Updated with correction.
Health care is too large a part of the economy for private equity investors to ignore, but a burning spotlight on how managers run some hospitals and nursing homes is prompting a few asset owners that generally prefer to quietly engage with general partners to speak up.
Demand for health care is rising: In the U.S., health-care spending grew 4.6% to $3.8 trillion in 2019, amounting to 17.7% of gross domestic product, according to the Centers for Medicare & Medicaid Services.
In an attempt to ride the wave of this growth, private equity investment in health care has grown, to $120.1 billion in 874 deals in 2019 and $95.6 billion in 938 transactions in 2020, from $58.2 billion in 2007, according to PitchBook Data Inc.
At the end of the first quarter, private equity firms had invested $20.2 billion in 182 deals.
Private equity health-care funds outperformed the internal rate of return of all private equity for funds raised between 2006 and 2017, PitchBook data shows. The median IRR for health-care fund vintages 2006 through 2008 was 10.3% compared with a 9% IRR for all funds of the same vintages. Health-care funds raised from 2015 to 2017 earned a 16.8% median IRR, out- performing the median IRR for the same vintages of all private equity funds of 13.1%.
However, academic studies are starting to show that certain investments in the private equity health-care universe, including investments in hospitals, nursing homes and behavioral health companies, have been detrimental to patient well-being, according to testimony at a March 25 House Ways and Means Subcommittee on Oversight on private equity's expanded role in the U.S. health-care system.
"Research on private equity has found that in sectors where product quality is transparent, markets are competitive, and there is no government subsidy, private equity has positive effects on productivity and product quality," Sabrina T. Howell, assistant professor of finance at New York University Stern School of Business, testified. "However, health care has none of these features."
Patients cannot accurately assess health-care provider quality, they typically do not pay for services directly and government agencies act as both payers and regulators, Ms. Howell said.