Private equity Medicare Advantage investment slumps: report

Private equity investment in Medicare Advantage has declined in recent years amid rising interest rates and an unfavorable regulatory environment, according to a report the Private Equity Stakeholder Project published Tuesday.

These investor groups inked just four Medicare Advantage-related deals in 2023, the second-lowest total during the seven years the Private Equity Stakeholder Project has tracked such transactions. Over that period, private equity investments in Medicare Advantage insurers, brokerages and other companies peaked at 19 in 2021, then declined the next two years, according to the nonprofit organization, which focuses on transparency in private equity and supports laws to limit these firms' activities.

Related: Rising Medicare Advantage costs squeeze providers, insurers, tech

This investment shift coincides with a difficult business environment marked by high interest rates, and with a slew of federal policies that have squeezed Medicare Advantage margins for health insurance companies, including stricter marketing regulations. Medicare Advantage carriers are looking ahead at possible benefit cuts and premium increases if the Centers for Medicare and Medicaid Services finalizes a proposed rule that would slightly reduce the benchmark payment rate in 2025.

From 2016 through 2023, private equity firms invested in 80 Medicare Advantage companies, the Private Equity Stakeholder Project found. According to the organization, private equity investors were especially attracted to Medicare Advantage marketing and brokerage firms, which are subject to less government oversight than insurance companies, are not capital-intensive and tend to have free cash flow, according to the report.

Moreover, demand for third-party marketers has grown along with the Medicare population and the share opting for Medicare Advantage over fee-for-service Medicare. One in three Medicare beneficiaries relies on brokers to navigate the crowded market, according to the Commonwealth Fund.

Forty-five out of 80 private equity deals the Private Equity Stakeholder Project identified were so-called add-on acquisitions in which a Medicare Advantage company was purchased by another business the investors already owned.

For example, private equity-backed Integrity Marketing Group, a life and health insurance marketer, made 28 such deals during this time, or 62% of all add-on acquisitions, with Medicare Advantage brokerages. HGGC, Harvest Partners and Silver Lake Capital are minority investors in Integrity Marketing Group. Integrity Marketing Group did not respond to an interview request.

The 19 private equity deals in 2021 transpired against a backdrop of deregulation during President Donald Trump's term. During that administration, CMS relaxed marketing rules by eliminating a requirement that Medicare Advantage advertisements include information about complaints and appeals and permitting physicians to advertise specific Medicare policies in their offices, for instance.

The Private Equity Stakeholder Project report draws a contrast to how CMS has managed Medicare Advantage under President Joe Biden. The agency has imposed stricter marketing rules, including undoing some of the Trump administration's actions. For example, CMS proposed a cap on insurance company compensation to third-party sellers, in part to to rein in spending on field marketing organizations, which the agency asserts disadvantages smaller insurers that cannot afford to pay as much as the market leaders.

The Private Equity Stakeholder Project also partially attributes diminished activity in this space to higher interest rates that made lenders reticent about debt-financed deals. The Federal Reserve may be poised to bring down interest rates this year as inflation fears subside. That could lead to a rebound in private equity Medicare investments, said Mary Bugbee, senior researcher and campaign coordinator for the Private Equity Stakeholder Project's healthcare division.