A projected upsurge in private equity investment in health care will result in accelerated consolidation, reduced competition, and increased patient risk, according to a 70-page paper published in May by the Petris Center, School of Public Health, UC Berkeley, and the American Antitrust Institute (AAI), “Soaring Private Equity Investment in the Healthcare Sector: Consolidation Accelerated, Competition Undermined, and Patients at Risk.”

“Our health care system is organized on a private for-profit and non-profit basis with a professional, cultural, and legal foundation that places the well-being of patients ahead of the financial interests of the providers and organizations that compose it,” wrote the authors. “There is reason for grave concern that private equity investment could tear this foundation apart. Private equity investing is characterized by an outsized appetite for risk, a relentless drive to consolidate business, and a singular focus on short-term revenue generation.”

Using data gleaned from PitchBook, Richard Scheffler, PhD, Laura Alexander, and James R. Godwin, estimate that private equity investment in health care has nearly tripled over the past decade, from $41.5 billion in 2010 to $119.9 billion in 2019—$750 billion over ten years—and the authors anticipate that this explosive rate of growth will increase in the years ahead. “This explosive growth is being driven by a perfect storm of projected increases in health care spending, tremendous stores of uninvested capital already dedicated to private equity funds, and market disruption caused by the COVID-19 pandemic,” wrote Scheffler et al.

The authors emphasize that private equity is exactly that—private— and that gathering information is difficult because these companies operate under the public and regulatory radar. What they were able to discover prompted them to call for urgent action from the Federal Trade Commission, the Department of Justice, the Department of Health and Human Services, and organized medicine to oversee, investigate, and understand the impact of this financial instrument on our national health care system.

“What we are able to discern about the impact of private equity on health care is deeply troubling,” the wrote. “Though there may be instances where private equity firms produce value for a health system, hard evidence of these benefits is hard to come by. What is apparent from the anecdotes and studies on private equity in health care, so far, is that private equity business practices have caused significant harm to individual health care companies, to patients, and to markets, and that there are strong reasons to suspect that additional transparency and further study will reveal deeper, more serious, and growing problems. The American Medical Association has noted that private equity limits the autonomy of doctors—interfering with doctor-patient relationships—the core of our healthcare system.”

A Sector Based on Trust

The authors emphasize that health care is different than other sectors of the economy and should be treated differently by regulators because health care is a “public good” in that half of the national expenditure is financed by the government. Another point of distinction is the role of trust in health care in that the system “is structured to deal with the lack of knowledge by patients in what they are buying and treatments they receive. Trust is the foundation of our health care system….profit-based health care threatens this trust.”

Another problem identified is that the private equity business model inherently incentivizes risk. Pools of capital organized as partnerships managed by fund managers acting as general partners, the general partners typically provide 4% of capital. Limited partners (e.g. pension funds and other institutional investors) provide 20 to 30% of funding, and the remaining 70 to 80% is provided by banks and secured by company assets. Fund managers receive fees equal to 2% of the assets managed and a 20% return on capital above a set threshold. “This financial structure sets up a moral hazard, whereby the fund manager is entitled to large fees regardless of the funds’ performance and whereby the fund manager puts little of its own capital at risk but enjoys a large share of profits. As a result, fund managers have tremendous incentives to take on large amounts of risk.”

Recent Activity

Nonetheless, health care accounted for 18% of private equity investment in 2020, the second major investment sector for private equity. The total number of reported deals hit a high of 937 in 2020, with clinics and outpatient care representing the greatest number of deals. The authors predict a continued climb in the number of deals and emphasis on outpatient services in 2021, with the 10 most active firms in this sector holding $16 billion in “dry powder.”

With health care expenditures forecast to rise 5% annually in the next five years, and many physician groups and under-capitalized outpatient firms under post-Covid financial stress, the authors suggest that companies such as Audax (with $5 billion in dry powder), which specializes in growing outpatient companies through aggressive acquisition, may find themselves in a buyer’s market.

Case Studies

The authors used a series of case studies to illustrate the perceived threats that private equity poses to the U.S. health care system and patients through the use of aggressive, debt-funded mergers and acquisition (M&A) strategies to consolidate markets.

• Jordan Health Care. Illustrates private equity’s ability to identify opportunity and quickly create a major position in a sector. 
• Ardent Health Services. Demonstrates private equity companies’ ability to rapidly consolidate and generate revenue, while loading the portfolio company with debt that can lead to hospital and clinic closures.
• Par Pharmaceutical. Highlights private equity’s use of M&A strategy in the pharmaceutical industry and the anti-competitive behavior it enables.
• Advanced Dermatology and Cosmetic Surgery. Outlines how private equity grew a regional dermatology company into a large national company through aggressive acquisition funded by debt.

Three key takeaways of these case studies articulated by the authors are:

• Private equity involvement in markets drives and amplifies consolidation.
• Private equity, using short-term investment strategy of “buy and build”, rapidly transforms the structure of markets, particularly at the regional and local level.
• Private equity infuses a high level of risk into health care.

Threats to Patients and Markets

The authors insist that the impact of private equity involvement in health care must be viewed in the context of potential benefits of private equity investment. Proponents suggest that PE investors improve efficiency by cutting costs and provide capital for investments in new technology and innovation that could improve patient care, but the authors note that evidence in the literature to support those claims is “mixed at best.”

At worst, the evidence is alarming, such as new research cited by the authors that explore the effects of private equity on quality of care in the nursing home sector, an early target of private equity. A respected research team from multiple academic institutions looked at the impact on the quality of care of private equity investment in nursing homes and found a 10% increase in 90-day mortality for patients admitted to PE-owned nursing homes.  

Antitrust and competitive issues are another area of immediate concern and require urgent attention, the authors maintain. Consolidating fragmented markets is a central strategy of private equity and the implications for health care include decreased quality, increased prices, and “potentially ruinous” bills, as seen in the consolidation of outsourced physicians and the air ambulance field. Two PE-owned firms control 30% of the outsourced physician market, a factor in a surprise billing crisis that required the intervention of Congress. The authors cited research showing that air ambulance providers, of which two PE-owned firms control 64% of the market, resulted in a 60% increase in the cost of air ambulance trip over 5 years.

Criminal charges alleging a no-poaching conspiracy were recently filed against Surgical Care Affiliates, a major player in the ambulatory surgery field (230 centers), as well as two co-conspirators who allegedly agreed to not hire one another’s employees. SCA is now owned by UnitedHealth but at the time of the alleged conspiracy it was owned by TPG Capital. According to the authors, one of the co-conspirators, United Surgical Partners Holding Co. (550 centers), was owned at the time by a private equity firm active in the corporate radiology market, Welsh Carson Anderson Stowe.

The authors suggest that these national examples underestimate the scope of the problem that private equity poses to health care from the patient’s perspective, which is predominantly local. “Pricing patterns in health care markets reflect the fact that the presence or absence of local competitors is a primary driver of healthcare pricing,” they write. “Some of those who do focus on these local and regional markets have identified private equity as one of the major contributors to this concentration problem.”

Call to Action

The authors conclude with a list of recommended immediate actions and areas of study for regulators and stakeholders, including antitrust authorities, legislators, health regulators, and health professional associations. They include:

• Expand HHS review of health care mergers.
• Increase transparency efforts and development of health care quality measures.
• Revise Hart-Scott-Rodino Act reporting requirements to improve visibility into health care consolidation activities by private equity.
• Study implications for Stark Law, federal Anti-Kickback Statute, and False Claims Act.
• Adjust merger remedy guidance.
• Develop theory for addressing accretive acquisitions.
• Incorporate financial risk analysis in health care mergers.
• Develop  guidance for practitioners on ethics of private equity sales.
• Conduct 6(b) study of private equity in health care.

Access the paper here.