The Other Villains in U.S. Health Care: Private Equity Firms
What one state is doing about the PE takeover of the industry.
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
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Apollo, KKR, Blackstone, ABRY Partners, Cerberus, FLC, JLL, Paladin, CCMP Capital Advisors, GTCR, TPG Capital.
This alphabet soup of just a few of the thousands of global private equity (PE) firms means nothing to the average American. Yet these firms have been radically transforming the global and American economy, including our health care system, over the past decade, with over $1 trillion dollars in transactions in health care alone. The rate of this radical change was markedly increased during and abetted by the pandemic. Yet this process has been almost completely invisible to the public.
With major loss of revenue from the pandemic’s reduced provision of services and the need to possess or upgrade information technology for reporting on quality and other metrics required by the Affordable Care Act, thousands of hospitals and medical practices face significant financial risk and are looking for ways to survive. They are ripe for picking by PE firms.
A major report released last year by the American Antitrust Institute (AAI) and the Petris Center at the University of California at Berkeley found that:
- The PE business model is fundamentally incompatible with a sound health care system that serves patients;
- PE’s focus on short-term revenue generation and consolidation undermines competition and destabilizes health care markets;
- PE amplifies and accelerates health care market concentration and anticompetitive practices;
- PE firms operate under the public and regulatory radar; and
- Urgent action is needed to oversee, investigate, and understand the impact of PE in health care on patients and markets.
The AAI/Petris report states that health care was the second major sector for PE investment in 2020. There was over a 250% increase in PE deals in the decade 2010–2020. This is likely a significant undercount due to lack of transparency and reporting requirements. All four sectors of the health care industry—clinics/outpatient services, elder and disabled care, hospitals/inpatient services, and pharmaceuticals/medical supplies—saw increases in PE buyouts 2010–2020. The greatest spikes have been in outpatient and elder care. PE firms like KKR have also pioneered exploitative and deceptive hospital practices, such as surprise billing. The largest hospital chains with the highest cash reserves created by this market consolidation even received most of the federal Covid relief payments.
PE firms are flush with billions of dollars in cash borrowed from wealthy investors, pension funds, and other sources. PE uses this borrowed money to put together massive chains of hospitals and physician staffing firms through mergers and acquisitions. They then strip assets to extract wealth and profits and resell them on a preferred short-term horizon of three or four years. That is not enough time for a hospital or a system of hospitals to pay off the debt they are burdened with in typical PE transactions nor to improve care and operations. In the meantime, investors and lenders make off with huge profits. Studies show that this destabilization and resource drain out of the health care system is dangerous for the quality of and access to care. Federal and state regulators lack effective means to ensure that the U.S. health care system is not negatively impacted by the massive, ongoing, and widespread buying and selling of facilities and human resources. There are few if any policies or regulations that require transactions or PE activity to be reported and PE likes it that way.
How Does This All Play Out in California?
PE has been increasingly active in California’s health care sector. A May 2024 report by the California Health Care Foundation (CHCF, citing data from Pitchbook and the Private Equity Stakeholder Project) notes that PE-related deals have skyrocketed over the past two decades, going from 36 deals totaling less than $1 billion in 2005 to 224 deals totaling $20 billion in 2021. Pharmaceutical companies were involved in 71.4% of the transactions between 2109 and 2023. A small number of large transactions accounted for the total. Of the total $14.53 billion in PE purchases of hospitals, clinics, and elder and disabled care facilities in the past 19 years, $4.31 billion or 29.7% occurred in the past five years. These numbers indicate accelerating PE activity in health care in California. There is a profound lack of transparency (and hence data) because PE firms are not required by law to report transactions below $119.5 million. (See below.) Up to the present, PE acquisitions in California have focused largely on clinics and outpatient services. PE purchases of outpatient providers increased from two in 2005 to 70 in 2022. As of 2024, as the CHCF report notes, PE firms currently own 22 hospitals across the state, which represent 6% of all private hospitals in California. Thirteen of those 22 hospitals are operated by the Kindred Healthcare, which is owned by PE firm Apollo Global Management.
How Do PE Firms Expand Their Health Care Holdings?
The Hart-Scott-Rodino (HSR) Act requires companies to report mergers and acquisitions to the Federal Trade Commission (FTC). These mergers cannot be finalized until the FTC or the Antitrust Division at the Department of Justice (DOJ) examines the deal and determines that it will not harm competition. But PE funds are very skilled at evading existing regulations. They target deal amounts that fall just below the HSR reporting and pre-approval threshold currently set at $119.5 million, as noted above. Through a “buy-and-build” strategy, PE funds purchase a “platform company” which can be a hospital, hospital chain, medical equipment and supply company, physician practice, or physician staffing company; they then use a series of small acquisitions to build the original one into a powerful local and even national market player. As a result, most PE acquisitions in health care are never reviewed by antitrust regulators and are not evaluated by the FTC or DOJ for their impact on competition and prices.
Regulators are forced to play a game of “whack-a-mole” because by the time government intervenes, PE firms have taken their enormous profits and moved on. In health care this comes at a cost to patients. The top 10 deals alone (out of 937 total that could be discovered in 2020) added up to almost $70 billion dollars in the decade 2010–2020. And PE firms are sitting on billions of dollars in so-called “dry powder,” poised to continue snapping up medical groups and health care institutions financially crippled by the pandemic.
PE-purchased entities are typically loaded with debt to quickly pay off PE managers and investors. Further profits can be extracted through lease-back agreements, management contracts, and selling off pieces of these debt-ridden companies. In the case of hospitals, this can mean closing unprofitable but essential services like obstetrics and gynecology units and pediatric departments, and laying off hundreds of physicians, nurses, and other essential health care workers.
As noted above, this destructive process accelerated in the pandemic and has imperiled patients, thousands of medical practices, and numerous hospital systems around the country. This resulted in system-wide instability at the worst possible time. A prime example is the purchase of pandemic-induced financially strapped physician practices by physician staffing companies that are actually owned by private equity, like Envision Healthcare, which is owned by private equity giant KKR. Physician practices are being bought up at alarming rates. Seventy-four percent of U.S. doctors now work for hospital chains or corporate entities. Between January 1, 2019 and January 1, 2021, 48,000 physicians chose employment with hospital-based health care systems or with corporate entities. While this phenomenon was well under way even before the pandemic, it has greatly accelerated due to increased financial stress faced by thousands of physician private practices impacted by the lockdown. This scale of essentially unregulated market consolidation and radical transformation of the U.S. medical practice infrastructure has ominous implications not only for physicians but also for patients and payers.
Urban areas are not the only place PE has been active. Rural hospitals have been closing in increasing numbers and their staffs laid off as PE purchases them, strips them of assets, and then moves on to other targets.
Evidence shows that increasing market concentration leads to increased prices and costs of care. This has not deterred PE managers, investors, and lenders whose priority is profit-taking and not improving access, efficiency, quality of care, and equity. A study early in 2021 in the prestigious health policy journal Health Affairs reported that quality is not improved from merger and consolidation in the health care system.
What About the Doctors?
The physician advocacy organization Take Medicine Back cites the following shocking facts:
- 74% of U.S. physicians are now employees working for corporate entities.
- 90,000 physicians alone (10% of the total) now work for Optum/UnitedHealth.
- In 2020, U.S. physicians reported an all-time high burn-out rate of 63%, and that number is rising. Burn-out correlates very closely with the moral injury caused by the conflict between caring for patients and meeting the corporate bottom line.
These circumstances present a great challenge to younger physicians just coming out of training and looking for practice opportunities. They entered medicine with high ideals and then encounter a brutal hiring market with priority based on profit-making. Doctors take an oath to always put their patients first, while PE and other fund managers take an “oath” to always put their shareholders first. These two principles are in conflict and are the root of the crisis for physicians.
In addition, physicians who sign on to PE-controlled professional corporations must sign away their right to due process and also sign a non-compete clause that prohibits them from working for or starting their own practices that could compete with the PE firm in question. Physicians can then be summarily fired without cause. These professional corporations are run by a “friendly physician” or “straw doctor” who also serves on the board of the PE firm. This arrangement provides a way to evade the “corporate practice of medicine” doctrine, which only permits physicians to hire other physicians. (The exception is government entities and some non-profits.) In one of the most egregious cases, one “friendly” doctor was the president of 300 professional corporations in 20 states. Thirty-four states prohibit the corporate practice of medicine, but enforcement is weak if done at all.
Is There Any Good News?
On March 6, 2024, the FTC held a major hearing on the role of PE in health care, with testimony from physicians, nurses, patients, health policy experts, anti-trust attorneys, and others on the negative impact of PE in health care. The FTC, the DOJ, and Department of Health and Human Services have begun investigating the impact of PE. And a bipartisan investigation has begun in the U.S. Senate with Sheldon Whitehouse (D-Conn.) and Chuck Grassley (R-Ind.) leading the way. Senator Elizabeth Warren (D-Mass.) is also working on bipartisan and bicameral legislation to make it illegal to demand that physicians give up their right to due process. Further progress and even ongoing efforts at the federal level may hinges on the outcome of the November election.
Physicians themselves are increasingly and successfully fighting back with legal actions and also by organizing unions, both at the trainee/resident levels and out in practice.
Again, What About California?
In California in 2018, AB 595 (introduced by Assemblymember Jim Wood, D-Healdsburg) was signed into law. It required health plans seeking to merge to get prior approval from the Department of Managed Health Care. The intent of the bill was limited to ensuring that competition would not be decreased and lead to increased prices. A California bill (SB 977, Monning) that might have set further requirements on mergers and acquisitions and PE, particularly that equity and quality not be reduced and that an explicit financial threshold for review is set, failed to pass the state legislature in the 2020 session. Xavier Becerra, then California Attorney General, and now U.S. Secretary of Health and Human Services, led the effort on that California bill. The third bill authored by Jim Wood in the 2021 session also sought to tighten regulation of mergers and acquisitions and private equity activity in the California sector.
In the state’s 2023–2024 legislative session, Jim Wood introduced AB 3129. The bill passed the state legislature but regrettably was vetoed by Governor Newsom in October. AB 3129 was the strongest bill yet to regulate PE and would have regulated mergers and acquisitions more tightly by requiring approval by the State Attorney General (AG). The bill had passed the state legislature in the last hours of the session after a concerted effort by industry lobbying groups managed to wrench amendments that exempt for-profit hospitals and dermatology medical groups from AG oversight. Mergers and acquisitions of non-profit hospitals are already subject to approval by the AG. While disappointing to advocates of stronger regulation of PE, the bill would still have covered large medical groups, nursing homes, and other facilities. Cash-strapped and under-funded public hospitals would likely have sought to be exempted in future legislation. If enacted, AB 3129 would have been one of the toughest laws in the nation regulating PE activity. The Governor stated the reason for his veto was that the state Office of Health Care Affordability (OHCA), ironically established by a prior bill also authored by Jim Wood and signed into law by Newsom, already had oversight over mergers and acquisitions (M&A), making AB 3129 redundant. However, OHCA cannot block M&A, which the AG would have been able to do under AB 3129. Perhaps Newsom just did not want the AG to have this power. Perhaps Newsom, with his eye on a future presidential bid, succumbed to intense lobbying efforts by the state hospital association, the Chamber of Commerce, and the PE industry. Other reasons for the veto remain speculative, and analyses of the reason for the veto have been sketchy at best. Adding to the difficulty of any further movement on this issue, Jim Wood has been termed out of the Assembly and has not to date expressed any further desire to run for other state office. It also remains unclear if there will be a new health care reform champion to take the legislative leadership mantle from Wood.
One thing is certain, however. There remains further work to do to rein in the destruction wrought on the health care system by private equity, both in California and the rest of the country. Organizations like Health Access California, Take Medicine Back, California Physicians Alliance, and others continue working to address the PE crisis here in California.
Ultimately, it is action at the federal level, both in terms of legislation and of ongoing and intensified agency focus, that must be brought to bear. As for California, we must revisit the issue and bring for-profit hospitals and dermatology groups into the regulatory environment. As for California’s underfunded public hospitals, there will need to be meaningful increased public investment, otherwise they will be increasingly ripe for PE incursion with the attendant problems of higher costs, lower quality, lower satisfaction, workforce layoffs, and increased disparities.
Is this all too little too late? The barbarians are already through the gates and are pillaging the city and the House of Medicine. Can regulations and laws reverse the damage or merely limit it?
Health care in America is increasingly becoming financialized—a process for extracting wealth instead providing care to people who need it. This process is also causing moral injury to the people who work in that system as they are confronted with the choice of caving to the demand for ever increasing profit over their duty of care. Growing PE control of the U.S. health care system will provide neither universal coverage nor affordable, high quality, and equitable care. The free market has not only failed to solve the health care problems in the United States, it has actually worsened them. It will not protect frontline health care workers. Government will need to step up its game. Ultimately, Americans will have to answer this fundamental question: Should health care continue to be treated as a commodity or as a public good?
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