A Policy Framework for the Growing Influence of Private Equity in Health Care Delivery

Private equity acquisitions of clinician practices and hospitals continue to increase. Over the last decade, hundreds of hospitals, thousands of physicians, and many additional health care entities in the US—including nursing homes, ambulatory surgical centers, and fertility clinics—have been acquired by private equity firms. As evidence emerges on the clinical and economic consequences of these buyouts, federal and state policy makers have begun exploring ways to improve oversight and regulation in this space. To date, however, a framework for potential policy responses to this growth in private equity ownership remains lacking.

What is Unique About Private Equity?

Several characteristics distinguish private equity firms from other for-profit health care delivery models. First, private equity firms operate on a shorter timeline, often acquiring and selling a clinical entity within approximately 5 to 10 years. This emphasis on rapid returns on investment is thought to be consistent with the finding that private equity firms increase prices, increase volume, shift to higher-margin services, and reduce labor costs, including physician staff shortly after acquisition.^1–4 Firms may acquire multiple clinical organizations in a region to increase market power, which boosts commercial prices and increases their valuation. Among 578 physician practices acquired by private equity firms between 2016 and 2020, prices increased by 11%, and volume increased by 16% after acquisition.¹

Second, private equity firms introduce new financial risk into the health care delivery system. To make a purchase, private equity firms often assume large amounts of debt, using the acquired entity’s assets as collateral. This leveraged buyout increases the risk for the acquired entity and the potential return for the private equity firm. Most of the debt from leveraged buyouts is tied to the acquired entity, minimizing long-term risk for the private equity firm. In contrast, companies acquired through leveraged buyout (including those outside of health care) are 10 times as likely to go bankrupt,⁵ exemplified by Hahnemann Hospital in Philadelphia, Pennsylvania.

Third, private equity firms enjoy special tax and regulatory privileges. Because they are not publicly traded, private equity firms are subject to less regulatory oversight by federal agencies. In particular, income from private equity firms is taxed at a maximum of 20% (ie, the capital gains rate), which is substantially lower than ordinary income tax.

These features of private equity may fuel preexisting profit incentives in health care delivery and render patient outcomes more susceptible to their influence. For example, for-profit nursing homes demonstrate higher COVID-19–related mortality, lower staffing ratios, and higher rates of personal protective equipment shortages.⁶ But even among for-profit nursing homes, private equity acquisition has led to higher patient mortality—likely resulting from decreased staffing, reduced patient mobility, increased length of stay, and 50% increased probability of receiving antipsychotic drugs.⁴ In another example, private equity acquisition of for-profit physician staffing firms can also subject patients to surprise billing.⁷ Similarly, private equity acquisition of private physician practices and hospitals has resulted in higher charges and out-of-pocket costs for patients.^1,3 Evidence that private equity acquisitions improve quality of care or patient outcomes is thus far scant.

Existing Policy

Federal regulation of private equity firms is limited or challenging to enforce. Only mergers above a transaction threshold of $111.4 million are subject to federal regulatory review—a cutoff that only 10% of private equity acquisitions meet.⁸ When mergers have been reviewed, the vast majority have been approved. Despite being exempt from review, the remaining smaller acquisitions can still have a meaningful impact on the purchased entity’s consolidation, especially in local markets as private equity firms often acquire multiple clinical entities within a specialty in a geographic area.

Several laws prohibit outright fraud or kickbacks from private equity–owned firms. For example, the False Claims Act (FCA) imposes a 3-fold penalty on actors who knowingly defraud government programs. In 2019, the US Department of Justice received its first settlement from a private equity firm in health care for violations of the FCA. The firm and codefendants admitted to having sold expensive pain creams, regardless of patient need, to beneficiaries of TRICARE, the health insurance program for active duty service members and families. While the case resulted in a $21.4 million settlement, it took 4 years to litigate.

Federal regulatory agencies appear relatively understaffed and likely underfunded to thoroughly review private equity acquisitions. From 2014 to 2021, approximately 6982 private equity acquisitions in health care were completed, yet only 34 cases under the FCA advanced to settlement,⁸ resulting in $500 million in settlement fees—less than 0.1% of the total private equity investment in health care during that time.^8,9 While total annual private equity acquisitions in health care increased by 167% between 2010 and 2020, the number of full-time positions at the FTC decreased by 1%.⁹

States as Laboratories

Passing federal antitrust reform faces legislative hurdles. States have had more success in implementing reforms, although data on outcomes are limited. Some states have created stricter merger and acquisition reporting thresholds than federal thresholds for regulatory review. In Massachusetts, the Health Policy Commission has oversight over mergers and acquisitions and reports to the office of the state’s Office of the Attorney General, which can sue to stop mergers. However, substantial resources are similarly needed to litigate. To overcome such resource constraints, one bill in California, AB 1132, sought to give the state Attorney General authority to veto private equity acquisitions, although it ultimately stalled in committee following opposition from the California Medical Association, among other parties. Critics worried the veto, an unprecedented expansion of oversight into the free market, could be used unevenly and subject to political considerations. Proponents argued that such unprecedented executive action was needed to match the unprecedented growth in private equity ownership in health care.

Limiting Moral Hazard

In addition to expanding regulatory review, policy makers could limit incentives that encourage undue financial risk taking. For example, from 2000 to 2004, Italy outlawed leveraged buyouts entirely. After the 2008 financial crisis, the European Union (EU) passed legislation designed to limit debt allowed in leveraged buyouts and financial instruments that shift risk from private equity firms to purchased companies. To our knowledge, peer-reviewed studies of these policies and clinical or economic outcomes are lacking. Taxing private equity earnings at the same rate as ordinary income or tying executive compensation to a broader set of outcomes, such as bankruptcy, might improve accountability, although this effort would be challenging to pass legislatively.

Improving Transparency

Improving transparency by private equity–acquired businesses may be more politically feasible. In 2011, the EU passed legislation requiring these firms to publicly disclose the amount of debt assumed during leveraged buyouts. After this legislation was passed, enforcement has been inconsistent across member nations. US lawmakers could go a step farther and mandate the reporting of patient experience or other outcomes that may be less easily gamed, such as changes in prices or 90-day mortality postdischarge. This strategy may hold promise, as private equity–owned health care entities seem more responsive to quality measures and market forces.¹⁰ However, increased price transparency may have unintended consequences, as competitors to private equity–owned hospitals or medical practices may seek to raise their own prices in response. Research on such responses to price transparency is needed.

Protecting Patients and Clinicians

To our knowledge, there are no US laws specifically targeted toward protecting patients or clinicians after private equity acquisition. After Hahnemann Hospital was acquired by a private equity firm, its real estate was sold. As a result of this asset stripping, the hospital eventually closed under the weight of its newly acquired debt. Thousands lost jobs, and more than 550 residents and fellows had to relocate their training. The EU has passed legislation limiting asset stripping for 24 months after private equity purchase. Comparatively, policy makers in Congress have proposed increasing priority of severance pay for employees whose companies go bankrupt after private equity acquisition.

Conclusions

Crafting thoughtful evidence-based policies to address the growth of private equity in health care is challenging because of data limitations, the limits of government intervention in the free market, and the political constraints of large-scale regulation. However, private equity acquisition of health care facilities and health care and dental practices continues to amass with unclear implications for patients and frontline clinicians. Enforcing existing laws would be a first step, but doing so would require increased funding or oversight for regulatory agencies. State governments may be better positioned to respond by decreasing reporting thresholds, expanding executive action, and increasing transparency. Such proposals would remain largely untested, but given emerging concerning evidence of changes in economic and clinical outcomes associated with private equity acquisition, they are worth considering.