The Harm from Private Equity’s Takeover of Medical Practices and Hospitals

Private equity intrusion into medicine is harmful to physicians and their patients.

Introduction

An increasingly harmful trend is the invasion by private equity firms to buy up medical practices, hospitals, nursing homes, and every other aspect of healthcare. By the beginning of 2024, private equity owned at least 386 hospitals, or roughly 30% of all for-profit hospitals in the United States. Thousands of medical practices involving many tens of thousands of physicians have likewise been acquired by private equity in recent years.

The result is more debt, more bankruptcies, higher prices, and less quality care. In 2023, more than 20% of the healthcare companies that filed for bankruptcy were owned by private equity firms as short-term investments. Indeed, nearly all the healthcare entities in the US that are rated with a high risk of default are those that have been acquired by private equity, according to the nonprofit Private Equity Stakeholder Project (PESP). The “aggressive debt-funded growth strategies” of private equities are the cause, explained the PESP healthcare director, Eileen O’Grady.

The bankruptcies are not because private equity firms are running out of money. Just the opposite. Private equity firms are well-heeled with abundant assets, totaling $8.2 trillion (not just billion) in worldwide. Their largesse rapidly increases in part due to tax loopholes for their benefit. As a financial sector that did not even exist 40 years ago, private equity is growing so fast that it has more than doubled in size in just the last five years.

Yet physicians should be forewarned about the immense harm that occurs when a private equity firm purchases a medical practice or hospital. As explained here, private equity typically acquires healthcare entities to load them with debt, while distributing the funds received from the loans back to investors as dividends. This is known as dividend recapitalization, and it leaves the medical practice, hospital, or other healthcare entity with a weaker balance sheet and greater pressure to cut costs and increase revenue. The result is lower quality or an outright denial of medical care, a shortage of equipment, a firing of employees, and in an increase in prices. Patients and physicians lose, at the expense of short-term private equity profits. In many cases, the ultimate outcome is closure or bankruptcy, leaving patients and employees stranded.

Understanding Private Equity Wealth Extraction

Before a physician sells his practice to private equity or becomes an employee of a hospital so owned, it is important to understand what such ownership means. Private equity wealth extraction is how money managers acquire medical entities and then strip their assets, increase their prices, sometimes sell their real estate for a non-medical use or even declare bankruptcy.

An example from 2019 vividly illustrates the harm. Then a private equity firm acquired Hahnemann in Center City Philadelphia, which was a 171-year-old hospital that served primarily poor minority patients. The new owner reportedly did not improve the hospital for 18 months, and then closed it in order to sell its real estate to build luxury apartments. “This seems to have been [the] plan all along, to buy this place, let it fail, and shut it down,” observed the 17-year employee and registered nurse Lauren McHugh while physicians also protested. While that approach may be good for private equity profits, it reduces the availability of medical care in a community to the detriment of patients, physicians and other medical practitioners.

Here in Missouri, the acquisition of hospitals has led to a curtailment of services and then, in several cases, a complete closure of the hospitals. “What we’ve seen over the last 12 to 15 years is a rash of hospital closures, especially rural hospitals, and it is concerning, just because of that lack of emergency services that could be available, and then the length of time it would take to get to another emergency room,” observed Melissa Van Dyne, Executive Director of the Missouri Rural Health Association.

Private equity firms are not motivated by providing quality medical care to a community, but rather are squeezing their targets for profits. As part of an acquisition or soon afterwards, private equity firms typically often load the acquired entity with new debt, while using those loans to enrich their investors, or sell off the real estate that the acquired entity may own as the Hahnemann hospital in Philadelphia did. Either way, the acquired entity suddenly has a much weaker balance sheet that makes it a difficult struggle to survive.

For example, in 2021 a private equity firm imposed new debt onto Cano Health, which had operated many primary care offices and other healthcare entities, mostly in Florida. This new debt helped fund a $100 million dividend to shareholders of the private equity firm. Inevitably Cano Health ran out of cash as it tried to service debt that grew to nearly $1 billion by 2024, and it ultimately filed for bankruptcy in what was described as a “spectacular collapse” by Ari Gottlieb, who monitors healthcare startups.

Whenever one of these many bankruptcies occur, court approval is needed before paying back wages, satisfying other obligations and, at the bottom of the list, providing future medical care to patients. This summer Cano Health emerged from bankruptcy under a court-supervised restructuring process.

While many of entities acquired by private equity spiral downward into bankruptcy, as Cano Health did, others survive only by cutting corners on equipment, support staff, or other expenses. The private equity wealth extraction has the effect of transferring assets used for medical care to investor profits, leaving behind a medical practice or hospital less able to provide medical care to patients.

Many, unfortunately, are misled to have an expectation that private equity firms, because they are flush with trillions of dollars in assets, will use their assets for quality medical care of patients. But exactly the opposite occurs. If there is a bankruptcy or closure, then this becomes an attractive tax write-off for the private equity firm such that it can offset its paper loss against unrelated business income. The private equity firm that previously stripped away the assets earlier comes out ahead overall with tax write-offs from bankruptcies at the end. In essence, the acquired healthcare entity becomes a piggy bank and subsequently a tax shelter for the private equity firm, without any viable long-term future. The victims are patients and physicians.

Economists have the concept called “moral hazard” for when there is a lack of an incentive for a company to protect against harmful risks, such as allowing damage to occur in order to collect on a more lucrative insurance policy. Moral hazards abound when private equity invades healthcare. In the legal profession, there are strict rules against ownership of a law firm by anyone who is not himself a lawyer. Traditionally there have also been state laws against the corporate practice of medicine, but these laws are rarely, if ever, enforced. Physicians, as owners of medical practices, have an inherent motivation to maintain supplies, keep an adequate staff, not replace physicians will less-skilled practitioners, and not leave patients stranded. But private equity firms have no such motivation, and feel no such ethical duty.

The notorious “carried interest” tax loophole allows managers of private equity firms to pay merely the capital gains tax on their compensation rather than the much higher income tax rate that everyone else must pay on their income. The windfall in lower taxes for private equity managers is roughly 17% in after-tax dollars on their bloated compensation. For more than a decade, elected officials of both political parties have tried to close this loophole, but the revolving door between the US Senate and private equity firms has blocked reform. Private equity assets have increased rapidly due in part to this loophole, while has the effect of shifting tax burdens to others.

When entities acquired by private equity do not go bankrupt, the private equity owners sharply increases prices to patients, demand more aggressive coding on insurance claims, and replace physicians with less-skilled alternatives. These changes are necessitated by the new debt load imposed as part of the leverage buyouts, and by the high return on investments demanded by private equity. Medical ethics is sacrificed due to this process.

Medical Practices

In 1988, physicians owned 72.1% of medical practices, which gave them control over their work and the flexibility to see patients who were self-pay outside of insurance. Physicians who owned their practices could also generously provide charity care whenever they had time to do so. But the invasion of medicine by private equity firms, and other factors, have transformed most physicians into employees. By 2018 more physicians were employees (47.4%) rather than self-employed owners of their practices (45.9%). As employees, physicians are bound by the rules of their employers, which are increasingly controlled by private equity money managers today.

Between 2013 and 2016, private equity firms acquired 355 physician practices, some involving hundreds of physicians apiece. Since then, that number has mushroomed further. In the following four years, private equity acquired another 578 physician practices, again typically large practices employing many physicians.

There is a common pattern after private equity acquires a practice. First, the new money managers impose steep cuts in the staff, and substitute less expensive nurse practitioners for physicians. Physicians are disappearing from emergency rooms that are owned by private equity firms. Second, the Wall Street types pressure physicians to provide additional, perhaps unnecessary, medical care while also coding more aggressively with insurance in order to jack up the revenue. This pressure makes ethical physicians feel very uncomfortable.

Physicians are often attracted to these sales of their practices in order to obtain some immediate cash, and be partly relieved of suffocating paperwork duties that plagued their practices while independent. But too often the result is the equivalent of jumping out of a frying pan and into a fire.

The cash enticement can be very appealing to a physician. Private equity typically pays 15 times the physician’s annual income to acquire it entirely, or a smaller proportional amount to acquire as little as 30% of it. That purchase price may then be taxed at the lower capital gains rate, leaving the physician with a handsome payday and an opportunity to retire early.

DISTURBING TRENDS IN MEDICINE.

Changes in Hospital Adverse Events and Patient Outcomes Associated with Private Equity Acquisition

CONCLUSION

Private equity acquisition was associated with increased hospital-acquired adverse events, including falls and central line–associated bloodstream infections, along with a larger but less statistically precise increase in surgical site infections. Shifts in patient mix toward younger and fewer dually eligible beneficiaries admitted and increased transfers to other hospitals may explain the small decrease in in-hospital mortality at private equity hospitals relative to the control hospitals, which was no longer evident 30 days after discharge. These findings heighten concerns about the implications of private equity on health care delivery.¹

But beware of onerous strings attached, and unwelcomed changes to the practice when the physician does not retire. One study showed that private equity increases prices 20% for insurance claims compared with physicians who are independent. The result could be a reduced patient flow, and the purchase price may have been contingent on not losing patients.

Physicians who want to continue to work are often very unhappy about the conditions under which they must practice, compared with the autonomy they enjoyed when they owned their practice. Many soon long for a return to when they controlled their own schedule.

The fine print in the contracts by which physicians sell their practices to private equity firms could thwart an attempt to regain independence. Private equity firms typically demand and obtain restrictions on a physician’s ability to earn a living on his own. Non-compete agreements are valid in 46 states, with only California, North Dakota, Minnesota, and Oklahoma banning these provisions. The new proposed regulation by the Federal Trade Commission (FTC) to ban all non-compete provisions was invalidated on July 3, 2024, by a federal judge. Missouri courts have fully enforced non-compete agreements, and do not typically revise contracts in order to make them more reasonable.

The 2,600-year-old adage “look before you leap,” which originated in an Aesop’s Fable, applies with particular force to any physician who receives an offer from a private equity firm, either to purchase his practice or to employ him. Conditions buried in a long contract may make the purchase price less attractive, or essentially prevent the physician from practicing again as he may later want to do. A takeover by private equity of his hospital can also adversely affect him, and the community of patients too. Physicians could already be educating their patients and the public about the long-term harm of selling out to private equity.

Example: US Anesthesia Partners

In 2012, US Anesthesia Partners (“USAP”) was created in Texas by the New York City private equity firm Welsh Carson along with several physician partners. USAP then aggressively bought up anesthesiology practices that had exclusive contracts with hospitals in Texas. For $100 million plus loans, Welsh Carson acquired Greater Houston Anesthesiology, which was the largest such medical practice in Houston and 20 times bigger than its second largest competitor there. By using “tuck-in clauses,” USAP imposed its higher prices on services that its acquired practices had been providing at its own lower pricing. USAP bought up competitors, each time raising the prices that had been previously been lower due to competition.

Next USAP went to Dallas, first purchasing the largest anesthesiology there, and subsequently purchasing six more, similar to what it did in Houston. After that, USAP made similar acquisitions in Austin, San Antonio, Amarillo, and Tyler. Each time, patients were harmed by the decrease in competition and the increase in prices. By 2024, USAP was handling nearly half of all the hospital-only anesthesia cases in Texas (and a higher 70% in Houston and Dallas), while reaping almost 60% of all the hospital anesthesia revenue paid by Texas insurers, employers, and patients. USAP also paid $9 million to a potential competitor, Envision Healthcare, for it to stay out of the Dallas market for five years.

After a decade of this, in 2023 the Federal Trade Commission sued USAP and the private equity firm Welsh Carson in federal court in Houston, for defendants’ alleged violation of antitrust laws. Although somewhat unusual for a non-litigant to file an amicus brief in a district court, the American Investment Council entered the case with top-drawer New York City and Houston law firms to submit an amicus brief in support of Welsh Carson. AIC is a trade association of more than 60 private equity firms, including among its members Apollo, Bain Capital, Blackstone, the Carlyle Group, and KKR, many of which themselves are big players in healthcare acquisitions today.

In May of this year, US District Judge Kenneth Hoyt held that the FTC’s antitrust case against US Anesthesia Partners could proceed, but dismissed the private equity firm Welsh Carson from the lawsuit. This denies legal accountability by the private equity firm for the alleged anti-competitive conduct, including the increase in prices that the acquired practices began charging. The private equity firm applauded its escape from this lawsuit, saying that they were “mere investors” and that the FTC’s inclusion of it as a defendant constituted “turning decades of corporate law on its head.” Unless the private equity firm is somehow brought back into this case or sued separately by the FTC, USAP and its physicians will be ones to bear the brunt of any fines and damages that are assessed.

Conclusion

Private equity is affecting almost every aspect of healthcare today, and causing substantial harm. In the next installment of this article, we will discuss the detrimental impact of private equity investments in surgery specialties.