Understanding the Role of Private Equity in the Health Care Sector

The Association of Health Insurance Plans, the lobbying group representing the interests of health insurers, recently sent letters to the President and Congress asking for greater transparency of private equity acquisition of health care entities and increased oversight of health system consolidation, citing concerns about anticompetitive behavior that is increasing health care costs. This comes at the heels of both President Biden and Congress calling attention to the higher costs and worse health outcomes in private equity-owned nursing homes. As private equity involvement in the health care industry increases, here’s why some are sounding the alarm and calling for better regulation to control costs and protect patients.

What is private equity and how does it impact the health care industry?

In broad terms, private equity (PE) is an investment vehicle; institutional investors like pension funds as well as high net-worth individuals can pool their resources to directly invest and acquire a stake in a private company with the general goal of making a profit on that investment. For those who can afford it, PE offers a higher risk, higher reward alternative to buying stocks in publicly traded companies. A PE firm is the entity that, for a fee and a piece of the profits, pools the investors’ money, identifies private companies to acquire, and then manages that investment. While there are many types of PE investment arrangements, one of the most common types is the “buyout,” where a PE firm acquires a target company that has the potential to make more money, makes operational or management changes to realize these gains, and then sells the company for a profit. PE funds are not registered with the Securities and Exchange Commission (SEC), and are not required to disclose any information about their investments.

PE involvement in commercial sectors like tech, retail, media, and finance has proponents and critics. PE investment vehicles can be hugely profitable for investors, but PE acquisition has been linked to bankruptcy of acquired companies as well as layoffs. Federal legislators have tried to examine the PE industry and pass laws that would create more regulatory oversight, but these efforts are yet to succeed.

In the last two decades, the PE industry has increasingly turned its sights towards the health care sector; investments rose from less than $5 billion in 2000 to $100 billion in 2018. Over 70 percent of health care industry investments took place just in the last decade, and these cut across almost all sectors of the health care delivery system, from hospitals, clinics, and specialty practices to the staffing firms and billing and collections companies used by health care organizations.

Rising Concerns About PE Investment Across the Health Care Sector

Aggressive debt collection

PE firms have acquired interests in air ambulance companies and physician staffing firms, which have a history of not participating in health plan networks and often aggressively pursuing patients for debts associated with out-of-network services. PE firms have also acquired interests in revenue cycle management companies, which have been linked to aggressive medical debt collections practices. The recently enacted No Surprises Act curbs at least the first of these problems, and was vehemently opposed by PE-backed firms, which launched ad blitzes opposing the prohibition against surprise billing as well as any regulation of provider prices. PE-backed entities are now pursuing an aggressive litigation strategy to strike down key elements of the No Surprises Act; the outcome of these cases is uncertain.

Impact on quality and health outcomes

Another, potentially greater concern is emerging evidence that PE investment can result in lower quality care and worse health outcomes. Researchers have connected PE ownership of nursing homes with increased short-term mortality of nursing home residents, and determined that PE-owned behavioral health companies serving vulnerable and at-risk youth saw declines in quality of care, safety issues, and even “horrific conditions” for patients. Further, while PE ownership of hospitals can lower costs per discharge by about $400, it is also associated with fewer beds, reduced staffing, and increased inpatient utilization . However, at least one study has found that PE-acquired hospitals performed better on certain process quality measures, which the authors noted could either be a result of better patient care or a result of these hospitals just being better at maximizing opportunities for quality bonuses on payer contracts without necessarily improving patient care in a broader sense.

Higher health care costs

Evidence also ties PE investment with increases in health care costs for public and private payers as well as patients. An investigation by USA Today found that when PE firms acquire an interest in dental practices that treat Medicaid enrollees, dentists were incentivized to increase the number of procedures irrespective of medical necessity. A study showed that PE hospital acquisition was associated with increases in hospital charges, charge-to-cost ratios, and a case mix change indicating these hospitals were either seeing sicker patients or upcoding. This study also showed that PE acquisition resulted in a decline in Medicare patients, suggesting an increase in privately insured patients for whom the hospitals can generally charge higher prices for care. Since 2013, PE-owned health care entities have paid more than $500 million to government health care programs to settle claims of overcharging. And finally, a popular strategy PE firms employ to increase the value of their health care acquisitions is acquiring more nearby practices and consolidating fragmented markets to create more negotiating power and achieve economies of scale. This kind of provider consolidation has been shown to raise health care costs.

Hospital closures

In some cases, PE investments can also result in hospital closures, which can reduce access to health care. In one prominent case, when a private equity firm acquired the Hahnemann University Hospital in Philadelphia, which served a significant proportion of the city’s low-income population, the PE firm shut down the hospital, laid off staff, and sold its assets, which included some highly coveted real estate.

Finding the Right Tools to Regulate PE Activity in the Health Care Sector

Improving transparency

A potential first step in regulating PE activity is to improve transparency, particularly with respect to their involvement in the health care sector. The SEC has expressed interest in imposing disclosure requirements on PE investments and activities.

States also have a role in PE regulation, and could potentially better enforce the requirement that health care practices be owned by doctors. While 30 states do have these laws in place, PE firms have found loopholes in state laws aimed at regulating ownership. As the primary regulators of health care providers, states could also require better reporting by PE-affiliated providers on their revenue growth and other measures that would demonstrate any increase in prices or decline in quality post-acquisition.

Reducing harmful billing and referral practices

Improving the monitoring of and enforcement against problematic practices related to referrals and billing is also crucial. While the federal Stark and Anti-Kickback laws can be deployed to curb a lot of problematic referral-related practices with respect to Medicare and Medicaid, the False Claims Act can help reduce inappropriate billing practices. For example, in October 2021, the Massachusetts attorney general used the state false claims act to obtain a $25 million settlement from the PE owners of a health care company (in addition to $4 million obtained from the company itself for submitting Medicaid claims for mental health services by unlicensed and unqualified staff).

Preventing consolidation

Finally, both federal and state regulators have the potential to better monitor, and when necessary stop PE-driven mergers and acquisitions activity in the health care space. Indeed, the Federal Trade Commission (FTC) was able to block PE-driven consolidation in the Hawaiian air ambulance industry. However, under the Hart-Scott-Rodino Act, FTC’s ability to intervene is limited to large deals, and a number of PE-driven mergers fall below this threshold set by federal law. The FTC commissioner has also suggested that the Commission order information on health care mergers that fall below this threshold or even lower the threshold.

At the state level, states like Washington and Connecticut have laws in place requiring additional reporting with respect to health care mergers. California considered a bill that would have required the consent of the state attorney general prior to any change in control or acquisition involving a health care entity and given the attorney general power to reject the transaction unless the involved entities showed the merger or acquisition would result in clinical integration, and/or improve or maintain health care access for underserved populations.

The Urgency of the Moment

Health care is not a retail good—it is a basic human right. People generally do not have the ability to choose when, where, or what health care services they “purchase,” and this can create perverse incentives for entities like PE firms and their investors who are primarily driven by profits. Given the significant impact of PE’s increasing involvement in the health care industry, policymakers will need to take further steps to protect patients and control rising health care costs.