Role of Private Equity in Driving Up Health Care Prices

The Role of Private Equity in Driving Up Health Care Prices | Harvard Business Review – By Lovisa Gustafsson, Shanoor Seervai, and David Blumenthal – Oct 2019

Private investment in U.S. health care has grown significantly over the past decade thanks to investors who have been keen on getting into a large, rapidly growing, and recession-proof market with historically high returns.

It scares me when the healthcare system I depend on is evaluated merely on its ability to generate a profit for corporate officers and stockholders.

This corporate “vision” regards healthcare workers like any other expenses, a cost to be cut wherever possible. Managing healthcare as a financial enterprise denies its humanitarian purpose and the societal benefit it provides for all. 

Private equity and venture capital firms are investing in everything from health technology startups to addiction treatment facilities to physician practices. In 2018, the number of private equity deals alone reached  almost 800, which had a total value of more than $100 billion.

Their common business model of buying, growing through acquisition or “roll-up,” and selling for above-average returns is cause for concern.

Private equity firms have been buying and growing the specialties that generate a disproportionate share of surprise bills: emergency room physicians, hospitalists, anesthesiologists, and radiologists.

Patients are often unaware that they need these particular services in advance and have little choice of physician when they use them.

Physician practices have been a popular investment for private equity firms for years.

Yes, these investments can provide independent physicians and small practices with an alternative to selling themselves to hospitals and can help them deal with administrative overhead that takes them away from the job they were trained to perform: providing care.

But, at least in some cases, the investors’ strategy appears to be to increase revenues by price-gouging patients when they are most vulnerable.

Private-equity-owned freestanding emerging rooms (ERs) are garnering scrutiny because of their proliferation and high rates.

The majority of freestanding ER visits are for non-emergency care, and their treatment can be 22 times more expensive than at a physician’s office.

However lucrative in the short run, private investor-backed companies that hurt consumers are not likely to perform well financially in the long term.

Unlike many other markets, health care is both highly regulated and highly sensitive to the reality or appearance of victimizing the sick and vulnerable.

Consumer outrage leads quickly to government intervention. [?]

Actually, it has not.

Consumers have been “outraged” about all kinds of price-gouging by various “healthcare” corporations for decades, yet even the most limited congressional bills to fix these atrocities never seem to make it even to a vote.

This could be because wealthy congresspeople (the usual kind) are often the very ones who benefit from such profits through their stock holdings.

Those that try to maximize their short-term profits by pushing up prices without adding real healthcare benefits are likely to find that those strategies are unsustainable.

But by the time the corporation files for bankruptcy, those corporate “leaders” have already cashed in on huge stock grants, which they quickly sell before the bad news is public.

They aren’t stupid and I’m sure they’ll be long gone before they suffer consequences. This is the playbook for corporate raiders: take the money and run.

Lawmakers and regulators won’t let them get away with such practices for long.

I strongly doubt that, especially since this has been going on for decades.

Authors:

Lovisa Gustafsson is an assistant vice president at the Commonwealth Fund. She previously consulted for investor and industry clients on health policy and strategy issues.

Shanoor Seervai is a senior research associate and communications associate at the Commonwealth Fund.

David Blumenthal, MD, is president of the Commonwealth Fund. He previously served as the National Coordinator for Health IT in the Obama Administration.