It’s well known that private equity has drastically increased its presence in the healthcare industry, acquiring hospitals, physician practices and other providers. These acquisitions have received scrutiny following the bankruptcies of numerous health systems like Steward Health Care and Prospect Medical Holdings. But a new report from the Private Equity Stakeholder Project (PESP) details a lesser-known private equity strategy: joint ventures with nonprofit health systems.
PESP is a nonprofit focused on bringing transparency and accountability into the private equity industry. The organization explains in the report that joint ventures are when two or more parties create a single enterprise together for profit. Usually, the parties “each contribute something to the venture, including capital, labor, assets, skills, experience, or knowledge, and generally, a joint venture involves an agreement to form a joint venture, some form of joint control, and a way to share profits and losses,” the report states.
Private equity firms are pursuing joint ventures because they allow them to expand into new markets, while benefiting from the reputation and relationships associated with nonprofit health systems. Joint ventures also allow private equity firms to share financial risk with nonprofit partners and continue to grow through partnerships that may have different regulatory requirements than traditional acquisitions.
PESP found that more than 500 healthcare facilities currently operate under nonprofit-private equity joint ventures. This is likely an undercount as the number is only based on publicly identifiable arrangements. These joint ventures include hospitals, inpatient rehabilitation, hospice, home health, behavioral health, ambulatory surgery centers, urgent care and other providers.
In addition, 21.4% of private equity-owned hospitals are owned via joint venture arrangements with nonprofit health systems.
“Private equity’s healthcare playbook is evolving,” said Jim Baker, executive director of PESP, in a statement. “Our research documents how private equity has increasingly relied on joint ventures with nonprofits to expand its presence in healthcare. These arrangements have received far less attention than traditional private equity buyouts, even as they become more common across hospitals and other healthcare sectors.”
The report also looks at case studies of joint ventures with Lifepoint Health, Compassus, Ardent Health Services and Ascension. The researchers found that Lifepoint — which is owned by PE firm Apollo Global Management — owns 61% of its hospitals via joint ventures with nonprofit and other healthcare providers.
In addition, PESP noted that IRS rules governing partnerships between nonprofit and for-profit healthcare organizations are outdated, dating back to 1998 and 2004, before the rise of large private equity-backed healthcare companies.
“Healthcare business models don’t stand still, and oversight frameworks shouldn’t either,” Baker said. “Policymakers should have a clear understanding of how these partnerships are structured, how they operate, and whether current oversight reflects the current realities of private equity’s healthcare acquisition strategies.”
The report provides several federal and state policy recommendations focused on these joint ventures, including updated tax guidance, expanded transaction reviews and ongoing reporting after deals close.
Photo: Andriy Onufriyenko, Getty Images
