Your Money and Your Life: Private Equity Blasts Ethical Boundaries of American Medicine

Yves here. We’ve covered the pathbreaking work of Eileen Appelbaum and Rosemary Batt on how private equity acquisitions of outsourced hospital and outpatient center staffing, along with buyups in related areas like ambulance services, veterinary products and pet supplies, have led to price increases and deterioration of care. Political scientist Laura Katz Olson builds on and extends their work in her recent book, Ethically Challenged: Private Equity Storms US Health Care. The article below makes for a good introduction for friends and family members who may be new to this topic.

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

Newsflash: Private equity firms– the most rapacious entities ever spawned by Wall Street — want your body.

They’re already in your urinary tract and your fallopian tubes. In your dentist’s chair and your dermatologist’s office. Unbeknownst to you, these financiers track you from cradle to grave, lining their pockets through everything from fertility treatments to hospice care, all the while decimating the quality of services you receive and jacking up prices.

Kids, the elderly, and the poor are especially tasty targets in their break-neck hunt for profits. They’re even coming for your pets.

In her harrowing new book, Ethically Challenged: Private Equity Storms US Health Care, political scientist Laura Katz Olson documents how private equity firms are reshaping health care in the U.S., circling in to buy dentist offices, mental health facilities, autism treatment centers, rehab facilities, physician staffing services, and myriad other providers, forcing them into bare-bones, bottom-lined focused “care”.

Once upon a time, it was stores like Toys ‘R Us that learned what happens when billionaire-run PE firms fix companies in their sights. Now, the harm they do is about more than bankruptcies and lost jobs. It’s a matter of life and death.

In a nutshell, PE seeks to invest or acquire equity ownership in companies and flip them fast for a higher price. They’ll get that higher price by any means necessary – chopping staff, cutting corners, and loading the company with debt along the way. The idea is to buy, squeeze, dump, repeat. Private equity is now a major player in the health care sector, with investments accelerated in recent years at a mind-blowing pace ($100 billion in capital invested in 2018 alone).

So how do these motives and operations line up with health care? Let’s see … how would you like to send your loved one to a rehab facility where successful treatment would be considered a failure because they want the patient to come back?

As Olson documents, that’s how perverse things get. She notes that in order to gin up business, PE firms taking over rehab centers will resort to a tactic known as “body brokering” – having companies pay intermediaries to lure patients in by trolling on social media, hanging out at 12-step meetings, and spinning fancy marketing campaigns. If the (often unscientific) treatments don’t work, score one for private equity! Owners aren’t liable for ineffective treatments, Olson points out, “so when patients relapse they can charge them another round.” Meanwhile, they abuse eligibility for federal payments, soaking up taxpayer funds meant to fight human tragedies like the opioid scourge.

Some of the worst players in this frightening game of human health roulette have likely already set up shop in your town. Bain Capital (hi, Mitt Romney!) swoops in on renal care, home health care, substance abuse, emergency medical transport, and hospitals. The Carlyle Group goes for dentistry, home health care, hospice, and eating disorders. KKR, one of the biggest players in the health care industry, targets physician staffing, emergency medical transport, dentistry, home health care, substance abuse, autism disorders, health information, and hospitals.

As usual, it all goes back to the 1980s, when financialization took hold of the American economy. Olson observes that private equity has been growing ever since, boosted by lax regulation and preferential tax treatment. Politicians and regulators grease the wheels of the gravy train in hopes of hopping aboard the minute they leave office. Private equity often gushes campaign contributions, and both parties enjoy the largesse. Never mind that PE bilks taxpayers through Medicare and Medicaid, making medical bills more burdensome and patients sicker.

“PE firms take over businesses using other people’s money; plunder what they can, and spit out the remains,” writes Olson. And sadly, it’s public pensions that feed the hungry beast. She notes that pension funds, along with endowments and wealthy individuals, finance the largest percentage of PE deals. This means that workers are invested in the very business model that wrecks their jobs – and now, their health.

“Private equity’s business model is neoliberalism on steroids,” declares Olson. It’s the profit motive over everything – most assuredly over human life. And there’s hardly a whiff of accountability: “private equity lives in a darkly curtained world, protected from external scrutiny,” she writes.

It’s like the black hole of capitalism, into which every positive human value vanishes into oblivion.

This is real. This is happening. And as Olson warns, it’s just getting started.

The Institute for New Economic Thinking (INET) has focused on the alarming trend of private equity buying health care providers and taking them private through research by Eileen Appelbaum and Rosemary Batt, and detailed the encroachment of private equity into emergency rooms in a series of articles over the pandemic. INET’s Thomas Ferguson and colleagues Paul Jorgensen and Jie Chen have also focused attention on private equity’s political contributions. Now, Laura Katz Olson shares her perspective with INET on how we got to this dangerous place and what we can do to get out of it.

Lynn Parramore: We all remember Mitt Romney telling us during his presidential campaign that private equity firms like Bain Capital are good for society, saving failing companies and creating jobs. What didn’t Mitt tell us? How is the public perception skewed?

Laura Katz Olson: There are a few private equity firms that specialize in buying distressed firms — sometimes they buy businesses decimated by other PE firms just to milk what’s left. But in reality, most of them buy up flourishing companies. The results usually aren’t very good for society.

LP: How do they make money buying well-functioning companies?

LKO: The first way is to put high debt on the company and have the company pay it off. PE firms generally aren’t putting in more than 2% in equity themselves. Maybe 28% or so comes from their limited partners, like public pension funds. When the PE firm sells the company, the debt has been paid off by the company but the PE firm gets 20% of the money, having put very little in.

The second way is to charge the company all kinds of enormous fees – transaction fees, monitoring fees, annual management fees, consulting fees, advisory fees, servicing fees. The PE firms siphon a great deal of money in fees both from the company and from their limited partners, like the pensions.

The third way, becoming more popular recently, is to take special dividends called “dividend recaps.” The company has to take on even more debt to pay these dividend recaps. The PE firms share a little bit of the money with limited partners but they pocket most of it. And it’s a lot of money – PE took in $58 billion this way in 2021.

Just think about all this debt and all this money going into the PE firm’s pockets! The company is stuck paying off the debt, so it has to increase the cash flow any way it can. It all makes me think of that old medical practice of bloodletting. PE just drains the company and weakens it, at times driving it into bankruptcy.

Private equity firms used to take huge conglomerates and tear them apart to sell off the parts because the parts were worth far more than the whole. Today what they do is the opposite – they take a small piece that’s well-functioning, like a flourishing dental practice, and they add more and more dental practices to it — consolidating. They’re especially interested in niches that are not consolidated. After they consolidate for three or four years, they sell it in a secondary LBO [leveraged buyout], and after that, they’re selling it to a third, on and on.

LP: It seems like a neat trick to extract so much money from a company and at the same time build its market worth for resale. How do they manage it?

LKO: Consolidating is one of the main ways they do it now. Instead of the parts being worth more than the whole, the sum is worth more than the parts. They put all this debt on the company and then squeeze it. When you’re talking about services like home care or hospice care, it’s the front-line staff that will get squeezed. They cut the workforce, so you have fewer workers per patient. You lower the qualifications for the staff so you can get cheaper labor. You have fewer physicians because they’re expensive. You have less training and supervision. You overbook – you get a kind of production line going. For products, you use cheaper materials. You skimp on medical supplies, etc.

In the case of dermatology, we’ve seen unnecessary treatments being pushed, as well as untrained people who may not know, for example, how to spot cancer. Dentistry has had an especially egregious history — and some companies known for abuses, like the chain Aspen Dental, are still around. It’s incredible.

LP: Private equity firms like to claim that they are maximizing efficiency and controlling costs, but it looks like what they’re really doing is pushing shoddy services and products at higher prices.

LKO: That’s right.

LP: What happens to patients when they get into the hands of a health care provider under pressure from private equity? What else can go wrong beyond getting poorly trained staff?

LKO: Well, you have to worry about getting lured into procedures you don’t need. I’ve heard of dental offices where children were put in straight jackets and teeth were pulled that didn’t need to be pulled. Elderly people have been given unnecessary dental work. I’m particularly offended by what goes on in hospice care. You have people dying and Medicare is paying for them to have a dignified, quiet death. Instead, they are neglected as these PE firms are profiteering. Children with autism are being harmed, too. Autism is an easy target for profiteering because there’s a shortage of practitioners and you’re free to do whatever treatment you want and call it standard treatment. There’s so much that goes wrong. These are just a few examples.

LP: As you’re pointing out, children and the elderly are especially vulnerable to the harm done by the intrusion of private equity into medicine. How are the poor affected?

LKO: If you go through all of these areas of health care, Medicaid is paying a significant percentage. The poor are very vulnerable. Minorities are also vulnerable.

LP: And the taxpayers?

LKO: Taxpayers get hit hard by the Medicare and Medicaid costs. Medicaid is the second-largest item on every state budget and around the fifth largest item on the federal budget. Medicare, for example, is the major payer for hospice services.

LP: How is this allowed to go on? Why isn’t anybody in government doing anything about it?

LKO: I would have to argue – I’m trying to think how to put it – this is not a partisan issue. The Democrats and the Republicans both take advantage of it. They go back and forth between private equity and top government positions, like secretaries of defense and secretaries of state. It’s so lucrative. Even presidents. George H.W. Bush was involved—he went to a private equity firm.

LP: We’re talking about big money here, as you say. In your book, you mention that the heads of the six main listed PE firms are among the topmost earners in the U.S. right now.

LKO. It’s very big money. A significant percentage of our billionaires now come from private equity. They make far more money than investment bankers.

LP: Let’s talk about how this money is working its way through the political system. What most concerns you?

LKO: You have the lobbying and the campaign donations, of course. But the larger issue in my view is the revolving door. If government officials come down hard on private equity, that would preclude them from joining the PE firms when they leave the Biden administration, for example. It just keeps anybody from being interested in this, with a few exceptions like Elizabeth Warren. Such a lack of interest!

One thing that has to be looked at is how the public pension funds are invested in private equity. That is steadily increasing, and it means that PE is getting more and more money. They are now going to appeal to retail so that the general public can put in money. And the more money they get, the more they have to spend, and the more health care facilities and practices they buy.

LP: So this problem is metastasizing as we speak, to use a term from medicine.

LKO: Yes. That’s a good word.

LP: How does a regular person know if private equity has gotten involved in their health care? Are there any telltale signs?

LKO: You have to ask. It’s difficult to know. Many of these chains have separate names for each of their businesses so they are hard to identify. Often I’ve noticed that the facilities have nice, shiny nice buildings, like the rehab centers, for example. They’re gorgeous.

LP: Let’s talk about this involvement of private equity in rehab and mental health facilities. It seems that PE contributes to the distress in our society – and then turns right around and profits from that distress. How are patients faring in these facilities?

LKO: Not very well. Look at the rehab facilities – one thing they tend to have in common is that people who have alcohol or drug problems usually have other issues, too. But the facilities taken over by PE tend not to have other kinds of specialists. They focus on one thing and don’t look at the co-existing issues. The staff tends to be less trained. It’s all the things we’ve talked about. They use techniques and treatments without scientific backing. One of the techniques is using horses. Look, horses are wonderful. I love horses. But there’s no proof that horse therapy can treat drug or alcohol abuse!

LP: Sounds like there’s not much oversight on the efficacy of treatments.

LKO: It’s a problem with private equity in general. They tend to pick areas that have very little oversight.

LP: Private equity is even getting into pet care, as I understand it.

LKO: I haven’t studied it specifically, but I belong to groups and I see things coming in about pet facilities that are very concerning. PetSmart, for example, is reported to have some serious issues. Animals are reportedly being killed and abused.

LP: Is there any case that you’ve seen in which private equity makes medicine better?

LKO: No, I haven’t. Private equity argues that one of the best things they do is make more services available in scarce markets. Well, certainly they do make more services available, as in the case of autism services. But is it better to have more low-quality services than none at all? Experts will tell you that low-quality autism services are pretty damaging to the child.

LP: Does private equity belong in medicine at all? Should it be banned?

LKO: This is something I didn’t put in my book, but the conclusion I have come to is yes, we have to ban it. We really need to prohibit, I think, the corporate practice of medicine, period. If you look at the private equity playbook, its only goal is to make outsized profits – they can’t make ordinary profits. If they make ordinary, respectable profits, their investors will go somewhere else because of the risk.

Private equity doesn’t care whether the product is Roto-Rooter or hospice. That’s one of the major differences between PE and a regular company, which may care about the community, the reputation of the company, and the quality of the product. They want to keep their customers. They care about the future. But private equity doesn’t work like that. Because private equity often aims to sell a company after four or five months, they don’t care about the future. They don’t care about the product at all. Private equity is antithetical to our health care system.

So yes, we need to ban private equity from health care. But given that it’s not going to happen, I would say that we need to prohibit the corporate practice of medicine – anybody can make a case for that. You can eliminate their tax advantages. You can limit the debt imposed on companies, especially in the health sector. You could easily control consolidation and monopolies in the health sector. You could use specific anti-trust laws. I would definitely forbid investment by retail customers such as their 401(k)s. I would forbid non-disclosure and non-disparagement agreements, which make it so difficult to obtain information. I had such a hard time interviewing people. When I could get people to talk to me – and that was really hard — they were extraordinarily careful. I would also prohibit “stealth branding” – where the PE firm buys a chain, like a dental chain, but gives each office its own name, like Marilyn’s Happy Dental Care. It’s very deceptive.

LP: It’s interesting that PE players and firms don’t tend to be household names. They’ve really managed to fly under the radar. Can you mention a few that came up a lot in your research? Folks to look out for?

LKO: Bain Capital, the PE company that Mitt Romney still profits from, is one. The Carlyle Group has really been involved in recruiting high-ranking people from the government – one of its co-founders, David Rubenstein, served as Deputy Assistant to the President for Domestic Policy during the Carter administration. George H.W. Bush became a senior member of its Asia advisory, and so on. KKR, of course, is one of the biggest. They control a lot in health care.

I’m concerned that as PE gets more and more money – with these pension funds, and especially if they get their hands into the 401(k)s – they’re just going to keep buying up anything and everything. And it’s not just health care. More and more of these firms are appearing and getting into more and more industries. As young people, or even older people involved in the well-established financial firms, realize how much money is involved, they just start a PE firm. Look at Jared Kushner [Affinity Partners]. It’s a very worrisome situation.