In the last decade, private equity investment has become a key strategy for achieving economies of scale, particularly for independent, physician-owned ASCs in more consolidated markets.
According to the Private Equity Stakeholder Project, there were 95 private equity deals involving outpatient centers in 2023, the highest number in any healthcare subsector.
However, with the increase in investment has come heightened scrutiny from federal and state policymakers, with many expressing concerns that the influx of private equity could affect care quality, among other issues. Last year saw a decline in private equity deals in healthcare for the second consecutive year, down 16% from the previous year.
At the federal level, Sens. Elizabeth Warren and Ed Market of Massachusetts introduced a bill in July that would target the rise of "corporate greed and private equity abuse" in the healthcare industry. The bill included more penalties, stricter reporting requirements and additional payment regulations.
Josh Mastracci, director of an investment bank TM Capital's Healthcare Practice, joined Becker's to discuss how recent scrutiny on private practice investment in healthcare could stifle ASC development.
"Movement towards increased regulatory scrutiny of institutional investment in ASCs is troubling as it has already started to inhibit physicians’ ability to finance continued growth of and improvements to these facilities," he told Becker's.
He also noted concerns around state-level intervention. "There's a lot of sensitivity around a state having the ability to veto these highly complex transactions, often at a late stage in the game," he said, citing the recently-vetoed California bill that would have increase scrutiny over private equity firms and hedge funds acquiring physician practices
The California bill would have empowered the state’s attorney general to set conditions on the acquisition of physician groups and healthcare entities in cases where authorities believed such investments could lead to anticompetitive effects or harm healthcare access. Mastracci pointed out that the bill also posed a risk of “outright denial at a late stage,” which could deter investors.
Because private equity investment processes are already lengthy, and getting longer, the introduction of regulatory authority late in the process, often a year or more in, tends to make investors uneasy, according to Mastracci.
"This issue exists on both the buy and sell sides," he said. "There’s a real risk that, at a very late stage, the transaction could fall apart without a clear definition of why it would be approved or denied."
Despite the challenges posed by increased regulatory scrutiny, Mastracci acknowledged that there are positives. He believes investors with the right experience and a solid strategy will still succeed, which could ultimately benefit shareholders and patients.
"For those who continue to invest despite these pressures, they’ll likely have a compelling story to tell — one that convinces both shareholders and regulators of their strategy to improve the quality of care," he said. "There’s a well-defined playbook for adding value, whether through attracting surgeons, managing JV partnerships, site selection or dealing with increasingly complex certifications and licenses."
Private equity has been the subject of scrutiny by many parties. According to one survey in MedPage Today, 60% of physicians viewed PE investment in healthcare negatively.
Similarly, a recent Becker's LinkedIn poll revealed that 50% of the 778 respondents feel that private equity ownership is having a "mostly negative" impact on hospitals. A widely cited 2023 study published in JAMA found that patients are "more likely to fall, acquire new infections, or experience other forms of harm during their hospital stay after it is acquired by a private equity firm."
"Private equity continues to purchase groups and invest in numerous domains for care delivery. I remain deeply concerned, as current GDP spend in the U.S. on healthcare is approaching 20 percent," Matt Mazurek, MD, assistant clinical professor of anesthesiology at St. Raphael's Campus of Yale New Haven (Conn.) Hospital, told Becker's last year. "Private equity investors expect return on investment. With this trend, it is easy to imagine GDP on healthcare to grow to 25 to 30 percent. These dollars are not necessarily going to translate to better care and quality or access."
Nevertheless, private equity-backed physicians cost Medicare less than those affiliated with hospitals. According to a recent study by Avalere and the American Independent Medical Practice Association, expenditures in private equity-affiliated practices were, on average, 9.8% lower than those in hospital-affiliated practices in 2022.
Other leaders view it as a means for physicians to maintain clinical autonomy while providing access to capital.
"The emergence of private equity investments in healthcare have provided opportunities for physicians to maintain a level of independence," Rich Searles, partner at Merritt Healthcare Advisors, told Becker's. "Private-equity-backed platforms have created alternative structures to the traditional 100 percent physician owned, or full employment models. Physicians can leverage executive and financial resources of private equity investors, while maintaining clinical autonomy over their private practice. As history seems to dictate, as physician practices grow and thrive, so do ASCs."