Private equity is scooping up thousands of health care businesses across the nation. If you present at an emergency room there is a good chance you will be treated by a physician employed by a firm backed by private equity investors. In some cases, entire hospitals are being purchased or managed by firms backed by private equity. Increasingly, physician practices are being bought up by private equity investors. The profit motive is worrying many stakeholders, fearing high prices and lower quality. Kaiser Health News has a series of articles on private equity investing in health care.
Private equity, known for making a profit on quick-turnaround investments in struggling businesses across many industries, has taken an increasingly active interest in health care in the past decade. It has invested in gastroenterology practices in recent years to tap into the revenue potential in meeting growing demand.
Then there was an article on investors buying rural hospitals only to dump them when there wasn’t a quick buck to be made.
Private equity investors, with their focus on buying cheap and reaping quick returns, are moving voraciously into the U.S. health care system; investments increased twentyfold from 2000 to 2018, and have only accelerated since. Financially distressed rural hospitals like Audrain are targets, putting vulnerable communities at the mercy of firms whose North Star is profit, rather than patient health. A recent report found that 441, more than 20%, were at risk of closing or losing services.
Another article focused on Hospices Have Become Big Business for Private Equity Firms, Raising Concerns About End-of-Life Care.
“Many of these transactions are driven by the motive of a quick profit,” said Dr. Joan Teno, an adjunct professor at Brown University School of Public Health, whose work has focused on end-of-life care. “I’m very concerned that you’re harming not only the dying patient, but the family whose memory will be of a loved one suffering because they didn’t get adequate care.”
Another take on investors buying hospices has more to do with standardizations and scalability.
“Private equity sees a huge opportunity to take smaller businesses that lack sophistication, lack the ability to grow, lack the capital investment, and private equity says, ‘We can come in there, cobble these things together, get standardization, get visibility and be able to create a better footprint, better access, and more opportunities,’” said Steve Larkin, CEO of Charter Healthcare, a hospice chain owned by the private equity firm Pharos Capital Group.
But he acknowledged that not all of those entering the hospice market have the best intentions.
“It is a little scary,” he said. “There are people that have no business being in health care” looking to invest in hospice.
There is even worry about for-profit investors buying nursing homes. I recently helped locate a facility for a family member and there is intense competition for those seniors with enough money to pay privately. Private Equity Ownership of Nursing Homes Triggers Capitol Hill Questions — And a GAO Probe.
The exponential growth in these private equity investments in recent years “has been associated with a host of trends that are negatively impacting the American people” — including an increase in nursing home mortality rates, wrote Pascrell, who chairs the Ways and Means Oversight Subcommittee. He noted the need to “better understand” the consequences of private equity’s involvement in health care and “the far-reaching impact” of “bankruptcies or closures following PE buyouts.”
This is what worries me about private equity investing in health care. Our health care system is dysfunctional. It consumes nearly 20% of our economy and 90% of the resources are paid for by parties other than the patient. This is a recipe for waste, fraud and abuse. From what I’ve seen there is very little interest in innovative business models that compete for cash-paying patients. Most of what I’ve seen are schemes seeking ways to maximize reimbursements against third-party payers’ reimbursement formulas.
There has been significant investment in air ambulances by private equity in recent years. Why air ambulances? Because if you need air transport as my father did a few years ago, you are in no position to negotiate. Furthermore, states are not able to regulate the huge fees that air ambulances charge (often more than a new luxury car). The airline industry was deregulated in the late 1970s and federal law pre-empts states laws. Thus, private equity investors in air ambulance services took advantage or two different areas of market failure. The first: patients cannot refuse when their life is on the line. Second: states cannot prevent price gouging.
To the degree that private equity is seeking to standardize business models and buy struggling health care businesses to make them more efficient, then investment is beneficial. To the degree that private equity is taking advantage of health care market dysfunction then it’s probably less than beneficial.