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Once upon a time, in a land that now seems very far away, Health care was considered a public good. Hospitals and Nursing homes were mission-driven, not profit-driven. Their number one priority was the health and well-being of patients. They weren’t expected to make Money. That’s why most of these institutions operated as nonprofit organizations.
A rather quaint idea, wouldn’t you say?
Today we are well into the corporatization of health care. Nothing demonstrates this better than the deluge of private equity capital flooding the sector – more than $1 trillion over the past decade.
Private equity (PE) firms operate differently than banks or other investors. When a PE firm buys a company or nonprofit, it finances the purchase by taking on a sizeable amount of debt, using the asset they have acquired as collateral. (The term of art is leveraged buyout.) Then the PE firm shifts most of the debt onto the books of the newly acquired asset. This generally forces the acquired company to reduce costs, reduce staff, and increase revenues by raising prices and focusing on its most profitable procedures.
PE firms are organized to generate large returns for their investors in the short term, usually three to seven years. In most PE deals, the PE investors are first in line for payouts. Once the PE investors carve out their generous share, they have no further interest in the company they purchased, leaving it to sink or swim under the weight of its massive debt load.
Some health care providers have sunk. A PE firm acquired Philadelphia’s Hahnemann Hospital and sold off its Real Estate. In 2019 the hospital was forced to close. Companies acquired through leveraged buyouts are ten times as likely to go bankrupt.
The rationale for PE is that it can infuse needed capital, introduce efficiencies, and rescue failing enterprises. The reality within the healthcare system is somewhat different: PE’s short-term focus on generating revenue and investor profit often leads to stripping assets, forcing prices upward, reducing staff to dangerously low levels, avoiding infrastructure investments, and eliminating vital services that are less profitable.
Evidence of improved quality of care or improved patient outcomes “is thus far scant.”
Nursing homes that have been acquired by PE firms, for example, have higher mortality rates, a lower ratio of patients to staff, and a 50% probability that patients will be sedated with antipsychotic drugs.
A more recent development is PE acquisition of medical practices, often consolidating multiple practices in the same specialty. PE firms have purchased 6,000 physician practices in a decade. In one-third of metro areas in the U.S., PE-purchased practices have more than a 30% market share in at least one specialty. In 13% of metro areas, a single firm owns more than half the physician market for one or specialties. That degree of market clout has led to price increases of 10-20%, with impacts on quality ranging from mixed to harmful.
Apparently, that’s not enough. Now PE is gobbling up small care navigation companies. Why? Because these companies help families decide where to get care, which services to use, and how long to maintain those services. “Private equity is industrializing a relationship-based profession,” writes Kathy Heery, a nurse with more than two decades of experience in the industry. “What once relied on local expertise is being transformed into a tech-enabled, repeatable, standardized, and national service model.”
Is there any way to control this particular form of vulture capitalism, which has been compared, even in business publications, to an octopus, a band of pirates, and “financial termites devouring the woodwork and foundations of the U.S. healthcare system?”
More than a dozen states have passed laws requiring PE to notify state regulators in advance about planned transactions, and several require state approval. At the federal level, while several senators attempted to hold hearings on PE, regulatory agencies are too understaffed and underfunded to review more than a handful of PE acquisitions. Between 2010 and 2020, PE acquisitions in health care rose 167%, while full-time positions at the Federal Trade Commission decreased by 1%. And that was before the Trump Administration took an axe to federal Employment.
There are no federal laws that protect patients or health care employees after a PE acquisition. Anti-trust reform is unlikely to get through the current Congress.
Perhaps it is worth noting that the federal tax code gives PE firms special privileges. Unlike publicly traded companies, they have minimal regulatory oversight. The income of general partners is treated as capital gains, which is taxed at a maximum of 20%, rather than as ordinary income. PE firms can also deduct the interest on the debt they rack up, lowering taxable income. They are also exempt from the corporate minimum tax.
These privileges have enabled the sector to accumulate tremendous wealth. Given the sector’s less-than-stellar record in health care of raising costs without improving care, is it reasonable to question whether PE firms deserve such special treatment?
