As the healthcare landscape continues to change rapidly, private equity firms are taking note and getting involved in the healthcare sector. Private equity firms are now the owners of a growing number of physician groups in the U.S. A study published in JAMA Health Forum suggests that these private-equity-owned practices are linked to increased healthcare spending and patient utilization. The study found that private-equity-owned practices showed a consistent rise in spending through eight quarters after an acquisition, with the average charge per claim increasing 20% and the average allowed amount per claim up 11%. The private equity acquired practices saw visits by new patients increase by 38% and total visit volume rise by 16%, compared to the control group, with a 9.4% increase in the share of office visits for established patients that were billed as longer than 30 minutes.
While it’s still unclear why private equity-owned practices are associated with higher spending, one possibility is that private equity firms could be making significant changes in terms of management, operating hours, or improved branding and referrals. Private equity firms typically seek annual returns exceeding 20%, so they need to generate higher revenue or reduce costs.
Why Private Equity for Physicians and Healthcare Companies?
Given the current state of the healthcare industry, it’s no surprise that private equity firms are taking an interest in physician groups and the healthcare industry as a whole. In recent years, we’ve seen a rapid increase in the cost of healthcare, and this trend is likely to continue. At the same time, the Affordable Care Act has put pressure on hospitals and physicians to provide high-quality care at a lower cost. As a result, many physician groups are struggling to remain profitable. Private equity firms can provide the capital and resources that these physician groups need to survive and thrive in this landscape.
For those in the general healthcare field, private equity creates a rise in new inventions and treatments for the medical field that can save and improve lives. New companies are constantly being born from the minds of those with interests in improving healthcare. These people have ideas to make treatments more affordable or to create new ones altogether and even design technology that improves the processes of those working in healthcare. However, they are often restricted by a lack of funding. That is where private equity comes in to play an important role in expanding the industry. This type of investment allows these new companies to have the start-up capital they need to succeed. In return, the investors are rewarded with a return on their investment if the company goes public or is sold, all while helping fund a medical solution that can help others.
We’re beginning to see private funding options, like those outlined by the JOBS Act, be utilized by medtech companies. However, will physician groups also explore this route as well opposed to traditional private equity funding?
Regardless, one thing is clear. Private equity-owned physician groups continue to grow, it will directly impact the care patients receive. Do these groups raise their prices to generate a return for the private equity firm or cut costs and pass that on to the patient? While there are some concerns about how these firms will impact healthcare spending, it’s still too early to tell. We’ll need to wait and see how things play out before we can make any definitive conclusions.
With the availability of the JOBS Act, capital-raising organizations can now seek out new investors and gain the resources they need to grow and compete in this rapidly changing landscape privately. By empowering themselves through education, healthcare practices can stay ahead of the curve, avoid common mistakes and pitfalls, and position themselves for success when raising private capital.
You can view recaps from the recent KoreSummit event on raising capital for Medtech companies to learn more about how healthcare and life science-based companies can utilize the JOBS Act exemptions.