Healthcare Private Equity Is Soaring – What Does It Mean For Health Systems?

Private equity firms are well-known for investing in privately-owned and publicly-traded companies, typically sourcing funds from high-net-worth individuals, pension funds and other institutional investors. Their approach often involves strategic tactics such as leveraged buyouts, which aim to acquire and consolidate companies, streamline operations, and boost overall efficiency and financial performance.

In the pharmacy sector, private equity firms have increasingly taken an active role because of the industry’s potential for growth due to factors like an aging population, technological advancements, and escalating healthcare demands. Notably, recent data reveals a substantial surge in private equity activity in healthcare, with a 250% increase from 2010 to 2020, marking a jump from 352 deals in 2010 to 937 deals in 2020. This surge amounts to an estimated $749.5 billion in deal values between 2010 and 2020, which aligns with the pharmacy industry’s steady annual growth rate. Additionally, this trend signifies a shift in how healthcare services are managed and operated, with private equity firms playing a more active role in shaping the healthcare landscape.

Keeping up with a fast-changing market

Recognized for their intelligent decision-making and quick execution, private equity firms stand out against the slower nature of health systems. Agility allows private equity firms to capitalize on opportunities, make fast decisions, and act efficiently. Compared with their complex structures and regulations, health systems sometimes struggle to keep up with market changes effectively. Private equity will push health systems to streamline processes, be more flexible and adapt quickly. Recognizing private equity’s strategic moves in healthcare, health systems may benefit from keeping a pulse on pharmacy investments to help guide strategically how the market is shifting. Investing internally in your health system pharmacy capabilities will be important to capitalize on the opportunities.

Several noteworthy instances highlight the significant involvement of private equity firms in the pharmacy sector. We have observed private equity investments (majority, minority, and joint ventures) in hospitals/health systems on a macro level, infusion services, specialty pharmacy programs, and 503 A&B compounding operations. The pharmacy sector represents an attractive target market for private equity as it is highly regulated and a definite growth market.

Potential for future challenges

While private equity firm investments in the healthcare sector can bring about positive changes, there are concerns about potential negative implications for health systems in the future. One significant worry is the intensification of competition as private equity-backed entities enter the market, leading to new competitors or the rapid expansion of existing ones.

This heightened competition could result in market consolidation, potentially leading to patient and business leakage from health systems, reduced patient options and increased pricing pressure. With substantial financial resources and the ability to move quickly, private equity-backed businesses may also be able to negotiate more favorable pricing with suppliers and payers, putting smaller healthcare providers at a disadvantage.

It will be important to critically assess private equity involvement in pharmacy, as we expect investment interest in pharmacy programs to increase in 2024. With concerns around interest rates and the economy abating, private equity is currently estimated to have over $3 trillion in funds ready to invest. Used correctly, private equity investment can be a positive tool to build and advance services rapidly.

To learn more, read our full summary of the top 10 issues facing health system pharmacy in 2024.

Here at Visante, we help health systems accelerate strong financial and operational performance through pharmacy. Our team’s deep expertise and innovative approach can help you optimize your fully integrated health system pharmacy program. Contact us to learn more about how we can meet your unique needs.