As private equity (PE) activity in healthcare continues to expand, investors face mounting regulatory and operational scrutiny. Enforcement agencies are increasingly focused on PE-backed physician practices. From fair market value (FMV) compliance to ongoing portfolio oversight, today’s investors must adopt a proactive approach to risk management across the entire investment lifecycle.
A New Era of Regulatory Attention
Recently, regulators have intensified their examination of PE-backed arrangements in healthcare, pursuing enforcement actions for issues ranging from improper billing and coding at the practice level to excessive management fees. Investigators are no longer limiting their focus to the provider entity alone—they are also targeting the investment firms themselves.
This heightened scrutiny underscores the need for clear documentation and defensible FMV analyses. For PE firms, maintaining compliant and arm’s-length arrangements with physician practices is critical to mitigating exposure under state corporate practice of medicine (CPOM) and fee-splitting prohibitions. These rules are designed to ensure clinical decision-making remains independent from corporate influence.
Two key points of regulatory concern have cropped up: management fees and provider compensation. Management fees often serve as the vehicle for investor returns, but if they are not set at FMV, regulators may argue that the PE firm is effectively operating the medical practice, which is an arrangement prohibited in many states. Similarly, physician compensation has become a central focus where it was once a secondary concern.
Ensuring compensation levels align with FMV reinforces compliance while supporting provider retention and long-term practice stability.
The Framework for Compliance & Retention
Establishing FMV for management fees and physician compensation is more than a legal safeguard; it’s a business imperative. PE investors depend on strong physician relationships to sustain growth and preserve enterprise value. When compensation is structured at a reasonable market level, it demonstrates that the arrangement is both compliant and designed to promote provider satisfaction.
Aligning compensation with FMV creates a strong environment for retention. In many deals, physicians accept below-market earnings in exchange for upfront consideration or equity opportunities. Over the long term, maintaining equitable compensation helps reinforce engagement, reduce turnover, and ensure the continuity of revenue-driving activities.
Strengthening Post-Close Oversight
For investors, the closing of a transaction marks the beginning—not the end—of compliance and financial oversight. Effective post-close monitoring is essential for maintaining portfolio value, supporting audit readiness, and positioning for future exits.
From an accounting perspective, purchase price allocation (PPA) and goodwill monitoring are foundational elements of post-close financial management. Even when not formally required by auditors, conducting a PPA at closing establishes a clear valuation framework for tangible and intangible assets. This foresight can prevent significant challenges later, particularly if an audit or valuation review reveals insufficient documentation or inaccurate asset allocation.
As the business evolves, investors should also perform periodic goodwill impairment testing or equivalent valuation analyses. These exercises provide critical insight into whether the investment is performing as expected and whether any operational or strategic adjustments are needed.
For PE firms managing multiple physician practice platforms, this level of oversight also supports accurate quarterly and annual reporting to investors, an increasingly important expectation for larger funds.
Risk Beyond the Transaction
Post-close risks extend well beyond accounting and financial controls. Healthcare remains one of the most regulated industries, and compliance failures can erode both financial performance, reputation, and patient trust. PE firms have been fined for improper coding practices at the practice level and for charging management fees that fall outside of FMV parameters. These cases highlight the need to establish a robust compliance framework that includes appropriate oversight of revenue cycle operations, documentation practices, and physician contracting from the outset.
Equally important is the human element. A healthcare investment is only as strong as its physicians, and PE firms must take deliberate steps to retain top talent. Successful firms often employ a combination of income repair mechanisms, rollover equity opportunities, and junior physician equity pathways to align incentives and maintain engagement throughout the hold period. These strategies both promote provider loyalty and ensure clinical operations are sustainable and scalable.
Looking Ahead
With regulatory expectations and demand for greater transparency rising, PE firms in healthcare must elevate their approach to compliance and oversight. Establishing defensible FMV arrangements, maintaining rigorous post-close monitoring, and prioritizing physician alignment are essential to sustainable success.
Healthcare remains a high-potential sector for investment, but it also requires a higher degree of diligence. With the right valuation methodologies, documentation processes, and compliance programs in place, PE investors can protect their portfolios, enhance operational performance, and position themselves for strong, compliant exits.
Healthcare investments require tailored strategies for identifying value, mitigating risk, and maximizing returns. Contact our team today to start the conversation about your investment goals.
