Private equity is consuming healthcare from the inside out, weakening its structure and strength and enriching investors at the expense of patient care. Incremental reforms have failed. It’s time to move past political barriers to achieve consensus on real reform, says J.E. McDonough, professor of practice at the Harvard T. H. Chan School of Public Health.

     Private equity firms are financial termites devouring the foundations of the healthcare system. Laura Katz Olson professor of political science at Lehigh University, documents in her new book, Ethically Challenged: Private Equity Storms U.S. Health Care, “PE firms are gobbling up physician and dental practices;  homecare and hospital agencies; mental health, substance abuse, eating disorder, and autism services; urgent care facilities; and emergency medical transportation.”

     Private equity has become a growing and diversified part of the American healthcare economy. Demonstrated results of private equity ownership include higher patient mortality, higher patient costs, fewer jobs, poorer quality and closed facilities.

 

What Is Private Equity?

     A private equity fund is a large unregulated pool of money run by financiers who invest in and/or buy companies and restructure them. They seek to recoup gains through dividend pay-outs or later sales of the companies to strategic acquirers or back to the public markets through initial public offerings.

But that doesn’t capture the scale of the model. There are also private equity-like businesses that scour the landscape for companies, buy them and then use extractive techniques, such as price gouging or legalized forms of complex fraud to generate cash by moving debt and assets like real estate among shell companies. Private Equity funds also lend money and act as brokers and are morphing into investment bank-like institutions. Some are public companies.

 

     While the movement is couched in the language of business, using terms like strategy, business models returns of equity, innovation and so forth and proponents refer to it as an industry, private equity is not business. On a deeper level, private equity is the ultimate example of the collapse of the enlightenment concept of what ownership means.

     Ownership used to mean dominion over a resource and responsibility for caretaking that resource. PE is a political movement whose goal is to extend deep managerial controls from a small group of financiers over the producers in the economy. Private equity transforms corporations from institutions that house people and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and leave the rest behind as trash. Like much of our political economy, the ideas behind it were developed in the 1970s and the actual implementation was operationalized during the Reagan era.

     Journalist Matt Stoller succinctly describes the essential business plan of private equity:

Financial engineers ... raise large amounts of money and borrow even more to buy firms and

loot them. These kinds of private equity barons aren’t healthcare specialists who help finance

useful health products and services. They do cookie-cutter deals targeting firms/practices/hospitals

they believe have market power to raise prices, who can lay off workers or sell assets, and/or have

some sort of legal loophole advantage. Often, they will destroy the underlying business. The giants

of the industry, from Blackstone to Apollo to Bain, are the children of 1980s junk bond king and fraudster Michael Milken. They are essentially super-sized mobsters.

 

Looting for Profit

     The classic description of the looting-for-profit practice process is presented by economists George Akerloff and Paul Romer: “Firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.” The fact that paper gains from stock prices can be wiped out when financial storms occur makes financial capitalism less resilient than the industrial base of tangible capital investment.

 

Modus Operandi

     All around us we see private equity firms moving into healthcare by clustering specific specialties into new corporate entities. These equity firms may profess to infuse quality and efficiency into the systems they create, but their true objective is not altruism. Their interest is found in their label: equity, the more ($$), the better. California physician, Don McCanne, M.D. of PNHP, describes private equity’s modus operandi:

  1) Acquire a relatively large platform practice in a given specialty,

  2) Then acquire smaller practices in the same geographic area and merge them into the platform practice.

  3) Use debt to finance the acquisitions and assign that debt to the acquired practices.

  4) Find ways to increase net revenue from the agglomerated practices.

  5) Sell the agglomerated practices within three to five years for considerably more than the price paid.

Conveniently, McCanne notes, the debt is left with the practices they purchased, and the equity investors walk away with the money. How does this benefit the patients? How does this benefit healthcare professionals? We know how it benefits the equity firm investors, but does anyone seriously contend that this is what healthcare should be about? 

But that’s what it has become.

 

Mental Health Buyout Kings

     The Private Equity Newsletter reports that psychiatrists, psychologists and clinical social workers once ran their own practices. Now the local therapy office could be controlled by a buyout king. Venture capitalists and private-equity firms are pouring billions of dollars into mental health businesses, including psychology offices, psychiatric facilities, telehealth platforms for online therapy, new drugs, meditation apps and other digital tools. Nine mental health startups have reached private valuations exceeding $1 billion last year, including Cerebral Inc. and BetterUp Inc.

     Demand for these services began rising as more people dealt with grief, anxiety and loneliness amid lockdowns and the rising death toll of the COVID-19 pandemic, making the sector ripe for investment, according to bankers, consultants and investors. They say the sector has become more attractive because health plans and insurers are paying higher rates than in the past for mental health care and virtual platforms have made it easier for clinicians to provide remote care.

     “Since COVID, the need has gone through the roof,” said Kevin Taggart, managing partner at Mertz Taggart, a mergers-and-acquisitions firm focused on the behavioral health sector. “Every mental health company we are working for is busy. A lot of them have wait lists.”

     In the first year of the pandemic, the prevalence of anxiety and depression increased by 25 percent, the World Health Organization said in March. About one-third of Americans are reporting symptoms of anxiety or depression, according to the Centers for Disease Control and Prevention.

     The number of behavioral-health acquisitions jumped more than 35 percent to 153 in 2021 versus the previous year, and of those, 123 involved private-equity firms, according to Mertz Taggart. In the first quarter of this year, there were 41 acquisitions, of which 30 involved private equity firms.

     The push into mental health carries risks. A rush of private-equity firms could send prices for practices higher, reducing potential profits. A risk for patients and clinicians is that new owners could focus on profits rather than outcomes, perhaps by pressuring clinicians to see more patients than they can handle. If care becomes less personal, private patient care might also suffer.

     Online mental health company Cerebral and other telehealth startups have begun to face scrutiny over their prescribing practices. The Wall Street Journal has reported that some of Cerebral’s nurse practitioners said they felt pressure to prescribe stimulants. This past week, Cerebral said it would pause prescribing controlled substances, such as Adderall, to treat ADHD in new patients. Last year, Cerebral logged a $4.8 billion valuation.

​

Private Equity Doesn’t Belong in Healthcare

     Olson concludes, “private equity does not belong in medicine at all and should be banned. We really need to prohibit, I think, the corporate practice of medicine, period. If you look at the private equity playbook, its only goal is to make outsized profits – they can’t make ordinary profits. If they make ordinary, respectable profits, their investors will go somewhere else because of the risk.

     She continues, “Private equity doesn’t care whether the product is Roto-Rooter or hospice. That’s one of the major differences between private equity and a regular company, which may care about the community, the reputation of the company and the quality of the product. They want to keep their customers. They care about the future.

     “But private equity doesn’t work like that. Because private equity often aims to sell a company after four or five months, they don’t care about the future. They don’t care about the product at all. Private equity is antithetical to our healthcare system. So yes, we need to ban private equity from healthcare. But given that it’s not going to happen, I would say that we need to prohibit the corporate practice of medicine – anybody can make a case for that."