Despite economic disruptions and geopolitical tensions in 2022, the healthcare private equity market experienced its second strongest year on record. Although deals fell between 20% and 30% compared to 2021’s all-time high, last year was still on par with 2020 levels.
Why such resilience? Consolidation in the healthcare industry is driving private equity momentum as firms and corporate entities continue to capitalize on investments despite a challenging financial outlook. Indeed, PWC predicts more divestitures in the sector and a track record of returns will ensure it remains a top priority for private equity firms.
With that in mind, below are six healthcare trends for private equity in 2023, including challenges that impact deal evaluation and due diligence.
FTC proposes non-compete rule
The use of employee non-compete agreements is widespread, particularly in the healthcare industry where larger healthcare systems have acquired doctor practices and hospital staffing agencies with requirements for staff to be bound by broad non-compete clauses.
However, a proposed rule in January 2023 by the Federal Trade Commission (FTC) challenges the traditional structuring of transactions in healthcare. The proposed rule would prohibit employers from requiring employees to sign non-compete agreements, which it considers unfair competition and a violation of Section 5 of the Federal Trade Commission Act. It also requires employers to nullify existing non-competes and notify workers within 45 days of nullification that restrictions will no longer be enforced.
Furthermore, the Department of Justice, state courts, and state attorney generals are also scrutinizing non-compete language and compliance with Corporate Practice of Medicine (CPOM) laws.
As private equity investment in healthcare and management services organizations (MSOs) becomes more common, the likelihood of legislation over widespread non-compete arrangements looms large.
There are the additional complications brought by telemedicine and telehealth practices, which have enabled service providers to practice medicine remotely and which may eliminate the need to move outside the geographic scope of a non-compete clause when looking for new work. Restrictions on practicing telemedicine would have trouble succeeding in court.
In 2023 and beyond, private equity firms must understand how the FTC proposed rule may affect the enforceability of restrictive covenants and to what extent it should be considered when negotiating private equity transaction documents, given the common use of restrictive covenants in these.
Additionally, non-compete agreements — such as those in acquisition documents, equity documents, and employment agreements — should be reviewed to ensure they align with the FTC's stated purposes, as well as other restrictive covenants to determine their enforceability. Firms should have a plan in place if the FTC demands that these agreements be amended.