By Dana Jacoby

Demystifying the Role of Private Equity Partnerships and its Influence on the Future of Medicine

Private equity (PE) investment is progressively altering the dynamics of the healthcare sector. These partnerships, once mostly limited in scale, now extend to an extensive array of medical specialties, each embracing these financial collaborations in order to help navigate an increasingly complex and nuanced healthcare environment that continues to see demand grow.

This article will explore the significance of private equity investment in healthcare, considering the reasons for its escalating presence, the specialties capturing the most attention today, the potential benefits and risks, and what the future may hold.

If you are considering the process of selling medical practice to private equity, or simply want to learn more about private equity investment in healthcare, read on.

Decoding Private Equity Investment in Medical Practices

PE partnerships have emerged as an innovative financial strategy in the complex landscape of medical finance. They involve investment firms acquiring a majority stake in a medical practice.

This financial model offers more than just capital — it provides comprehensive support in the form of strategic guidance and administrative assistance, all geared towards facilitating growth and stability within the healthcare industry.

The scope and influence of PE firms are indeed substantial. According to the Bain & Company’s 2021 Global Private Equity Report, the combined assets of global PE firms amounted to an impressive $4.5 trillion as of 2020. This large scale financial impact allows these firms to make sizable investments in healthcare, increasing advancements in medical technologies, care delivery, and patient outcomes.

PE partnerships can also support the integration of value-based care models, which focus on improving healthcare quality and efficiency. They provide the resources required to shift from traditional fee-for-service models, thus helping to advance the broader objective of healthcare transformation.

But what are the reasons behind this accelerating rate of PE investments in the medical industry?

The Accelerating Pace of Medical Private Equity Partnerships

PE partnerships have emerged as a significant trend in the medical industry over the past few years. This trend has only accelerated, with the COVID-19 pandemic serving as a potent catalyst. In 2020, PE healthcare deals reached a record-breaking $78.9 billion, marking a robust 21% increase from the previous year.

There are several factors fueling this accelerated pace. First, the consistent revenue stream and potential for growth offered by the healthcare sector make it an attractive prospect for PE firms.

Second, healthcare organizations face numerous challenges, such as rising operational costs and regulatory pressures. PE firms can provide the capital, strategic guidance, and operational support necessary to navigate these hurdles.

For instance, take orthopedics, a specialty that experiences high demand but suffers from a limited supply of practitioners. The situation is exacerbated by the looming ‘retirement cliff,’ where nearly 60% of orthopedic surgeons are aged 55 or above. Partnerships with PE firms equip these groups with the resources necessary to scale their operations, enhance technological capabilities, and improve patient care.

Likewise the oncology industry has experienced an increasing demand for services due to the rise in cancer incidences. Given the push towards value-based care and the complexity of cancer treatments, PE partnerships can offer the capital and strategic support needed for oncology practices to expand access, incorporate novel therapies, and optimize care delivery.

Leading Medical Specialties in PE Partnerships

As we delve into the key specialties attracting PE investment, there is a clear confluence of demographic shifts, technological advances, and public health concerns that are shaping the landscape.

  1. Orthopedics: As discussed above, the sector’s high-demand services and stable revenues, paired with the growing need for services like joint replacements, make it a highly attractive investment for PE firms and one of the top sectors for PE partnerships to form.
  2. Dermatology: This specialty has gained substantial interest due to its diverse revenue streams from medical, surgical, and cosmetic services. The rise of social media and its influence on body image is driving a surge in demand for cosmetic procedures within dermatology. At the same time, advances in telemedicine are facilitating access to dermatological care, thus expanding the patient base.
  3. Ophthalmology: This field stands out for its high consolidation potential and the growing patient demographics. An aging U.S. population forecasts a rise in eye-related conditions such as cataracts and macular degeneration, indicating a promising growth trajectory for the specialty. Additionally, the rapid advancements in eye care technology are making it an increasingly attractive proposition for PE firms.

These partnerships enable these specialties to better navigate complex healthcare ecosystems and evolving patient needs, thereby improving healthcare outcomes while also promising attractive returns for PE investors.

The Key Benefits of PE Partnerships

Despite the possible risks, private equity buying medical practices and partnering with them offers a multitude of benefits, as highlighted by our comprehensive survey of orthopedic surgeons post their PE partnership. Key findings include:

Operational Stability: Contrary to concerns about increased bureaucracy or interference with operational efficiency, all surveyed surgeons reported no change in their daily practice.

Reliability and Integrity: Participants confirmed the trustworthiness of their PE partners. Promises made were kept, demonstrating the partners’ commitment and integrity.

Preservation of Work-Life Balance and Benefits: No increase in work hours or reduction in benefits was reported post-partnership, debunking a common myth.

Maintenance of Clinical Authority: 93% of respondents confirmed that they retained their clinical autonomy, while none reported profit-focused cost-cutting by their PE partners.

These findings suggest that, handled correctly, PE partnerships can be beneficial and pose minimal disruption to the practice’s operations.

The Promising Future of Private Equity Investment in Healthcare

As we look into the future, the trend of private equity investment across medical practices is likely set to continue, fueled by promising returns and the demand for innovative care delivery models.

Like orthopedics, other medical specialties are likely to witness increased PE investment, providing the financial leverage needed for innovations and improvements in care delivery.

For such partnerships to remain effective, priorities must include optimizing patient care through the integration of technology and patient portals.

As medical groups navigate the evolving landscape of PE partnerships in 2023 and beyond, an understanding of these dynamics and strategic alignment can prepare them for sustainable growth and improved patient care.

For better or worse, PE partnerships are here to stay. Adapting to these trends and understanding their implications is essential to navigate the future.

To learn about what we do, or get further insights about private equity trends impacting a number of areas of medicine, and other hot topics, visit the Vector Medical Group Thought Leadership page.