Declining Private Equity Investments in Medicare Advantage: Analyzing the Shift and Its Implications

The Decline in Private Equity Investments in Medicare Advantage

Recent reports indicate a significant shift in the private equity landscape, specifically in the realm of Medicare Advantage-related companies. In 2023, only four investments were made in this sector by private equity investors, a sharp drop from the twelve in 2022 and an even more significant decline from the peak of nineteen in 2021. This trend could be attributed to a multitude of factors including regulatory changes, market trends, or other influences.

The Impact of Market Trends and Regulations

A report by the Private Equity Stakeholder Project (PESP) suggests that high interest rates and new regulations are key factors behind the decline in private equity investments in Medicare Advantage. From 2016 to 2023, PESP tracked 80 private equity-backed growth investments, leveraged buyouts, and add-on acquisitions in the sector. The majority of these investments were in marketing and brokerage firms, which are primary targets for private equity deals in Medicare Advantage.

Regulatory changes under the Trump administration were relatively friendlier for such investments, but the current CMS has tightened its grip on deceptive marketing practices for Medicare Advantage plans. Additionally, major payers like UnitedHealthcare, Anthem, and Centene have already started hosting machine-readable cost files onsite, pushing the sector towards more transparency and compliance.

Effect of High Interest Rates

High interest rates and unfavorable federal policies have squeezed Medicare Advantage margins, leading to a decrease in private equity investment. The drop in investment rates coincides with stricter marketing regulations and a proposed rule to reduce benchmark payment rates by 2025. Despite the current lull, experts, including Foley & Lardner LLP partner Roger Strode, believe that the private equity investment in Medicare Advantage-related companies may rebound if interest rates decrease.

Risks and Concerns

While the decline in investments has its own implications, the presence of private equity in the Medicare Advantage industry also brings forth risks such as increased consolidation, anticompetitive issues, rising healthcare costs, and potential Medicare and Medicaid fraud. U.S. Representative Pramila Jayapal has expressed concerns about the impact of private equity on Medicare Advantage, citing growing consolidation and rising costs for seniors. The bankruptcy of Cano Health, a former private equity-owned company, serves as a cautionary tale of the risks associated with high levels of debt used for acquisitions and growth.

The Future of Private Equity Investments in Medicare Advantage

The current decline in private equity investment in Medicare Advantage-related companies could have significant implications for the healthcare industry and Medicare Advantage providers, impacting funding, innovation, and competition. However, the industry is likely to see a rebound in private equity investments once interest rates settle down and if the regulatory environment improves. The ever-present practice of consolidating small companies and selling them to larger ones for profitability continues to attract investors, suggesting a potential uptick in the sector in the future.