The outlook for private equity investment in healthcare in 2025 and beyond

In 2022, health expenditures per person in the United States were $12,555, almost double the average in comparable countries, according to the Peterson-KFF Health System Tracker. Yet, the U.S. finished last in a Commonwealth Fund ranking of the performance of healthcare systems in 10 high-income countries.

This misalignment of expenditures and patient outcomes has led to increased regulatory involvement in the healthcare industry, complicating the calculus for private equity (PE) investors at a time when lower interest rates, cooling inflation, and a more stable economic outlook promise to increase the flow of investment into the sector.

At the 11th Annual Cain Brothers Private Company Healthcare Conference in New York, Matt Margulies, Managing Director at Cain Brothers, moderated a panel discussion about recovering M&A markets and unique PE investment perspectives for 2025. The panelists were Jeff Abramoff, Partner at Court Square Capital Partners; Ben Edmands, Managing Partner and Co-Founder of Consonance Capital; and Anna Haghgooie, Managing Director at Valtruis, a Welsh, Carson, Anderson & Stow (WCAS) company, and an Operating Partner at WCAS.

The panel kicked off with a look at the current state of healthcare M&A and how it’s changed from a few years ago.

No going back to unbridled M&A

After peaking in 2021, PE dealmaking in the healthcare space cooled¹ because of high inflation, rising interest rates, and macroeconomic uncertainty. More recently, capital flow and deal activity have both strengthened in anticipation of interest rates coming back down.

“We’re seeing very high-quality platforms coming to market, and we expect these companies will trade at historically high multiples,” Margulies said. “Investors must decide whether to pull the trigger on the right business now or hold off until there’s more value opportunity.”

Abramoff agreed that healthcare M&A is looking more robust, but said he thinks the market recovery may be more subdued, and not just because of hesitancy around timing.

“While it’s true that there are a handful of companies selling for big multiples, the type of deals that were popular in 2021 — the big roll-ups, where you’re getting a lot of multiple arbitrage — have fallen out of favor,” Abramoff said. “PE firms seem to be looking for B2B companies that have a really strong organic growth story and great management teams. For those companies, M&A can be a cherry on top, but it doesn't have to be the key part of the story.”

Splashy deals have lost their luster in part because of increased scrutiny by regulators concerned about the potential impact of consolidation on costs and quality.² Efforts to align those two variables are at the center of one of the biggest healthcare mergers announced this year: the $3.3 billion purchase of Cigna Group’s Medicare Advantage, Medicare Supplemental Benefits, Medicare Part D, and CareAllies businesses by Health Care Service Corp. (HCSC).³

Obstacles and opportunities in value-based care

The Cigna assets being acquired by HCSC are all intended to support providers in value-based contracts, which tie incentives to patient outcomes.⁴ This contrasts with the traditional fee-for-service (FFS) arrangement, which pays providers based on the volume of services they render, regardless of results.

For years, the U.S. government has been encouraging the healthcare industry to embrace value-based care (VBC) to help close the healthcare cost/quality gap. Since 2012, the Centers for Medicare & Medicaid Services has offered quality-based incentive payments to providers through a handful of Medicare programs.⁵ Outside of Medicare, however, uptake of VBC has lagged.

“VBC models haven’t progressed the way all of us had expected,” Margulies said. “Payers say that providers aren't ready or willing, and providers say payers aren’t willing and don’t play fair.”

In the near term, experts agree that VBC models have a better chance of success in specialty care than in primary care. Before VBC can take root in specialty care, stakeholders must learn to work together.

“If you look at this industry from a margin perspective versus a revenue preservation perspective, there are enormous opportunities for a different type of collaboration,” Haghgooie said. “It’s harder, it takes time, and it takes true trust and partnership, which are all really challenging when everybody’s pointing fingers at each other.”

Haghgooie added that provider-oriented specialty models optimized for dollars-per-hour of the specialist’s time are misaligned with what consumers want. A patient with knee pain may not know whether to seek help from their primary care doctor, an orthopedic surgeon, an imaging center, or physical therapy. Leaving it up to the patient to navigate these disparate options, Haghgooie said, is wasteful.

“Medicare Plans spend about $100 per member per month (PMPM) on MSK (musculoskeletal) episodes. If we used that money to create a really differentiated experience for members, while also achieving clinical outcomes so that their knee doesn't hurt anymore, you would spend the dollars pretty differently than how people are utilizing today,” Haghgooie said. “But, by and large, people don’t have an optimized experience in specialty care, and I think that’s the big opportunity for the next five to 10 years.”

Edmands said it’s up to employers to push for wider adoption of VBC models.

“Medicare Advantage is shifting towards value-based care because the government shifted all the risk to the plans. But on the commercial side, it is mostly employer-based,” said Edmands. “The employers need to get together to explore new ways to deliver healthcare to their employees.”

Opportunities are plentiful but will require a different approach

As investor equity starts flowing again, PE firms looking to invest in the healthcare industry are navigating a landscape that’s changed markedly from the heady days of 2021. One of the biggest changes is increased scrutiny on the FFS model. Investors entering the space will have to look for ROI without increasing volume and raising prices.

“Scale, density, and infrastructure are not enough anymore,” Edmands said. “You need to be investing in models that are using technology and integration to deliver better outcomes and drive costs down.”

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