Private Equity Is Buying Up Health Care: Patients (and Doctors) Beware

August 13, 2021

REPORT TO THE CONGRESS: Medicare and the Health Care Delivery System – Chapter 3 – Congressional request: Private equity and Medicare. MedPAC.
June 21, 2021.

We examined PE business models in three key sectors: hospitals, nursing homes, and physician practices. PE firms have made investments in each sector but have a limited presence: We found that PE firms own about 4 percent of hospitals and 11 percent of nursing homes. We do not have a comparable figure for physician practices. At least 2 percent of practices were acquired by PE firms from 2013 to 2016, but that figure does not account for previous PE acquisitions and appears to have grown since then.

Because there is no single comprehensive source of ownership information, researchers compile data about PE ownership from proprietary datasets and public announcements. As a result, the estimated numbers of health care providers with PE backing are likely too low.

Global Healthcare Private Equity & M&A Report 2021.
Bain & Co.
2021.

At a Glance:

• Healthcare private equity deal volume increased by 21% to a total of 380 deals in 2020, compared with 313 the year earlier, despite a 14% decline in total global PE activity.
• The healthcare provider and biopharma sectors were the most active, despite Covid-19’s damage to patient volumes and provider margins, with nearly 150 deals in each sector.

Comment by: David Himmelstein and Steffie Woolhandler

Private equity firms pool outside investors’ funds and a small amount of their own money to buy assets (e.g. hospitals, nursing homes, doctors’ practices or Toys“R”Us), which they hold “privately”, i.e. their stock is not for sale to the public. That private ownership excuses them from the disclosure requirements applicable to publicly-traded firms.

Private equity purchases are usually funded mostly by loans that amplify the investors’ money, with the acquired asset – not the private equity firm or investors – liable for the debt. So when a private equity firm buys a nursing home, the nursing home is on the hook for repayment, not the investors. The private equity firm usually collects large annual “management fees”, assuring that it takes home profits, and aims to sell off the asset in 3-5 years. In the meantime it seeks to gin up profitability in order to drive up the eventual sale price.        

The COVID-19 pandemic has apparently fueled an increase in private equity purchases of physician practices that were struggling because of decreased patient volumes. But exactly how many doctors they own is a mystery, because private equity operates behind a veil of secrecy. Indeed, even MedPAC, Congress’ official Medicare advisory body, couldn’t penetrate that veil.

What is clear is that private equity owns tens of thousands of emergency physicians, a major chunk of dermatologists, and an increasing number of primary care doctors.

The galloping private equity takeover of medical assets should ring alarm bells. These corporate raiders’ only interest is in short term profits. Dentists they own have been pressured to drill healthy teeth in children, dermatologists have been pushed to amp up lucrative procedures, and private equity-owned ED staffing firms are largely responsible for “surprise bills” for ED care. The private equity firm that purchased Hahnemann Hospital – a vital safety net provider in inner city Philadelphia – ran the hospital into the ground, but made a killing by selling off the hospital’s real estate before it crashed into bankruptcy.

In the short term, Congress should lift the veil of secrecy around private equity ownership of medical assets, e.g. by requiring full disclosure of the ownership structure of firms that bill Medicare. (California already requires pharmacies to publicly report the names of individuals and  organizations with any share of ownership, as well as the property owner, management company, and administrator). In the longer term, investor ownership of health care facilities and practices should be banned.