Shaping Markets
The Growth of Private Equity Ownership in the Home Healthcare Market
06. 07. 2023
The incursion of private equity into healthcare, and home healthcare in particular, raises pressing questions.
Private equity is a class of investment whereby investors purchase a controlling stake in other companies. Investment by private equity has risen rapidly over the last decade. For example, year-over-year growth in private equity fundraising in North America from 2017-2022 was about 10%—the highest of any region in the world. In the first half of 2022, private equity assets under management across buyouts, venture capital, growth, and other categories in the U.S. totaled almost $4 trillion, or just over 50% of all private equity assets worldwide. Private equity has made significant investments in the healthcare sector. Key drivers of this investment include: increases in healthcare spending, uninvested capital reserves in private equity funds, and financial weakness and failures of healthcare companies prompted by the COVID-19 pandemic. Home healthcare is one of the fastest-growing markets in the healthcare sector and has attracted significant interest from private equity investors. Employment in home healthcare is expected to increase by about 8% per year through 2030.
It is a growing and stable source of Medicare revenue, with spending averaging $17.6 billion a year from 2016 to 2021. Moreover, home healthcare generates some of the highest earnings of post-acute care services that are reimbursed by Medicare. Indeed, the return on equity in home healthcare was about 66% in 2017—one of highest in the healthcare sector.
“Home healthcare has attracted significant interest from private equity….it is a growing and stable source of Medicare revenue and generates some of the highest earnings of reimbursable post-acute care services.”
The aging U.S. population is a primary driver of increasing demand for home healthcare services. People over 65 will account for over 20% of the population in 2050, a 50% increase over 2012. Major features of the aging population are conducive to the delivery of healthcare at home, versus more expensive in-patient settings. These include an increase in dementia and Alzheimer’s, orthopedic diseases, and multiple chronic conditions. But increasing demand for home healthcare also puts pressure on the supply of workers, and costs, which are estimated to increase 8.5% year-over-year between 2019-2030. Consumer out-of-pocket costs are expected to grow at a similar rate.
For all of the foregoing reasons, investment in home healthcare markets is enticing to private equity investors. Private equity ownership provides opportunities to maximize revenue by cutting costs, increasing control over prices by consolidating markets, and deploying financial engineering mechanisms such as fees and dividend recapitalization.
This aligns closely with the private equity model of generating high short-term returns for investors. And private equity’s well-known disclosure problems, enabled by an outdated regulatory framework that is riddled with exemptions and loopholes, create opacity that works to keep investment under the “radar” of antitrust enforcers and regulatory authorities.
“The report adds to the growing body of research that explores competitive concerns around private equity ownership in vulnerable areas of the healthcare sector.”
The incursion of private equity into healthcare, and home healthcare in particular, raises pressing questions. For example, are the economic incentives and strategies typical of private equity compatible with ensuring affordability, access, and quality in healthcare? What do aggressive acquisition strategies, roll-up strategies, and rapid market exits mean for market concentration and the stability of healthcare markets? Is private equity targeting or driving higher concentration in healthcare markets? Is the private equity investment model incompatible with restoring competition in markets where private equity is a buyer of divested assets in challenged mergers, as was apparent in the recent litigated merger of United Health Group and Change Healthcare? Finally, what does this all mean for competition, prices, and quality of healthcare services?
This report examines the role of private equity in home healthcare markets. It is part of a growing body of research that explores competition concerns around private equity ownership in vulnerable areas of the healthcare sector, including outpatient and home healthcare, physician practices, nursing homes, and others. The report is, by design, a descriptive analysis.
It will help facilitate identification of key issues around the effects of private equity ownership on competition and risks to quality of care and prioritization of patient welfare. The takeaways from the report are important for antitrust enforcement, regulators, and legislators in framing further areas of inquiry that are important for developing competition policy around private equity. Major conclusions from the report include:
- Home healthcare is a rapidly-growing and high return on equity market in the healthcare sector that is attracting significant interest and potential disruption from private equity investment.
- The private equity investment model raises concerns over its compatibility with promoting competition, affordable and high-quality healthcare, and stable and resilient healthcare markets.
- Private equity accounts for a relatively small proportion of ownership but only a few players control a large proportion of Medicare payments.
- MSA-level home healthcare markets display higher levels of concentration overall and private equity owned or backed firms have made significant and rapid incursions, now operating in over 50% of all markets.
- High market concentration, the role of large home healthcare firms, and the potential for further incursions by private equity emphasizes the need for antitrust enforcers and regulators to engage early.
- High market concentration, the role of large home healthcare firms, and the potential for further incursions by private equity emphasizes the need for antitrust enforcers and regulators to engage early.
- High market concentration, the role of large home healthcare firms, and the potential for further incursions by private equity emphasizes the need for antitrust enforcers and regulators to engage early.
- The data collection process for this report emphasizes that significant reforms are needed to ensure that the private equity industry discloses full and meaningful data that can be used to evaluate the impact of private equity ownership on competition.