Federal agencies may be cracking down on private equity investment in health care, which could have implications for behavioral health dealmaking in the future.
In early March, the Federal Trade Commission, the Department of Justice’s (DOJ) Antitrust Division, and the U.S. Department of Health and Human Services launched a new investigation into private equity and other corporate investment control in the healthcare industry. Specifically, the agencies are investigating how health care consolidation impacts the quality of care, safety and affordability.
While the investigation may not have any real-world impacts, but the headline risk could cool the M&A temperature, according to industry insiders. And behavioral health, which has been an investor darling for the past few years, could potentially see some of the impacts.
“The administration’s rhetoric around PE in healthcare has become increasingly pointed. Sponsors are much more cognizant of headline risk than they were even a couple months ago,” Rebecca Springer, lead analyst for healthcare at Pitchbook, told Behavioral Health Business. “We believe some of the larger generalist firms, which tend to be placed under greater public scrutiny, may be less likely to pursue healthcare provider deals in the current environment. This effect will be strongest for provider types that tend to serve vulnerable populations, including behavioral health.”
Founded in 2007, Pitchbook is a data and research firm focused on the global capital markets.
While FTC leadership has acknowledged some of the benefits of private equity money funding small and mid-sized companies, it also warns of the potential pitfalls of this type of investment.
“When private equity firms buy out healthcare facilities only to slash staffing and cut quality, patients lose out,” Lina Khan, chairperson of the Federal Trade Commission, said in a statement. “Through this inquiry the FTC will continue scrutinizing private equity roll-ups, strip-and-flip tactics, and other financial plays that can enrich executives but leave the American public worse off.”
Private equity has accounted for more than 60% of all behavioral health deal flow since 2018, according to The Braff Group’s 2023 Behavioral Health Year in Review Report. This means any crackdowns on PE could be meaningful to the space.
The investigation is likely linked to a slew of bad press which came out over the past two years about PE’s role in health care, Dexter Braff, founder and president of The Braff Group noted.
Still, this type of crackdown isn’t exactly new in the health care space. Several states have already put in place stricter regulations around health care deals that veteran investors are familiar with. But these regulations have already led to deal slowdowns.
“Thirteen states have already enacted some form of legislation requiring advance notification of health care transactions, presumably to step in if a particular deal is deemed anti-competitive or bad for health care consumers,” Braff said. “We’ve already seen the application of such state laws add another three or four months to an already burdensome closing process. And with time being the enemy of all deals, such a delay can derail a transaction, regardless of whether there are problems, or not. So, if this type of oversight expands to the federal level, it will likely scare away would-be PE investors that are not already familiar with health care.”
The Braff Group is an M&A advisory firm specializing in the health care industry. Founded in 1998, it has closed more than 375 transactions.
What investors and companies should know
Investors will not need to take immediate action in response to this investigation. The agencies conducting the investigation have issued a Request for Information (RFI) from stakeholders, including health systems, private payers, private equity funds, and other alternative asset managers.
“We do not expect the inquiry to have an immediate impact at this point, but rather see it as a signal of the increased scrutiny of healthcare transactions by these agencies,” Tani Weiner, co-chair of behavioral health law group Polsinelli, told BHB.
Polsinelli is a national law firm specializing in health care, real estate, finance, tech, PE and corporate transactions.
In the near term, many private equity companies and other investors are increasingly emphasizing antitrust compliance in the health care space.
“This includes assessing whether any state or federal notifications will be required and planning for any such notifications in the early stages of a transaction process as these can become a timing factor in reaching closing,” Weiner said. “Investors should also assess potential investigation and/or enforcement risks when first considering any transaction. We see this playing out across healthcare transactions generally, but may be particularly relevant to behavioral health M&A where most transactions (apart from larger platform deals) have historically been below the federal HSR reporting thresholds.”
While this investigation could cause some concern in the private equity space, it’s likely not the main culprit to the ongoing dealmaking slump.
“I’d also underline that the biggest impediment to dealmaking right now remains the cost of capital and resulting buyer/seller price expectation gaps,” Springer said.
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