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Dan Loney: Well, you may have
recently heard that Walgreens was going to be acquired by
private equity firm Sycamore
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Partners. It is not the first
time, and probably won't be the last, that we will hear about
private equity's involvement in
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the health care sector, as it
has been growing significantly in the last many years. To
discuss where this takes health
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care right now, we're joined
right now by Atul Gupta, who is Assistant Professor of
Healthcare Management
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here at the Wharton School. Atul, great to talk to you again.
How are you? I'm great. Thank you so much for
having me again, Dan.
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Thank you. And again, this latest
announcement with Walgreens kind of highlighting the influence or
the importance that private
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equity sees in the healthcare
sector right now. Tell us about how you view the connection
between private equity and
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healthcare at the moment. Yeah. So you know, as you said,
private equity has been growing
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its— its investment into
healthcare, particularly in the US, over the last decade. If you—
if you chart their growth in
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healthcare, it's been growing
pretty much every year, year on year, until 2021. That was the
peak, when we had about 100
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billion, with a B, dollars of
investment in healthcare. But since then, as you know, the
interest rate environment has
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turned pretty unfavorable.
There's also been this sort of vibe-session, recession sort
of concerns. And so since then,
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actually, private equity
investments in healthcare have dropped. 2022 and 2023 were
actually pretty linear, and the
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early numbers from 2024 suggest
that now things are beginning to rev up again. And so, you know,
now we have this new deal
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suggesting that 2025 might
actually be going back in the same direction of higher deal
values.
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So what has private equity, then,
brought to health care? So, that's a great question, you
know. And honestly, I don't think that
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there's a consensus on that yet.
You know, there's— if you look at— if you just look at it
conceptually, private equity can
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be a vehicle for great good,
because they tend to be more efficient. They tend to bring
investments into IT and sort of
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cutting edge management
practices. They're obviously very sophisticated in their
financial practices. So all of
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that suggests that there could
be some good there. But then, on the other hand, because it's
such a high-powered financial
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incentive model, and because
healthcare markets are so imperfect, if you bring these
two forces together, it could
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lead to some negative
consequences for patients, for taxpayers. And so there has been
some evidence suggesting that
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when private equity gets
involved, particularly in healthcare providers— you know, for
example, evidence from hospitals
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and nursing homes— they tend to
cut back on staff, which can lead to poor quality outcomes
for patients. So I would say the
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evidence is pretty mixed. And it sounds like the the issue
of transparency is one that
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seems to be a concern by many on
the outside. Absolutely, I would say
transparency is probably one of
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two most important issues with
the involvement of private equity in healthcare. It's— as
you know, as you may know, it's
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very difficult to actually track
the ownership of these firms. When a private equity invests in
a target, it's very difficult to
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figure that out, because they
use a very complex structure of ownership. The deal terms are
not transparent to outsiders—
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and by outsiders, I mean
anybody who's not part— a party to the deal. Because it's a private
business model, they don't have
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the same kind of regulatory
compliance that publicly-listed firms face. So there are a
number of challenges to actually
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tracking the performance of
private-equity-owned firms. But it seems like there are
states that have concerns about
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the level of growth.
Pennsylvania, where we are, being one of them. Tell us— take us
through that side of the story.
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Yeah, a number of states are
actually considering regulatory action on their own, without waiting for
the Feds on— on— on improving— on
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increasing transparency, on— on,
actually, not just private equity. So California looked
into this. But I think at the
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last minute, Governor Newsom
vetoed that bill, which would have actually given the state
attorney general more power to
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block healthcare deals by
private equity firms. In Pennsylvania, again, the
legislature is looking at this
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as well. Here, I think I'm more
optimistic that actually there'll be more significant
action that will be taken,
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particularly with regards to
transparency and how data will be available. Not just on
private equity, but also,
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you know, transactions above
a certain size. Is the decision process for, then,
businesses in healthcare— and
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look, you have big health
systems and you have smaller businesses like physical
therapists, etc. I mean, I would
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think it can be a relatively
simple decision to invite private equity into your
business and provide the support
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that maybe some businesses are
looking for. Absolutely. I think that
for— for small practices,
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physician practices like
physical therapists, like you mentioned— I think for them,
it— private equity can be a real
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help, because they bring in some
of this technological support, management support, access to
capital that they lack on their
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own. And actually it can make
life easier for the physician. And that's part of the appeal of
private equity, particularly for
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young physicians who, you know,
don't— there's been a cultural shift in that the newer
generation of physicians don't
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actually want to get bogged down
in all that goes into running your own practice. That being
said, you know, I've spoken with
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a number of physicians. And sort
of, you know, reading about this in the academic literature, you
know, physicians are now
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beginning to get worried that
with all of this investment and the good, there's also some
concerning things that come in,
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which is that private equity
firms sometimes start controlling your treatment
decisions. Or, you know, they
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may influence you, you know,
towards doing certain kinds of procedures. The other thing that
doesn't directly affect
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physicians, but affects society
at large, is that private equity firms, when they acquire these
physician practices, they
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renegotiate the prices with
private insurers. And they try to get higher prices. And what
that means for patients and
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customers in general is that the
cost of your healthcare premiums goes up, whereas the quality of
the service may remain the same.
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Well, but we don't have
definitive data that the care has been impacted to this
point, right?
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No, not on the physician practice
side. In fact, I am quite optimistic that private equity
involvement with physician
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practices and small businesses
in general can actually improve their efficiency, and hopefully
some of those efficiencies can
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then get passed through to
insurers in the form of lower costs. And this all coming at a time
where we're seeing a big change
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in health care anyway, with the
move to digital. Obviously, when you look at labor, health care
has been a big supporter of the
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labor markets over the last
what, decade or so? Yeah, no, absolutely. Healthcare
is now— if not the largest, it's
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probably one of the top two or
three largest sectors in terms of employment in the US. And as
we all know, healthcare is
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recession-proof, or at least
perceived to be recession-proof. We'll find out. And— and so
that's, you know, part of the
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appeal of private equity, also,
for, you know, why they're interested in health care, is
because they think that health
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care will continue to grow. But it sounds like this is an
area to watch, when you talk
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about the investment that PE is
making in health care, and what the government at the state or
local level might be looking to—
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to draw out of them in the
months and years ahead. Yeah, absolutely. I think we
should all watch this space very
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carefully. Governments are going
to seek more transparency. I would encourage them to also
think about aligning the
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incentives of private equity
firms with those of patients and taxpayers in the form of— you
know, perhaps, you know, in the
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use of value-based payments,
which link their performance on quality and spending to their
payments. So I think you'll see—
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you'll start to see some
movement on that. And then, of course, you know, if private
equity does get back to the good
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old days, then you'll start
seeing a lot more deals, particularly on physician
practices.
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Atul, great to talk to you. Thanks
for your insight. All the best. Thank you so much.
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Thank you. Atul Gupta,
who's Assistant Professor of Healthcare Management
here at the Wharton School.