While private equity activity in healthcare has been high over the last several years, a more recent rise in bankruptcies and defaults points to a possible rough patch for healthcare PE investments.
According to The Wall Street Journal, debt defaults and bankruptcy filings by physician groups and other healthcare organizations have more than doubled each year since 2022. PE-owned healthcare providers also represent the majority of bigger companies with assets over $100 million that filed for bankruptcy or defaulted during that same period.
On Jan. 15, HHS released a report warning of the harmful effects of PE involvement in healthcare. The report stems from a March 2024 request for information into how healthcare market transactions by health systems, insurers, private equity and other investors may drive consolidation, harm patient care and affordability, endanger workers and burden taxpayers.
More than 2,000 comments were submitted from patients, physicians, health systems, insurers, industry associations, labor unions and academic researchers. The report was prepared in consultation with the Federal Trade Commission and the U.S. Justice Department.
"In theory, private investment in health care services could lead to increases in output, reduced prices and improved quality, but the comments we received — which are consistent with the growing body of research — suggest that the opposite is true," the report said.
Becker's has reported on the bankruptcy filings of two major PE-backed healthcare companies, Los Angeles-based Prospect Medical Holdings and Dallas-based Steward Healthcare. As part of its restructuring efforts, Prospect is negotiating the sale of several facilities. Steward is also working to sell its 31 hospitals.
Among healthcare providers with debt rated by S&P Global Ratings and Moody’s Investors Service, 12 private equity-owned companies defaulted on debt in 2024, up from five in 2023, according to the Journal.
The report cites changes to government policies, soaring post-pandemic labor costs and rising interest rates as major factors behind the closures. Massachusetts recently passed a healthcare oversight bill that largely targets private equity, and at least eight other states have similar proposals in their legislatures or have cemented new healthcare PE-regulations.
Due to both public and private reimbursement, rates that have not kept up with inflation in recent years, PE deals that once seemed "attractive" to private physicians promise less profit, according to the report.
"It used to be that you could guarantee that, if you’re a private-equity firm, someone else would buy your [physicians] practice at a profit," Leon Adelman, MD, co-founder of Ivy Clinicians, which provides employer information to physicians, told the Journal. "But that’s no longer the case."