Overall, the stepped-up oversight creates uncertainty for M&A activity in healthcare, said Victoria Heller Johnson, partner at law firm Fox Rothschild and co-chair of its health law group. It also adds layers of complexity to the transactions, said Tom Shorter, partner at law firm Husch Blackwell, who represents health systems and physician groups.
In response, more healthcare organizations are exploring alternative strategies such as cross-market mergers, joint ventures and conducting series of small deals — hoping to avoid triggering scrutiny by avoiding more regulated states and keeping the size of transactions below the review threshold, Cooper said.
However, those approaches likely won’t escape review, he said. The government is particularly focused on transactions involving private equity in healthcare, and ensuring the for-profit model won’t disrupt patient care, he added.
“We are living in a time of very aggressive, expanding and morphing antitrust enforcement, and while that is by no means limited to healthcare or private equity … it is uniquely focused on the intersection of healthcare and private equity. And that is a trend that I don’t really see letting up anytime soon,” Cooper added.
Private equity disruption
Private equity firms are actively investing in various healthcare sectors, focusing on physician practices. Specialties like ophthalmology, optometry, dermatology, orthopedics and behavioral health are seeing significant interest, Shorter said.
Investors buying up clinician practices are also looking for opportunities to adopt technologies such as telemedicine, remote monitoring and artificial intelligence, all of which have the potential to enhance patient access to care and optimize overall system efficiency, said David Sokolow, partner at Fox Rothschild and co-chair of the firm’s health law group. Private equity groups are attempting to build out their strategy and create verticals that integrate virtual care and administrative tasks with care delivery, consolidating physician groups that can be sold down the road.
Health systems often struggle to compete with private equity investors because of various compliance limitations related to anti-kickback laws and are often outbid during negotiations, said Howard Bogard, partner at law firm Burr and Formann and leader of its healthcare practice.
“The amount of money they can offer a target, especially if it’s a physician practice, is significantly greater than what a hospital could provide for the same target because of anti-kickback laws,” Bogard said.
However, recent acquisitions by private equity players have exposed potential flaws in the initial arrangements. Some organizations have had to revise compensation frameworks as they introduce risk-based payment models and productivity measurements into physician practices, Heller Johnson said. And some providers are having regrets after it becomes clear that certain buyers lack the industry expertise to operate in the rigorously regulated sector, Sokolow said.
“I’ve been approached by several physicians, who, very soon after the deal happened, they had sellers’ remorse. A lot of it is because they feel, in retrospect, they chose the wrong dance partner, somebody who … might have money but [doesn’t] know how to run a healthcare business and [doesn’t] know how to get contracts or enhance contracts or achieve efficiencies,” Sokolow said.
Regardless of the challenges related to relationships with private equity investors, they’re still likely to play a growing role in healthcare, law firm leaders said.
“They can be competitors, but they can also be partners and help give [healthcare systems] access to new streams of revenue,” Cooper said.
Taking a different track
Healthcare organizations are increasingly exploring joint ventures since they require less capital than a traditional acquisition and are easier to unwind. They also allow health systems to experiment with new service lines and partnerships without committing to the substantial costs and complex processes associated with full-scale mergers. Over time, these joint ventures may naturally evolve into complete mergers.
Health systems have sought collaborations with behavioral health and inpatient rehab companies and formed partnerships within the retail care sector, encompassing urgent care centers, imaging facilities, and similar services, Shorter said.
Joint ventures also serve as a strategic approach to expansion. With mounting pressures on their core services, health systems are exploring alternate avenues to bolster their financial stability. Rather than an acquisition or creating a new business, collaborations with established entities in specific sectors, such as laboratory services or physical therapy, offer a pathway to introduce new revenue streams. Sometimes, these ventures may extend beyond healthcare-related services to encompass other profitable ventures, Cooper said.
“We’ve seen a lot of interest in [joint ventures], particularly from health systems looking to expand the continuum of care that they offer outside of general acute care,” said Tom Hawk, partner at King & Spalding, who specializes in healthcare mergers and acquisitions. “They are looking to add something that is outside of their core expertise, and they don’t feel comfortable operating those without the experts. So, they look for national operators.”
