The Growth of Private Equity in US Health Care: Impact and Outlook

• Executive Summary
• Conversation with the Researchers: Jane M. Zhu, MD, MPP, MSHP & Zirui Song, MD, PhD
• Research Round Up: Cost, Consolidation, Quality of Care, Utilization of Care, and Geographic Variation
• Policy: Current Policies and Those to Watch

Song: There are at least three ways in which PE acquisitions have affected patients. First is through influencing access to care. In the earlier years of PE activity, acquired hospitals frequently closed less profitable service lines and sometimes closed entirely. Second is through prices. PE acquisitions have been shown to increase charges and negotiated prices, which translate into higher cost-sharing and are ultimately passed on to taxes or lost wages. Third is through utilization, as the volume and intensity of services have also changed in inpatient and outpatient settings following PE acquisition.

Zhu: Evidence also suggests mixed results on quality of care. As Zirui said, the most consistent evidence of PE’s effects has been an increase on prices and spending. This is important because when prices go up in the health care system, this often translates into higher costs for patients, either through direct out-of-pocket costs or via increases in insurance premiums.

Zhu: PE often leverages a first mover advantage by being first to a market area – it enters a particular industry or market, quickly consolidates, and then exits. PE has already made a lot of investments in nursing homes, hospitals, and certain specialties like dentistry, anesthesia and emergency medicine, and dermatology. Our data suggests that PE has now entered into nearly every field and industry in health care, most recently in behavioral health and primary care, particularly those that participate in value-based payment arrangements. I think PE will increasingly look at targeted approaches that will easily weather economic downturn, and respond creatively to growing policy and regulatory interest in their investments and effects.

Song: Agree. Given the nature of its business model and the fragmented, often community-based structure of the delivery system, PE penetration into physician practices, procedural facilities, revenue cycle management (i.e. bill collection), health IT, and other areas ripe for consolidation will likely continue. The policy community is beginning to catch up, though markets often move faster than regulation (as is the case with PE). As long as there is minimal risk to PE firms from leveraged buyouts, tax benefits to support large returns, few requirements for transparency, and little regulation, PE acquisitions in health care will likely continue. Recent turmoil in the U.S. banking sector and interest rate hikes by the Federal Reserve have made it more expensive (or uncertain) to borrow, particularly from smaller banks, potentially making PE funding an attractive option. PE firms face some headwinds nonetheless. Insurers and health systems are also acquiring practices, which is raising the prices of acquired entities and making it harder for PE firms to exit with a profit quickly. Efforts to stop surprise billing, including the No Surprises Act, diminish another avenue for profit. Accordingly, the holding times for PE investments have lengthened. Future policies at the federal or state level could further change the outlook for PE.

Song: Running a practice is hard and often costly. Human labor, physical capital, supplies, malpractice insurance, and other costs all chip away at margins, separate from the non-financial costs of managing a practice, hospital, or care delivery entity. As Jane said earlier, PE offers providers a source of capital, which many need or are looking for. PE can also relieve the providers of management responsibilities. Sometimes providers may seek out PE as much as PE targets providers for acquisition.

Zhu: Agree - a willing buyer needs a willing seller, and for many physician practice owners, the alternative to PE is not remaining independent, it’s an eventual sale to another corporate entity, like CVS or Optum or Amazon, or to a hospital or health system. For older practice owners seeking an exit after a lifetime of practice building, PE may have the advantage of continued equity.

Zhu: It is important to note that PE serves as an important source of capital to many health care entities, including medical practices, who may need to expand their physical footprint, invest in electronic health records, engage in population health management, and hire more staff in order to keep up with large competitors benefiting from economies of scale. In many ways, PE is both a response to and an accelerator of broader health system trends – one in which consolidation is happening quickly, care is being delivered by larger and larger entities, and corporate influence is growing.

PE is particularly adept at identifying undervalued and underperforming entities, and they enact exacting changes to increase the value of their investment and generate profits for investors. This singular focus allows them to excel in what has historically been a fragmented health care system, and to leverage the financial promise in health care that comes with an aging population and growing demand for health care services. At the same time, their activity is not subject to a ton of scrutiny, for several reasons. First, PE transactions are often not transparent, which makes it hard for regulators and patients to track what’s being bought and sold. Second, PE’s “roll-up” strategy – particularly in the physician practice space, where there is a lot of activity – allows smaller transactions to escape federal mandatory reporting thresholds. Third, PE is permitted to treat its profits at a lower capital gains tax rate, rather than as ordinary income, which in turn fuels PE’s financial well-being and incentivizes its activity.

Song: Policies that touch on PE acquisitions are currently limited. About 90% of private equity transactions, often reaching tens of millions of dollars apiece, are exempt from federal regulatory review. Yet these smaller acquisitions in suburban and rural markets can have large effects on competition. Regulatory agencies are relatively understaffed and under-resourced to provide oversight of most PE acquisitions, considering their sheer volume in recent years. Moreover, inherent features of health care have facilitated PE entry, including fragmented practices in the community (facilitating add-on acquisitions to consolidate market power), predictable third-party payment, opportunities to cut costs (including physician labor), and reliability of demand for health care.

After PE acquisition of independent physician practices or contracting with PE firms, studies found increases in the charged amount per claim and allowed amount per claim (the maximum amount a health plan will pay for a covered service) (Bruch et al., 2020; Singh et al., 2022A; La Forgia et al., 2022; Offodile et al., 2021).

A cohort study of PE-acquired hospitals found increases in charge to cost ratios (the charged amount compared to the actual cost of the medical expense), including a $407 increase in total charge per inpatient day (Bruch et al., 2020). Singh et al. (2022A) uncovered a $23 rise in the allowed amount per claim and an average increase of $71 charged per claim when comparing PE-acquired and non-acquired practices across three specialties. Utilizing commercial claims data, La Forgia et al. (2022) reported an even greater increase in the allowed amount per claim among anesthesia practitioners: $116.39. Offodile II et al. (2021) studied PE-acquired hospitals between 2003 and 2017 and observed higher charge to cost ratios in PE-acquired sites than non-acquired sites. However, not all studies found that PE acquisition leads to increased costs. When comparing acquired and non-acquired hospitals between 2005 and 2014, Cerullo et al. (2022B) reported at least a $432 decline in costs per discharge.

Private equity firms are highly incentivized to consolidate health care providers in order to maximize profits (Scheffler et al., 2021). Private equity firm purchasing of independent physician practices typically follows a “platform and add-on” approach, where the firm acquires an established clinical practice (“the platform”) and then acquires smaller, additional practices (“the add-ons”) (Zhu & Polsky, 2021). This approach allows PE firms to continually build market power; however, consolidation and subsequent acquisitions have anticompetitive effects (Brown et al., 2021; Matthews & Roxas, 2022; Scheffler et al., 2021). A growing body of research has found that consolidation in health care leads to increased prices and lowered or stagnated quality of care (King, 2023; Beaulieu et al., 2020; Capps et al., 2018; Cooper et al., 2018; Baker et al., 2014).

Consolidation of practices has led to changes in quality of care received by patients. Although, declines in quality have not been as strongly found in competitive markets, where pre-existing incentives for Centers for Medicare & Medicaid Services quality metrics exist (Matthews & Roxas, 2022).

A study of 21 million Medicare beneficiaries with acute medical conditions found an association between PE-acquisition and significantly lower inpatient mortality and 30-day mortality among patients with acute myocardial infarction. For patients admitted with acute stroke, the comorbidity burden also decreased slightly (Cerullo et al., 2022A). In another study among 204 hospitals acquired by PE firms between 2005 and 2017, greater improvements in process quality measures were observed when compared to non-acquired hospitals (Bruch et al., 2020). It is important to note that when the Hospital Corporation of America (HCA) hospitals were removed from Bruch et al.’s (2020) data set, quality metrics declined and acquired hospitals performed worse. The HCA company has had a long-term focus on quality metrics. Also, a more recent study by Bruch et al. (2021) observed that among community hospitals acquired in 2018, a year after the scope of the previous study, patients at acquired hospitals had slightly lower patient experience scores.

The ongoing PE focus on maximizing short-term revenue increases the risk of overutilization of health care, or the use of unnecessary or low-value care. A study of three specialties found a 37.9% increase in visits by new patients and a 25.8% increase in unique patients seen at PE-acquired sites (Singh et al., 2022A). These findings may be the result of changes in management and practice operations under PE ownership (Bruch et al., 2023; Singh et al., 2022A). Braun et al. (2021) found that among dermatology practices, there was a 15% increase in patients seen. However, in the adjusted difference-in-differences results, acquisition was not statistically associated with changes in patients seen (Braun et al., 2021). Cerullo et al. (2022B) also found an increase in patient throughput and inpatient utilization.

Private equity firms' tactics to acquire practices may accelerate consolidation of practices in the same geographic market or across several regions, impacting patients’ choice in where they receive care and potentially creating gaps in care (Matthews & Roxas, 2022; Johnson & Frakt, 2020). There is substantial variation in PE involvement across the country. Singh et al. (2022B) found that across six office-based specialties, PE penetration was highest in DC, Arizona, New Jersey, Maryland, Connecticut, and Florida. There were no identifiable acquisitions in 11 states. Offodile II et al. (2021) found higher activity in mid-Atlantic and Southern states. Though more research is needed to understand why PE involvement is more heavily concentrated in some regions, it may, in part, be due to state regulations that incentivize investment.

April 2023: Centers for Medicare & Medicaid Services (CMS)

The proposed rule would require increased transparency of nursing home ownership to state and federal regulators. Currently, it is estimated that PE-firms own up to 10% of nursing homes nationally (Scheffler et al., 2021). This proposed rule would implement portions of the Affordable Care Act (Section 6101a), requiring nursing home facilities enrolled in Medicare or Medicaid to divulge additional information, including detailing the entities providing administrative services or owners (Centers for Medicare & Medicaid Services, 2023).

January 2023: Federal Trade Commission (FTC)

The proposed rule would prohibit non-compete clauses in contracts between employers and employees, including health care workers. The FTC Act states that non compete clauses represent “unfair methods of competition” and allows for regulation by such entities (Federal Trade Commission B, 2023). If finalized, could have a significant impact on private equity investments in the healthcare space (Gliadkovskaya, 2022).

November 2022: American Medical Association (AMA)

PE investment in health care raises concerns for residents and students training at teaching hospitals. The AMA recently adopted a policy aimed at protecting residents and encouraging training hospitals to monitor the programs to minimize interruptions (American Medical Association A, 2022). In 2019, more than 570 residents and fellows were left without malpractice coverage or a training program spot after a PE-owned hospital in Pennsylvania closed (AMA B, 2020).

April 2021: California SB 642 (Patients over Profits)

This bill aims to expand state restrictions on the “corporate practice of medicine”, with significant impact on PE-involvement (California State Senate, 2021). It was introduced into the California State Senate in February 2021. California’s AB 1132 (the Health Care Consolidation and Contracting Fairness Act of 2021), which would have given the state Attorney General the authority to deny PE acquisitions, stalled and is no longer under consideration by the state assembly (Buck et al., 2021; Cai & Song, 2023).

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