Across the United States, state legislatures are beginning to evaluate and debate the growing impact of private equity on the healthcare sector. This scrutiny is markedly increasing due to high-profile instances like the bankruptcy of Steward Health, which is under investigation by federal authorities following its financial collapse. This investigation raises questions about the broader ramifications of private equity firms stepping heavily onto the healthcare scene.
The case of Steward Health, which emerged from Cerberus Capital Management's acquisition of the Massachusetts hospital chain, has become emblematic of what critics argue are the perils of private equity’s profit-driven approach to healthcare. Cerberus initiated its expansion strategy by acquiring struggling hospitals, which eventually turned Steward Health Systems—at one point the largest private for-profit system—into a troubled operation, culminating in its bankruptcy filing on May 6, 2024. The concerns surrounding debt liabilities and vendor payments point to broader systemic risks associated with private equity’s involvement.
So, what exactly is private equity, and why are state leaders feeling the need to step up regulation? Private equity consists of investment partnerships or entities focused on acquiring and managing companies with the intent to sell them later at profit—in other words, the main goal is boosting value. While creating profit isn’t inherently negative, the manner in which private equity firms achieve financial improvement often involves aggressive cost-cutting measures. These strategies can lead to substantial shifts within healthcare organizations, which might be abrupt and disruptive due to the relatively short average hold time of only 5.6 years for investments, as noted by industry reports.
Such rapid changes can leave acquired healthcare firms burdened with long-term challenges, as evidenced by Steward Health’s predicament. So far, twelve states have taken legislative action specific to regulating private equity’s influence on healthcare, demanding pre-transaction reviews by state attorney generals. With the legislative session soon to open, the question arises: how will Oklahoma regulators respond to the growing concerns over private equity?
Activists and health advocates contend the results of these acquisitions can lead to rising healthcare costs, diminishing quality of care, and increasingly limited access to necessary services. For example, private equity’s swift grab for control of over 6,000 physician practices over the last decade has yielded outcomes where healthcare expenses typically increase following such buyouts.
California is among the states pushing for reform, with legislation proposed to enable its Attorney General, Rob Bonta, to pre-approve private equity transactions involving healthcare. The proposed law aims to restrict the degree to which non-physicians participate directly in healthcare management and decision-making and demands prior notification for transactions involving various medical businesses. Advocates for this legislation assert it is necessary due to the historically rampant mergers by private equity firms and their concerns about the healthcare business model increasingly prioritizing profit rather than patient care.
Critics argue, though, this legislation could deter much-needed investment. Following significant loans and backing from private equity, many healthcare organizations have been able to innovate and stabilize financially. These acquisitions could transform previously struggling sectors, opening up new paths for patient care and systems management improvement.
The undeniable rapid growth of the private equity sector has been shaped by low interest rates and sky-high stock prices, significantly accelerating transactions over all industries. Alongside healthcare, the market for retail, telecommunications, and technology has observed similar trajectories paved by private equity involvement.
The recent scrutiny falls under the Biden administration’s enhanced focus on antitrust policies. Notably, KKR, one of the leading players within the private equity space, is currently tangled up with the Justice Department over investigations related to inadequate disclosures during mergers. Investigators suspect KKR may have withheld significant information from their filings, raising the stakes for all private equity firms under the intensifying regulatory spotlight.
The injection of private equity firms has swayed the dynamic within healthcare settings wherein substantial capital resumes may lead to operational efficiency, but often at the expense of long-term strategic perspective. It calls to mind whether financial optimizations truly align with the multifaceted needs of patient care. The potential for exploitation or corner-cutting to maximize short-term financial gains raises ethical questions surrounding the appropriateness of private equity operating within extremely sensitive sectors such as healthcare.
For much of the past decade, aggregative transactions led by private equity firms focused on outpatient services, physician practices, and healthcare startups have reshaped the operational fabric of American healthcare. Supporters argue this often brings necessary resources and restructures mismanaged practices. Yet, the broader narrative asks: What happens when the financial viability of healthcare operations replaces the patient-first approach historically championed by medical professionals?
Recent reports, including findings from Health Affairs, express significant concern over how such business models bear consequences for treatment accessibility, leading many to advocate for stronger oversight. Increased attorney general reviews aim to provide protective barriers ensuring healthcare providers adhere to patient-centered practices.
The intensification of regulation around private equity and healthcare continues to evolve as consumer groups, medical associations, and lawmakers engage. The impetus for these developments rests on the promise of protecting healthcare access and quality, with fierce contention between industry advocates and those seeking standards of accountability. The discussions are set to set significant precedents as states redefine the relationships between profit-driven motives and healthcare service delivery.
