While private equity (PE) investments in healthcare have long been subject to scrutiny, as PE investment in healthcare has grown sizably over the last decade, so too has the concern from federal and state regulatory bodies surrounding this type of investment. Here we explore some of the ongoing and emerging issues regarding PE in the healthcare sector, including the recent Centers for Medicare and Medicaid Services (CMS) rulemaking on PE transparency requirements.
PE in Healthcare: A Brief History and Recent Concerns
The concern about money in healthcare, and its impact on professional judgment, is a longstanding one. As far back as the 1930s, investment by nonhealthcare professionals in the healthcare industry has attracted the interest of regulatory bodies. Due to potential conflicts of interest in various disciplines, including medicine and optometry, various states have devised what we now refer to as the Corporate Practice of Medicine doctrines. Since the proliferation of investment funds and PE companies, federal and state enforcement agencies have been wary of their involvement in healthcare enterprises.
Numerous studies have raised concern that such PE investments are pushing healthcare providers to cut corners to achieve financial goals. Critics assert that PE investment in hospitals and healthcare providers can result in higher costs across the board, medically unnecessary care, and poor patient outcomes.
Conversely, proponents of PE healthcare investments assert that capital infusion is in fact necessary to help the healthcare industry remain commercially viable with tighter margins from payors and increased expectations related to technological infrastructure, regulatory compliance burden, patient satisfaction, and care metrics.
CMS Nursing Home Disclosure Rule: A New Frontier
One of the most consistent criticisms is that there is a lack of transparency in knowing whether a healthcare organization is backed by a PE investment. The federal government has heard this criticism acutely and is actively seeking to remedy it, hoping that more fulsome disclosure will allow payors and patients to be better consumers in choosing the type of healthcare they want.
Effective January 16, 2024, a new rule (the Final Rule) promulgated by CMS significantly expanded disclosure requirements for skilled nursing facilities participating in Medicare (SNFs) and nursing facilities participating in Medicaid (NFs) with respect to direct and indirect ownership, oversight, and managerial control, among other information, in order to increase transparency and provide families necessary data for evaluating such facilities.
Specifically, in addition to previous disclosure obligations, SNFs and NFs will now be required to disclose each of the following:
The Final Rule defines an “additional disclosable party” as any person or entity who does any of the following: (1) exercises operational, financial, or managerial control over the facility; (2) provides policies or procedures for any of the facility’s operations; (3) provides financial or cash management services to the facility; (4) leases or subleases real property to the facility; (5) owns a whole or part interest equal to or exceeding 5% of the total value of the facility’s real property; (6) provides management or administrative services; (7) provides managerial or clinical consulting services; or (8) provides accounting or financial services to the facility.
SNFs and NFs will also have to identify whether any of these parties are PE firms or real estate investment trusts.
CMS has noted that the transparency requirements aim to empower families and other stakeholders to closely examine the correlation between the ownership of a facility and the quality of care at such facility in order to make better-informed decisions about nursing home care.
While the initial focus has been on SNFs and NFs (likely due to PE’s historic investment in these entities and the significant quality-of-care concerns arising from the COVID-19 pandemic), it remains to be seen whether this same disclosure obligation will expand to other provider types. For instance, will CMS soon request information about the identity and ownership of management companies and administrative services organizations that support physician practices? While PE firms are hesitant to disclose ownership and control information, they should attempt to acclimate themselves to that possibility.
Trends in PE Healthcare Investing: Federal and State-Level Focus
Both the executive branch and Congress have had PE investment in healthcare in their crosshairs. There has been considerable US Federal Trade Commission (FTC)/antitrust concern regarding PE involvement in healthcare. In recent months, the FTC has been particularly active. In September 2023, the FTC filed suit against US Anesthesia Partners alleging anti-competitive activity associated with the purchase and operation of anesthesia practices in Texas.
The FTC’s action followed on the heels of comments by FTC Chairwoman Lina Khan that the agency would be investigating anti-competitive activities of PE-backed companies. Only months later, in November 2023, two US senators followed the FTC’s lead and sent letters to US Anesthesia Partners, demanding information about its acquisition and pricing strategies.
More recently, Chairwoman Khan made additional comments on March 5, 2024, doubling down on her prior position and noting that “[t]he FTC will continue to use all of our tools and authorities to protect people’s access to affordable, high-quality health care. Doing so requires that we keep pace with how firms are acquiring and deploying monopoly power or undermining competition in the modern economy.”
States have also been more active in the PE healthcare space, including nine states (Connecticut, Illinois, Massachusetts, Minnesota, Nevada, New York, Oregon, Washington, and California) that have laws that require state review and/or approval of healthcare transactions as well as disclosure of direct and indirect owners of healthcare organizations. State legislatures have noted that these laws are an attempt to enhance transparency of PE ownership in healthcare organizations.
Future Considerations for Healthcare PE
Whether it’s federal or state disclosure requirements, antitrust review, or US Department of Justice scrutiny, PE investors should anticipate their investment in healthcare organizations being public. While the healthcare landscape for PE investors is highly scrutinized, there is still opportunity. Deals will take additional time and patience, with state transaction review likely to be the longest gating item to closing.
Related Resources
For more information, see our previous thought leadership below: