Private Equity is Buying Up Health Care Providers- Commentary

Private equity is scooping up thousands of health care businesses across the nation.

If you present at an emergency room, there is a good chance you will be treated by a physician employed by a firm backed by private equity investors. In some cases, entire hospitals are being purchased or managed by firms backed by private equity. Increasingly, physician practices are being bought up by private equity investors.

Private equity typically refers to a partnership or group of investors who seek out struggling businesses to purchase to make a quick turnaround on the investment. The profit motive is worrying many stakeholders in health care, fearing higher prices and lower quality.

The Patient Payoff

Kaiser Health News has been reporting on how private equity is investing in health care. In one article on May 27, investors are tapping into the growing demand for colonoscopies.  “We are in the Golden age of older rectums,” the article quotes one investment manager.

Another article on June 15 describes how investors are buying rural hospitals only to dump them when there wasn’t a quick buck to be made. The practice can devastate a community when suddenly they find the doors to a local hospital are slammed shut.

A Kaiser article on July 29 describes how hospices are becoming a hot investment that could interfere during a sensitive time for patients and families if profit, not end-of-life care is the driving force behind the business.

“Private equity sees a huge opportunity to take smaller businesses that lack sophistication, lack the ability to grow, lack the capital investment, and private equity says, ‘We can come in there, cobble these things together, get standardization, get visibility and be able to create a better footprint, better access, and more opportunities,’” the article quotes Steve Larkin, the CEO of Charter Healthcare which is owned by the private equity firm, Pharos Capital Group.

“It is a little scary,” Larkin tells Kaiser Health News. “There are people that have no business being in health care” looking to invest in hospice.

Nursing homes are another investment target that is causing worry for families. I recently helped locate a facility for a family member and there is intense competition for those seniors with enough money to pay privately.

Not a Typical Investment

This is what worries me about private equity investing in health care. Our health care system is dysfunctional. It consumes nearly 20 percent of our economy and 90 percent of the resources are paid for by parties other than the patient.

This is a recipe for waste, fraud, and abuse. From what I’ve seen there is very little interest in innovative business models that compete for cash-paying patients. Most of what I’ve seen are schemes seeking ways to maximize reimbursements against third-party payers’ reimbursement formulas.

There has been significant investment in air ambulances by private equity in recent years. Why air ambulances? Because if you need air transport as my father did a few years ago, you are in no position to negotiate. Furthermore, states are not able to regulate the huge fees that air ambulances charge (often more than a new luxury car).

The airline industry was deregulated in the late 1970s and federal law pre-empts states’ laws. Thus, private equity investors in air ambulance services took advantage of two unusual market characteristics: the consumer, patients cannot refuse the service when their life is on the line, and states cannot prevent price gouging.

To the degree that private equity is seeking to standardize business models and buy struggling health care businesses to make them more efficient, then the investment is beneficial. To the degree that private equity is taking advantage of health care market dysfunction then it’s a concern.

Interestingly, the latest private equity target is the $23 billion funeral home industry, according to Kaiser. With a vast cohort of boomers slipping into old age, death is becoming a growth industry.

Devon Herrick (devonherrick@sbcglobal.net) is a health care economist and a policy advisor to the Heartland Institute. A version of this article appeared in the Goodman Health Blog on September 15.

See the related article, Private Medicine Trumps Private Equity.