Scrutinizing Private Equity Acquisitions of Medical Practices
As we mentioned in a prior post, private equity (PE) firms have been rapidly acquiring medical practices, driven by the potential for high returns. In fact, during the past decade, PE investments in healthcare have exceeded $1 trillion. Yet, as of 2024, health care providers backed by PE firms constituted only 4% of the United States health market by revenue. Moreover, growth in PE investment in health care had slowed from nearly 25% in 2018 to less than 1% in the first quarter of 2024. Even so, regulators have taken notice of PE firms’ acquisition of medical practices.
Federal Oversight
The federal government is intensifying its scrutiny of PE investments in healthcare due to growing concerns about their impact on patient care, healthcare costs, and market competition. In March 2024, the Federal Trade Commission (FTC), Department of Justice (DOJ), and Department of Health and Human Services (HHS) launched a joint inquiry to examine how PE and other corporate ownership structures affect healthcare delivery. This initiative included a Request for Information (RFI) seeking public input on transactions involving healthcare providers, facilities, and services, especially those that might not trigger antitrust reviews under existing thresholds. FTC Chair Lina Khan highlighted concerns that PE strategies, such as “roll-ups” (i.e. PE firms acquiring multiple small healthcare practices within a region, potentially leading to monopolistic control and higher prices) and “strip-and-flip” tactics (i.e. PE firms using strategies involving significant debt, burdening healthcare facilities financially and potentially compromising patient care), may prioritize profits over patient care, leading to reduced staffing and quality. Additionally, the Centers for Medicare & Medicaid Services (CMS) issued a rule in November 2023 requiring skilled nursing facilities to disclose ownership details, including PE or real estate investment trust affiliations.
State Oversight
Corporate Practice of Medicine (CPOM) Challenge: New York has a strong CPOM doctrine. This doctrine prohibits non-physicians from owning or controlling medical practices to ensure that physicians make medical decisions free of corporate influence (i.e. unlicensed third parties who are free of professional responsibility requirements and may disregard patient care in operating a corporation organized simply to make money). A 2019 landmark case, Andrew Carothers, M.D., P.C. v. Progressive Insurance Co., involved a CPOM challenge in the context of non-physician MSO’s control over a medical practice. During the trial, a forensic accountant opined that “Dr. Carothers was not . . . actively involved in the operations or the financial aspects of the company. . . . [T]he core business assets . . . were owned and controlled by Hillel Sher. . . . Hillel Sher not only controlled the company, but profited from the monies . . . . since a medical practice is the only way you can bill an insurance company, [Dr. Carothers] was used as a vehicle to siphon money to Sher and Vayman . . ." The New York Court of Appeals held that a medical practice that ceded excessive control over its operations and finances to a non-physician MSO was "fraudulently incorporated" and thus, it was not eligible for insurance reimbursements. This case underscores the legal risks associated with arrangements where MSOs exert significant control over clinical practices. Yet, the scheme in Andrew Carothers, M.D., P.C. v. Progressive Insurance Co. was unsophisticated, and PE-backed MSOs with sophisticated arrangements might well avoid a CPOM challenge.
Regulatory Notice Requirement: Effective August 1, 2023, as outlined in Public Health Law Article 45-A, New York implemented a law mandating that healthcare entities—including physician practices and MSOs—provide at least 30 days' notice to the Department of Health (DOH) before closing any "material transactions." These transactions are defined as mergers, acquisitions, affiliations, and the formation of certain partnerships or organizations resulting in a health care entity increasing its total gross in-state revenues by $25 million or more within a single transaction or over a rolling 12-month period. The DOH is authorized to forward these disclosures to the Attorney General and failure to comply may result in civil penalties of up to $2,000/day. In April 2025, New York proposed further amendments to this law, indicating an intensified focus on private equity-backed transactions and MSO affiliations. These amendments aim to expand compliance requirements by introducing new data disclosure obligations and empowering the DOH to review a broader range of deals. Consequently, transactions involving PE and MSOs are likely to face closer scrutiny and longer timelines.
Impact
These combined federal and state efforts indicate a significant shift toward increased oversight of PE activities in healthcare. Regulators are particularly focused on ensuring that financial strategies do not compromise patient care, inflate costs, or reduce market competition. Due to this increased regulatory scrutiny, PE firms are becoming more cautious in acquiring medical practices. Yet, we anticipate continued PE investment in the healthcare field, as PE investment in healthcare is capitalism on steroids.