Song Joins Aspen Panel to Discuss: Why is Healthcare so Amenable to Private Equity?

Private equity is classically a debt-financed investment strategy that enables financial institutions to acquire companies and generate returns for investors. Sometimes involving reorganization, cost cutting, and financial engineering strategies, such acquisitions have become increasingly common in health care since the turn of the century. Hospitals, nursing home, physician practices, and other providers are now increasingly acquired by private equity firms, with growing concerns for patients and societal resources.

At the Aspen Ideas: Health conference, Alan Weil, editor-in-chief of Health Affairs moderated a conversation between Eileen O’Grady of the Private Equity Stakeholder Project, Former HHS Secretary, Alex Azar, and Zirui Song, Associate Professor of Health Care Policy and Medicine at Harvard Medical School and Massachusetts General Hospital to discuss “what it is about health care that makes it so amenable to Private Equity, what are its shortcomings, and how can it be utilized for more positive outcomes?”

As Song pointed out, health care is ripe for increases in both the price and volume of care, which yield increased revenue for investors. Compared to other industries, health care may be more countercyclical in that demand for care can be robust even in times of economic uncertainty. Moreover, with an aging population, demand for more intensive, complex care is growing. Across the country, a general laxity of regulation in private equity health care markets further encourages firms and investors to target health care providers. Financial engineering strategies, including the sale of real estate and assets previously owned by providers shortly after acquisition, generate additional revenue for firms and investors. To date, private equity firms have often consolidated market power within a sector of the delivery system by acquiring providers of a given specialty in an area. This has led to increased commercial prices.

The impact of private equity on health care has proven difficult to study due to data limitations. While non-profits and publicly traded firms report more data publicly, private equity firms are generally not required to do so. However what information is available in current data has revealed increased charges and prices, increased volume of visits, changes in patient mix toward commercially insured patients, and decreased staffing. Newer work is evaluating effect on quality of care and patient outcomes.

While available data point to such shortcomings, there are also arguments in favor of private equity. Among these are its funding and growth opportunities for smaller, founder led, physician practices; efficiency gains through cuts in operational and administrative costs, and a desirable path for older clinicians who are approaching retirement. Private equity also promises alternative financing for innovation and pharmaceutical development. Finally, private equity serves as a critical source of finance to smaller rural hospitals, many of which might not exist without it.

Since private equity appears to have staying power, there is greater emphasis on increasing available data and looking for ways to thoughtfully regulate its activity and protect patients. O’Grady emphasized changing liability laws. Currently, private equity firms are often not strictly speaking liable for the bankruptcy of companies they acquire; increasing this accountability would help protect against the more risky types of financial gambles with acquired companies and their workers.

To establish a framework for regulation and policy, Song cites policy levers in the following 5 domains: 1. Enforcing federal statues targeting fraud and abuse; 2. Improving antitrust oversight and of mergers and consolidation; 3. Reducing the amount of moral hazard in private equity through lowering the debt used in acquisitions, increasing accountability as noted above, and changes to the tax code governing private equity profits; 4. Protecting patients from high prices; and 5. Transparency in reporting of private equity acquisitions. Currently, private equity acquisitions do not need to be reported unless they are in excess of 111.4 million dollars, but most acquisitions of physician practices are below that threshold.

As the impact of private equity ownership in health care delivery is further evaluated, it is agreed that thoughtful regulation is essential to protecting patient and society. Improvements in policy would help ensure that acquired providers prioritize affordable, accessible, high-quality health care for all patients relative to maximizing revenues to pay down the debt and finance investor returns.