Understanding the Growth & Influence of Private Equity in Health Care

Time & Location

1:00 - 2:00 pm ET

Private equity investment has grown in recent years, playing a significant role in the financing of health care in the United States. Increased involvement may be due to a variety of factors, including limited regulation, rising demand for and costs of health care services, and many opportunities for profitability. Private equity investment in health care impacts several key aspects of care, such as consolidation, costs, quality, and utilization.

This webinar explored private equity in health care, including a discussion of why private equity investment is difficult to monitor and regulate. Speakers discussed:

  • The mechanisms behind private equity and overall trends in health care investment
  • Recent research on how investment is impacting health care delivery and consumer costs
  • How regulatory and policy levers are affecting private equity growth


Good afternoon. I'm Cait Ellis, Director of Research Programs at the National Institute for Health Care Management Foundation.


On behalf of NIHCM, thank you for joining us today for this important conversation about private equity in health care.


Private Equity or PE investment plays a growing and significant role in the financing of health care in the United States.


In 20 22, it was estimated that nearly 900 healthcare related service deals were closed by PE firms, after reaching the peak of over one thousand transactions in 20 21.


Despite the surge in private equity related healthcare deals, there's little regulation of private equity investment. And while private equity investment in healthcare may improve operational or technological efficiencies, there are growing concerns about the impact on cost, quality, and utilization of care.


Today, we'll hear from a prestigious panel of experts to understand more about private equity growth in health care.


Before we hear from that, I want to thank NIHCM's President and CEO, Nancy Chockley, and the NIHCM team, who helped to convene today's event.


You can also find biographical information for our speakers along with today's agenda and copies of slides on our website. We also invite you to join the conversation on Twitter using the hashtag private equity.


I am now pleased to introduce our first speaker, Dr. Atul Gupta, Assistant Professor in the Department of Health Care Management at the University of Pennsylvania, Wharton School.


Doctor Gupta's recent study on private equity ownership in nursing homes was cited in the 2022 State of the Union, and by subsequent regulations to improve transparency and nursing home ownership.


We're honored to have him with us today to share his perspective and expertise.


Good afternoon everyone. Thanks to NIHCM for inviting me on this prestigious panel. I'm really excited to be here to get us started.


My talk is really going to be focused on 3, 3 parts.


The first part, I'm going to try and explain in simple words, it is as simple as possible, what private equity is, and sort of set the stage and get everybody on the same page. It's admittedly a complicated concept that took me some time to understand.


The second part, I'm just going to give you some facts on the trends in private equity involvement in the US. Healthcare, and make the case that private equity has dramatically increased over the last few years.


Then, the third part, I will, again, give my own views, based on the literature and my own reading, on why it is the case that private equity has grown. It's involved with healthcare, and what the implications could be.


Next slide, please.


So, what is private equity? So, in the most simplest terms, you know, let's break down the storm of private equity to the first word private.


Well, private just denotes the fact that when these transactions happen, our private equity firm acquires a stake in the company If they know that form is, quote, unquote taken private.


So if that form happens to be publicly listed on the Stock Exchange, they actually dealers that form.


and it's under private control.


There's no public reporting on the financial performance of this, of the target.


There's also no transparency for all entities that are outside of the deal, and that includes regulators, researchers, customers, you know, any stakeholders who are sort of interested in how their target firm is doing without legal action.


And this transparency, unfortunately, or the lack of transparency, unfortunately, also sometimes extends to ownership.


Oftentimes, it's not exactly clear who owns how much of a stake in, in the powdered form.


I'll expand more on that. We're going to talk a little bit on the next slide about how the profits from these views.


The second word is, equity or equity really relates to the source of the capital that's used to acquire the stake in the flow.


And for this, I'll have to explain a little bit on how this all plays out.


So, private equity firms are typically organized as partnerships.


These partners, who are sometimes also called general partners, they approach investors or to ask them for money, or funds, which are going to apply to a specific fund.


These, you know, the, the funder they try to raise money for usually has, or targeted, purpose, so, you know, it could be a sector specific purpose, like, let's say, health care, or even more narrow than that, you know, like health care.


They may also have a size focus, so there could be different ways in which these funds could be targeted, but that's usually how they organize them.


And then they appropriately approach investors who are interested in those sectors.


Who are these investors?


Well, these investors are sort of a variety of groups, typically large institutions, like venture fund managers, endowment's, sovereign wealth funds, and sometimes even wealthy individuals.


But, for example, some of the largest investors in private equity funds. Actually, the California Public Employees' Funds Pension funds, scalpels.


Also, though, Pennsylvania Public School Teachers benches.


So, the firm gets money from these investors, that's the source of the capital or equity.


They then combine it with lots of the rays from lenders, banks, typically, And they use this corpus of money to acquire a controlling stake or controlling stakes in the phone, so they're interested in investing.


So this is a key aspect of private equity. They acquire controlling stakes, they don't just take a small stick, you know, target, they actually want to control that flow.


This is a distinctive characteristic of private equity.


Oh, they usually have a very limited time horizon. As far as this, controlling stake is concerned. They look to sell the stake either to another private equity firm or by listing the stock exchange. We are various ways of, of what they call, exiting the stake.


And usually this happens within 5 to 8 yards.


How do they make money? Well, they have three revenue streams.


one, if they get, you know, a small share of the revenue from what is called annual management fees, which they take from the funds that they raised from these outside investors. That's usually about one to 2% of the total corpus of capital that was covered by the investors?


You can think of it as, you know, that's the money that they take for the job of identifying targets, investing in managing those investments, et cetera.


The biggest part of their revenue comes from their share of profits that they receive when they sell their stake.


So, from the so-called exit, usually, they get about 20% of the profits.


For some reason, this is known as carried interest, in Oregon, barely showed why, I'm sure there's some legacy reasons.


And, you probably heard a lot of debate about carried interest in the carried interest loophole, and I believe it's going to talk a lot more about that.


Um, then, the third source of the revenue is the so-called monitoring fees, Which they take from the target for the target form, For the privilege of being managed by a private equity entity. They have to pay the private equity owner monitoring fees.


This is also usually a small amount, the vast majority of their revenue comes from their share of the profits when they exit.


Next slide, please.


OK, so, how do they make money?


Um, the literature is sort of, I thought about this in three ways. The most important way is financial engineering.


The, the, the single most critical aspect of private equity, financing, or private equity control of these targets, is the fact that they use a lot of that.


60 to 90% of the deal value is financed using Dick.


And that's one reason why these acquisitions were historically known as leveraged, buyout, leveraged a little bit.


In fact, you know, I sometimes joke that private equity should actually be called a private bank, because that is by far the most important component.


This deck, interestingly, is not placed on the balance sheet or the private equity fund. It's placed on the balance sheet of the target firm.


So imagine that the private equity for requires us to, in a hospital or nursing home, they actually put all that debt, which they used to buy the nursing home on the balance sheet of the nursing home itself, which is, you know, quite interesting.


Um, the use of debt is very important in terms of profitability for the deal.


because it introduces tax liability obviously, because, you know, interest payments are shelter dogs, then it also increases your dollar equity, because it reduces the amount of capital that's required to actually finance a transaction.


So you can actually go out and buy more phones for the same amount of money, because you're using all this debt to finance the transaction.


So, this was the initial innovation or ingenuity in private equity when it first started in the eighties.


Over the last couple of decades, they've added a couple of more financial engineering tools, so what is that?


You know, they also target firms which have real estate, and then when they acquire these firms, they actually unlock the value of the real estate, so to speak, by actually hiving off the real estate ownership, from the operational part of the company, then selling that real estate.


We try to do this fairly quickly.


You know, within a couple of years of the ownership of the firm, build, separate the real estate and sell it off.


The sale of this real estate, which is called sale leaseback, sometimes.


It unlocks the capital even before they formally sell their stake in, you know, in the garden.


And another recent thing that's, you know, sort of, another example of financial engineering, is the so-called dividend recapitalizations.


I know it's a complex word, all it means is, after they acquire the phone, they go out and try to get more bang, because they can put on the balance sheet, or the target boom to unlock some of the capital that they invested.


But how do they do that is once they put, once they get that, that, instead of using that debt to improve the operations of the firm, they use the debt actually to get paid themselves in the form of dividends.


So, this is financial engineering, which, in my view, is the core of the private Equity Playbook. But then, in addition to this, they do some other things as well.


There's the so-called Governance Engineering, and what that means really is that they change the leadership of the firm. They bring in people who they have more faith in.


The thing I will export in running forms, the way they want them to be done, they reject the governance board.


You know, oftentimes the partner of a private equity firm or no place does direct the board of the dog.


And most importantly, they change the performance incentives of the leadership team or the target, so that they are more responsive to aspects that the private equity firm cares about.


And finally, there's operations engineering, which is a more recent addition to the toolkit.


You know, at the end of the day, they will get a higher value from their sale of the stake, if, if they increase the phone's profit. So how do you increase profits, value, reduce, cost, and increase revenue?


And you know, Jane. will talk a lot more about this in the healthcare context. I'll just give some high level points.


On the cost side, they are known to cut staff. You know, healthcare context staff is a very big component.


They also realize scale efficiencies, typically on the procurement side, on the revenue side, they do all the usual things that you could imagine, You know, they even negotiate the prices of the shorter ones so they can get higher prices, they try to increase patient volume using some referral techniques.


They increase treatment and intensity by doing more complex procedures.


And sometimes we can also indulge in things like coding.


But, you know, this is really just a high level view, gene. And, next slide, please.


So, I've given you an overview, and you might still be wondering about, this does not sound that different from conventional or appropriate ownership. There will always be things for profits, or some dark evil. And, you know, maybe they shouldn't be appropriate.


So, it is true that for profits are profit motivated.


And that's been a very, very old debate in economics and particularly in health economics, but even relative to conventional for profit organizations, private equity is a little bit different.


And I think it really comes down to three points.


The first point is, this is the financial engineering aspect of how debt is used.


They know debt is a big part of the deal acquisition, and it's placed on the balance sheet of the target. So now, the target has to pay interest and repay the debt.


There's little capital inclusion infusion into the target in order to improve its own operations.


If you compare that, or contrast that to what usually happens in a regular acquisition, know, obviously, that does play a role, but that debt is not necessarily placed only on the balance sheet of the target. It's usually on the combined entities, cheat.


And therefore, it's the joint responsibility of the combined entity to repay that low.


So that plays a very important role in distinguishing private equity from these types of deals, or in other types of profits.


The second aspect is the short-term lists.


So railroad equity firms, they make most of their money when they sell their stake, and so exciting is very, very critical to making a profit from the deal.


And they usually have to do it in 5 to 7 years, and that makes them prioritize certain things to increase value from the beginning. Like. I mentioned the sale of real estate. That's one way to do it quickly.


Another way to do it quickly is to cut stuff.


There are some things you can do quickly, the other things that are required. And the way private equity is organized. They tend to focus on the things that have happened quickly.


In contrast, no, as a going concern for-profit doesn't necessarily need to exit to make a big payoff from their investment in a book, and so that changes their priorities.


Then the third part is this moral hazard.


Private equity firms don't do well, even if the target suffers.


We've now seen multiple examples, even in healthcare itself, and many more outside of hope, where the target form often goes into bankruptcy for the private equity fund itself, You know, actually did quite well on the view. And this happens for a variety of reasons that, as I've already said, because debt was placed on the target's balance sheet, not on the private equity firms' balance sheet.


So, it's the target's responsibility to pay that back.


Secondly, if there aren't any losses, the losses for the private equity firm are limited to its own equity investments, which tend to be quite minimal.


And then the third one is in terms of reputation loss.


Somehow there is a minimal hit to reputation loss, You know, we've now had pretty celebrated examples of bankruptcy for some of the largest private equity firms.


It doesn't really seem to affect the reputation, because for some reason it's seen as its par for the course, in this industry or business, that some of these deals go solve.


On the other hand, when you think about a regular for-profit, let's say regular investor.


The fortunes of the investor are quite intertwined with the fortunes of the target.


I mean, this is particularly even more so if your target happens to be listed on the stock exchange, because there's a lot of public reporting that's involved.


There's a lot of liability that's involved because of regulators.


And so, there, I think this moral hazard aspect is mitigated.


Next slide, please.


OK, so, now that we have some understanding of what private equity is, I'll just give a couple of facts.


So, one fact is that private equity investment, and very dramatically in the last decade, was relatively flat. In the 2000 through 2000, there was uptake. And 5 and 6 7. But then again, to the great recession, things went down, but no.


But it's been almost monotonically increasing over the last decade, peaking in 20 21. And now, you know, in 20 22, with the overall economic Outlook becoming a little bit less rosy.


The number of deals. And also, the value has dropped.


So it peaked in 20 21 at about $100 billion of investment across the healthcare sector with about 4000 B.


Next slide, please.


The investments of private equity firms and health care has increased disproportionately to the increase overall in the economy.


So, this figure is showing you pretty much the same sort of numbers, but overall, you know, investment across all sectors in the US, this is for a shorter time horizon, But you can see that it's, it's much more muted.


But as a consequence of this, the share of healthcare of private equity, both deal value, as well as number of deals, has increased from 2000 and grows, about 5%, To about 10 to 12% in 20 1.05 22, It dropped again a little bit, But, but, but still higher than the 5%.


Next slide, please.


So why is private equity investment growing so rapidly?


Whoa, There's both supply and demand side factors, right?


So on the supply side, there's cheap goods that really fuels borrowed equity acquisitions, because I saw that policies have become more favorable over the last couple of decades where corporate practice of medicine laws relaxed.


Antitrust scrutiny is somewhat limited and we will talk more about this for lack of a better word, that a macro factor, you know, health goes seen as being recession proof the aging society, so health care seems to have good growth potential.


The government is heavily involved, and has great political will behind this.


And then there's of course a micro factors load.


Consumers are relatively inelastic in terms of being very sensitive to both quality as well as prices because insurance is a part of this.


On the demand side, At the end of the day, providers, and other assets, other segments within health care, want capital. They need capital to grow, and to defend themselves in a competitive environment.


And private equity offers another source of capital.


Private equity firms are also available. Next slide, please.


And I'll actually skip this one, in the interest of time.


I'll move to my last slide, just to close things out witches, All of this, as well and good, But, you know, Why should we care about road equity investment in healthcare?


In fact, the evidence from other sectors, it's actually quite positive. They lead to growth.


They lead to improvement of efficiency, but we have to remember that poker markets have some uniquely dysfunctional features.


Quality is very difficult to absorb.


And as a consequence, consumers don't punish poor quality providers. The market doesn't punish poor quality providers as much as it should.


Consumers are relatively insensitive. They don't observe quality as much. They don't pay on the margin, so they are relatively insensitive to price.


The government plays a huge role. In government prices are fixed.


They are not necessarily responsive to quality, then the markets for some services are concentrated, in general, the big entry value.


So I'll leave it there. I think, around one hour over time. But hopefully, this is a good segue.


Great. Thank you so much, Doctor Gupta for setting the stage for this conversation and outlining the recent growth trends in private equity.


Next, we'll hear from Dr. Jane Zhu, Assistant Professor of Medicine at the Oregon Health and Science University, and Dr. Zirui Song, Associate Professor of Health Care Policy and Medicine at Harvard Medical School, and Massachusetts General Hospital.


Doctor Zhu and doctor Song have published extensively on private equity. We're so grateful. They are both with us today to share their perspectives and research. Sorry, I will pass it over to you first.


Thank you, Cait, and my gratitude to Jane and Atul and a tool for making this session possible, and doing this altogether.


Building on what a tool said, I first want to sketch out for all of you, the classic model of a private equity acquisition.


This in diagram form.


on the next slide, captures a lot of what tool has walked us through, um, first you see a PE firm with a general partner, denoted the GP, creating what is called a PE fund.


The private equity fund is a pot of dollars, in this fund, next.


Classically, you'll have about 30% of it comprising equity.


Those are the dollars that the PE firm has contributed, as well as the dollars that limited partners largely in the US. US. Pension funds, university endowments, sovereign funds, and the wealth and wealthy people have contributed.


The split is typically 2% equity in the classic model from the PE firm and 98%.


From these outside, we're limited partners.


The rest of the PE fund next is composed of debt, as a tool noted.


The debt typically comes from some lender, think of a bank.


Next, the summer, the totality of the equity and the debt is used to acquire in the R setting today.


A hospital, or a physician practice, or a nursing home, and the assets, the physical infrastructure, and assets of that acquired entity, is used as collateral, or that debt.




The green arrows here denote for you, the movement of dollars in retards.


And the basic takeaway here is that the private equity firm has three streams of revenue, which a tool had talked about when you see here, that there are two types of management fees. one coming from the acquired entity, another coming from the limited partners, and the rest coming after the sale of the acquired entity.


Now, typically in the classic model, when you look at 30% debt, that's 2% equity from a PE firm, and 98% from the limited partners, that typically means that the private equity firm has less than 1% specific, specifically 0.6%.


In this case, of actual equity, of its own, in the entire private equity fund.


The limited partners get some returns. Typically, the first 8% call that the hurdle.


And after the hurdle, they'll get a large share of the subsequent returns while the PE firm also gets a substantial share of the subsequent returns and the bank, the lender, gets a return from the fixed rate loan.


Next, finally, the acquired entity is typically sold within 3, 7, 5, 9 years, or something of that order of magnitude. And as Jane will show you as well, there are three typical types of exit strategies in healthcare, either going public in an IPO, selling to a secondary, private equity firm, or to another corporate entity, which I'll leave to Jane.


Next slide, please.


The evidence on hospital acquisitions in the US basically is around several hundred hospitals that have been largely acquired from roughly 2000 through the 2010 range. This is a red, very rough range, and on this map is a study from 20 20 using 2018 data that shows you the locations of private equity acquired hospitals.


When we study these hospitals relative to matched control hospitals and the blue line here with the private equity hospitals in the orange line, this study with colleagues, Joe ..., in 2020, basically looks at a number of economic outcomes and a couple of quality measures. This is a representative economic outcome that shows you three years prior and three years after a private equity acquisition.


We're previous to the acquisition.


The cost ratio of these private equity hospitals was rather similar and moved along a rather parallel path relative to matched control hospitals. But after private equity acquisition, they began to diverge.


Charge the Cost Ratio began to grow differentially relative to the matched control hospitals.


On the next slide, you'll see in numbers form, the other outcomes that follow the similar pattern, net income grows by 27% after acquisition, total charge per inpatient day grows by 7%. The emergency department charge, the cost ratio, grows by 16%.


The graph you just saw shows the total charge, the cost ratio grows by about 7%.


Case mix, a composition of patient morbidity or coding intensity grows by about a percent.


And the share of patients from Medicare declines, while the share from Medicaid stays about the same, implying that the share of patients who are commercially insured.


Awesome, Grosz, next slide?


In the literature so far, we don't have a whole lot of evidence on quality of care, this is a composition or a compilation of roughly eight publicly reported.


He does type quality measures, comprising three clinical entities here, among which there were mixed results.


Heart failure, quality measures, AMI quality measures for heart attacks, and pneumonia quality measures gave us a rather mixed sense of whether private equity acquisition potentially improves or makes quality of care worse.


In this case, without going into the details, the Hospital Corporation of America, 2006 acquisition of many hospitals within the HCA family had a lot to do with the average result here. When you pull the HCA cohort out of the data. The results look quite different.


So for the average private equity acquisition, that was not in the HCA family.


The results on Quality were quite nice.




In current work in progress, we are exploring this element of quality of care in more depth.


I apologize for the spacing here within the box, but the graph here on the left shows that hospital acquired conditions as defined by CMS in a composite fashion, differentially increased among private equity, acquired hospitals relative to their matched controls in the blue.


So, the red line begins below the blue line, meaning that private equity hospitals before acquisition had a quality of care level that had A Hospital acquired conditions are adverse event level below their matched controls, but after private equity acquisition, they work themselves to a level above the matched controls.


This 25% increase in composite hospital acquired conditions was driven by a 23% increase in falls, a 41% increase in central line associated bloodstream infections, and a 5% increase in sepsis mortality.


That was, just among patients with sepsis.


Not included in here was also a rather sizable increase in surgical site infections, despite the fact that fewer surgeries were being done at private equity hospitals after acquisition.


That result, though, was a little less statistically precise than the one shown here.


There are other results on mortality that are quite mixed, which, in the interest of time, I'll skip over.


Next slide.


Then another version of this work, we examine mortality during the early phases of Kobe, both Kobi mortality and mortality among patients without co-pays were hospitalized in the Medicare population.


Basic takeaway here was that among patients hospitalized with COVID during the early phases of coded, private equity hospitals demonstrated a higher mortality rate on average, about 2.3%.


2.3% points higher relative to there.


Non Private Equity Match Controls for non coven patients, however, which there was a pre intervention period for.


We saw a differential increase in 30 day mortality.


Among patients in Medicare hospitalized for all other conditions outside of ..Private equity has hospitals, relative to their map controls.


This is shown here by the orange line, basically in parallel and on top of the gray line, which is the control hospitals, before COVID, and soon after COVID working itself to above the great way.


Next slide.


Next slide, Thank you.


Our colleagues at Cornell have done some great work on nursing homes as a tool. And I'll just quickly summarize here by saying that when you look at the map of nursing home acquisitions across the different years here on the left and think about comparing those nursing homes acquired relative to their match controls.


We basically learned that there's been a sizable increase in ED visits, hospitalizations, and Medicare spending relative to controls suggesting that the quality of care in these ED in these PE acquired nursing homes has differentially declined.


Next slide.


And finally, to quickly summarize our tools, excellent work here in the MDR.


We found that we learned through tools that mortality in nursing homes, among patients admitted to nursing homes, increased by about 10% within 90 days and that societal spending has increased by also about 11% relative to the counterfactual. Next slide.


In this, rather, concerning finding, a tool and his colleagues have found that the staffing, which we'll talk about a bit, has been thinner after private equity acquisition, specifically, nursing assistants have declined.


And, in addition, the overall patient rating or rating of the nursing home has also declined relative to control.


So I'll wrap up here and pass it to Jane.


Jane, are you still with us?


Look at her one moment, otherwise we can hop over to Aaron. and then circle back, if needed.






Jane, is that, you know, can you hear me?


Yeah, we can hear you. Thanks. I'm having a little bit of trouble with my clicker right now. Just give me a second while I put my camera on. But, in the meantime, I can just get started.


OK, well, first of all, thanks so much to Nicole for hosting this webinar. I am really grateful to the foundation for sponsoring research on this important topic. And I just wanna give a shout out to the attendees. It's so nice to see a webinar this well attended, and it tells just sort of what I think is interesting. This topic is too many people. So I'm going to talk a little bit about private equity's activity and the physician practice space. I'm still trying to get my camera on.


Uh, but let me, let me see if I can get it on in a second. So at this, this is essentially saying that similar to what Zirui showed with hospitals and nursing homes, we're really seeing hotspots of private equity, acquisitions, of physician practices in Arizona, and Texas and Florida, parts of the north-east, as you can see on this graph. This was a study that was led by a colleague of ours. Yes, just when you sing across six different office space specialties. We find some areas with virtually no PE acquisitions, which is shown in the gray here. And in some areas we see that P acquisitions surpass one third of practices and in a given specialty. Next slide.


So, there's considerable variation by specialty that we're seeing. In Gastroenterology, for example, about 14% of office based physicians now work for ... practice, compared to about 10% in dermatology and 3% in orthopedics. And I think this variable penetration by specialty really underlies PE's reliance on what we call a first mover advantage. PE often enters a market that's quite fragmented. They consolidate really quickly within a region or within a specialty, and then they move on to the next specialty, the next market, and so, earlier, PE activity took place in hospital based specialties. For example, anesthesia, radiology have moved on since two higher volume procedural specialties, like the one seen here.


And then the current frontier is really in primary care, and in particular, in risk bearing entities who are participating in value based payment.


Next slide.


In many states, there are actually these corporate practices of medicine restrictions. And they actually bar lay entities, corporations from outright owning a physician practice, and this has historical roots. So, to get around that structure, a typical transaction for a PE firm might look like this. Essentially a PE firm will set up a management services organization to in principle, provide no backend administrative and billing services and then the PE firm will install a friendly, quote unquote, friendly physician to one paper who owns the practice, but it's also simultaneously employed by the Management Services Organization, or MSO.


Then the PE firm acquires all of the non clinical assets. Doctor Gupta, I already talked about, you know, the real estate, they can acquire medical equipment, the non clinical staffing, supplies, and an exchange to align financial incentives. In some cases, the employed physicians often retain an equity position in the form of company stock.


And with that corporate structure, the PE firm is able to implement a roll up, or buy, and build strategy, and that means simply that the PE buys a Platform Practice, one, that often is well performing financially, but perhaps, you know, under valued, or can do even better when that has good market reach. It might have an expanded geographic footprint, a good clinical reputation, and perhaps multiple physicians and clinical sites already. And, then, it will start adding a, rolling up smaller practices to this platform.


And, it does so, for a few reasons next.


Please, I think there's an animation. So, first, larger practices can leverage greater economies of scale. So, we have more cost savings, more efficient production.


Larger practices can capture larger market share of course, which then, translates into market power which favors these practices when they negotiate terms with insurers. And then for reasons that both Zirui and a tool talked about, it also means cheaper debt in the form of bank loans, which helps the PE company finance more acquisitions. And then finally, the larger the practice, the greater the revenues such that an eventual sale brings in higher valuation multiples. Next slide.


So, what is the next slide?


What does the evidence show, in terms of peace effects on physician practices? In a study published last year, we evaluated the effects of P, acquisitions, and dermatology, ophthalmology, and GI. This figure shows the excess access to the quarter relative to act acquisition. The Y axis is change in total spending per practice relative to control practices. We see a visible visible trend upwards, and in fact, we find that relative to control practices, PE acquisitions, increased average charges by 20% average prices by 11%. Aggregate volume of encounters by 16% unique patients by 26% and new patient visits by 38%, but at the same time, encounters coded as long visits, greater than 30 minutes also increased. And since we limited our analysis to the same set of physicians that were present through all steady years, it leaves one to wonder how exactly these positions are seeing more patients and more visits for longer periods of time.


Next slide.


In another study that is currently under review, we're looking at changes in care delivery among retina practices that are acquired by P. So in retina there's a group of high cost injectable medications that are used very frequently, as much as monthly, to treat common diseases like macular degeneration, and diabetic retinopathy. And what's interesting here is that there are a number of essentially substituted medications obviously with some clinical exceptions. So the Medicare allowable reimbursement for a ..., for example, is about $1500. The same for the ... or a vast and is about $100 per dose. And what we find is that after P acquisition, spending on a flipper Sept increases by 21%. And that translates into an extra $250,000 per practice per year of just Medicare spending.


Next slide, It's important to note that not all studies have found such large effect sizes. Another study by Robert Bryan and his colleagues, looked at P acquisitions and dermatology, shockingly. You'll see on this map that there are some markets in which a majority of commercial claims are actually from PE employed physicians but they found in that study. In fact, the prices paid to PE Dermatologists for routine medical visits were just three to 5% higher than for non PE dermatologists. And they did not find any significant changes on spending or use of specific procedures.


Next slide.


I'll just share two more, sort of, notable studies. Amber, for Joe, who's currently at Berkeley, Haas. And her colleagues examined what happens when outpatient facilities contract with physician staffing companies and it's in a seizure. And these are often PE backed. And this plays a large role in the delivery of anesthesia care.


The eight largest Anastasia focused physician staffing companies. For example, they employ about a quarter of all anesthesiologists in the US. So these are actually very common arrangements. And the authors basically tested whether outcomes were different for PE backed physician management companies compared to both control facilities and facilities that contract with non PE physician staffing companies. And just the takeaway from these figures is that there is a differential change in multiple outcomes. So, allowed amounts, unique prior unit price.


The probability that a practitioner becomes out of network and that's differentially higher for facilities that contract with PE back staffing companies compared to all other physician management companies and to control facilities.


So there's something unique about what PE is doing here.


Next slide.


The same author looks at what happens when OB GYN practices contracts with management services organizations that are explicitly different in their priorities. So in Panel A for example, when an OB GYN practice is acquired by a management company that's focused on clinical performance or quality, we don't see any changes in unnecessary C sections and perhaps it even trends downwards.


But in Panel C, when an OB GYN practices quoted by management Company, focused on financial performance, that the unnecessary C sections actually go up. And I think these findings really have important implications about how we think about PE, which as a tool and Zirui both talked about, are uniquely focused on extracting these high financial returns.


And so, a couple of concluding notes.


Next slide please.


As Zuri noted earlier, PE is really just a brief layover in a practice trajectory. Next button please.


Among the provider organizations that are sold to PE, about 65% are bought out by other PE firms. About 20% are sold to other corporations, like ..., and about five to 10% go public. I think there's two key implications here. One is that physicians who are looking to sell their practices may be able to vet their PE investors. They may be able to retain board seats and equity with the first sale. But the further out you look, the more that control is dilated. And then, we often talk about P in isolation, but the fact is that Optimum now is the largest physician employer in the U S. And P relies on the presence of an eventual buyer that allows it to exit their investments successfully. And I think we ought to be keeping an eye on that dark gray, gray box.


So I'll stop here and I transfer over to Erin and I again apologize for my camera mishap.


No worries. Thank you so much, Sarah and Jane, for sharing the recent research and impacts of private equity, and leaving us with some really clear takeaways.


Next, we'll hear from doctor Erin Fuse Brown, the Katherine C hence, and Professor of Law, and Director of the Center of Law, Health, and Society at Georgia State University College of Law. Her research focuses also on healthcare markets, consolidation and cost control. Erin?


Great, Thanks, Cait. And thanks to NIHCM and my co panelists for putting together this fascinating, this fascinating webinar. And we are all coming at it from different angles, and so I'm going to bring sort of the legal, the legal lens to wrap up our presentations. Next slide.


So one of the, sort of, zooming back out, what can we possibly do now that we've seen the trends that at all let laid out of private equity investment in health care?


And then some of the early research emerging about some of the effects on health care, quality, outcomes, access, staffing, that Zirui and Jane has been, you know, really did a great job summarizing, but also there's just like a whole body of work that's emerging on these topics. And I think the takeaway here is, it's concerning right.


But private equity poses some unique threats and some maybe heightened threats to the healthcare environment, both in terms of cost and spending. But also, in terms of quality outcomes and the experience that clinicians have practicing medicine when they actually go through a PE acquisition. What is, you know? What is their past experience like? when, when it comes to their own professional satisfaction? So one of the premises that, you know, when my colleagues and I have looked at this issue is to think of private equity for trying to think of, well, what are the policy levers that we can apply to? This issue is to think of private equity almost as a defining rod to find market failures and payment loopholes.


Because private equity investors are particularly adept at identifying and exploiting, healthcare market dysfunctions in the form of payment loopholes are market failures, and they use this ability to use them as a way to signal what are the Sentinel pockets of money that are sitting out there? If you notice, not every single type of physician practice specialty is equally targeted by private equity, so why are they looking at particular specialties and not others? You know, what is the revenue playbook drilling down even further into the specifics? For example, for example, that Jane Illustrated with the ophthalmology example is that they have identified a market loophole there in terms of the Medicare Part B injectable drug.


Reimbursement policy, so identifying what those specific revenue playbook in any given health care specialty will help us zero point two, whatever the policy loophole, payment loophole or policy market failure exists, it's being exploited for revenue, then I guess the policy response would be well, let's close that loophole. That's at least one of the first policy responses. So there isn't, I'm just going to say it now. There's not gonna be a silver bullet.


But what there is a sort of a series of identifying loopholes and attempting in a policy response to close those loopholes. Alright, next slide.


So I'm just going to go through these a little bit quickly but again they're just sort of that doing that exercise of when we think about these different types of buckets of specialties, then we can identify what the revenue playbook is and then what the policy response should be. So, for example, as Jane mentioned, the early private equity entry into physician practices was based on the hospital based specialties. These are the types of specialties, where the patient doesn't choose the emergency room doctor, they're anesthesiologist. So the policy loophole here, the payment loophole was to exploit the possibility for out of network surprise medical billing.


Because the patient doesn't choose these providers, and the payers can't steer no patients to in network providers. There really is no volume loss, if an emergency department, a group of emergency room physicians, decides just to stay out of network.


And, no bill, higher out of network rates, and balance bill, for almost every patient they see come through the ED, Even if the hospital is in network. So, that was a revenue strategy identified by private equity investors. And, I guess, one could wonder, well, why wasn't this fully exploited to the max before? And I think that there are some sort of professional norms that prevent physicians from doing so.


You know, again, extracting the maximum amount of profit from a possible billing situation, as opposed to, you know, an investor who has a short-term return as their goal.


So suppressed, the threat of surprise billing, of course, also increases the rates. when you, when you eventually do contract for network providers. And this strategy was the revenue playbook. Of course, then the policy response is to, you know, and surprise medical bills, which we've sought. We saw several states, dozens of states do. And then, finally, the no surprise, act of 2020 at the federal level that closes this payment loophole.


And I guess the footnote to that is that one of the biggest private equity backed emergency room staffing companies envisioned healthcare a little less than a month ago, declaring bankruptcy. And so I think that was almost a direct response to the changed revenue environment. If you close their payment loophole, you close the revenue strategy, and they're declaring bankruptcy. Of course, KKR. Their private equity owner is doing just fine.


It's not as a tool pointed out, it's not necessarily it doesn't go all the way up to the private equity owner in terms of the reputational hit.


Next slide.


So the playbook for the Office Space Procedural specialties that Jane was discussing, like the dermatology, ophthalmology, guestroom, gastroenterology.


Those seem to be the types, physician practices that have not typically and historically been attractive to hospital and health system purchasers. So, these are practices that are seeking capital investment, they're seeking investors, but they're predominantly procedural in the sense that they do a lot of in-office procedures, a lot of outpatient procedures, and a lot of fee for service reimbursement. They're not always just serving on a value based payment.


There's also a steady commercial as well as Medicare revenue stream, as well as potentially even cash revenue for no optional procedures, think of LASIK or cosmetic dermatology. In addition, a lot of these types of specialties have a possibility of doing what are called wraparound services. So in addition to just the office visit, the practice can also bill for additional services, whether it's a Physician Administer drug, whether it's pathology lab services, or physical therapy, that there are additional services that they can keep within the practice and bill for if they can capture those referrals.


So, the strategy here is to increase the volume of patients, increase the volume of procedures and the intensity of the procedures that are done, keep them in house within the practice, and also, as Jane and others have alluded to, reduce the staffing levels. So the same number of physicians might be seeing a greater volume of patients, many of whom are seen by mid-level practitioners.


Next slide.


So, the playbook for value based primary care type practices, which is, I think, the current, cutting edge of a lot of activity, is, again, to, to build on the market share.


Use this platform, and roll up strategy to find, must have, you know, well positioned practices that have strong Medicare Advantage participation, for example.


Or also, just just have a good presence in the value based payment ecosystem, and then partner with the payers. Whether it's literally financially partnered with the payers, or eventually sold to a payer backed company, a physician organization needs to create a vertically integrated pave either. So that's a payer and physician practice. Conglomerate. And so what this allows, the combined entity to do is to aggressively use coding strategies, particularly risk based coding on diagnoses of the dependent, the patients or the Medicare beneficiaries, which are then used directly to increase the payments per patient payment. For example, under the Medicare Advantage system, but also under a variety of value based purchasing arrangements.


So the strategy here is to grow the Medicare population, the Medicare Advantage population, maximize that budget, and then reduce costs with utilization management. Alright. So now I'm going to go on to the next slide to the policy levers. So if these are the you know, the playbooks, then what are the policy levers? The first one is just to close the loopholes that we find are being exploited. So, for example, the No Surprises Act was a good example of closing myths, making it sound easy. It was not easy, but it was an example of closing the surprise billing loophole. So, what are the other ones? So, another one would be to change the Medicare Part B Payment System for physician administered drugs. to close the 6% sort of arbitrage loophole that the ophthalmology practices are being pressured to to use.


For example, another would be to, again, increase Medicare Advantage Coding, intensity Adjustment to increase recruitment of overpayments of the Medicare Advantage system to get at that sort of coding game that a lot of the primary care acquired physicians are now engaged in. So, I think that it's not, again, so satisfying. It has the feel of whacking a mole, but if you identify a payment loophole, I think one of the most direct routes is to close that loophole.


All right. Next slide.


And then as another would be antitrust enforcement. A lot of the results here in terms of cost and spending, are the result of market power, you know, increasing the market power of these physician practices. And the problem is a lot of physician practice acquisitions, even some smaller hospital acquisitions, and certainly nursing home acquisitions, are so small that they are not in dollar value, that they're not reported to the federal antitrust enforcement authorities. Right now, the Hart Scott Rodino Act reporting threshold is one hundred and eleven point four million dollars per transaction, so, you can imagine a lot of these just don't even get reported at all because they fall below that threshold.


In addition, the current antitrust authorities at the Federal level are very reluctant to challenge vertical meaning like husk pay or a physician or hospital physician or other types of transactions that aren't just a traditional hospital buying its neighbor hospital in the same market. So, there's just sort of a lack of FTC and DOJ oversight in these spaces. And, in addition, there are some things that the federal government could do. It could change the reporting threshold, could allow the speed of the sort of accumulation of practices to sort of trigger reporting at a certain point, or just start to increase the scrutiny of these other types of non horizontal transactions. In addition, states can play a role here as well. By supplementing the antitrust, they have parallel antitrust enforcement authority in some states and are expanding their oversight over the smaller deals.


All right. Next slide.


Another is to increase fraud and abuse enforcement, so fraud and abuse sort of gets at the over coding, up coding, you know, improper staffing levels. And those types of behaviors that can be used for revenue, can look like fraud and abuse, when it comes to federal payers. So increasing fraud and abuse enforcement, by looking very carefully at the way these arrangements are structured. The private equity firms, because they have a controlling stake, have very, very deep pockets, that are often very knowledgeable about, and, in fact, at the steering wheel, of the practice and coding patterns of the clinical acquired entities. So there could be a potential for significant fraud and abuse liability of running all the way up to the private equity owner, if they were to be probed, and investigated by whistleblowers or by the government.


Next slide.


Then there are some levers that States in particular, could pull, as well. And these, you've heard, mentioned the Corporate Practice of Medicine, and there are other types of other state laws that could be strengthened to address, in particular, private equity, investment, and physician practices. So one is to, let me start with the corporate practice of medicine, I think, in some ways, that's the biggest one. So the corporate practice of medicine, as Jane alluded to, is a historic doctrine that exists in just about every state. It's pretty weak. It's under enforcement. It hasn't, you know, it hasn't really played a role in the practice of medicine in a long time, in most places.


However, most states have a law on the books that does prohibit, or at least limit the ability of lay entities in, in controlling, employing, and owning physician practices. So there are ways that hospitals, for example, have gotten around this traditional other corporate investors have contracted around this, So states could try to again close that loophole to try to make it a little tougher, to simply contract around the corporate practice of medicine doctrine. They could do so statutorily. For example, and there are a couple of bills in recent memory from states like California that have tried to do that that have not passed. But it would be, I think, a significant way for states to exert some oversight and leave the control not only of clinical decisions, but also business decisions in the hands of the licensed physicians. Not the, you know, the private equity backed manager. There are other things that could be done in terms of non-compete, gag clauses, non disparagement agreements. But I'll sort of leave it at that.


There are just a bunch of different employment laws and other things that could protect physicians from the control of the private equity owner.


Oh, so, we are on time. I'm just going to advance one more slide, just to show that there are some levers that can be targeted to PE itself.


One is to close the carried interest loophole that O'toole referenced, and this has, is a popular provision that seems to make its appearance most recently in the Inflation Reduction Act didn't pass. It was removed at the last minute to guarantee its passage. And then, the other is to increase the transparency of ownership in health care. And there's a current bill that's being debated or discussed from the House Energy and Commerce Committee that would do just this. Alright. So I'll leave it at that, and I'll open it up to some questions.


Great, Thank you so much, Aaron. I would like to try to answer one question, so if our other panelists can come back on video, that would be fantastic.


So, we've had a few questions come in around why private equity investment is attractive to providers and provider groups.


What is the rationale for nursing home hospital physician groups in accepting this funding, particularly when there might be some of these negative impacts, and I'll open that up to whoever would like to answer.


Jane, do you want to take a first shot? I'm happy to follow you.


Go for it. Sorry.


All right, well, maybe on behalf of Jane, I think from our work, we would probably conclude that at times, provider practices look to private equity funding as much as private equity firms look to acquire provider practices, especially for some of our older generation providers in the delivery system.


The private equity firms can give them a fairly healthy financial package. You can think of it as a buyout, potentially in the earlier part of the deal that gives them a fairly attractive or smoother path towards potential retirement or leaving medicine or scaling down from medicine. That is not to be discounted as a reason for the growth in private equity acquisitions on the physician side.


Great. Thank you so much.


And I know we are almost out of time if we have questions for just our time, for just one more.


How was private equity impacted by the cup in the 19 pandemic?


Can anyone speak specifically to that?




Quick answer. I'm sorry to speak, again, given my colleagues here several of our students and had worked on this question. And we had a paper, maybe a couple of years ago, suggesting or sort of hypothesizing that.


Because fee for service revenue had a nosedive during the earlier phases of the pandemic. And many practices were sort of on the edges of potentially having to close. That private capital, private equity included might be a source of rescue. Those practices.


And so, we were thinking that there may be an acceleration of private equity buyouts of stressed practices during the earlier years of Kobe. I must say, empirically, I'm not sure if it's actually materialized. and it's probably hard to separate from the secular trend of Private Equity acquisitions, anyways.


But that was at least a thought earlier on.


Great. Thank you. And unfortunately, we are out of time. We've had a lot of questions come, in which we will just pass along to our presenters. I would like to thank our excellent panel of speakers. You did excellent with your presentations. I really appreciate you sharing your valuable work and perspectives with all of us. And thank you to our audience for joining us today. There is a survey that will pop up on your screen, and we really appreciate everyone's feedback. We also have other resources available on our website, including some of the resources that our panelists discussed. Just really appreciate everyone joining us today. Thank you so much.


Thank You, Cait.


Hi, everyone, Thank you so much.


Atul Gupta, PhD, MBA, MS

University of Pennsylvania

Zirui Song, MD, PhD

Harvard Medical School & Massachusetts General Hospital

Jane M. Zhu, MD, MPP, MSHP

Oregon Health & Science University

Erin C. Fuse Brown, JD, MPH

Georgia State University College of Law


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