Private Equity Investment in Healthcare Remains Steady Despite Challenges

Private equity (PE) firms maintained a consistent level of investment in the healthcare sector throughout 2024, demonstrating resilience in the face of increased regulatory scrutiny and high interest rates. However, overall investment volume saw a decline compared to the previous year, according to a new study from the Private Equity Stakeholder Project.

Deal Volume and Sector Focus

The report tracked 1,049 unique PE-backed healthcare deals in 2024, including 166 leveraged buyouts, 262 growth or expansion investments, and 621 add-on acquisitions. Despite this substantial activity, total deal volume decreased by 7.6% compared to 2023, falling considerably short of the peak levels observed in 2021.

Dental care, health IT, outpatient care, medtech, and pharmaceutical services emerged as the most active sub-sectors for deals. Behavioral health, disability services, home health, home care, and hospice also attracted significant investment from PE firms.

Factors Influencing Investment Trends

The "sluggish" deal volume in healthcare was primarily attributed to high interest rates, which tend to make lending riskier and more expensive. As a result, lenders often impose stricter conditions on loans, potentially suppressing deal activity.

Despite these challenges, PE firms remained undeterred by increased regulatory scrutiny. However, the report warns that firms might adopt nontraditional investment strategies to evade regulatory review. Joint ventures between nonprofit health systems and PE firms are highlighted as an area to watch, as these partnerships could potentially "evade antitrust scrutiny versus if they were engaging in traditional merger and acquisition growth strategies."

Impact on Healthcare Quality and Financial Stability

Growing evidence suggests that PE investment in healthcare could negatively impact care quality. Studies have found that PE hospital ownership has led to worse care quality, increased patient falls, higher costs for patients, and increased employee turnover.

The financial stability of PE-backed healthcare companies has also come under scrutiny. In 2024, seven of the eight largest healthcare bankruptcies involved companies backed by PE firms, according to research from the Private Equity Stakeholder Project.

Regulatory Response and Future Outlook

In response to these concerns, multiple state and federal lawmakers have attempted to further regulate healthcare PE deals. In January, the Senate released findings from a year-long probe into how PE ownership of two hospital chains negatively impacted operations. Massachusetts passed a law allowing regulators to more closely review deals involving private equity investors.

Looking ahead, PE deal volume could increase in 2025, driven by falling interest rates and potential changes in the political landscape. Analysts predict that a new administration may adopt a more favorable stance towards PE investors compared to the current administration.