Private equity firm investing in a healthcare business and going over the acquisition contracts on an iPad.

Private Equity & the Digital Future of Healthcare


Private equity firms are seeing opportunity in the healthcare sector and investing accordingly while absorbing businesses. Here's what you need to know.

Private equity (PE) firms are seeing greater opportunity in the healthcare sector, and they're investing accordingly. PE firms have been buying up an increasing number of healthcare businesses annually since 2015. Deal values have been escalating too, reaching a record $78.9B in 2019.

The strategies for many firms focus on consolidating small providers and rolling their practices up into larger healthcare groups. In the process, firms are capitalizing on the increasingly digital landscape of healthcare—finding new value in areas related to data and access to technology by bringing previously separate organizations together.

As implications of the coronavirus pandemic play out, the approach to capitalizing on market change in healthcare may shift significantly. Regardless, PE firms will undoubtedly play a key role in the future of the industry and the way it delivers patient care.

Seizing Value in Industry Shifts

PE investments are typically made in industries perceived as ripe for consolidation and managerial oversight. Now is a time when PE may grow especially active, as many companies across industries are experiencing distress. After piling up record levels of investor cash (aka “dry powder”) in recent years, PE firms will likely find many different kinds of targets appealing in light of the coronavirus crisis.

Healthcare companies have been going through a broader consolidation phase since well before the current crisis, however, for a number of reasons. The inefficiencies inherent in healthcare are unmistakable: Broadly, 15% or more of each dollar spent on healthcare in the U.S. is consumed by payment and transaction costs and other administrative expenditures. (In industries like retail, it’s closer to 2%.)

Lessening administrative waste requires better interoperability across the industry. As healthcare shifts away from the traditional fee-for-service model to embrace new models of value-based care (VBC), digital technology and process standardization are growing more central to the industry at large. (VBC and other patient-centered approaches to healthcare hinge on effective collection and utilization of data, for quality improvement in areas like cost and patient outcomes. They also seek to empower patients with more control of their health information, and with more and better information on costs and treatment options.)

Recognizing this, PE firms closed roughly 800 deals a year in 2018 and 2019—often to combine multiple physician practices of the same type to dominate a market, or create large multi-specialty practices. Medical device and healthcare information technology companies have also seen more PE activity over the last two years.

The efforts of PE firms may accelerate long-term innovation toward VBC. As they deploy the capital, resources and technical knowledge to create new models and payment methods based on quality and value, patients will potentially benefit from reduced administrative costs and better care coordination.

Even looking beyond data and technology, there are additional ways PE’s involvement in the industry may lower patient spending. Consolidation is giving previously independent practices—who tend to have little negotiating power with payers—access to more favorable reimbursement rates and other contract advantages. With PE firms increasingly adding investments in medical devices, diagnostics and technology tools to their portfolios, there’s additional potential for them to connect companies for collaboration or dealmaking in areas that support innovation or reduce costs.

Creating New Considerations

The consumer impact of PE in healthcare may not be entirely positive, though. PE’s traditional focus on optimizing for short-term profits may actually be driving up costs in the industry, at least in some instances. For example, PE firms are highly active, according to experts, in the specialization areas where price-gouging and surprise billing tend to pose especially significant problems for patients—such as radiology, anesthesiology and emergency room services.

Not all of the new models for care delivery emerging from PE have cost-reduction and quality at the center, either.

The many free-standing emergency rooms owned by PE firms, for example, are marketed as helping provide for patients without access to emergency care. The vast majority of care they deliver, however, is for preventive services—for which they may charge patients amounts 20 times greater than they would pay at a physician office or urgent care center.

In the wake of the coronavirus crisis, however, many of these kinds of novel business models (and many companies in PE firm portfolios) may struggle or fail.

The ways PE firms will adapt their strategies around the impact of the pandemic remains to be seen. Changes to the insurance marketplace that result from the crisis—should any policy initiatives expanding coverage soon emerge—may affect what kind of deals can drive profits for PE firms, over time. If more Americans are covered by a Medicare-type insurance, for example, it may make it easier for small practices to stay independent (as they’d rely less on private-payer reimbursements).

Healthcare will likely continue to see increased investment, regardless. As consumers grapple with the impact of the coronavirus on their health and personal finances, it will be more important for them to have digital control of their medical information and access to affordable care services. PE firms will undoubtedly be looking for ways to capitalize on their new and changing needs—potentially with a focus on interoperability and long-term collaboration across the industry.

Ongoing Change

Healthcare has long been considered a slow-to-change industry, but the pressure is on for the sector to change—and to serve patients more transparently, in the process.

Private equity’s role in the changes to come will be prominent. Especially with technology continuing to play a greater role in the relationships of providers with both insurers and patients, PE firms’ activity will continue to reshape how doctors do business in the increasingly digital healthcare industry.

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