking, chart audits, and compliance program infrastructure reviews to identify potential compliance risks. Likewise, PE firms should be aware of the DOJ’s recent M&A Safe Harbor Policy, which incentivizes acquiring companies in M&A transactions to voluntarily disclose misconduct they discover through the acquisition of a target, either during pre-deal diligence or for a period post-deal.
Next, PE firms need to anticipate likely government reactions to deals and operating models and adopt a proactive and comprehensive approach to compliance, risk management, and patient care that is within their risk appetite. Doing so mitigates investment risk and contributes positively to the healthcare ecosystem.
The U.S. healthcare industry has a rich history of delivering high-quality, innovative patient care. Market forces such as aging populations, shrinking physician bases, and rising costs are pressuring the industry like never before. Some healthcare providers navigating these headwinds would benefit from PE partnerships. In these situations, PE firms and the target asset must have a clear path to value creation that benefits the consumer, clinical quality, and the healthcare ecosystem itself. This cannot be done without assessing and addressing compliance and reputational risks.
PE firms considering mergers, acquisitions, and other material investments in healthcare entities must formulate a compliance and reputational risk appetite as part of their pre-deal due diligence process. Upon completion of pre-deal due diligence, this will provide a framework for PE firms to determine which, if any, compliance and reputational risks must be mitigated and, ultimately, whether to commence with the deal.
Pre-deal due diligence should consider clinical quality, antitrust, technology, and healthcare FWA risks by conducting the following:
Post-acquisition measures should include:
With increased regulatory scrutiny, especially as it pertains to post-acquisition business practices, PE firms and their portfolio companies should start addressing risks now. Guidehouse helps providers, payers, private equity firms, and healthcare law firms navigate this complex regulatory landscape. We can help PE firms and their portfolio companies not only mitigate risk but also operate within regulatory bounds while accelerating value creation.
1. Cai, Christopher, and Zirui Song. 2024. “AUTHORS.” https://www.chcf.org/wp-content/uploads/2024/05/PrivateEquityPrevalenceImpactPolicy.pdf.
2. Condon, Alan. 2023. “386 Hospitals Now Owned by Private Equity Firms: 6 Things to Know.” www.beckershospitalreview.com - December 19, 2023 https://www.beckershospitalreview.com/finance/386-hospitals-now-owned-by-private-equity-firms-6-things-to-know.html
3. Office of Inspector General. 2023. “GENERAL COMPLIANCE PROGRAM GUIDANCE.” https://oig.hhs.gov/documents/compliance-guidance/1135/HHS-OIG-GCPG-2023.pdf.
4. for, Secretary. 2024. “HHS, DOJ, and FTC Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care.” HHS.gov. March 5, 2024. https://www.hhs.gov/about/news/2024/03/05/issue-request-for-public-input-as-part-of-inquiry-into-impacts-of-corporate-ownership-trend-in-health-care.html.
5. “Office of Public Affairs | Federal Agencies Launch Portal for Public Reporting of Anticompetitive Practices in Health Care Sector | United States Department of Justice.” 2024. Www.justice.gov. April 18, 2024. https://www.justice.gov/opa/pr/federal-agencies-launch-portal-public-reporting-anticompetitive-practices-health-care-sector
6. “Private Equity Healthcare Transactions under Scrutiny | Insights | Holland & Knight.” 2024. Hklaw.com. 2024. https://www.hklaw.com/en/insights/publications/2024/03/private-equity-healthcare-transactions-under-scrutiny.
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