How Private Equity Harms Health Care, Especially in Physician Practices

October 22, 2021

Summary: A far-reaching new review of private equity investment in physician practices makes clear that PE tactics – aggressive and sometimes illegal – extract money from the health care system, often without delivering quality in return. Concerns exist regardless of payment model.

Private Equity Investment As A Divining Rod For Market Failure: Policy Responses To Harmful Physician Practice Acquisitions
USC-Brookings Schaffer Initiative for Health Policy Report
October 2021
By Erin Fuse Brown et al

Private Equity and Health Care Delivery: Value-Based Payment as a Guardrail?
JAMA
August 11, 2021
By Brian W. Powers et al

How Private Equity is Ruining American Health Care
Bloomberg
May 20, 2020
By Heather Perlberg

Comment by: Allison K. Hoffman and Hannah Leibson

For the past few years, private equity investment in health care has been surging. To put numbers on this explosive growth, from 2000 to 2018, the valuation of private equity deals in the health care sector rose from $5 billion to over $100 billion.

This sharp rise has raised alarm bells among health policy researchers and policy makers concerned about the negative impact this investment may have on health care spending (especially for public programs like Medicare), quality outcomes, and patient care.

A recent JAMA article by Powers and co-authors seeks to quell blanket concerns with private equity investment, arguing that “context matters” and suggesting that value-based payment models might counterbalance the profit-seeking nature of outside investors. This piece draws attention to two health care delivery organizations, CareMore Health and Oak Street Health, operating under value-based payment systems. Both systems saw positive patient outcomes after private equity investments were secured.

The authors contrast these examples to fee-for-service payment systems, where they argue the impact of private equity investments is “likely to be unfavorable” because this investment only “amplifies” the negative incentives created when financial performance is not tied to quality of care. 

Drawing from these two case studies and based, they say, on the lack of evidence otherwise, the authors argue that “private equity could have an important role in acceleration of value-based transformation in the health care system, as well as access to new models of care delivery.” The article’s optimism, based on these two case studies, is borne of simplistic thinking of what payment systems can actually produce—or, in this case, resist.

A thorough report on private equity and health care delivery issued this month by Erin Fuse Brown and others through the USC-Brookings Schaffer Initiative for Health Policy makes abundantly clear why. The report is cautious in its tone yet chronicles the many ways in which private equity investment produces or capitalizes on unattractive aspects of the payment and delivery systems, from surprise billing, to upcoding in the Medicare Advantage program, to outright fraud. The report describes that value-based models, in particular, can create incentives “to stint on care.”

Likewise, a Bloomberg article by Heather Perlberg notes that to get the quick results private equity investment demands cost-cutting becomes a major focus, telling stories of physicians struggling to obtain the bare minimum materials necessary to safely carry out their practice. In the worst case scenarios, private equity investors unsophisticated in the nuances of the businesses they enter can sink the very ships they try to buoy.

Unless outcome parameters in value-based models are precise and comprehensive—and maybe even then—sophisticated private equity players will find sweet spots where they can cut corners, while still checking all the value-based boxes. Years of evidence from these models that purport to drive value, from Medicare Advantage to ACOs to direct contracting, have largely not saved money or improved care as promised. But they have made it abundantly clear that developing good quality metrics is hard, and metrics can be gamed.

The USC-Brookings report recounts a historical example that provides just the kind of evidence from private equity investing that the JAMA article suggests does not exist. They recount the physician practice management companies, where investors, including private equity, bought up physician practices in the 1990s to take advantage of the rise of managed care. Attempting to generate economies of scale through rapid growth, they proved to be little more than a shell game of short-term revenue growth to increase the value of equity shares—value that deflated as quickly as it grew.

Even if there were zero empirical evidence, there is a fundamental structural problem with outside profit seeking investors in healthcare that should produce skepticism. The authors of the JAMA article note this problem in their intro and then too quickly set it aside. Private equity’s whole game is invest, profit, exit—typically in less than five years. And the profit potential must be quite rich to entice them to invest in the first place. Unless private equity radically transforms the quality of care, which seems unlikely, these companies become just another party looking to extract money from the health care system, including from public programs like Medicare, driving up costs without producing concomitant value.

The rising influence of private equity investments, especially in primary care, leave the American health care system increasingly beholden to parties who are ultimately not concerned with boosting patient care. One must have great, unwarranted, and blind faith in incentives to think that they can sufficiently counterbalance the motive to extract all possible profit before jumping ship.