There were more than 1,400 private equity deals in health care last year totaling $208.7 billion, more than double the 664 transactions, valued at a total of $58.5 billion, in 2016, according to PitchBook Data, Inc., a Seattle-based firm that tracks mergers and acquisitions.
Private equity firms are companies focused on generating quick and substantial profits through acquisition and sales of businesses. They typically sell the acquired businesses within three to seven years for a higher price. This short-time commitment is one of the defining characteristics of private equity firms, according to the industry’s trade association, the American Investment Council. In comparison, health insurance plans and even other for-profit companies buy hospitals, nursing homes and physician practices with an aim of holding onto them for a long time, according to Erin C. Fuse Brown, director of the Center for Law, Health & Society at Georgia State University.
Private equity firms owned 11% of U.S. nursing homes, along with 4% of U.S. hospitals as of 2021, according to the Medicare Payment Advisory Commission (MedPAC), a nonpartisan independent legislative branch agency that advises Congress. Private equity firms also acquired at least 2% of physician practices in the U.S. from 2013 to 2016, an estimate that does not take into account previous acquisitions, according to MedPAC. Private-equity firms have continued to expand in primary care since 2016, according to MedPAC.
Private equity firms argue they bring value to health care businesses through improved management techniques and investment in newer technologies.
Critics of private equity’s approach say the intense drive for quick profit puts patients at risk, because the firms cut staffing costs and make financial arrangements that commit the resources of acquired companies to paying back loans and associated interest.
“Private equity’s business model involves buying companies, saddling them with mountains of debt, and then squeezing them like oranges for every dollar,” Rep. William J. Pascrell Jr. (D-NJ) said at a 2021 hearing he chaired about these firms’ health care operations.
It has been challenging to study how private equity ownership affects the care of patients, due in part to the difficulties in tracking down details about acquisitions. The Biden administration this year has made more data public about the ownership of nursing homes, intending to aid researchers. But the public reporting to date on these sales has been fairly murky.
So researchers like David Grabowski of Harvard University, Atul Gupta of the University of Pennsylvania, Jane Zhu of Oregon Health and Science University and Yashaswini Singh of Johns Hopkins University have had to consult a database created by Pitchbook to keep score in the private equity industry, research reports and in some cases comb press releases one by one for details.
Findings from some of the studies so far are concerning, especially the findings of a 2021 National Bureau of Economic Research working paper, one of several studies summarized below.
Being admitted to a private equity-owned nursing home increases the short-term probability of death by about 10%, implying about 20,150 lives lost due to private equity ownership of nursing homes, said Sabrina T. Howell, an associate professor of finance at New York University and one of that paper’s authors, during a congressional hearing last year, citing her research.
“Nurse staffing declines after buyouts, while rates of anti-psychotic medications and pain intensity increase,” Howell said, adding that both suggest decline in attention to patients. “Meanwhile, the amount billed to Medicare increases by 11%. Finally, we show that fees charged by the parent company, lease payments after real estate is sold, and interest payments all increase dramatically. This all suggests a systematic shift in the operating costs away from patient care.”
During her testimony, Howell explained the other mechanisms private equity firms use to make profits.
The owners of private equity firms often borrow money for these purchases and then look to use revenue and assets of the acquired business to manage this debt. For example, firms sometimes sell the buildings owned by hospitals and nursing homes to other companies they own. They may then proceed to charge the hospitals and nursing homes rent for buildings they used to own. This results in a new expense for hospitals and nursing homes, diverting money they might have otherwise used on patient care.
Private equity firms also can charge fees for management and monitoring services to the nursing homes. In addition to these costs, some of the funds nursing homes receive for patient care go toward paying debt that private equity firms used to buy these businesses.
Tax advantages for private equity firms
Pascrell’s been among the chief watchdogs of private equity firms. He has been seeking to have Congress address a loophole in the tax code that makes it more lucrative for owners of private equity firms to manage companies, including ones involved in health care.
Traditional business owners and managers have salaries that are taxed the same way as other employees. But executives in private equity firms have a more complex system for getting paid, which lowers their tax payments. They typically receive a management fee equal to 2% of assets under management plus 20% of the profits generated by their fund.
The 2-percent fee is subject to ordinary income and Medicare and Social Security taxes. But the 20% of profits are considered “carried interest” and taxed at lower capital gains rates, write Fuse Brown and coauthors in their 2021 report, “Private Equity Investment As A Divining Rod For Market Failure: Policy Responses To Harmful Physician Practice Acquisitions.” The report was published by a joint initiative of the nonprofit Brookings Institution and the University of Southern California’s Leonard D. Schaeffer Center for Health Policy and Economics. In the report, the authors recommend that the federal government take steps to remove tax advantages for private equity firms across the board, putting them on a more level playing field with other companies. They also note how the private equity firms have excelled in finding “market failures” in the U.S. medical system that can be exploited for high profits.
Surprise medical billing
Private equity firms, for example, played a large role in the phenomenon called surprise medical bills, Fuse Brown and her co-authors write.
They purchased practices that employ emergency room physicians and anesthesiologists. In many cases, the doctors were not part of agreements between health plans and the hospitals where they worked. Patients who had medical insurance were then often surprised to get large out-of-network bills from physicians who provided care at hospitals that were not in-network with the patients’ health plans. (The Journalist’s Resource covered this issue in June 2020; see “Surprise billing: Why consumers with medical insurance still may face major health care expenses.”)
Congress addressed this in a December 2020 law that took effect earlier this year. The law on medical bills, known as the No Surprises Act, was included in a larger legislative package, including annual spending bills as part of the 2021 Consolidated Appropriations Act.
But there are ongoing battles between the Biden administration and physician groups, some of which have significant private equity investment, about how the rule is being implemented.
The Federal Trade Commission also has signaled greater interest in private equity’s role in health care. The FTC in 2020 began a broad look into consolidation of physician practices, a trend driven in large part by hospital acquisitions.
State-level policy efforts
State lawmakers and regulators have also been looking at the influence of private equity on health care. California state Sen. Sydney Kamlager last year introduced bill SB 642, the Patients Over Profits Act. This would expand on the state’s existing restrictions on what’s called the corporate practice of medicine, with “significant effects in the private equity healthcare space,” according to a post from the Los Angeles-based Pacific Health Law Group PC.
The corporate practice of medicine doctrine “prohibits corporations from practicing medicine or employing a physician to provide professional medical services,” explains a brief from the American Medical Association.
The bill appears to have stalled — at least for now — but it’s drawn notable attention from law offices that advise private equity firms. The law firm Polsinelli issued an alert about the bill in May 2021, warning that it would limit certain contractual arrangements between professional medical corporations and entities owned by people other than physicians, such as private equity investors.
Last year Massachusetts Attorney General Maura Healy announced a record settlement agreement for a health care fraud case involving a private equity firm.
HIG Capital agreed to pay almost $20 million to resolve claims that its South Bay Mental Health Center fraudulently billed Medicaid for services provided by unlicensed, unqualified, and improperly supervised staff members. The settlement arose from a lawsuit initially filed by a former employee who used a federal whistleblower-protection law, known as the False Claims Act, to report this improper treatment of patients.
Yashaswini Singh, Zirui Song; et al. JAMA Health Forum, September 2022.
The acquisition of a physician practice by private equity firms appears to result in doctors making larger insurance claims for their services as well as increasing the number of patients they see, Singh and her co-authors report. These findings raise questions about the “market-driven influence” that private-equity firms bring to health care, they write.
Their study focused on three specialties in which private equity firms have been active in recent years: dermatology, gastroenterology, and ophthalmology.
The authors identified 578 practices that private equity firms acquired after 2015 and then created a control group of 2,874 similar practices under independent ownership. They then looked at how doctors in these practices had billed insurance plans between Jan. 1, 2015 and Dec. 31, 2020. Among the measures considered was the average allowed amounts per claims, meaning the price negotiated by insurers.
The practices owned by private equity firms on average allowed claims of $206 per patient before acquisition and $285 after, an increase of $79. That was $20 more than the increase in the control group of practices, where the average allowed claims rose by $59 from $201 to $260.
In practices owned by private equity firms, the total number of services, including procedures, referred to as total encounters, rose during the study period from 138.1 to 191.1, an increase of 53 encounters. In the control group, the number of encounters rose by 19.7 from 123.8 to 143.5.
The gains seen in practices owned by private equity firms may reflect changes in practice operations, such as expanding hours, branding and advertising, or broadening referral networks, Singh and her co-authors write. But they also could be a signal of increased use of what’s called low-value care, meaning services unlikely to do much to help patients preserve or improve their health, they write.
Ambar La Forgia, Amelia M. Bond; et al. JAMA Internal Medicine, February 2022.
Patients paid more for anesthesia if it was delivered by a doctor employed by a physician management company, with the tab rising even higher if that firm had received private equity funding, according to this cohort study of more than 2.2 million claims for privately insured patients.
The prices ultimately paid by insurers increased by 16.5%, or about $116.39, when anesthesia services were delivered by employees of management companies, compared with other physicians’ hospital staff, the authors write. Further slicing the data to look at management companies in which private equity had invested, the authors report that prices for care by management companies without private equity investment rose by 12.9%, or about $89.88. But those for management companies with private equity investment, the increase was 26.0%, or $187.06.
The study focused on data from 2012 to 2017 for people seen at hospital outpatient departments and ambulatory surgical centers. To create their comparison groups, La Forgia and colleagues tracked down details about the ownership of anesthesia practices. They used a mix of corporate filings with the U.S. Securities and Exchange Commission, which are public documents, and data from consulting groups such as Irving Levin and SDC Platinum.
To track how much health plans paid, they worked with the nonprofit Health Care Cost Institute. HCCI data included claims for patients insured by Aetna, Humana, and UnitedHealthcare, three of the largest US health insurers. Identifying details for patients are removed from the claims data.
The authors suggest that physician management companies may have had superior negotiating tactics, resulting in higher payments. Strategies may have included threatening to move anesthesiologists out of networks, they suggest. “We did not find evidence that practitioners moved out of health plans’ networks except for a modest increase in the year the contract started,” they write. “However, the mere threat may be sufficient to influence negotiating dynamics between PMCs and insurance companies.”
Robert Tyler Braun, Hye-Young Jung; et al. JAMA Health Forum, November 2021.
People living in certain nursing homes owned by private equity firms were more likely to end up in emergency rooms and to be hospitalized for conditions for which better care might have prevented these episodes, the authors write. In this study, they focused on what health policy researchers call ambulatory care-sensitive visits. These include complications from conditions such as diabetes.
People living in private equity-owned nursing homes were 11% more likely to have an ambulatory care-sensitive emergency room visit and 8.7% more likely to be hospitalized, the authors write. This contributed to higher costs for Medicare, which pays for health care such as ER visits and hospital stays for most people 65 years and older in the United States. The authors estimated Medicare costs were 3.9% higher, or $1,080 more annually, per patient in nursing homes owned by private-equity firms compared to those living in other for-profit nursing homes.
To do this study, the authors created two comparison groups. They identified 302 nursing homes owned by private equity firms, with a total of 9,632 residents, and then found 9,562 comparable homes owned by other for-profit companies, with a total of 249,771 residents. They then compared information from Medicare claims and data from the giant health program on the quality of homes, known as the Minimum Data Set assessments for the period from 2012 to 2018.
The authors compared resident outcomes at private equity-owned facilities with resident outcomes at 9,562 other for-profit nursing homes, which included 249,771 long-stay residents during the study period.
Atul Gupta, Sabrina T. Howell; et al. National Bureau of Economic Research, February 2021.
Staying in a nursing home owned by a private-equity firm increases the probability of death during the stay and the subequent 90 days by 1.7 percentage points, report Gupta and his coauthors.
This finding was based on an analysis of records from the Centers for Medicare & Medicaid Services and a search to uncover deals in which private equity firms had bought nursing homes, Gupta and colleagues write. An estimated 20,150 lives were lost during the 12-year study period, compared with what would have happened if those patients were in other kinds of nursing homes, Gupta and colleagues write. In the paper, they note differences between nursing homes owned by private equity firms and those with other kinds of ownership, such as nonprofit organizations or businesses without the same kind of compelling incentives to cut costs.
Beyond the higher mortality rate, Gupta and colleagues find worse performance for private-equity-owned firms on several measures, including use of antipsychotic medicines and higher reported pain scores.
Benjamin Brown, Eloise O’Donnell, and Lawrence P. Casalino. JAMA Psychiatry, March 2020
Private equity firms have also shown marked interest in recent years in behavioral health services, which help people manage mental illnesses or substance use disorders. In 2016, private equity transactions accounted for 60% of all acquisitions in the field of behavioral health care, note the authors of this Viewpoint article.
The influx of private equity has helped to expand access to medication-assisted treatment for opioid addiction. But there are no peer-reviewed data yet to show how the involvement of private equity firms affects the quality and cost of behavioral health care, they write.
“Private equity firms bring business expertise and much-needed capital to behavioral health treatment and may introduce standards of care that benefit patients,” they write. “On the other hand, some physicians (and patients) might be uneasy about this ‘corporatization’ of behavioral health care and the intense pressure on PE firms to generate short-term profits.”