The media and even some members of Congress have been cataloguing how private equity fund managers have been systematically targeting key segments of the healthcare industry. The results include price hikes, degraded service quality and increased risks to patients.
Two of the most important academic leaders in documenting these abuses are Eileen Appelbaum, Co-Director of the Center for Economic and Policy Research, and Rosemary Batt, a professor at the Cornell University School of Industrial and Labor Relations. Appelbaum and Batt wrote the landmark book, Private Equity at Work, which was a many-faceted study of how the industry operates. Applebaum has been very active in documenting the impact of private equity profit-mining on the healthcare industry, including publishing extensive, data-driven analyses that have have informed press and policymaker commentary.
I have long been an admirer of Appelbaum’s and Batt’s work. Its hallmarks are rigor and fair-mindedness. Both scholars regularly engage in extremely careful readings of academic literature, and regularly point out how the analyses either point only to limited at best conclusions, when industry advocates and sometimes the academics themselves make stronger claims, or even show results (if you pore through the statistics) that contradict the narrative findings. They always explain how they have come to these conclusions in a careful, measured way.
I should not have been surprised to learn that the private equity industry is coming under sufficient heat on the healthcare front that it has attempted a pushback. Pitchbook, the premier publisher of private equity industry data, recently released a report by independent journalist John Canham-Clyne titled Quantifying PE Investment in Healthcare Providers. The supposed show-stopper finding is that only 3.3% of hospitals, physician practices and other healthcare providers as measured by revenue are private-equity backed and therefore private equity is too minimal a participant to exercise any leverage.
This argument is fallacious on its face. As anyone who has done competitive or deal analysis knows well, what matters in terms of pricing power (and ability to effectively increase prices by other means, such as lowering offering quality) is the relevant market, not the total industry. For healthcare, nearly all “buyers” are geographically constrained. The relevant market for all sorts of services like diagnostics (think MRIs and clinical labs) or dialysis is a not-too-far driving distance from patient homes or doctor offices.
Below is a longer-form debunking of the Pitchbook report from Eileen Appelbaum. We have also embedded a recent paper by Appelbaum, Batt, and research assistant Emma Curchin, Structural Determinants of Health: Hospitals’ Unequal Capital Investments Drive Health Inequities, which illustrates the complexity of performing proper segment-relevant economic studies, as well as how financial decisions, here hospital investment, impact health outcomes.
Appelbaum informed me that she attempted to engage with Canham-Clyne and sent him some of the papers she and Batt had written. He did not respond.
I hope readers will circulate this debunking widely.
Open Letter to PitchBook:
On July 8, PitchBook published a research report, Quantifying PE Investment in Healthcare Providers, whose purpose was intended “to lay out pertinent,
objective information in order to contribute to fact-grounded future discussion.”
It had as one of its main takeaways that “PE-backed providers represent less than 4% of the US healthcare provider ecosystem by revenue.”
For a data-driven organization, this article commits a fundamental error in analyzing its own data. It uses the entire health system as the denominator and not the local health markets that PE firms dominate, an error that appears to relieve private equity of any complicity in the problems that the relentless pursuit of profit has created.
In my view, this report is part of PE’s push back against the increased attention the PE industry and business leaders are getting from regulators. We’re so small and the economy is so big, the report seems to say, how can we affect health care prices or limit patient choice? There’s nothing to see here. Regulators should go back to ignoring us.
This PitchBook analysis is guilty of what I call the denominator effect. Some examples may clarify the problem: Over the thousands of PE deals,most of them acquisitions of smallish companies by smallish PE funds, the bankruptcy rate is low. Over the hundreds of huge leveraged buyouts, it is 20%. The share of anesthesia practices nationally owned by PE may be small. But in Houston and then Texas, WCAS owns nearly all of them and has contracts at 7 of the 10 major Texas hospitals/health systems. The practices raised prices and are being investigated by the FTC. PE owns a tiny fraction of the 5,000 hospitals in the US, but tell that to the people of eastern Massachusetts reeling from the bankruptcy of Steward, until recently owned by Cerberus, and the closure of 8 hospitals, 4 of them safety net hospitals. Massachusetts state officials are scrambling to find health care for these residents.
PE owned companies employ as many or more workers than belong to unions. Is that a little influence on labor standards or a large one?
I find the argument “we are small and therefore harmless” disingenuous. The specific examples are also misleading. Why is PE investment in nursing homes near zero? Because corrupt practices drove many PE-owned nursing homes into bankruptcy and degraded the quality of care so that, pre-pandemic, patients were more likely to die in a PE-owned nursing home. This has led to a situation where these investments receive more scrutiny – a research finding that has pierced the consciousness of PE firms. Why do PE investors avoid the remaining out-of-network billing opportunities for quick cash? Because with the help of many of us concerned about price gouging, we have managed to end surprise billing for patients for out-of network services at hospitals and elsewhere. Now that Envision has gone bankrupt and KKR has lost multi-millions of limited partner money, this business model doesn’t look so attractive any more.
The argument that PE can safely be ignored because it is a small share of national health markets fails because health markets are local. It’s no comfort to pregnant women in Mississippi that reproductive health care is widely available in California.
PE monopolizes particular segments of health care in local health markets, raises prices, degrades quality, enriches its partners, executives and principals with taxpayer and insurance funds meant for care of patients.
The scrutiny the industry is getting from Congress and federal agencies is long overdue. Senator Elizabeth Warren’s new legislation, the Corporate Crimes Against Health Care bill, seeks to hold private equity and other financial firms accountable for lining their own pockets as they drive health care companies to ruin. It would claw back the ill-gotten gains that have personally enriched the owners and executives of these companies. It might just lead to increased spending of taxpayer dollars on actual care of patients and less attention to extracting maximum wealth from health companies in the 3 to 7 year period that they own the company, with no regard for the company’s future.
Eileen Appelbaum
Co-Director
Center for Economic and Policy Research
This is the pre-publication version of the paper and the format is difficult to read. I’ll send a link to the article later this week when it is published on CEPR’s website.
Eileen