The Dangers of Private Equity in Healthcare
Introduction:
The American Hospital Association reported that private equity (PE) entities accounted for 65% of physician practice acquisitions in 2019. Despite growing evidence that the presence of PE has been a detriment to patient-care quality and prices, its prevalence continues to rise. Private equity firms invest capital in various healthcare practices with the intention of improving profitability and generating returns for investors. Thus, these PE investments have faced scrutiny and criticism for prioritizing profit over patient care. Furthermore, physicians have been faced with more paperwork and administrative tasks, resulting in an increased demand on them from insurers and hospital administrators. With less time being spent on taking care of patients, the Mayo Clinic Proceedings have reported that physicians are experiencing “a dramatic increase in burnout and decrease in satisfaction.” Thus, it is clear from both the patient and provider perspectives that private equity backing is troublesome and that the United States healthcare system is trending in a monopolistic direction.
Why practices are being backed by PE firms:
From the doctor’s perspective, private equity firms can offer a highly attractive proposition. That is, PE firms have the potential to increase income and reduce insurance hassles. However, in exchange for these benefits, physicians often cede control of their practice to the firm. Furthermore, PE firms leverage this control to generate significant profits, and they do this in two general ways: 1) the firm can lower the costs by cutting support staff or replacing physicians with less costly providers, such as nurse practitioners. 2) the firm can pressure physicians to provide unnecessary medical care and testing and thus manipulate the insurance system to maximize revenue. From the firm’s perspective, the goal is to demonstrate an increase in value through these exploitative methods in hopes of a secondary buyout. That is, acquisition of the practice by another PE firm with the same goals, which thereby perpetuates a harmful cycle.
How PE firms approach market monopolization:
According to a recent Forbes article, it is estimated that 25% to 40% of emergency departments are now staffed by private-equity firms. Emergency departments are among the biggest targets for private equity firms for a variety of reasons. Almost all emergency department cases are considered essential and, thereby, rarely require prior authorization from insurance companies. Thus, emergency departments offer a relatively constant and stable demand. People require emergency medical care regardless of the state of the economy, making ED medicine a recession-resistant industry in the eyes of private equity investors. Furthermore, emergency departments have high potential in terms of consolidation opportunities. The emergency medicine sector is fragmented, as both independent small practices and large hospitals coexist. Consolidation allows PE firms to benefit from economies of scale, outperforming individual practices and hospitals, and increasing profitiability. Even with high, constant demand and strong scaling potential, private equity firms can further drive profitability in emergency departments by urging ED/ER physicians to over-test or over-treat patients while prioritizing the most expensive services, as evidenced by studies reporting high-intensity billing for expensive emergency services has risen 400% in the past 15 years.
Private equity firms have also targeted private practices run by ‘solo’ doctors, and they typically acquire these doctors for anywhere from 30% to 100% of the practice. PE firms prefer to acquire practices at a higher percentage. While a lower percentage requires less of an investment, it ensures that doctors retain more control over their practice; however, a higher percentage allows the firm to obtain complete control of the practice and consequently attempt to monopolize the market. Furthermore, firms have focused on surgical specialties, such as orthopedics and gastroenterology. By collecting all physicians in a community into a single specialty group, the private equity firms essentially force insurance companies to include facilities and services in their network. As a result, rates increase, profitability is prioritized, and quality of care is decreased.
The physician’s dilemma:
According to the American Medical Association (AMA), the overall physician burnout rate reached 53% in 2022. Furthermore, the AMA reported that physician job satisfaction dropped to 68%, which is now below the satisfaction rate of nurse practitioners and physician assistants. With an increase in physician dissatisfaction, many may assume that the role of PE in medicine would be growing even faster, given the financial benefits given to physicians. However, doctors recognize that the involvement of PE is often harmful for patients; that is, doctors do not want to order tests or provide further treatment with the hopes of increasing profitability. Moreover, physicians do not want to generate medical bills that force patients to make high out-of-pocket payments. Forbes reports that PE-acquired practices charge a whopping 20% more per insurance claim than independent physicians.
Therefore, it is clear that there is a conflict of interest where doctors prioritize patient care, while private equity firms are only interested in generating wealth. A question to ponder moving forward is: are there ways in which physician satisfaction can increase without monetary incentives? In essence, physician stress must be lowered. Doctors should not be turning to private-equity acquisitions to compensate for high levels of stress financially. Furthermore, American healthcare should concern itself more with quality of care and lowering costs, as opposed to the opposite, such as seen with private equity-acquired practices.