Labor pressures rankling sponsor-backed health care providers could cut private equity-backed deal flow volume this year, according to a new report from Bain & Company.

Why it matters: The dynamic is likely to depress valuations and lengthen hold times, prompting more intense competition for tier-A assets.

By the numbers: Provider-based businesses represent about 20% to 30% of health care private equity buyouts, Bain's report says.

• Wage inflation rose about 5% in the U.S. and roughly 4% in Europe.
• Salaries and wages represent roughly 50% of operating expenses for hospitals and other sites of care.
• That number is even higher in more labor-intensive provider businesses like home health, personal care services and hospice.
• Simultaneously, while costs are high, reimbursement has grown only modestly, with rates often set on a multiyear basis with payors, or changed yearly by governments.

Yes, but: Specialty health care providers with a payor mix that tends toward more cash or private pay, attractive consumer dynamics and less reliance on patient financing will be more insulated, the report says.

• Veterinary, dental, oral surgery and vision have historically been more insulated from economic downturns.
• The current environment has boosted investor interest in cash-and-carry businesses, like plastic surgery and medical spas, according to Chris George, a senior managing director at FTI Consulting.
• Additionally, specialties like cardiology and orthopedics employing value-based care playbooks will remain attractive.

Be smart: A looming recession has not yet chilled discretionary spending in health care, but it's only a matter of time.

Meanwhile, Bain predicts augmented investor appetite for technology that improves provider workflows.

• In 2022, private equity was hungry for revenue cycle management, remote care solutions, clinical data solutions and claims management software — interest that's expected to persist into 2023.

Zoom out: While the second half of last year brought a slowdown in sponsor-led health care deal flow, health care-focused funds raised almost record levels of capital.

• Per Preqin data, firms raised more than 300 health care private equity-focused funds in 2022 for the second year in a row.
• Total assets under management for 2022 vintage funds also approached near-record highs.
• Despite all the macro-pressures, 2022 was still the second-biggest year on record for health care private equity M&A.

Editor's note: This story has been corrected to show the report came from Bain & Company, not Bain Capital.