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Dan Loney: Well, you may have
recently heard that Walgreens
00:00:02
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
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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
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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
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Assistant Professor of
Healthcare Management
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here at the Wharton School.
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Atul, great to talk to you again.
How are you?
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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
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of highlighting the influence or
the importance that private
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equity sees in the healthcare
sector right now. Tell us about
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how you view the connection
between private equity and
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healthcare at the moment.
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Yeah. So you know, as you said,
private equity has been growing
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its— its investment into
healthcare, particularly in the
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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
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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
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since then, as you know, the
interest rate environment has
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turned pretty unfavorable.
There's also been this sort of
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vibe-session, recession sort
of concerns. And so since then,
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actually, private equity
investments in healthcare have
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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
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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
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same direction of higher deal
values.
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So what has private equity, then,
brought to health care?
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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
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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
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efficient. They tend to bring
investments into IT and sort of
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cutting edge management
practices. They're obviously
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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
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the other hand, because it's
such a high-powered financial
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incentive model, and because
healthcare markets are so
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imperfect, if you bring these
two forces together, it could
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lead to some negative
consequences for patients, for
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taxpayers. And so there has been
some evidence suggesting that
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when private equity gets
involved, particularly in
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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
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lead to poor quality outcomes
for patients. So I would say the
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evidence is pretty mixed.
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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.
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Absolutely, I would say
transparency is probably one of
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two most important issues with
the involvement of private
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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.
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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
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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
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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
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firms face. So there are a
number of challenges to actually
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tracking the performance of
private-equity-owned firms.
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But it seems like there are
states that have concerns about
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the level of growth.
Pennsylvania, where we are, being
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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
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their own, without waiting for
the Feds on— on— on improving— on
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increasing transparency, on— on,
actually, not just private
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equity. So California looked
into this. But I think at the
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last minute, Governor Newsom
vetoed that bill, which would
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have actually given the state
attorney general more power to
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block healthcare deals by
private equity firms. In
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Pennsylvania, again, the
legislature is looking at this
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as well. Here, I think I'm more
optimistic that actually
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there'll be more significant
action that will be taken,
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particularly with regards to
transparency and how data will
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be available. Not just on
private equity, but also,
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you know, transactions above
a certain size.
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Is the decision process for, then,
businesses in healthcare— and
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look, you have big health
systems and you have smaller
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businesses like physical
therapists, etc. I mean, I would
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think it can be a relatively
simple decision to invite
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private equity into your
business and provide the support
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that maybe some businesses are
looking for.
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Absolutely. I think that
for— for small practices,
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physician practices like
physical therapists, like you
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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,
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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.
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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
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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
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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
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in the academic literature, you
know, physicians are now
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beginning to get worried that
with all of this investment and
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the good, there's also some
concerning things that come in,
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which is that private equity
firms sometimes start
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controlling your treatment
decisions. Or, you know, they
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may influence you, you know,
towards doing certain kinds of
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procedures. The other thing that
doesn't directly affect
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physicians, but affects society
at large, is that private equity
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firms, when they acquire these
physician practices, they
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renegotiate the prices with
private insurers. And they try
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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
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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
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has been impacted to this
point, right?
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No, not on the physician practice
side. In fact, I am quite
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optimistic that private equity
involvement with physician
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practices and small businesses
in general can actually improve
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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.
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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
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you look at labor, health care
has been a big supporter of the
00:06:58
labor markets over the last
what, decade or so?
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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
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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.
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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
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interested in health care, is
because they think that health
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care will continue to grow.
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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
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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.
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Yeah, absolutely. I think we
should all watch this space very
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carefully. Governments are going
to seek more transparency. I
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would encourage them to also
think about aligning the
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incentives of private equity
firms with those of patients and
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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
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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
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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,
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particularly on physician
practices.
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Atul, great to talk to you. Thanks
for your insight. All the best.
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Thank you so much.
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Thank you. Atul Gupta,
who's Assistant Professor
00:08:19
of Healthcare Management
here at the Wharton School.
