Is Private Equity Bad for Health Care?

Senator Edward Markey (D-Mass.) has taken notice and wants to do something about private equity investments in health care. Private equity investors have purportedly invested hundreds of billions into health care acquisitions in recent years.

The trend has sparked criticism from federal regulators and watchdogs, who say the financiers enrich investors by monopolizing markets, raising prices and compromising patient care…

Sen. Markey is particularly angry about Steward Health Care’s bankruptcy filing. An investment firm owns 31 Seward hospitals, many of which are in Massachusetts. The perverse incentives in health care are the primary problem. However, that is not something Sen. Markey proposes to address in his Health Over Wealth Act.

I too have complained in the past about private equity investing in health care. After private equity began buying radiology practices, the Federal Trade Commission alleges that prices rose as practices consolidated into regional monopolies. Two major private equity firms began acquiring emergency room physician staffing companies a dozen years ago. As a result, the firms stopped affiliating with health plan networks so they could balance bill patients much higher fees. After the No Surprises Act was passed by Congress and took effect in 2022 the firms found their business model was no longer as lucrative. Private equity investors are buying into veterinary practices and raising prices. Private equity investors are buying into behavioral health clinics and gastroenterology practices. Indeed, a recent study found private equity investors own half of specialists’ practices in many major cities.

Air ambulances are another great example. In recent years investors have been snapping up air ambulance companies because patients are in no position to compare prices and federal law prevents states from regulating the prices firms charge. The sky is now the limit.

I wrote this in 2020:

Medicine is probably the only area of our economy where corporations, private equity investors, venture capitalists and Wall Street tycoons don’t deliver value. Corporate medicine is big business, but it’s not Sam Walton trying to bring low-cost, high quality health care to a town near you. Private equity funds are targeting areas of medicine where they can gouge patients, extort insurers and loot employee health plans.

Free-market capitalism has repeatedly been proven to provide consumers with the most goods at the lowest prices. The benefit of capitalism is self-evident. Competition is what drove these benefits, not government planning. So why doesn’t the same occur in health care? Just to be clear, it is not a bad economic system or even bad people; it is due to bad incentives perpetuated by bad government regulations unique to health care.

Health care is unique because consumers bear the cost of medical care indirectly. About 90% of medical bills are reimbursed by someone besides the patient. Prices are opaque and price competition nonexistent. Private equity investors are particularly good at figuring out how much the market will bear in terms of prices. For example, emergency room staffing became lucrative because patients have few other options by the time they present to the ER. Why not surprise them with a huge bill? When a patient has an accident and needs an air ambulance, it only makes sense to hit them with a life altering medical bill in return for possibly saving their life.

In competitive sectors of the economy investors are rewarded for generating value for consumers and often punished when they fail to provide services consumers demand. That does not happen in health care, where consumers only pay about 10% of their medical bills directly out of pocket and third parties negotiate prices for most services.

Market failure is essentially what private equity investors are taking advantage of when they invest in health care.

Health care is what economists call a “market failure.” In other words, the normal logic of competition is not working. Part of the failure involves what is called “price discovery.” Simply put, markets don’t work well unless the buyer can discover the price of something before signing the order. How can you choose between a Tesla and a Corolla without knowing the price? Yet, it is all but impossible to find the real price for your medical services until after the service is performed, and after the insurance company (if you have coverage) has pored over the bills from the doctors, labs, hospitals and other providers.

What can be done about market failure in health care? The problem is complex, but a good dose of price transparency would help. Although hospitals are required to post prices on their websites it is all but impossible to compare prices. Many physicians’ practices are also owned by hospitals and are not required to inform patients they have options. For that matter, corporate practice of medicine is sketchy. Until recently many states banned it. Furthermore, the old standard for an enforceable agreement, called mutual assent, does not seem to apply to medicine. It should.