Forming a healthy relationship between PE and healthcare

By Dan Shoenholz and Peter Gates, EY-Parthenon, Ernst & Young LLP

In the healthcare sector, private equity is often viewed as a financial sponsor with limited impact on improving clinical outcomes and patient satisfaction. In fact, some founders and physicians are concerned that PE may even hurt the patient-care effort.

Often overlooked, however, is the discipline PE instills in smaller companies that lack mature infrastructure. Discipline has long been the keystone for improved tracking of clinical metrics.

In a recent EY-Parthenon survey of more than 80 healthcare executives, we found that PE investment does boost healthcare organizations’ value beyond financial performance.

While the pursuit of attractive returns on capital remains a primary goal of investors, our survey shows an encouraging sign for industry observers who fear disharmony between the forces of capital and care.

The survey showed that companies that had taken private equity investment outperformed their peers in areas such as capital allocation, strategic planning and organizational development.

Executives indicated that PE investment also significantly improved patient satisfaction, talent acquisition and enhanced compliance.

One executive, speaking on consolidation trends, said, “Private equity not only provides us with the capital we need, but the vital access to unexplored markets.”

What’s more, a large percentage of respondents said that under PE ownership, investment in managing key patient-care activities increased, including tracking of clinical outcomes (50 percent), patient satisfaction (55 percent) and overall compliance (65 percent). Less than 10 percent said private equity decreased focus on these.

PE investors were also credited with introducing best practices for investment portfolios, especially with respect to improved management, clinical metrics and compliance. A CFO of a large dermatology group noted that his private equity partner formed a committee, which led to a more streamlined compliance process.

Some apprehension about private equity persists, however, particularly around governance. One homecare company CEO summed it up well:

“I think some in private equity are spread pretty thin, and as such don’t grasp the nuances of clinical care. In healthcare, sometimes a subtle issue can lead to underperformance, but private equity folks [make] changes before it can be properly addressed.”

It’s a sentiment that’s certainly understandable. The sudden transfer of control from a founder (possibly a physician) to new ownership, with an unfamiliar business language, and performance pressures, can destabilize.

Physicians are concerned about interference with their medical autonomy and loss of professional control, job security, loss of patient focus and fears that financial metrics will be prioritized over clinical outcomes.

Despite these, we found that respondents judged clinician reactions to PE favorably, with nearly 60 percent gauging clinician reactions as positive.

These results show a need for education and awareness.

Investors and entrepreneurs must be willing to understand the complexities of each other’s businesses to achieve success. Then, when a bump in the road occurs, they will be able to work together with a shared appreciation of the uniqueness of the healthcare sector.

Additionally, the need for a long-term relationship should always be readily apparent at the beginning of the deal. According to our survey, 90% of respondents said PE had a positive impact on their businesses. While these partnerships may cause short-term change, the long-term benefits are evident.

We believe that clear understanding of each party’s perspectives is vital. Our survey shows most partnerships between private equity and healthcare executives lead to successful outcomes.

As aging populations lead to rapid growth in healthcare and as innovations increasingly disrupt current clinical models, the healthcare market will continue to attract PE investors.

As our survey indicates, PE produces successful outcomes for investor, company and patient alike.

Dan Shoenholz is managing director and co-head of healthcare in the New York office of EY-Parthenon, Ernst & Young LLP. Peter Gates is executive adviser in the firm’s Boston office. Reach Dan at dan.shoenholz@ey.com and +1 212-773-4517. Reach Peter at peter.gates@parthenon.ey.com and +1 617-478-2550.