Private Equity in Medicine

Some commonly expressed sentiments I’ve heard amongst my colleagues since beginning my medical training is, “the older generation sold out and left us,” or “big firms all own medicine now, this is a terrible time to be entering.” — what they are referring to is the presence of private equity in healthcare. While there is certainly merit in where these perceptions came from, we should have a deeper look as to what the implications of having private equity in medicine means.

So, what exactly is private equity and how does it work? How has it emerged in healthcare?

Private equity (PE) firms are investment groups that provide capital for private financing, away from public markets – think less publicly traded stocks of companies and more privately owned businesses. The funds pooled together by the firms are collected from investors and directly used to invest in privately-owned companies in the form of either buyouts or limited, structured partnerships. The goal of a firm is to ultimately restructure businesses to make them more efficient, cost effective, and to drive growth, before exiting the partnership [1]. A simple analogy is to think of someone buying a house from or choosing to partner up with the owner, flipping it, and selling it and repeating the process – now just apply that to private businesses instead.  Now you might wonder, underneath all this business jargon, how is this related to medicine and health care?

Let’s look at the goals of each party. A private equity firm seeks partnership with a practice with the intention of ultimately gaining a return on investment in the practice over the course of a few years. The firm either outright purchases the practice or enters a shared partnership with the owner of the practice. If the firm performed an outright purchase, they could take over the practice entirely and manage as they saw fit and input their strategies for increasing efficiency and economic growth of the practice. If the firm entered a partnership with the owner of the practice, e.g., the physician(s), they would then strategize collectively to meet the goals of both parties. Simply put, it is a business partnership: the PE firm provides the funds, and the practice owner provides the investment medium or product.

From the standpoint of the physician(s), why they would want to engage with a PE firm is more nuanced and multifactorial. Let’s look at some of the benefits and challenges.

What are some of the benefits?

The answer to this is going to depend largely on the goals of the owner, which can ultimately be influenced by what stage of their career they are in. A younger physician owner of a small private practice may be looking to expand and scale to a larger practice model with higher operation and function capability. On the other hand, older physicians may seek liquidity in their practice – cash in hand they may otherwise not have, whether that be for retirement or any other reason. Physicians may generate value in their practice through “sweat equity” by putting in significant work over long periods of time, but this does not always translate into liquid valuation of a practice. Furthermore, a sinking practice may look for a solution to create and transform into a fiscally sustainable mode.  

In larger scale practices, private equity investment can be beneficial in greater magnitudes. For example, a multi-partner practice may expand and improve facilities, increase regional coverage, or sustainably increase their number of partners/employees while reducing costs. Larger healthcare entities may also gain the funding for implementing more advanced technologies or systems to improve patient-care outcomes. Research and medical innovation are often driven by these partnerships as well [2].

What are some of the challenges and definitive cons of private equity?

Definitive challenges exist surrounding the presence of private equity in healthcare. Arguably the most considerable disadvantage is the possibility of subpar patient care all while driving up total care costs [3]. PE firms are experts in increasing business efficiency, profitability, and generating returns on investment. However, applying this skillset to the context of healthcare practice is very different. PE firms are not clinicians and may lack significant understanding in what optimizing patient care entails. Cost-cutting measures or altering the economics of a system can result in the loss of critical components that drive quality practice – ultimately resulting in a negative for patient care [4].

Another con to private equity involvement may be an overall change in culture of the practice. After all, a new partner is being “added into the mix” and making decisions for physicians. This doesn’t always bode over well among all other partners in a practice as it can present with significant differences in leadership style and decision-making mechanisms as well lead to a dilution of ownership in a practice. These issues seem to have already impacted some specialties very heavily (e.g., emergency medicine, radiology, anesthesiology, etc.) while others are just now experiencing the emergence of private equity partnerships.

So is it good or bad?

In conclusion, the real answer is somewhere in the gray – it depends. It all depends on why a practice/group is looking for the partnership currently, how it impacts the next generation of physicians or owners, and what the long-term vision of the practice or system may be. Advocates support the notion of private equity increasing innovation and productive value, and critics endorse that these partnerships harm hospitals and reduce the quality of care for patients.

Ultimately, I believe having structured regulations and over these partnerships can protect patients from being harmed or experiencing subpar care at the expense of a company earning a profit. Whether you support or advocate against private equity, it is present in the current system. My hope was to shed some light on the matter and ultimately encourage others in the profession to explore the subject and push for better patient care and the development of more sustainable healthcare systems.

Aaron Tran

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Aaron Tran is a member of The University of Arizona College of Medicine – Phoenix Class of 2023. He graduated from Arizona State University in 2018 with a degree in Kinesiology. In his spare time, he enjoys training Brazilian Jiu-jitsu, bodybuilding, playing guitar and piano, and hanging out with his labrador retriever, Rex, outdoors.

For questions, concerns, or discussion: atran13@email.arizona.edu

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