Private Equity Looting of U.S. Health Care: An Under-Recognized and Uncontrolled Scourge

Though there is always a profit motive when private investors acquire a company, private equity firms in the realm of health care should be viewed with skepticism. In this industry, the “product” at issue is a person's health, not a computer or a bicycle pump. The business model of these companies—its goals, structure, and the operation of portfolio companies—combine to incentivize short-term profits at the expense of all other considerations. The result is that patients, communities, and even entire health care systems can suffer .… As private equity firms further encroach upon the health care industry, it is essential that their activity is closely monitored for fraud and patients’ best interests are protected and prioritized. ¹

The above quote by two attorneys experienced with the harmful fallout of private equity (PE) investments reflects the dire challenge to the existing U.S. health care system, vulnerable as it is to Wall Street profiteering. PE through leveraged buyouts initiated on Wall Street, motivated only by short-term profits to investors, has become a scourge of the health care system in recent decades. For all its influence across the medical–industrial complex, however, it is still not well understood. Its deleterious impacts on patient care and the stability of our health care system are under-reported and fly under the radar of public awareness.

This article has three goals: (1) to show the widespread reach and typical modus operandi of PE investments across the health care system; (2) to describe their harmful impacts on patient care, physicians, access, costs, and quality of care; and (3) to summarize what is being done about this profiteering predator.

Private Equity's Broad Reach Across the Medical–Industrial Complex

PE investments in health care have exploded in the past 20 years, causing increased consolidation through mergers and acquisitions (M&A) and growth of monopoly in certain areas. PE firms have been especially active in four main segments: (1) hospitals; (2) outpatient care, including urgent care and ambulatory surgery centers; (3) physician staffing and emergency room services (surprise medical billing); and (4) revenue cycle management (medical debt collecting). In each instance, PE has consolidated small providers, loaded them with debt, rolled them up into large powerhouses with substantial market power, then exited with big returns. ²

Earlier PE concentrated more on hospitals, PhRMA/biotech, and high-tech systems, with more recent shifts to other market segments, such as clinics and outpatient services. Figure 1 shows the wide range of PE in health care by segment between 2000 and 2019. ³

OPEN IN VIEWER

Figure 1.

Private Equity Deal Flow in Healthcare: Capital Invested and Deal Count: 2000–2019.

The strategy varies somewhat by type of PE investment, whether hospitals, nursing homes, or other investments, but the emphasis on short-term profit generation is always the primary goal. In their classic, in-depth Working Paper from the Center for Economic and Policy Research in 2020, Eileen Appelbaum and Rosemary Batt describe the leveraged buyout model of profit generation this way:

PE firms have been at the forefront of the M&A [mergers and acquisitions] mania in the healthcare sector as they take advantage of opportunities to consolidate markets, reduce competition, and increase market power . . . This model is low risk, as third-party government and private insurers guarantee payments. These payments provide a steady cash flow to service the debt. It is one of high returns due to the extensive use of debt . . . 

Over the last decade, PE firms have exited their healthcare investments on average in less than five years—their preferred window . . . They began buying out hospitals and nursing homes in the 2000s before moving into more lucrative niches post-2010—ambulatory surgery, radiology, anesthesiology, emergency room management, neo-natal units, burn clinics, and trauma units, IT health and bill collecting. More recently, they have moved into nonhospital-based physician specialties—dermatology, dental practice management, case management, ophthalmology, and orthopedics—as well as behavioral health. ⁴

In her 2022 book, Ethically Challenged: Private Equity Storms U.S. Health Care, Professor Laura Olson brings us this description of PE's goals and business model: “Supersized earnings for PE and its shareholders are front and center, with no pretense otherwise . . . The PE industry—capitalism in overdrive—weighs down its health companies with enormous debt while pushing for extra-large earnings. Faceless PE shops take an oversize bite into U.S. health dollars, transferring substantial public and private money for medical needs into the pockets of financiers who do not provide any health services per se”. ⁵

Here are examples of the scope of PE investments across seven key parts of the medical–industrial complex.

Hospitals

The acquisition of Hospital Corporation of America, Inc. (HCA) through a leveraged buyout by a consortium of PE firms in 2006 signaled the large role that PE would play in hospital M&A activity. At that time, HCA was a for-profit system with 176 hospitals, 92 outpatient surgery centers, and 41,860 beds. Bain Capital was one of the buyers, which saw its initial investment grow by 10 times by the time it went public. ⁶

This is the general approach taken by PE firms investing in hospitals: “Typically [private equity] firms begin by acquiring a small hospital system, referred to as a platform company, in a leveraged buyout. Then they add smaller hospitals in geographically dispersed regions, creating a national, multi-state hospital chain. The purchases are all financed with borrowed money, and the private equity firms transfer the debt load onto the hospitals . . . The private equity owners plan to exit investments they acquire in three to five years . . . These acquisitions usually fall below the deal size that triggers review by antitrust regulators, allowing them to go unchallenged”. ⁷

These kinds of M&As have led to near-term closure for many hospitals, whether urban or rural. Here are examples for each type.

Hahnemann Hospital in Philadelphia, Pennsylvania

An excellent, well-known teaching hospital serving a largely low-income population, Hahnemann Hospital was struggling to survive and largely dependent on Medicaid and Medicare to cover its costs. Despite promises by its new PE owners that they would turn it around, they did nothing to make that happen. Instead, they quickly separated it into an operating company that provided patient care and another property company that owned the hospital's real estate. When the hospital continued to lose money, it went bankrupt in 2019, leaving the community bereft of its former patient care and teaching center while the PE owners had highly profitable real estate holdings to gain further profit. ⁸

Audrain Community Hospital and Callaway Community Hospital, 30 miles apart in rural Missouri

Noble Health, launched in late 2019 by a venture capital and PE firm, acquired these financially distressed hospitals, with 40 and 18 beds, respectively, soon after it was launched in late 2019 by a venture capital and PE firm. It recently closed both hospitals without explanation and with little advance notice, leaving a vacuum in health care for surrounding residents in a large, rural area. In addition to Medicare and Medicaid funds, Noble had received almost $20 million in federal COVID relief money, funds not fully accounted for after the hospitals were closed. Along the way, federal and state inspectors had found ineffective management and serious deficiencies in patient care, including inadequate staffing and a defective electronic medical record system. It is estimated that more than 20 percent of the nation's rural hospitals are similarly financially distressed and targets for PE takeover. ⁹

Clinics, Other Outpatient Facilities, and Primary Care

This sector is especially attractive to PE firms because they can take advantage of its fragmented market structure and use a “buy and build” formula to consolidate and flip entities in a low-risk, high-reward model. PE firms scour the market to find targets, then aggregate them for future short-term sale. In the past 20 years, they have bought out 2,500 clinics and other small health care services, which they see as a low-risk, high-reward investments. ¹⁰

Meanwhile, PE and other investors are pouring billions of dollars into primary care—about $16 billion in 2021 compared to $15 million in 2010. Although primary care physicians are the least well-reimbursed specialties, PE investors have become attracted to large primary care groups that make most referrals to other specialties. Many small practices could be bought up by PE, rolled together into chains, and used to gain more leverage in negotiating higher reimbursement rates with insurers. They were further motivated to step in during the COVID pandemic when so many primary care practices were financially stressed. ¹¹

Since then, PE investments have centered on very large, national primary care enterprises financed by big money, such as Walgreens Boots Alliance's purchase of a controlling stake in VillageMD and UnitedHealth's Optum, which already has some 30,000 primary care physicians and plans to open 30 to 50 primary care clinics each year. ¹² Given the short timeline for PE investments, however, that further fragments health care and is a complete disconnect of the goal of primary care to provide patients with long-term continuity of comprehensive care.

Physician Practices

PE investors have found the purchase of well-reimbursed physicians’ practices highly rewarding. The usual strategy is to pressure the physicians to see more patients and perform more procedures as a way to increase revenues. Practices may also be expanded as a way to gain more negotiating power with payers and get higher reimbursement rates. The new PE owners then load the practices with excessive debt in order to increase the likelihood of default and bankruptcy as a further way to increase its profits when the practices are sold five years or so after purchase. Target specialties have included dermatology, ¹³ gastroenterology, ¹⁴ obstetrics–gynecology, ¹⁵ and ophthalmology, ¹⁶ all involved with high reimbursed procedures. Other specialties impacted by PE involvement include anesthesiology, orthopedic surgery, and radiology. ¹⁷

In dermatology, as one example, Advanced Dermatology and Cosmetic Surgery (ADCS), a physician practice management firm, grew rapidly in recent years, fueled by PE investment that ended up through consolidation with at least 193 locations across 14 states. ¹⁸

ADCS was itself acquired by Audax Group, a Boston-based buyout firm that pursues a “buy and build” approach to investing through M&As that “roll up” practices into large investment platforms. ¹⁹ Between 2012 and 2018, 184 dermatology practices in 30 states were acquired by PE firms. Those practices were then pressured to see more patients, perform more procedures, and increase revenues. ¹³ In each case, quality of care suffered while prices also became unaffordable. ²⁰ Other ways that PE-owned dermatology practices raise revenues are by employing more physician assistants, having them do more procedures, such as unnecessary biopsies, then up-coding services provided, and overbilling. ²¹

Emergency Care

PE firms have uncovered another revenue jewel in outsourced emergency rooms as a source of high, surprise medical bills. How do they do this? Envision Healthcare is the largest such group with some 70,000 health care professionals staffing 540 emergency medicine facilities in 45 states. ¹⁹ It was bought in 2018 by a PE giant (Kohlberg Kravis Roberts) through a leveraged buyout that burdened it with a $5.3 billion first-lien term loan, due in 2025. Since Envision's ER physicians do not belong to any insurer's network, they can send surprise medical bills even when the involved hospital is in network. Despite its outsized returns, however, Envision is already in serious financial trouble as creditors have lost confidence in its ability to repay its huge debt. ²²

Air Ambulance Services

PE firms began buying up ambulance services in the wake of the 2008 recession. Since then, they have been highly profitable to investors, again as a source of high surprise medical bills when patients cannot choose their provider. A 2019 study found that these bills ranged from four to nine times higher than what Medicare paid for this service. ²³ One such bill was astronomical—$489,000 for an air ambulance flight from Colorado to North Carolina with ground transport between the airports and hospitals. ²⁴ Investigators have found that 80 percent of these flights were not emergencies but highly lucrative to the owners. ²⁵

Nursing Homes

PE investment in U.S. nursing homes has increased markedly over the past two decades, together with increasing concerns about lower quality of care. A 2021 study from the National Bureau of Economic Research estimated that PE ownership of nursing homes increases the short-term mortality of Medicare patients by 10 percent, with the likely loss of 20,150 lives due to PE ownership over a 12-year sample period. ²⁶ That was accompanied by other measures of patient well-being, such as lower mobility and higher rates of emergency room visits, hospitalizations, and Medicare costs per patient than for other for-profit nursing homes. Although dismissed by industry trade groups, these findings have led to a current request for the General Accounting Office to study this matter. ²⁷

These two examples illustrate the impacts of PE ownership on nursing homes and their patients:

The Carlyle Group, one of the richest PE firms in the world, shows the downsides to patients and health care in communities after buying Manor Care, the second largest nursing home chain in the country. Hundreds of layoffs were announced soon thereafter, resulting in serious health code violations and harm to patients. Investors had taken $1.3 billion from the company by the time it filed for bankruptcy. ²⁸

At the start of the COVID pandemic, the Portopiccolo Group, a New Jersey-based PE and investment firm, quickly bought up many nursing homes. It targeted lower-quality nursing homes that had violated infection-control regulations. Without any plan to improve their condition, the goal was to buy them at a discounted price, then renovate them just enough to make them profitable as short-term rehabilitation facilities that could be covered by Medicare, then sell them after extracting as much profit as possible. ²⁹

Home Care

PE firms and investors have found another lucrative market in home care as it has shifted to become more for-profit than in past years. Unfortunately, however, as in all other PE investments, this causes more harm to our most vulnerable: lower standards of care compared to not-for-profit counterparts, fewer visits to patients by health care professionals, higher rates of hospitalization, and lower compensation for employees. ³⁰

Private Equity's Adverse Impacts on Health Care

As PE investments surge in U.S. health care with resultant consolidation, less competition, and increasing profiteering, these are the adverse impacts on patients, families, and taxpayers:

prices to what the traffic will bear

uncontained prices and costs

decreased choice and access to care

variable, often poor quality of care

erosion of what safety net we have left

rampant profiteering and fraud ³¹

As hospitals have narrowed their networks and outsourced emergency, anesthesiology, radiology, surgery, and other fields to out-of-network status, the door swung wide open to PE profiteering of surprise medical bills for that care. Beyond increasing costs and prices of health care, PE firms could now capitalize on high medical bills and debt, once again finding ways to profit at the expense of people. Surprise medical bills have become the leading worry among the public, beyond the costs of health insurance, prescription drugs, and rent or mortgage. ³²

Disappointingly, three medical organizations that themselves profit from high medical bills—Envision Care, U.S. Acute Care Solutions, and U.S. Anesthesia Partners—have been lobbying Congress, with backing from PE firms, against a fix. ³³ The American College of Emergency Physicians, however, has resisted PE's consolidation of ERs across the country, stating that: “Consolidation is rapidly changing the health care landscape and may threaten the emergency physician's autonomy and ability to provide the highest quality emergency care, protect patient safety and maintain their own wellness”. ³⁴

Revenue cycle management (RCM)—that is, bill collecting—has become still another lucrative niche for PE firms. Again, their strategy is to buy up small RCM companies, roll them into large national enterprises, and then profit further beyond high surprise medical bills to hound patients to pay their increasing medical debts. ³⁵

Jim Hightower, author of The Hightower Lowdown, draws this overall perspective: “With some notable exceptions, the business of hedge funds and private equity outfits is corporate plunder: They amass a pile of money from big investors and banks and use it to buy foundering businesses on the cheap; slash workforces; degrade quality; jack up prices . . .”. ³⁶

What is Being Done about this Looting of Our Health Care?

All of the exploitive practices by PE firms continue on from their solid Wall Street base, still safe from regulation or reform and protected by supportive corporate stakeholders. The Affordable Care Act has made no difference, and regulators are still missing in action at both state and national levels.

There may be some hope on the horizon for positive change in the form of the Stop Wall Street Looting Act. It was introduced in the 117^th Congress on October 20, 2021, by Senators Warren, Baldwin, and Brown and by Representatives Pocan and Jayapal. The bill would:

increase financial and legal liability for these funds in the event of certain violations of law;

give employee compensation higher priority in bankruptcies;

prohibit the payment of dividends for two years from an acquired asset firm to a PE fund; and

modify the tax treatment of carried interest and treat the capital income with respect to a PE fund as ordinary income. ³⁷

Commenting on this bill, Rosemary Batt, co-author of the major report on PE discussed above from the Center for Economic and Policy Research, added these further reflections on the Stop Wall Street Looting Act:

The PE business model itself leads to a higher likelihood of financial distress, job loss, and wage stagnation in PE-owned companies. PE firms buy out companies using extensive debt, which is loaded on the company; and the company must service the debt, which immediately cuts into net revenues. And because PE firms promise their investors “outsized returns” (that beat the stock market) in a short time frame, they focus on cutting costs as much as possible. And they use other financial tactics to extract wealth—taking out additional loans that are loaded on the company, or selling off company assets—with the proceeds used to pay themselves and their investors dividends. These tactics weaken company financial stability . . . Our most recent research has shown the negative impact for both workers and patients in health care, where PE investments grew 20-fold between 2000 and 2019. ³⁸

Conclusion

There is no moral frame to what's going on in the U.S. health care system with its blatant profiteering overriding the rights and needs of 330 million Americans who trust us to have an equitable and competent health care system whenever they need care. PE has no redeeming value in U.S. health care. It is further fragmenting our already dysfunctional non-system, while disrupting the doctor–patient relationship and continuity of care.

Because stopping this PE outrage is certain to bring on powerful opposition from a corporate alliance committed to profits over service, fundamental reform of health care financing will be required. This will be a struggle, but we can hope for a positive turnaround by heeding these words of wisdom from the past:

New beginnings are often disguised as painful endings.

    —Lao Tzu