02/12/2025
Healthcare organizations need access to capital to grow, retain employees, and maintain a high standard of care. While the care itself is expensive for both patients and providers, high operational costs, limited reimbursement rates, and increasing patient deductibles stifle revenue generation and shrink capital available for these growth initiatives. Inadequate technology infrastructure, resistance to change, and inefficient operations are compounding factors that complicate the capital problem organizations are facing. To overcome these financial constraints and achieve their strategic goals, healthcare organizations seek external partnerships and healthcare investors. Enter private equity.
PE has established a presence in the healthcare industry over the past decade. Motivated by an economy with low interest rates, increased commercialization of healthcare, and a “recession-proof” business model, this type of private investment has sought partnerships with primarily physician groups, senior healthcare facilities, and some large hospital systems. While the expertise and resources brought forth by PE are valuable, healthcare providers should familiarize themselves with alternative financing strategies before committing solely to PE as a catalyst for growth.
Current Impact of Private Equity Investment in Healthcare
In the past, investors in the industry were primarily physicians who were using their own funds to start or acquire healthcare groups. Now, the investors are firms representing wealthy individuals and institutions, conducting acquisitions that come with their own pros and cons. Typically, these investment firms search for healthcare businesses with stable cash flows, opportunities for operational improvements, and a strong market position. After a PE firm makes a deal with one of those healthcare businesses, the impact can be seen as a catalyst for mergers & acquisitions, consolidations, and disruption.
The management expertise and networks provided by PE firms are invaluable and can bolster the financial performance of a healthcare organization. Additionally, PE investors can help with technology enhancement, research and development efforts, and economies of scale. However, traditionally, most of the capital used to fuel such advancements comes from debt with the business’ assets used as collateral. This increases risk because of larger debt obligations, which can divert money away from making operational improvements and supporting staff. Furthermore, the transition of decision-making control to PE investors may potentially limit physician representation. According to a Harvard Medical School research study, this exact arrangement resulted in a reduction of quality in patient care and increase in patient mortality rates.
This is not to say all PE-backed healthcare providers are experiencing negative outcomes. For example, KKR’s PE investment in Health Care Assistant (HCA) and the overall expansion of urgent care facilities in rural America exemplifies the positive outcomes achievable when interests align. However, it still warrants a second look to determine whether PE investment is the most effective method for financing organizational growth.
Alternatives to Private Equity
There are several alternatives to private investment that can accelerate organizational growth, including:
If your leadership team is currently evaluating growth strategies, consider the options outlined alongside the potential benefits and challenges of PE investment. While PE is the more familiar instrument, it is prudent to consider alternatives that align with your organization’s risk appetite, cultural fit, and growth trajectory.
Strategic Growth For Your Organization
Choosing the right financing strategy and partnerships starts by defining the type of growth your organization is striving for. Is speed a priority, or is retaining decision-making power? Does growth mean tapping into new geographic areas, or does it mean investing more in programs to retain employees? Does the organization need a one-time infusion of capital, or does it need to redesign the entire financial strategy?
Taking the time to define the vision for growth enables your leadership team to select the most effective financing strategy for your organization’s unique priorities and needs.
Have a vision for growth, but aren’t sure how to get there? Or, does your organization need to refresh a stagnant strategic plan? Fill out the form below to connect with one of our consultants.
