Across the Philadelphia region, private equity firms are increasingly investing in healthcare companies, raising concerns about the potential impact on patient care and costs.These firms, known for acquiring and selling businesses, are facing scrutiny from critics who fear that their focus on short-term profits may compromise the quality and accessibility of medical services.

The Private Equity Stakeholder Project (PESP), a watchdog group, argues that these firms often prioritize extracting profits over patient well-being. According to PESP, private equity investments can help medical facilities by providing capital or outsourcing administrative duties. Though, the group contends that the primary focus remains on generating short-term gains, which may not align with the best interests of patients.

A Notable Presence in the Philadelphia Area

A 2024 report by PESP highlights the extensive reach of private equity in the Philadelphia region’s healthcare sector. The analysis encompasses facilities in eight eastern Pennsylvania counties, and also parts of New Jersey and Delaware. Of the approximately 900 facilities identified in the report, around 650 are located in Pennsylvania.

Michael Fenne, a senior research and campaign coordinator at PESP, explained the rationale behind tracking private equity’s presence in the region:

We wanted to identify the scope of private equity’s presence in an area that had already experienced its risks. Pennsylvania has been the site of multiple closures in recent years of hospitals connected to private equity, most recently including two Crozer hospitals which had been affiliated with Prospect Medical Holdings, formerly owned by private equity firm Leonard Green & Partners.
Michael Fenne, Private Equity Stakeholder Project

Fenne emphasized the lack of transparency surrounding private equity investments, noting that these firms don’t have the same kind of reporting requirements that publicly traded companies on a stock exchange would have. He estimates that there are approximately 900 healthcare provider locations in the Philadelphia area owned by private equity,but believes the actual number is likely higher due to the difficulty in identifying these companies.

The Allure of Healthcare for Private Equity

Private equity firms are drawn to healthcare for several reasons, primarily its fragmented nature and the potential for consolidation. fenne explained:

They target areas that are fragmented with the hopes of consolidating certain health care subsectors. So nursing homes,cardiology,anesthesia providers,such as,they may try to consolidate in a given geographic market. And if they’re able to do that, it gives them more power to set prices for patients and consumers, to determine wages for workers, and also to shape and determine what kind of services are provided in a given area.
Michael Fenne, Private Equity Stakeholder Project

Additionally, the pursuit of short-term profits is a key motivator. Private equity firms typically aim to extract profits within three to seven years of investing in an area, believing they can achieve this in the healthcare sector.

Challenges in Data Collection

Gathering data on private equity-owned healthcare facilities is a significant challenge due to limited data availability. PESP relies on press releases and the firms’ public portfolio web pages to identify these companies.Fenne noted:

They’re typically not required to disclose their holdings, so anything we know about companies that are owned by private equity usually comes from what they choose to disclose themselves or what’s been uncovered by regulators or in bankruptcy lawsuits. We had to work off of that limited list of companies that we identified and just go through and map out all of the locations that they were operating from.
Michael Fenne,Private Equity stakeholder Project

Prevalent Types of Facilities

In the Philadelphia area,the most common types of private equity-owned healthcare facilities include physical therapy,behavioral health,and dental offices. While dental health aligns with national trends, Fenne could not confirm whether the other two areas mirror national patterns.

He clarified that the prevalence of these areas in the report may be due to the methods used to identify private equity-owned companies, suggesting that other sectors may be equally active but less easily identified.

The “Stealth Consolidation” Strategy

Private equity firms often employ a strategy of consolidating autonomous providers under a single corporate umbrella. This involves using “platform companies” to roll up smaller providers,a tactic described by a former Federal Trade Commission (FTC) director as a “stealth consolidation” strategy.

In physician practices, medical services organizations (MSOs) are used to handle administrative and billing tasks. While this can be attractive to physicians,it frequently enough leads to reduced control over day-to-day operations and patient care processes.

The Need for Transparency

Increased transparency around private equity holdings would benefit patients, healthcare providers, and policymakers in Pennsylvania. Fenne argued:

Patients, providers, and policy makers don’t really know where their money is going when they pay a health care provider — whether it’s going to the provision of care, whether it’s going to pay off debt that was put onto a company by a private equity firm, or whether it’s going to fund a private equity dividend. So there’s a need for increased transparency around what private equity owns, and what they’re doing with their money.
Michael Fenne, Private Equity Stakeholder Project

Impact on Patient Care

Private equity’s involvement in healthcare can lead to reduced access to care and fewer resources spent on patient services. fenne highlighted that in the previous year, 21% of health care companies that went bankrupt were backed by private equity. He also noted at least four hospital closures in eastern pennsylvania connected to private equity in recent years.

These closures force patients to find new providers, possibly driving farther for care and placing additional burdens on remaining providers.

Legislative and Regulatory Responses

Elected officials are beginning to address the concerns surrounding private equity in healthcare. In pennsylvania, the governor has called for legislation to grant the attorney general the ability to review mergers and acquisitions, as well as to limit sale-leaseback transactions that allow firms to strip hospitals of their real estate for short-term profits.

At the federal level, efforts to rein in private equity include the Stop Wall Street Looting Act, introduced in the Senate. Additionally, multiple regulatory agencies have initiated investigations to examine the effects of private equity consolidation in various industries, including healthcare.