Members of Congress took aim at private equity’s expanded role in the U.S. health care system on Thursday, addressing the topic during a special hearing held by the House Ways and Means Subcommittee on Oversight.
Much of the hearing focused on PE’s increasingly prominent role in nursing homes, as the COVID-19 pandemic has triggered heated debates about perceived differences in care between for-profit and nonprofit facilities. The discussion came just over a week after Sen. Elizabeth Warren (D-Mass.) promised to launch an investigation into for-profit and PE-backed nursing homes in light of the recently announced Genesis HealthCare (NYSE: GEN) restructuring.
“It’s past time for a bright light to be shined on how private equity ownership in our health care system affects patient safety, costs and jobs,” Rep. Bill Pascrell (D-N.J.), chairman of the House Ways and Means Subcommittee on Oversight, said at the start of the afternoon hearing. “Private equity’s influence stretches like an octopus.”
While nursing homes captured nearly all of the spotlight, hearing participants likewise raised concerns about private equity’s broader influence across the continuum of care.
PE firms took part in a record number of deals in 2020, despite an economic recession and other challenges related to the coronavirus. Through mid-November alone, PE investors announced nearly 4,100 deals, up 5% from all of 2019, according to PricewaterhouseCoopers data.
Overall, there was roughly $66 billion in PE investment across all of health care last year, a 21% increase compared to 2019, according to statistics cited by Pascrell.
“Private equity’s expansion to health care is troubling because private equity’s main focus on profits is often at odds with what is best for patient care,” the Democrat from New Jersey said. “Private equity’s business model involves buying companies, saddling them with mountains of debt and then squeezing them like oranges for every dollar.”
Private investors have been particularly active in the home health and home care spaces in recent years, dealmaking experts told Home Health Care News.
Reflecting back to a decade or two ago, it’s difficult to remember being part of even a single PE-related deal, Les Levinson, the co-chair of the transactional health care practice at Robinson & Cole LLP, noted. In comparison, Levinson in 2020 helped put together “six or seven” deals where the buyer was either a PE firm itself or a strategic home health company backed by a private investor.
“There has been private equity interest in the space for two or three years, certainly even longer than that,” Levison told HHCN. “But not at the level you’re seeing today.”
Rich Tinsley, president of M&A advisory firm Stoneridge Partners, similarly highlighted the increasingly active role of PE in the home health and home care industries.
In the past, Tinsley would field a handful of calls per month from private investors and other entrepreneurs looking to get into the space, he said. Now, it’s closer to a handful of calls per week — sometimes even per day.
“Over the last few years, I’ve been getting several calls from private equity companies that are not in the space, but want to be in the space,” Tinsley told HHCN. “And that interest level is from private equity companies that are small, medium and large — it runs the whole whole gamut.”
Reshaping the market
PE has been active in health care for a long time, especially in the context of skilled nursing facilities (SNFs) and the real estate entities that support them.
But as more Americans opt to age in place, investors have steadily migrated to the home-based care world. That trend has only accelerated due to the COVID-19 pandemic and the corresponding decentralization of health care.
“The pandemic has really brought even more to light that many people want to be out of the congregate settings, that they would prefer to be in their home,” Levinson said. “The desire and ability to get treated in the home, I think, is really inspiring additional private equity interest in the space, particularly from players who might not have been active before.”
The activity has been so robust, that it’s nearly impossible to identify the busiest or most aggressive PE buyers.
“I don’t have one particular financial or strategic that is gobbling up the bulk of transactions a year,” Tinsley said. “I don’t have one that is the predominant example. That wouldn’t be the case if we went back 10, 15 years ago.”
One of the larger recent PE deals took place in November, when Centerbridge Partners and The Vistria Group teamed up to purchase Help at Home, a Chicago-based home- and community-based services provider that operates across 13 states. Wellspring Capital Management — a different PE firm — had previously owned the provider.
Vistria also invested in the San Diego-based Mission Healthcare, a home health, hospice and palliative care provider, in December. Mission had previously been backed by HCAP Partners.
In some cases, PE buyers have invested in home-based care assets with the vision of adding on via acquisition. Bain Capital Double Impact, for example, has steadily added onto the provider it helped create by merging Arosa and LivHome back in 2018.
In other cases, PE firms have set their sights on top home health and home care players from the very start. Two of the largest home health companies in the country — Elara Caring and AccentCare — are both PE-backed.
So many of the large, strategic home health providers of today are backed by private equity, Tinsley said, that categorizing deals often becomes tricky.
“The blurring between strategic and financial buyers has greatly increased, right,” he said. “They’re not these two separate buckets anymore.”
Potential pros and cons
Thursday’s hearing was overwhelmingly critical of PE’s involvement in health care.
Among the dangers discussed, lawmakers and expert witnesses frequently touched on a lack of transparency, with PE-backed health care organizations often set up as a series of shell companies to minimize liability.
“I worry private equity has moved on from toy stores to hospitals, physician practices and nursing homes, many of which rely on taxpayer-funded programs,” Pascrell said. “Understanding the web of transactions, it’s like a Russian nesting doll. A lack of transparency in private equity ownership makes proper oversight by regulators nearly impossible.”
Patient care was likewise a major focus.
Sabrina Howell, as assistant professor of finance at the New York University Stern School of Business, explained during the hearing how some PE-backed nursing homes have a history of boosting short-term profits by cutting patient care costs.
“As one example of how private equity can have detrimental effects in health care, in recent research, I’ve shown that going into a PE-owned nursing home increases the short-term probability of death by about 10%, implying over 20,000 lives lost due to PE-ownership of nursing homes during about a 10 year period,” Howell said.
But the downsides of PE vary greatly across health care, even across organizations.
“It might look quite different in areas with different incentives, such as dermatology,” Howell added. “And there are probably examples where PE even in nursing homes is good for patients.”
Although there have been similar concerns voiced about PE in home health and home care at times, many have actually argued that private investment helps solidify the space.
For starters, PE firms bring with them greater resources and improved access to capital. That can help home-based care providers when it comes to purchasing new technologies or investing in staff training programs.
“They have way more resources than what I’ll call your entrepreneurial mom and pop,” Tinsley said. “The industry that we’re in — home- and community-based care — there’s just not a lot of assets to borrow against. Access to capital for most entrepreneurial or mom-and-pop providers is really tough.”
Additionally, PE buyers can also help providers become more efficient, which could help an organization dedicate more time and energy toward patient care.
One of the biggest knocks about PE in home-based care is a possible lack of ownership continuity, with most firms looking to exit between three and five years. Yet in many cases, a provider’s leadership team never changes, which keeps operations stable.
Figuring out what PE’s role in health care should ultimately look like is a Herculean task for executives, regulators and lawmakers alike. A potential solution to help ease concerns, though, could simply be more publicly available information for consumers.
Terris King, founder and CEO of King Enterprise Group, floated the idea of having the U.S. Centers for Medicare & Medicaid Services (CMS) include ownership structure on its Compare website.
“Does our system even capture [that information]?” King said at the hearing. “And if it does, if we put it on the Compare website, … is that an ability, through this process, to increase the choices that we make?”
Mark Parkinson — president and CEO of the American Health Care Association and National Center for Assisted Living (AHCA/NCAL) — pushed back on the PE criticism in a statement issued after Thursday’s hearing.
“Ninety-five percent of nursing homes in the United States were hit by the COVID-19 pandemic, and less than 10% of total nursing homes are owned by private equity firms,” Parkinson said. “There are many factors that affect the quality of care in nursing homes, and focusing solely on ownership structure will not achieve better outcomes for residents and staff.”