2025 Perspectives in Private Equity: Health Care & Life Sciences

Private equity investors in health care and life sciences must navigate a complex and shifting landscape influenced by regulatory and policy changes and technological advancements. As private equity investments in the health care industry boomed, the previous administration took an aggressive stance against such investments, and it remains to be seen if the Trump administration will continue these policies. Investors must account for potential regulatory scrutiny and reform, the impact of artificial intelligence (AI) advancements, and supply chain vulnerabilities when evaluating the valuation, compliance, and strategic growth of both new and existing investments. By staying ahead of these trends and understanding the regulatory climate, private equity firms can position themselves to mitigate risks and capitalize on emerging opportunities in this dynamic sector.

Here, we identify some of the key takeaways for private equity (PE) funds at the start of what will no doubt be a transformative year, with these topics front and center. 

Artificial Intelligence

Use of AI and machine learning (ML) in health care has continued to proliferate. AI/ML are being applied to research and development, manufacturing and postmarket surveillance, and communications with patients and providers. AI/ML is also being leveraged in a growing number of medical technologies. As of August 7, 2024, the U.S. Food and Drug Administration (FDA) announced that it had authorized 950 AI/ML-enabled medical devices. With this growing record of reliance on AI/ML, legal and regulatory scrutiny of AI/ML has increased, as FDA has clarified standards and expectations for use of AI, in terms of premarket validation, ongoing post-market assessment, and cybersecurity. In 2024, the Office of the National Coordinator for Health IT also issued regulations applying requirements to certain predictive decision support tools that are used in conjunction with electronic health records.

2024 also marked increasing focus on the use of AI/ML in research and development. FDA’s Center for Biologics and Research (CBER), Center for Drug Evaluation and Research (CDER), Center for Devices and Radiological Health (CDRH), and Office of Combination Products (OCP) regarding the development and use of AI across the medical product life cycle.

In 2025, expect to see continued support for clinical tools that improve the treatment of intractable conditions like cancer, sepsis, and other conditions, combined with continuing scrutiny of the unique aspects of AI/ML-supported applications, such as cybersecurity, transparency, hallucinations, data drift, and change validation. FDA will also face pressure to show progress in supporting the use regarding predetermined change control plans for AI/ML-enabled medical devices and medical devices more generally.

U.S. Regulatory Reform and Loper Bright 

President Trump has again promised an ambitious deregulatory agenda that will affect every major regulatory agency. The new Department of Government Efficiency (DOGE) is already playing an aggressive advisory role, helping to fill in the details of this agenda by identifying regulations for rescission. The Supreme Court’s 2024 opinion in Loper Bright v. Raimondo could serve as a roadmap for further deregulatory activity.

In Loper Bright, the Supreme Court overruled what has become known as the Chevron Doctrine, under which courts reviewing challenges to agency actions were expected to defer to an agency’s interpretation of an unclear statute. By overruling Chevron, the Court eliminated the presumption that statutory ambiguities are implicit delegations of authority to agencies. In a 6-3 opinion authored by Chief Justice Roberts, the Court reasoned that under Article III of the Constitution it is the duty of the courts to say what the law is. While courts should give “due respect to Executive Branch interpretations of federal statutes,” it is the function of courts to determine “whether the law means what the agency says.”

As a practical matter, the Court’s overruling of the Chevron Doctrine should not have much effect on agency litigation in the Supreme Court or in lower courts that had already abandoned Chevron deference years ago. However, the DOGE is likely to lean on Loper Bright to justify repeal recommendations for regulations – new and old – that arguably exceed the issuing agency’s authority. We expect regulated industries, like health care and life sciences, and other stakeholders will do the same, and use Loper Bright to bolster requests for regulatory relief in both administrative settings and federal courts.

Prescription Drug Pricing 

The Inflation Reduction Act (IRA) continues to reshape fundamentally the landscape for investment in health care and life sciences companies in the U.S., introducing a wide range of new incentives and disincentives as the federal government takes control of drug pricing. Drug pricing was a focus for the first Trump administration and looks set to be so again, though it remains unclear how the new administration will approach IRA implementation. 

With control of the House, Senate, and White House, Republicans may seek to legislate changes to the IRA as part of the budget reconciliation process or via additional measures like pharmacy benefit manager reforms. We think it is unlikely the IRA will be repealed in its entirety; instead, Congress may look to turn policy dials as we saw with the Affordable Care Act (ACA) in the years following its enactment. 

U.S. Health Coverage and Access 

Health care coverage will be a prominent policy area during the second Trump administration.

Temporary enhanced premium subsidies for ACA coverage are due to expire at the end of 2025 and, without an extension, approximately four million people stand to lose health coverage and remain uninsured. Further, out-of-pocket spending on premiums for health coverage is projected to rise across all income groups in all 50 states if subsidies expire. We expect the incoming administration to pursue the expansion of other mechanisms of health care coverage—such as high deductible plans coupled with health savings accounts and Individual Coverage Health Reimbursement Arrangements (ICHRAs)—as alternatives to coverage with enhanced ACA subsidies.

In addition, if Congress decides to undertake federal deficit reduction through the budget reconciliation process and include health care related provisions, spending under the Medicaid program could easily be a target for budget savings as it was under the Better Care Reconciliation Act of 2017, as such proposals have been demonstrated to meet the criteria for inclusion in a budget reconciliation bill. Per Congressional Budget Office analysis, Medicaid proposals would have wide-ranging effects on federal spending and the number of individuals with health coverage.

While the potential menu of savings options remains fluid, President Trump has focused Medicaid policy on program integrity efforts to address fraud and abuse under the program. Under this framework, proposals that substantially reduce federal Medicaid spending could plausibly be considered, such as establishing Medicaid work requirements, capping federal Medicaid spending per person, and limiting Medicaid provider taxes. It is not clear whether authority and federal funding for the Children’s Health Insurance Program will also be in play this Congress, as that program does not expire until September 2028.

In addition to (or in lieu of) Congressional action, regulatory steps that reform Medicaid could be taken that impact the number of people with health coverage. New restrictions on the ability of states to draw down federal Medicaid payments through intergovernmental transfers, for example, and regulatory flexibility for states to use Medicaid waivers to link work requirements with eligibility for coverage, would also likely reduce the number of individuals who qualify and are enrolled in the program. Most of these individuals are not likely to be able to afford other forms of health coverage and would likely remain uninsured.

Net losses in health coverage would not only reduce revenues for insurers but in the health system writ large, including for health care providers such as hospitals and physicians, pharmaceutical and device manufacturers, and the associated supply chains.

Life Sciences 

After a tough period for the global life sciences sector, we expect to see an uptick in investment opportunities and deal activity through 2025. Preventative and therapeutic solutions are likely to see a greater focus, including vaccines, therapies, data, and technology. More broadly, we expect to see greater AI use in both detection and prevention. 

Health care is moving towards a digital-first approach and we can look forward to more innovative solutions in relation to triaging, connected support, monitoring, and assessment. Drug discovery and clinical trial timelines have the potential to shorten due to enhanced technology and use of data assessment techniques. 

We expect to see some big gene therapy bets in 2025, with increasing capital being allocated to oncology therapies, in particular. It is still the case that 90 percent of new anti-cancer drugs fail in clinical trials and addressing that will be a focus. 

Regulatory compliance will be ever more complex for life sciences businesses this year, but even more important than it was in 2024. 

Medical Supply Chains 

Supply chain vulnerabilities and reliability remain a significant risk factor for FDA-regulated drugs and medical devices. Regulatory scrutiny relating to product disruptions and shortages is increasing, as are the expectations for manufacturer oversight of their upstream suppliers. Supply chain disruptions are increasing, and will continue to increase, due to a variety of factors. These include potential challenges in meeting global quality control and good manufacturing practice (GMP) requirements, tariffs, sanctions, and other policies that restrict certain markets or sources of production, and that favor “on-shoring” to the U.S. or allied countries. These growing challenges are replete with legal and regulatory risks, which we help our clients navigate.

Hospitals and Health Systems

Plans are underway to move forward with budget reconciliation to extend the 2017 tax cuts and pay for that, in part, with savings from the health care sector. This will certainly put provider spending on the budgetary radar screen, including for hospitals and health systems. Proposals to reduce Medicare spending could include Medicare site neutrality payment for hospitals, reforms to Medicare hospital payment for uncompensated care, and changes to graduate medical education. In addition, hospitals are at risk of revenue losses from other proposals that could be considered for reconciliation, particularly reductions in federal Medicaid payments and the expiration of expanded ACA tax credits. In considering reductions in federal spending, policymakers would likely weigh impacts to their constituents and may consider policy adjustments to mitigate such impacts, especially in rural areas where federal Medicare and Medicaid dollars often make up over 50 percent of hospital revenue.

Medicare Advantage

Under the Trump administration, the Medicare Advantage (MA) program will likely continue to grow faster than traditional fee-for-service Medicare and comprise a larger share of Medicare enrollment and spending than it does today (54 percent of total Medicare for both). This continued growth is likely to focus attention by policymakers on the MA program and scrutiny over the program by some policymakers as well as interest in potential modernization proposals. Various reforms to or changes in the regulation of the MA program could have varying impacts to MA plans’ revenue and practices. Marketing, AI-enabled medical claims review, prior authorization, and risk adjustment coding may all be areas of interest and oversight for policymakers. Today, MA plans conduct many of these activities through outsourced service providers. Any reforms to the MA program by the Trump administration would be pursued against the new administration’s emerging deregulatory landscape and post Loper Bright environment.