Reigning in PE’s worst excesses in healthcare: ImpactAlpha

ImpactAlpha recommended questions for private equity healthcare investments

In February, ImpactAlpha published an article to help asset managers assess whether their private equity managers are engaging in predatory behavior towards the U.S. healthcare system.

The piece points out that for some areas like labor and climate (as well as housing housing) standards already exist to help guide investors in their due diligence processes to guard against associated risks. However, similar standards do not yet exist in the healthcare sector.

Impact Alpha: An allocator’s guide to reigning in private equity’s worst excesses in healthcare – February 8, 2025

Private equity’s role in healthcare is rapidly growing, making it ever more important for pension funds and other limited partners to adopt standards and ensure that funds are allocated to responsible and sustainable investments which do not result in reduced healthcare quality or access.

The article recommends eight questions for asset owners (i.e., limited partner investors) to consider when making a healthcare investment. The questions are:

1. “Screen out or screen in?”

An investment policy can limit exposure to riskier operating assets such as healthcare facilities while still allowing for investment in other healthcare sectors such as medical devices, software, and digital health services.

However, as PESP has reported, private equity’s risks touch virtually every corner of the industry – including hospitals, outpatient providers, billing and medical debt collection software, clinical research, durable medical equipment, home health and hospice, prison healthcare, and more.

The typical private equity investment playbook – pursuing outsized returns over short time horizons while using high levels of debt – may lead to behavior that jeopardizes patient care and increases bankruptcy risk, regardless of healthcare subsector.

2. “Is the debt excessive?”

Private equity buyouts are often financed through debt, which the acquired operating company (and not the private equity firm) is responsible for paying off. It can be unsustainable in the long-term for a portfolio company to take on excessive debt at a private equity owner’s behest.

Private equity has played a disproportionately large role in U.S. bankruptcies. In 2024, private equity-backed companies accounted for 21% of all healthcare bankruptcies, and 7 of the 8 largest healthcare bankruptcies.

3. “Are there noticeable changes in staffing ratios and patient quality?”

Many healthcare facilities make staffing cuts to pay off excessive debts accumulated at private equity owners’ behest. There are no federal regulations and limited state measures that address healthcare staffing ratios. Limited partners should scrutinize data on staffing ratios at facilities and inquire as to why any staffing changes are implemented at private equity-owned facilities.

Steward Health Care, which declared bankruptcy in 2024, underwent rapid growth during the period it was owned by private equity firm Cerberus Capital Management. This growth was overshadowed by service cuts, layoffs, closures, and labor issues. From 2018 until 2024, Steward closed six hospitals in the U.S., resulting in the layoffs of at least 2,650 workers.

4. “Has the GP been sued for violating the False Claims Act and/or have a history of insurance fraud?”

Limited partners should consider if the asset manager has owned companies that have seen violations of or settlements over the False Claims Act, which seeks to prevent healthcare providers from inflated billing, unlawful referrals, and other fraudulent claims for reimbursement.

In a 2021 report, PESP found substantial overlap between activities targeted by the False Claims Act and the profit-seeking behavior exhibited by private equity healthcare owners, i.e., companies may be incentivized to commit fraud in efforts to meet the financial demands of private equity ownership.

In the year leading up to October 2024, PESP tracked seven False Claims Act settlements between the U.S. Department of Justice, state attorneys general offices, and private equity-owned healthcare companies.

5. “Do they conduct sale-leasebacks for healthcare facilities?”

Investors should ask private equity firms whether they would consider using sale-leaseback transactions in their investment process, and how they would avoid mistakes from other investors.

Sale-leasebacks are when a hospital sells its real estate to private investors and then leases the same property back. These deals can burden hospitals with costly rent payments on real estate which they used to own.

In one example, Steward Health Care sold its real estate in 2016, which helped fund a dividend paid to its private equity owner. The deal also contributed to the financial instability of Steward Health Care, which eventually filed for bankruptcy in 2024.

6. “How has the GP historically employed dividend recapitalizations?”

Investors should avoid private equity firms that use the tactic of dividend recapitalizations with healthcare assets. Dividend recapitalizations are when companies take on new debt to pay a dividend to their investors, with little operational improvement to the company.

In one recent example, home care services provider Help at Home has paid its private equity owners a $262.6 million debt-funded dividend, just one year after the company shuttered operations in the entire state of Alabama due to purported cost concerns.

Notably, private equity firm Leonard Green extracted at least $645 million in debt-funded dividends from safety net hospital chain Prospect Medical Holdings in the years it owned the company. In 2021, it sold its stake in Prospect. The hospital chain filed for Chapter 11 bankruptcy in January 2025 following years of financial difficulties and unsustainable debts.

7. “Request access to their regulatory disclosures”

Private companies must make some regulatory disclosures, such as annual disclosures of workplace injuries and illnesses to the Occupational Safety and Health Administration.

Limited partners should assess pre- and post-acquisition data from private equity-owned companies for any trends relating to ownership.

These investors should also request information on wages, benefits, and working conditions and protections to ensure that investments avoid supporting unethical labor practices. PESP has released a platform for labor rights calling on private equity firms to improve working conditions at the portfolio companies they own.

PESP also recommends limited partners request disclosures regarding management and board appointments, intended sale-leaseback or dividend recapitalization transactions, management fees, and other financial information.

8. “What are the lessons learned from industry failures?”

Private equity has played a disproportionately large role in U.S. bankruptcies. Limited partner investors should ask private equity firms that owned bankrupted companies what happened, why, and what serious steps they are taking to course correct. Private equity firms should be knowledgeable about the failures of their peers, have studied the bankruptcies relevant to their investment process, and be able to explain what they are doing differently.

Additional considerations

ImpactAlpha’s article helps to address a growing need for tools to help investors guard against fiduciary and headline risks in their private equity healthcare investments. Recently, policymakers have also ramped up their scrutiny of private equity in healthcare. As the private equity industry faces heightened criticism and scrutiny for its negative impacts in healthcare, PESP believes that it is important for investors to also be wary of misinformation from the private equity industry.

The industry’s leading representative, the American Investment Council, has engaged in a digital campaign aimed at burnishing private equity’s reputation in healthcare. It has downplayed private equity’s role in healthcare, by citing misleading data which suggests that private equity investment in healthcare is declining.

It has also downplayed private equity’s role in healthcare by focusing only on the relatively limited investments of its membership. According to the U.S. Securities and Exchange Commission, in 2021 there were more than 18,000 private equity funds. The American Investment Council has approximately 120 members: 86 principal and general members and 32 associate members including law offices, consulting firms, and private equity firms.

Private equity industry talking points such as these can downplay the risks to medical workers and patients stemming from private equity investment in healthcare. These claims and those of other interest groups espousing benefits from private investment in healthcare should be carefully examined and questioned by limited partners that seek to make responsible investments.