If you are reading the headlines, it is easy to come away with the opinion that private equity (PE) and healthcare are a bad mix for patients.
But there is more to the story, and federal regulators and enforcers like the Federal Trade Commission (FTC) need to read the whole novel before they act too forcefully.
Before getting to the potential benefits of PE in healthcare, let’s look at where we are and why policymakers are worried.
FTC Taking a Strong Stance
FTC Chair Lina Khan is skeptical of the influence of PE in healthcare. During recent remarks to the American College of Emergency Physicians, Khan said she wants to change the FTC’s processes “to be made aware of private equity acquisitions that may fall under the $100 million threshold that flags them for FTC review.”
Khan’s remarks came after the FTC sued medical group U.S. Anesthesia Partners (USAP) and its PE backers (Welsh, Carson, Anderson & Stowe), alleging the companies conspired to consolidate anesthesia practices in Texas, increase profits for the companies, and hike up anesthesia service prices for consumers.
That lawsuit is unprecedented. Combined with Khan’s remarks and widespread scrutiny of PE-backed Envision Healthcare — which says it is ready to exit bankruptcy just months after declaring it — will further elevate questions about whether PE firms should entangle themselves in healthcare.
Does this mean that PE and the presence of PE more generally, is always bad for patients? Not necessarily.
Why PE-Backed Healthcare Firms Are Catching Policymakers’ Attention
The commission says Welsh Carson “created USAP in 2012 after observing that anesthesiology in Texas was made up of small practices competing against one another, which allowed insurers to negotiate lower prices for themselves, for their clients, and ultimately for patients.”
The FTC says Welsh Carson saw a “chance to profit by eliminating this competition.”
USAP quickly acquired more than a dozen anesthesiology practices in Texas and, after each purchase, the FTC says USAP “raised the acquired group’s rates to USAP’s higher rates” — prices that “dwarf” those of USAP’s rivals.
“This roll-up strategy has made it the dominant provider of anesthesia services in Texas and in many of the state’s metropolitan areas, including Houston and Dallas,” the FTC also notes.
Why Would Healthcare Need Private Equity?
Over the past few decades, PE has played an increasingly significant role in healthcare. PE can increase productivity and operational efficiencies, and, as healthcare organizations faced financial and operational challenges, PE firms stepped in to provide capital and expertise. Sometimes PE firms approach weak businesses, but struggling physician practices also have sought out PE backers.
PE firms are typically more competitive and have greater financial incentives than other types of investment vehicles. While venture capital funds flow to startups, PE investment flows to more established industries and businesses that need to improve performance. A PE firm’s goal is to create a profitable company (or portfolio of companies), and their ultimate goal may eventually be to sell the company for profit.
The healthcare industry is attractive to PE firms for three reasons: it is a stable industry; it is a fragmented industry; and, with increased healthcare spending and an aging population, there is significant potential financial upside.
Once a PE firm acquires a healthcare practice, it will seek to improve performance by implementing cost-saving measures, streamlining processes, and consolidating functions. Additionally, PE firms may expand the acquired company’s offerings by adding complementary services such as diagnostic testing or specialty care. These changes can increase revenue and profitability, making the acquired company more attractive to potential buyers.
But how do these changes impact patients and caregivers?
Private Equity in Healthcare: The Good, the Bad, and the Ugly
PE can benefit patients and providers alike.
For starters, PE can provide healthcare organizations with the capital needed to invest in innovation and technology. This outcome is particularly important for an industry that is rapidly evolving and requires significant investment in research and development to remain competitive. In some cases, it can lead to improved patient outcomes and overall industry advancement.
Another benefit is PE firms help scale healthcare organizations, allowing them to achieve operational efficiencies and better negotiate with payers and suppliers, resulting in cost savings for patients and improved quality of care.
But, as we saw with the Envision bankruptcy and USAP, PE is no magic elixir for healthcare.
PE’s profit-driven nature can result in cost-cutting measures that negatively impact patient care and outcomes. According to one study, patient mortality increased and overall well-being fell following a PE firm’s acquisition of a nursing home facility. As with Envision, the high levels of debt incurred through leveraged buyouts can leave companies vulnerable to financial distress, especially in times of economic downturn, and in some cases, can lead to bad business practices.
Furthermore, the consolidation of healthcare practices under PE ownership may reduce competition and limit patient choice, which have negative consequences for both patients and providers since they may result in higher prices and reduced access to care.
Policy Recommendations: Protecting Patients and Providers
To amplify the benefits and mitigate the risks of PE, policymakers and regulators like the FTC must establish safeguards.
One approach to consider — the one to which FTC Chair Khan alluded — is to enhance transparency in PE acquisitions, requiring firms to disclose detailed information about their investments and the financial health of their portfolio companies. These requirements would ensure healthcare organizations are not being excessively burdened with debt and that cost-saving measures do not compromise patient care.
Policymakers should also consider regulations that promote competition and prevent excessive consolidation, in order to help maintain patient choice and ensure healthcare providers are not unfairly disadvantaged by large, PE-backed organizations. This goes for vertically integrated healthcare entities as well.
PE can be a positive force in healthcare by providing capital for innovation, scaling organizations, and driving the adoption of new technologies and practices, but risks must be carefully managed. To avoid another Envision or APP bankruptcy or USAP-type lawsuit, policymakers must strike a delicate balance between encouraging investment and innovation while protecting the interests of patients and providers.