Private equity firms have seen plenty of potential in the rapidly growing Medicare Advantage space, but deal volumes are slowing, according to a new report.
Analysts at the Private Equity Stakeholder Project dug into deal activity in MA between 2016 and 2023. The report (PDF) found that deals peaked in 2021 and have slowed in the years since as tighter regulations and nationwide inflation impact the sector.
The report found that there were 80 PE-backed deals—including leveraged buyouts, add-on acquisitions and growth investments—from 2016 to 2023. Of those, more than half (56.3%) were add-on acquisitions for platform companies.
The two busiest years for dealmaking were 2019 and 2021, with a likely pandemic-driven lull in between, according to the report. However, there were 79% fewer deals in 2023 compared to 2021.
"This decrease is likely due to rising interest rates that have made obtaining lending for debt-financed deals more challenging and has impacted private equity dealmaking across industries," the authors wrote. "It may also be related to the increased scrutiny of Medicare Advantage marketing practices followed by a tightening of marketing regulations that were finalized in April 2023 after the skyrocketing increase in complaints from consumers."
The analysts said it "remains to be seen" whether deal volumes will rebound following these pressures or whether investors will be turned off by the new regulatory environment.
The report notes that the risks related to PE investment in other sectors of healthcare also extend to MA. For one, there is a notable correlation between the profit-seeking efforts of PE-owned health companies and fraud, the analysts said.
In addition, PE ownership can lead to concerns about competition, according to the report.
The authors said a decline in the number of deals doesn't mean regulators should rest on their laurels. Given the broader scrutiny of the MA program, policymakers should keep their eye on the role of PE in this space.
The report also noted that while PE players in MA are key to watch, the segment in general has focused on growing profits of late.
"The regulatory improvements under the Biden administration are a critical step forward, but sufficient funding for robust enforcement is needed to protect Medicare Advantage beneficiaries, taxpayers, and other stakeholders impacted by troubling and even illegal business practices that have proliferated in recent years," the researchers wrote.