Dive Brief:

• Private equity dollars are continuing to flow into healthcare, despite controversy over downstream profit-motivated effects on medical quality and cost.
• PE firms announced or closed an estimated 863 deals in 2022, making last year the second-highest on record for activity in the sector, after 2021, according to a new report from market data firm Pitchbook. Pitchbook has been tracking the data since 2017.
• Deal activity is expected to slow in the first half of 2023 amid staffing-related margin pressures, liquidity constraints and a difficult PE fundraising market. But there could be a rebound in the second half of the year if macroeconomic conditions stabilize, researchers said.

Dive Insight:

PE deals in healthcare may have slumped from the prior year’s highs, but concerns are rife regarding whether private equity’s profit goals are at odds with the needs of patients.

Some proponents have expressed optimism about PE, arguing that the surge in healthcare investments can improve operations for payers and providers. Others are worried that PE firms will incentivize short-term profits at the expense of all else, resulting in poorer and costlier care — a claim backed up by numerous studies.

Last year trailed only 2021 in PE healthcare services dealmaking, despite quarterly trends showing a steady decline throughout the year as the industry adjusted to a new normal following COVID-19’s dealmaking boom, according to the report.

The pace of dealmaking slowed amid rising capital costs. In addition, the absence of many of the highest-quality assets that traded during the dealmaking frenzy of late 2020 to 2021 meant that remaining options might not have been as attractive to investors, the report said. In addition, staffing cost inflation — as demand for workers in healthcare is generally unaffected by tightening economic conditions — meant healthcare operators continued paying high rates for labor, stymieing earnings.

Staffing pressures have forced many skilled care and behavioral health businesses to slow their growth despite demand. As a result, deal activity in mental health and substance use disorder treatment, as well as intellectual and developmental disabilities care, slowed significantly last year, Pitchbook found.

That could set the sector up for an accelerated pace of deals in 2023, the report said. Care models that sidestep staffing issues, such as cash-pay in-home care, or those that boast high workforce efficiency, like ambulatory infusion, are also likely to see heightened interest.

Physician practice management companies are also less exposed to staffing shortages, suggesting the PPM landscape for deals remains robust and pent-up demand could result in a wave of activity once financing conditions improve, the report said.

In addition, the recent primary care M&A frenzy has benefited PE, by creating an “extremely dynamic” exit landscape for primary care, behavioral health, home health and multispecialty network assets, according to Pitchbook.

A number of recent reports have drawn negative attention to private equity in the medical sector, finding direct impacts of PE interference on the quality of nursing homes, autism care and rural hospitals.

Price is another factor. After being bought out by PE firms, physician practices charged insurance 20% more on average than they did before, and patient trends suggested overutilization, according to a study published in JAMA in September. Another study from last year found prices paid to anesthesia practitioners were significantly higher if the contracted staffing company had PE backing.

But the Pitchbook report suggests PE dealmaking, which remained significantly elevated last year compared to pre-pandemic levels, is undeterred by such findings, expediting consolidation in the sector.

A 2022 study from Avalere found nearly three-quarters of U.S. doctors now work for corporate entities such as private equity firms, health insurers and hospitals, up from 69% in 2021.