The acquisition was part of a larger trend of an increase of private equity investments in healthcare over the past few years. In 2012, the amount invested in healthcare organizations by private equity firms rose to more than $4 billion according to Thompson Reuters, fueled in part by the perception that the healthcare industry was a relatively stable area for investment. The investments have been made across the industry, from hospitals and surgical centers to home health services, dental practices and more.
Now, just sixteen months after the initial private equity investment, Physiotherapy Associates is preparing to file for Chapter 11 bankruptcy, according to a report in The Washington Post. Though the company could not be reached for comment, the Post reports the company is currently carrying about $325 million in debt, and will begin seeking input from creditors on a restructuring plan next month — a plan expected to ease the company’s path through bankruptcy court.
The unprecedentedly short time from acquisition to collapse is noteworthy in an industry in which private equity firms remain a key stakeholder in some of the largest organizations. Vanguard Health Systems in Nashville, Tenn., Steward Health Care System in Boston, Hospital Corp. of America in Nashville, among many others, are all at least partially backed or funded by private equity firms.
For proponents, private equity brings needed cash and financially experienced leadership into the industry. Private equity brings “a different level of management discipline,” that has the potential to be beneficial for both the hospital and the industry as a whole, says Scott Becker, JD, a partner at law firm McGuireWoods. Private equity capital has also been seen as the saving grace for several urban hospitals that might have gone under without a private equity intervention, an example being private equity-backed Vanguard’s buyout of the ailing Detroit Medical Center in 2010.
Opponents worry about the effect the private equity firms’ focus on the bottom line might have on the overall functioning of the organization. A private equity buyout can lead to layoffs, selling off assets or other money-saving steps that can be negatively perceived. “Opponents really see it as a destructive force,” says Mr. Becker, working against the missions and goals of a healthcare organization.
A private equity firm can hasten the destruction by overleveraging debt, or the buyout and subsequent organizational overhaul can simply be too bold a move in a time of increasing regulations, decreasing reimbursements and an unpredictable payer mix. The frequency of missteps may increase as margins shrink and healthcare reform shakes up the market, but investments will not disappear.
Private equity funding in the healthcare industry will continue because even in an increasingly unpredictable and unprofitable industry, there remains opportunity for dedicated, knowledgeable investors to succeed, says Mr. Becker. “Healthcare is a multi-trillion dollar industry,” he says. “Even with slower growth, there will still be opportunity.”
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