Private Equity Investment in Health Care Providers and Technology – 2025 Midyear Outlook

While macroeconomic volatility has continued to compress valuations and lengthen deal timelines through the first half of 2025, demographic tailwinds, persistent fragmentation among provider groups, and accelerating adoption of digital tools have kept the sector on the short list for growth-oriented capital.

Health Care Provider and Technology Deal Environment

Even though capital availability remained tight through the first half of the year, many founders — especially physician-owned specialty groups and founder-led health tech companies that scaled rapidly during the pandemic — continue to view PE partnerships as the most attractive path to liquidity and growth capital. Strategic investors are using proprietary sourcing to target physician practices and boost their operational efficiency. For tech targets, investors are continuing to prioritize software-as-a-service revenue models that integrate seamlessly into provider workflows, enhancing provider efficiency and cultivating demonstrable returns on investments to payors under value-based arrangements. Over the next 12 months, some PE investors are likely to continue making strategic investments with the following targets: 

1. Outpatient Care Models, Physician Specialty Platforms, and Behavioral Health: The Center for Medicare & Medicaid Services’ (CMS) 2025 payment rates for hospital outpatient and Ambulatory Surgical Center (ASC) services incentivizes health care delivery systems to shift procedures to lower-cost settings. Rate preferences for outpatient services allows for sustained volume growth in cardiology, orthopedics, gastroenterology, and ophthalmology. Well-capitalized PE sponsors that can aggregate regional practices, standardize clinical pathways, and monetize ancillaries (ASC, imaging, infusion) are positioned to create durable value. Furthermore, reimbursement tailwinds under the Mental Health Parity and Addiction Equity Act and state Medicaid expansions favor scaled outpatient mental health, substance use disorder treatment, and autism therapy platforms, particularly those leveraging telehealth.

2. Home-Based Care and Post-Acute Services: Expanded Medicare Advantage penetration and hospital “care at home” waivers incentivize tech-enabled home health, hospice, and skilled nursing facility (SNF) at-home models with integrated staffing and logistics.

3. AI and Clinical Decision Support: As health systems streamline to achieve better bottom lines without decreasing positive patient outcomes, artificial intelligence (AI) will continue to be a savvy investment target. AI and tech-enabled solutions can be used for administrative functions, utilization management, care coordination, and value-based care support. Furthermore, the US Food and Drug Administration’s proposed framework for low-risk clinical decision support tools clarifies the regulatory pathway, potentially boosting investor confidence in algorithms designed for triage, imaging interpretation, and chronic disease management.

4. Value-Based Care: Since 2021, CMS has been working on developing a series of value-based care models, with the ultimate goal of having 100% of traditional Medicare beneficiaries integrated in accountable care relationships by 2030 (accountable care being one of many types of value-based care models). Value-based care models are gaining traction as they offer expertise in guiding patients through the health care system, which improves care coordination and enhances patient engagement. PE-backed value-based care navigators and population health analytics vendors remain fertile ground because these entities can manage risk effectively and support providers in achieving quality metrics.

Key Challenges Facing Health Care Transactions in the Next 12 Months

While there continue to be strategic investment opportunities for PE firms in the health care industry, there remain hurdles that can complicate health care transaction structures. Over the next 12 months, PE investors must be prepared to encounter the following challenges:

1. Federal Enforcement and Regulatory Authorities: The Federal Trade Commission (FTC) and US Department of Justice (DOJ) have continued to increase second requests and public statements challenging consolidation among physician groups, reflecting concerns that private equity “roll-ups” may enable anticompetitive price increases. FTC Chairman Andrew N. Ferguson announced that the FTC and DOJ 2023 Merger Guidelines remain the framework for the FTC’s merger analysis review. Furthermore, the US Department of Health and Human Services and its subagencies are using enforcement discretion to scrutinize health care delivery quality, physician compensation, and Health Insurance Portability and Accountability Act (HIPAA) compliance:

• CMS is increasing scrutiny of PE-backed entities’ impact on quality metrics in SNFs and hospices.

• CMS is continuing to monitor provider platforms’ ability to maintain clinical quality, compliance infrastructure, and robust data analytics under CMS’s expanded adoption of ASC codes and novel physician-focused Alternative Payment Models.

• The Office for Civil Rights is issuing larger civil monetary penalties for HIPAA violations after ransomware attacks surged in 2024. Health tech companies must embed security features early; providers must allocate capital for continuous monitoring, multi-factor authentication, and incident response.

2. State Laws: State-level regulators play a significant role in shaping the health care investment landscape. Over the past year, there has been a significant increase in state efforts to protect health care consumers, marked by the introduction of new legislation that intensifies the examination of drug pricing strategies. Similarly, some states have implemented new laws, or broadened existing laws, that require material change notifications. Material change notification laws require health care systems to get prior approval from health departments before they may engage in certain mergers, affiliations, and acquisitions. Additionally, various state legislatures have passed laws governing the application of AI in health care services. However, should the Big Beautiful Bill survive a vote in the US Senate, newly passed and proposed state AI bills will be federally preempted until 2035. For-profit investors must remain mindful of the ever-changing regulatory landscape of PE investment in health care marketplaces that exists at the state level.

3. Labor Shortage and Wage Inflation: Persistent nursing shortages and emerging state minimum staffing ratios erode operating margins. Extended increases in health care expenses, along with significant labor shortages, may pose a fundamental risk to certain health care systems. State and federal laws impose minimum staffing personnel requirements for long term care facilities. For example, SNFs in Massachusetts require at least one nurse “24 hours per day, seven days a week for each unit” to comply, in part, with the minimum nursing personnel requirement. Furthermore, CMS has its own minimum nurse staffing standards for long term care facilities. The challenge of attracting suitable health care professionals will complicate operations in specific areas and widen health equity disparities, such as those between rural and urban communities. Investors will need to underwrite aggressive wage escalation and retention investments, particularly in home health, SNFs, and behavioral health settings.

Key Takeaways for Health Care PE Investing: Mid-2025 to Mid-2026

Investors that have succeeded in the first half of the year — and those who will continue to do so over the next 12 months — are those who proactively navigate aggressive federal and state enforcement initiatives aimed at (1) perceived “financialization” of care, (2) novel state pre-closing notice and approval regimes, and (3) evolving reimbursement and labor headwinds. At the same time, opportunities continue to abound in outpatient specialty platforms, behavioral health, value-based care enablement, AI-driven clinical decision support, and cyber-security solutions tailored to HIPAA and state law compliance. To continue to be successful in the health care industry in the coming year, PE investors should do the following:

• Prioritize targets that possess scalable technology platforms, can thrive in value-based arrangements, and demonstrate data analytics capabilities that translate into measurable patient outcome improvements.

• Conduct early, granular antitrust assessments, in addition to preparing advocacy materials that emphasize increased quality-of-care and access after PE-backed investments take place.

• Keep portfolio governing boards apprised of evolving federal and state policy trends, including potential FTC rulemaking on non-competes and DOJ/FTC merger guidelines to ensure governance processes document proactive compliance.

• Re-evaluate reliance on non-compete covenants. Consider compensation-based retention, equity rollovers, and physician leadership councils as alternative integration levers.

• Allocate resources to ongoing post-close compliance monitoring, particularly quality metrics reporting, HIPAA privacy, and patient billing practices, to forestall regulator and whistleblower actions.

• Embed cybersecurity diligence from day one, including third-party penetration testing and post-closing remediation budgets. Insure against ransomware.

• Model transactions with higher cost of capital, conservative reimbursement rates, and sustained wage inflation. Stress-test downside scenarios involving CMS rate cuts or state-mandated staffing ratios.

• Partner with experienced regulatory counsel and advisors who track state-specific licensure requirements for long-term care facilities, drug pricing practices, and the use of AI in health care delivery.

The attorneys at ArentFox Schiff routinely assist for-profit investors with complex health care transactions that meet clients’ goals while complying with applicable laws and relevant regulatory guidance.