The media and some members of Congress have been cataloging how private equity fund managers have systematically targeted key parts of the health care industry. The results include increased prices, reduced quality of service and increased risks to patients.
Two of the most important academic leaders in documenting this abuse are Eileen Appelbaum, Executive Director of the Center for Economic and Policy Research, and Rosemary Batt, a professor at the Cornell University School of Industrial and Labor Relations. Appelbaum and Batt wrote a landmark book, Private Equity at Work, which was a multifaceted study of how the industry works. Applebaum has been active in documenting the impact of private equity mining on the health care industry, including publishing extensive, data-driven analyzes that have informed media and policymaker commentary.
I have long admired the work of Appelbaum and Batt. Its signs are strong and logical. Both of these scholars tend to read very carefully the academic literature, and always point out how the analysis only points to the limit of the best conclusions, where the lawyers of the industry and sometimes the academics themselves make strong claims, or even show results (if you check the statistics) that contradict the reported findings. They always explain how they came to these conclusions in a careful, measured way.
I shouldn’t have been surprised to find that the private equity industry is coming under enough heat in the health care space that it has tried to pull back. Pitchbook, a leading publisher of private equity industry data, recently released a report by freelance journalist John Canham-Clyne titled Quantifying PE Investment in Healthcare Providers. It is assumed that the prohibited findings are that only 3.3% of hospitals, doctor’s practices and other health care providers as measured by revenue are supported by private equity and therefore private equity is too small for the participant to use any profit.
This argument is false on its face. As anyone who has done competition or deal analysis well knows, what matters in terms of pricing power (and the ability to effectively raise prices by other means, such as lowering the quality of the offering) is the relevant market, not the entire industry. For health care, almost all “consumers” are geographically constrained. The ideal market for all types of services such as diagnostics (think MRIs and clinical labs) or dialysis is within driving distance of patients’ homes or doctors’ offices.
Below is a long-form breakdown of the Pitchbook report from Eileen Appelbaum. We’ve also embedded a recent paper by Appelbaum, Batt, and research assistant Emma Curchin, Structural Determinants of Health: Hospitals’ Unequal Capital Investments Drive Health Inequities, which shows the complexity of doing the right economic studies with a partial, and financial approach. decisions, here investment in the hospital, impact on health outcomes.
Appelbaum told me that he tried to contact Canham-Clyne and sent him some of the papers he had written with Batt. He didn’t answer.
I hope readers will spread this article widely.
Open a Book on PitchBook:
On July 8, PitchBook published a research report, Quantifying PE Investment in Healthcare Providers, which aimed to “reveal important,
important information to participate in an informed future discussion.”
There was another important takeaway that “PE-backed providers represent less than 4% of the US healthcare provider ecosystem by revenue.”
For a data-driven organization, this article makes a critical mistake in analyzing its data. It uses the entire health system as the bottom line and not local health markets managed by PE firms, a flaw that appears to absolve private equity of any involvement in the problems created by the relentless pursuit of profit.
In my opinion, this report is part of the PE backlash in looking at the expansion of the PE industry and what business leaders are getting from regulators. We are too small and the economy is too big, the report seems to say, how can we affect health care prices or reduce patient choice? Nothing to see here. Regulators should go back to ignoring us.
This PitchBook analysis is guilty of what I call the denominator effect. Some examples may illustrate the problem: In thousands of PE deals, most of which are acquired by small companies with small PE funds, the bankruptcy rate is low. Of the hundreds of large subsidized purchases, it is 20%. The share of national PE anesthesia procedures may be small. But in Houston and then Texas, WCAS owns almost all of them and has contracts with 7 of the 10 largest Texas hospitals/health systems. The practices that inflated prices are also being investigated by the FTC. PE owns a small fraction of the 5,000 hospitals in the US, but tell that to the people of eastern Massachusetts because of Steward’s bankruptcy, until recently Cerberus’s, and the closing of 8 hospitals, 4 of which are safe hospitals. Massachusetts state officials are busy getting health care for these residents.
PE-owned companies employ as many or more workers than unionized ones. Is that a minor influence on labor standards or a major one?
I find the “we’re small and therefore harmless” argument ridiculous. Specific examples are also misleading. Why is PE investment in nursing homes close to zero? Because corrupt practices have made many PE nursing homes bankrupt and lowered the quality of care so that, before the epidemic, patients were more likely to die in a PE nursing home. This has led to a situation where these investments are receiving more scrutiny – research findings that have informed PE firms. Why do PE investors shy away from out-of-network cash flow opportunities? Because with the help of many of us concerned about price gouging, we’ve been able to eliminate unexpected billing for patients for out-of-network services in hospitals and elsewhere. Now that Envision is bankrupt and KKR has lost many millions in limited partner money, this business model no longer looks so attractive.
The argument that PE can be safely ignored because it is a small share of national health markets fails because health markets are local. It is no comfort to pregnant women in Mississippi that reproductive health care is widely available in California.
PE controls parts of health care in local health markets, raises prices, lowers quality, enriches partners, managers and principals with taxpayer money and insurance intended to care for patients.
The scrutiny the industry is getting from Congress and government agencies is long overdue. Senator Elizabeth Warren’s new law, the Corporate Crimes Against Health Care bill, seeks to hold private equity and other financial firms accountable for lining their own pockets as they bankrupt health care companies. It can reverse the ill-gotten gains that have personally enriched the owners and managers of these companies. It may simply lead to higher spending of taxpayer dollars on actual patient care and less attention to extracting more wealth from healthcare companies over the 3 to 7 year tenure of the company, with little regard for the future of the company.
Eileen Appelbaum
Co-Director
Center for Economic and Policy Research
A copy of Structural Determinants of Health
Source link