Private Equity Health Care Acquisitions – September 2022

Private Equity Health Care Acquisitions – September 2022

In light of the growing investor interest in healthcare and the risks associated with private equity ownership of healthcare companies, the Private Equity Stakeholder Project will be tracking private equity-backed healthcare acquisitions. Below is a list of private equity healthcare buyouts and add-on acquisitions completed or announced during September 2022. We will continue to track acquisitions on a monthly basis.

See August 2022 acquisitions here.

In September 2022, there were 77 private equity acquisitions and growth/equity investments in the healthcare space across a wide range of subsectors.

Private equity grows investment in Dental Services Organizations (DSOs)

Private equity firms continued to direct attention to specialty physician and dentistry practices with 20 add-ons or buyouts tracked for September. Endodontics, in particular, saw three add-on acquisitions by Quad-C Management to their platform company, U.S. Endodontics Partners, a dental services organization (DSO)[1] with over 80 offices in 28 states as of November 2021.[2] DSOs provide non-clinical business services to dental practices (such as billing and marketing). They also provide an avenue for private equity firms to skirt around regulations: in July 2021, PESP’s Eileen O’Grady reported how, “Both the DSO and physician practice management industries appear to have been created, largely by private equity firms, to avoid regulation that prohibits investor ownership of clinical practices.”

Because private equity firms aim to produce outsized returns on their investments over the short term, private equity-owned dental practices may be incentivized to engage in profitable, but harmful, practices. O’Grady explains:

“Pressure to meet revenue targets has been shown to lead to over-booking and understaffing or rushing through treatments to maximize the volume of patients. It can also lead dentists and hygienists to push unnecessary or expensive procedures, such as drilling into healthy teeth, conducting unnecessary and costly x-rays or screenings, and performing medically unnecessary root canals.”[3]

Investor interest in Contract Research Organizations (CROs) and life sciences research and development

Investors also saw ample opportunity in the medical and life sciences research sphere in September. We tracked 7 add-on acquisitions involving 15 different private equity firms, as well as 2 buyouts and one growth investment in a variety of contract research organizations (CROs) involved in research and development and regulatory/research compliance support. As noted in our June 2022 acquisitions blog post, “CROs can be an attractive investment choice for private equity firms because it’s a fragmented industry with opportunity for consolidation, and because unlike investment in pharmaceutical companies themselves, revenues will not depend on whether a drug makes it to market or not.”[4]

According to the American Investment Council (the primary lobbying group that represents private equity firms in the U.S.[5]), “investors are able to dramatically improve the hundreds of service providers that play a vital role in health care innovation and patient care,” and that “PE Firms can help drastically reduce costs and make drug development much more efficient.”[6]

These claims beg the question: for whom can private equity generate a reduction of costs and increase in efficiencies? Drugs (especially expensive biologics) and medical devices continue to drive high health care costs in the United States that ultimately fall on the consumer via higher insurance premiums, hospital bills, and out-of-pocket expenses.[7]

With a focus on generating substantial profits over relatively short time horizons (4-7 years), private equity firms add another layer of profit extraction into an already convoluted healthcare industry. Without having to incur the risks of a drug or device failing to make it to market, private equity firms that invest in CROs can profit from medical research and development even if consumers do not benefit. Further, in the absence of price controls for pharmaceuticals and devices, any purported cost savings that private equity firms can help generate for life sciences research will not necessarily trickle down to the consumers. Lastly, increasing consolidation of CROs and other companies involved in research and development (R&D) has the potential to drive up the costs of R&D if some companies gain outsized market power and can then extract higher prices for the services they provide.

Given the exorbitant costs of prescription drugs, biologics, and medical devices in the United States, private equity’s growing presence in the life sciences and medical research and development is cause for concern and warrants further scrutiny from researchers and regulators.

Medical Real Estate

September also saw private equity firm Stepstone Group make a “significant” investment of an undisclosed amount in Anchor Health Properties, an “owner, manager, and developer of healthcare real estate across the United States.”[8] Medical real estate is an attractive investment, as many consider it “recession resistant” and anticipate steady returns as the population ages.[9]

One analyst cited on the website of a major lobbying group for real estate investment trusts (REITs) explains:

“ ‘The baby boomer generation is like a huge pig that needs to work its way through a snake…People in their 80s tend to go to the doctor with more frequency than those below age 65. As the baby boomers age, there will be increased demand throughout the continuum of care that will first impact medical office buildings, then hospitals, then ultimately senior housing and skilled nursing centers.’”[10]

In addition to direct investments in REITs, some private equity firms that have purchased hospitals derive quick returns from selling the hospital medical real estate to REITs in sale-leaseback transactions. This generates immediate cash flow for the private equity firm which can soon thereafter exit its investment with fatter pockets than before, while leaving the hospital holding the bag in the form of burdensome monthly rent payments.[11] Such a practice is, in essence, asset-stripping, and can contribute to financial distress and even closure of hospitals.

September 2022 Add-on Acquisitions

September 2022 Buyouts

September 2022 Growth/Expansion Investments

[1] “PitchBook Profile – U.S. Endodontics Partners,” accessed October 6, 2022, https://my.pitchbook.com/profile/435555-28/company/profile#investments.

[2]Thurston Group, “Thurston Group Exits U.S. Endodontics Partners,” accessed October 6, 2022, https://www.prnewswire.com/news-releases/thurston-group-exits-us-endodontics-partners-301425434.html.

[3] Eileen O’Grady, “Deceptive Marketing, Medicaid Fraud, and Unnecessary Root Canals on Babies: Private Equity Drills into the Dental Care Industry” (Private Equity Stakeholder Project, July 2021), https://pestakeholder.org/wp-content/uploads/2021/08/PESP_DSO_July2021.pdf.

[4]Michael Patton and Dan O’Brien, “Consolidation in Clinical Research Sites and COVID’s Impact” (Provident Healthcare Partners, n.d.), https://www.providenthp.com/wp-content/uploads/2022/03/Consolidation-in-Clinical-Research-Sites-and-COVIDs-Impact-vF.pdf.

[5] Caitlin Oprysko, “Who Lobbies for Carried Interest Backers,” POLITICO, August 8, 2022, https://politi.co/3QaBVVb.

[6]“Improving Medical Technologies: Private Equity’s Role Supporting Life Sciences,” American Investment Council, March 22, 2022, https://www.investmentcouncil.org/improving-medical-technologies-private-equitys-role-supporting-life-sciences/.

[7] Patti Neighmond, “When Insurance Won’t Cover Drugs, Americans Make ‘Tough Choices’ About Their Health,” NPR, January 27, 2020, sec. Public Health, https://www.npr.org/sections/health-shots/2020/01/27/799019013/when-insurance-wont-cover-drugs-americans-make-tough-choices-about-their-health; Juliette Cubanski and Tricia Neuman, “Prices Increased Faster Than Inflation for Half of All Drugs Covered by Medicare in 2020,” KFF (blog), February 25, 2022, https://www.kff.org/medicare/issue-brief/prices-increased-faster-than-inflation-for-half-of-all-drugs-covered-by-medicare-in-2020/; RAND Corporation, “Prescription Drug Prices in the United States Are 2.56 Times Those in Other Countries,” January 28, 2021, https://www.rand.org/news/press/2021/01/28.html; Tina Reed, “Insurers Blame Specialty Drug Costs for Rising Premiums. This Report from California Shows Why,” Fierce Healthcare, January 7, 2019, https://www.fiercehealthcare.com/payer/report-prescription-drug-costs-driving-up-insurance-premiums; Sara Heath, “High Drug Prices Account for One-Quarter of Patient Insurance Costs,” PatientEngagementHIT, May 23, 2018, https://patientengagementhit.com/news/high-drug-prices-account-for-one-quarter-of-patient-insurance-costs; David Lazarus, “Column: When a Hospital Sling Costs 900% More than Amazon’s Price, Something Is Very Wrong,” Los Angeles Times, September 13, 2019, https://www.latimes.com/business/story/2019-09-12/medical-equipment-pricing; Chuck Dinerstein, “An Overlooked Health Care Cost – The Medical Device Market,” American Council on Science and Health, October 3, 2018, https://www.acsh.org/news/2018/10/03/overlooked-health-care-cost-medical-device-market-13468.

[8] Anchor Health Properties, “StepStone Real Estate to Make a Significant Investment in Anchor Health Properties,” September 26, 2022, https://www.prnewswire.com/news-releases/stepstone-real-estate-to-make-a-significant-investment-in-anchor-health-properties-301632686.html.

[9] Kevin Cifuentes, “Healthcare Real Estate Capital Expected to Hit $25B in 2022: Report,” The Real Deal New York (blog), April 20, 2022, https://therealdeal.com/2022/04/20/healthcare-real-estate-investment-expected-to-hit-25b-this-year-report/.

[10]Michele Lerner, “Health Care REITs Thrive as Americans Age,” September 21, 2017, https://www.reit.com/news/reit-magazine/september-october-2017/health-care-reits-thrive-americans-age.

[11] Eileen Appelbaum and Rosemary Batt, “Private Equity Buyouts in Healthcare: Who Wins, Who Loses? Working Paper N. 118” (Institute for New Economic Thinking, March 15, 2020), https://www.ineteconomics.org/uploads/papers/WP_118-Appelbaum-and-Batt-2-rb-Clean.pdf.