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Private Investments in Healthcare: What CFOs Need to Know

Analysis  |  By David Weldon  
   February 17, 2022

Investments in healthcare by private equity firms are on the rise, which creates several issues for CFOs.

It has been well publicized that mergers and acquisitions continue at a brisk pace in the healthcare industry. Typically, these actions involve a larger hospital or healthcare system absorbing smaller or struggling organizations, or systems merging to share complementary healthcare services for mutual benefit.

Also on the rise are investments in hospitals and healthcare systems by private equity firms. Supporters of such investments generally argue that they can increase innovation in the recipient hospital. Critics of the practice generally say it threatens the quality of care provided by those hospitals.

While there are laws in place that prohibit private equity firms from causing harm to patients in any way through their investments, which does offer a degree of protection, there is a lack of hard data on the most recent investments. The last major study looked at the growth of private equity investments in the healthcare sector from 2003 to 2017.

Related: Private Equity: Friend of Foe to Healthcare?

The nature of private investments in healthcare

While private investments in healthcare can mean different things to different people, "most people will think of the continuing trend of private equity and venture capital investments in healthcare providers, health tech, and related companies serving the broader industry," explains Rebecca Matthews, a partner  and co-chair of the Health Care Transaction practice at the law firm Wiggin and Dana. After having spent several years in-house at a large health system, Matthews' practice is now focused almost exclusively on healthcare transactions, from collaboration arrangements to mergers and acquisitions.

Many investments in healthcare by private equity firms involve the outright purchase of a struggling hospital or healthcare system. In those cases, the equity firm attempts to increase revenues by taking one or more of several major actions, including reducing staff; merging multiple practices; closing portions of operations; renegotiating reimbursement rates with payers; and trying to grow certain specialty services or profitable practices.

Of course, certain conditions must be in place for the investment by an equity firm to take place. First, the hospital or health system must be willing to sell all or partial ownership. Top factors for an organization being willing to sell are: a health system is struggling financially overall; it has an innovative product or service but needs financial assistance to boost it; the health system has a difficult time meeting compliance requirements; or the practice owner or partner is retiring.

As noted, there are conflicting views on what impact these private equity investments have on the delivery of care and the well-being of patients. But there is no hard data to support either the pros or cons.

Still, anecdotally, some impacts would seem to be a natural result. For example, if a private equity firm consolidates healthcare facilities or closes certain hospitals or practices, those actions would impact where certain care is available to the public.

Likewise, when any of these events occur, healthcare workers could find their jobs changing, or even eliminated.

Three top issues for CFOs

There are three issues in particular that should be of concern to hospital CFOs in relation to private equity firms investing in healthcare, Matthews says.

"Probably the most significant issue is valuations—and understanding that hospitals and health systems are, in some ways, more constrained than private investors (by which I mean private equity in a broad sense) because of regulatory restrictions on financial arrangements with referral sources," Matthews explains. "That said, hospitals and health systems can offer different strategic benefits that may not be available from private investors. Explaining this to an investment target will be important so that they can compare offers in a more nuanced and sophisticated way."

"Another significant issue is the prohibition on the so-called corporate practice of medicine," Matthews says. "This rule varies by state, but often prohibits private investors from owning, directly, entities that provide certain licensed professional services such as medical services."

In some states, this also means that medical practice revenues cannot be shared or "split" with entities that are not owned by licensed professionals, Matthews continues. Contracts with entities who do not comply with the rule can be in jeopardy, so validating compliance is critical, she stresses.

As to the third top issue, "to the extent that hospitals and health systems are diversifying investments or supporting centers of innovation and investing side-by-side with private investors, they must consider fraud and abuse rules, disclosure requirements, and other regulatory concerns that may not be issues for the private investors. This may require additional representations and covenants from the target that may not be in a lead private investor's standard deal documents," Matthews explains.

Increased investments leads to rising scrutiny

The rising influx of private capital into the healthcare industry has resulted in more attention being paid to the prohibition on the corporate practice of medicine. Antitrust considerations have also been heightened, Matthews says.

"Hospitals and health systems always need to consider fraud and abuse rules in any transaction with a referral source," Matthews says. "In addition to the federal Anti-Kickback Statute and the Stark self-referral law, there may be state laws to consider. These laws are complex and multifaceted and require a close review of all remuneration to be paid or provided in an arrangement—so that means not only cash, but in-kind support and other benefits." 

Because of this, Matthews advises CFOs to stay abreast of regulatory considerations and raise concerns or ask questions often.

"Building cross-functional teams and coordinating with other departments, including legal and compliance can be key," Matthews advises. "It's also helpful to avail yourself of resources from organizations that understand the complexity of healthcare and transactions in that space, such as the Healthcare Financial Management Association (HFMA) and American College of Healthcare Executives (ACHE), each of which has state and local chapters."

“Probably the most significant issue is valuations—and understanding that hospitals and health systems are, in some ways, more constrained than private investors (by which I mean private equity in a broad sense) because of regulatory restrictions on financial arrangements with referral sources.”

David Weldon is a contributing writer for HealthLeaders. 


Such investments generally involve an equity firm purchasing all or some of the ownership of a hospital or healthcare system.
Supporters of these investments say they can lead to greater innovation and more streamlined delivery of care.
Critics argue that such investments potentially result in the closing of healthcare facilities, loss of jobs, and reduction in services.

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