As of late, the bulk of headlines about private equity in health care have been overwhelmingly negative.
This concept is not only reflected in recent federal probes examining PE’s role in health care and the general anti-PE comments from some lawmakers, but also in the eye-catching legislative actions that some states, such as California, are taking to discourage private investors from buying physician groups, senior care facilities and, yes, behavioral health businesses.
Yet the negative perception of PE in health care might just be, at least in part, misinformed.
“Considerable confusion about the scope and emphasis of PE’s current involvement in U.S. health care is circulating widely in news articles, white papers and even government missives,” investment research group PitchBook declared in a recently published report.
In fact, PE-backed providers represent less than 4% of the U.S. health care provider ecosystem by revenue.
In addition to PitchBook’s work, a couple other PE-focused reports have recently come out. As part of this week’s BHB+ Update, I offer my thoughts and share some interesting takeaways from those materials.
Among the topics in this BHB+ Update, I explore:
– What we know about PE activity in health care, including the latest data on 2023 and 2024 dealmaking activity
– How private equity fits into behavioral health care, specifically
– What the future holds for PE in health care, with a closer look at emerging anti-PE legislation
Taking stock: Private equity in health care
If you Google “private equity in health care,” the first several search results you see likely focus on the rising danger of PE or highlight what happened when a private investor took over a health care business. Collectively, all the narratives out there suggest PE activity in health care is going way, way up – but that’s not exactly true.
PE and venture capital investments in the health care services sector actually fell 59% year over year in 2023, hitting $7.26 billion, the lowest annual value in three years, according to S&P Global Market intelligence data.
Deal volume likewise fell by roughly 33% from 2022 to 2023, with last year’s 310 transactions marking the lowest total since at least 2019.
This isn’t to say investors suddenly aren’t interested in health care. The broader macro-economic climate has, without a doubt, been a significant factor in this dip. Interest rates and inflation have been on the rise, and lenders have become more conservative in terms of their capital distribution.
Amid these complicating factors, sellers have typically held onto their lofty valuation goals, creating a chasm between buyer and seller.
That’s made investment and dealmaking tricky for everyone – not just private equity. Total health services deal volumes through April 30 of 2024 declined by 4% from 2023 levels, according to PwC’s mid-year dealmaking update.
But going back even further, PE’s hand in the overall health care sector hasn’t been as heavy of one as many would expect, according to PitchBook.
PE health care investment grew as a proportion of overall private equity activity between 2000 and 2018, the research firm explained in its recent report. However, it has declined proportionally since, with year-over-year growth in the total number of PE-backed companies slowing down over the past six years, dipping below 1% in the first quarter of 2024.
Other figures support this idea, too.
“According to the Centers for Medicare & Medicaid Services’ National Health Expenditure data, total annual U.S. spending on health care provider categories is projected at about $3.5 trillion for 2024,” PitchBook wrote in its report. “Care provided in hospitals accounts for 43.6%, or $1.6 trillion, of this figure. By contrast, we estimate the aggregate revenue of PE-backed health care providers in the U.S. at $117.7 billion for 2024, 3.3% of total U.S. health care provider spending.”
This, of course, is looking at PE activity throughout the massive health care sector.
The story gets a little more interesting when you drill down into individual industries and sub-industries.
For example, current PE deal activity in hospitals and skilled nursing facilities is near zero, PitchBook noted. Additionally, there has not been a sizable PE investment in a U.S. hospital or health system since 2018.
One corner of health care that has remained a target of PE: behavioral health care.
Behavioral health and PE
While PE investment in health care at large has been, arguably, modest, interest in behavioral health care has been robust – something I don’t see changing any time soon. Let’s revisit what we know:
– Recent statistics reported by Behavioral Health Business news show that private equity-owned mental health practices constituted 6.2% of all mental health facilities (652 of 10,324) and 7.1% of all substance use disorder (SUD) facilities (1,152 of 16,174).
– PE ownership is more concentrated in some states, too; in Colorado, for example, PE ownership for mental health facilities was 26.5%.
– There are 562 opioid treatment programs (OTPs) that are owned by private equity-backed providers, according to a recent analysis from STAT, which estimates that number at roughly one-third of all methadone clinics.
Even PitchBook’s data highlights the prominent role of PE in behavioral health care.
As you can see in the graphic above, “mental health” is one of four extremely active areas for private equity investors.
And the investment thesis in behavioral health care has gradually changed over time.
“In the early 2010s, PE firms backed numerous ‘luxury rehab’ SUD treatment facilities, which tended to fly in patients from out of state and to bill out of network,” PitchBook wrote in its report. “Due to payer pushback and the clinical inadequacies of this model, PE investment in SUD treatment and other mental health models swung in the late 2010s toward acquiring in-network, in-state, medically focused providers almost exclusively, as out-of-network reimbursement is considered too risky and volatile to underwrite.”
In May, BHB reported that Tenex Capital Management acquired Behavioral Innovations from Shore Capital Partners.
Also in May, BHB reported that GTCR was nearing a deal for Caravel Autism Health.
A month earlier, Your Behavioral Health announced a deal for teen mental health and SUD treatment provider Insight Treatment Program.
In March, HCAP Partners and two health care executives launched platform company PAX Health.
As interest rates stabilize, as private and government payers increasingly recognize the value of behavioral health care, and as the gulf between buyers and sellers shrinks, I anticipate even more PE activity in behavioral health moving forward.
A trend to watch
One emerging trend may complicate that hypothesis.
As federal regulators and U.S. members of Congress target PE in health care, more states are doing the same.
In California, A.B. 3129 gives the state attorney general the power to approve or deny an acquisition or change of control between a private equity firm and a health care entity. Some analysts believe more states will follow suit, as is usually the case with regulations that originate in California or New York.
In addition to California, at least two other states – Washington and Massachusetts – have already enacted laws and have pending legislation restricting PE health care deals, according to a report from Bloomberg Law, citing information from Ropes & Gray LLP. At least eight other states have already enacted laws or are on their way to doing so.
I don’t necessarily see the state-level actions and federal scrutiny as an insurmountable hurdle that will totally stall PE’s investment in behavioral health care, but it is certainly a complicating factor. And others agree.
“We believe some of the larger generalist firms, which tend to be placed under greater public scrutiny, may be less likely to pursue health care provider deals in the current environment,” PitchBook’s Rebecca Springer previously told BHB. “This effect will be strongest for provider types that tend to serve vulnerable populations, including behavioral health.”
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