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 (for which independent journalist John Canham-Clyne, via e-mail, depicted as connected to his work1 and Pitchbook’s headline claim appears to rely on it) 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
_____
1 The opening paragraph of John Canham-Clyne’s e-mail to me:
Structural Determinants of Health copyLast Monday, Pitchbook announced what should be the end of one of the most destructive, evidence-free waves of public policy hysteria in recent years: The OMG Private Equity! Panic. Their new report shows that just 3.3% of hospitals, physician practices and other healthcare providers as measured by revenue are PE-backed and “PE investment in healthcare providers is neither new nor surging.” At Healing and Stealing and FAIR, I’ve been reporting for months that the research behind alarming media reports about private equity ownership in healthcare is wildly exaggerated, poorly designed and often just wrong. Attached is a long form piece deconstructing the deceptive numbers with new analysis of competing sources, and pointing out how the OMG PE! panic has skewed policymakers away from policies that might actually address the triple crises of cost, access and quality that plague U.S. health care. I’m offering it as an original NC post, cross-posted to Healing and Stealing.
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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
It seems fine on my browser (Mac running Firefox). Actually looks attractive.
Thank you Dr Appelbaum. PE has seen way to little pushback on its march to owning everything.
I’m curious, did Canham-Clyne ever get back to you?
The post indicated Appelbaum said he did not. That was via an e-mail she sent to me at 9:15 AM yesterday. She sent the document embedded at the end of the post later, after 10:00 PM yesterday. If he had surfaced, I am pretty sure she would have mentioned it to me and have had me hold back on publishing her rebuttal until she had considered his reply.
Hi Yves, Hi Eileen:
I’ve been in the ER and at physical therapy all day without cell phone reception. Just saw the post. Will get back to you as soon as I have a chance to review. Thanks.
Before reading, just note that none of piece I emailed you yesterday relies on the Pitchbook piece from last week. For physicians, it deals with the market and therefor denominator question in detail, dissecting the most widely circulated study of physician specialty market power and prices (Scheffler). Looking forward to reading Eileen’s work.
Keep scrubbing
Oh my god, I just read your post. Retract and apologize immediately. I didn’t write the Pitchbook piece. I don’t work for Pitchbook and frankly, the claim that I’m responding for the industry is false, defamatory and made with reckless disregard for the truth. How dare you?
I’ve been writing about this issue for months on my own Substack and at notorious industry shill Fairness and Accuracy in Reporting based on my own analysis out of concern that Democratic-adjacent policymakers are wasting time on a trivial portion of the industry instead of actually setting prices and legislating universal coverage.
I included the Pitchbook report in the subject line of a pitch for a 5,000 word article based entirely on other sources. I’m stunned that someone who makes her living in part by criticizing the accuracy of others work would make this kind of factual error, and falsely characterize my work to the world. The simple act of clicking on a link to Pitchbook’s website would have told you who wrote their piece and actually reading your email and its attachments instead of popping off online might have saved you this embarrassment. I’m a longtime reader, occasional commenter, constant booster and even a one-time contributor, and this is among the most disgraceful failures I’ve ever seen at Naked Capitalism. Shame on you.
If you want my views, read the damned draft I sent you last night.
And by the way, I’ve had no contact with Eileen for months. We exchanged emails and I expressed a desire to talk to her, then got busy on a long piece about state health care reform in California and Oregon for Health Care Dive. I’ve read all her work.
There are at least two problems with Yves’ denominator problem.
1. The first question for policymakers is how many markets actually have a PE denominator problem and how many markets have a non-PE hospital owned physician practice denominator problem? Answer – a little more than 4 percent in the specialties that are key PE acquisition targets for one, and for the other, well, we know that hospitals now employ 55% of all physicians, so probably a hell of a lot more than PE, but PE-obsessed researchers haven’t bothered to count.
2. The second problem is whether markets with a PE-denominator problem have outlier high prices. Answer: the available data, although wildly distorted by the authors when first published, both in their article and press releases, strongly suggest no. cf the draft I sent Yves last night.
Finally, my work focuses on acute care hospitals and physician practices. PE market penetration in specialty hospitals and nursing homes is higher.
Focusing policy solutions narrowly on PE-ownership in hospitals and physician practices is a get out of jail free card for politicians, especially Democrats, allowing them to posture while doing nothing to address the triple crises of cost, coverage and quality.
Your reply demonstrates an unwillingness to read carefully (or worse, actually doing so but consciously choosing to mis-depict for rhetorical purposes). It is Applebaum, not me, who articulated the fundamental defect in the Pitchbook piece and your awfully similar analysis as a denominator problem. I was clearly relying on her and amplifying her in my intro. The word denominator does not appear in the headline nor in my text.
You straw man Appelbaum and the post yet again by depicting it as indicating the timing of her sending material to you and you not replying. It did not and you are again putting word in her mouth by claiming the reverse.
Your insistence the problem still exists on a micro-market basis is unsubstantiated and the problems with trying to reach strong-form conclusions based on macro analysis remain. . I have done this sort of analysis for over 25 years in my prior life in corporate finance and advisor to private equity firms and very substantial investors (often billionaires) on deal screening and valuation. The identification of a SINGLE relevant market is an analytically-intensive exercise and often requires consideration of soft factors, such as consumer behavior and incumbent advantages, as well as data. It is inconceivable that you have done this sort of exercise to anywhere near the degree to make your new claim. Shame on you for pretending you have.
You also sent me an abusive e-mail privately. I have no tolerance for this sort of thing and will not publish any more comments by you.
Your e-mail to me effectively took credit for the Pitchbook piece. From your opening para:
If you were not a key player or analytics supplier to Pitchbook for this research, why are did you insinuate you are in your opener?
And why are you so angry and defensive about having your role over-attributed (which I have now corrected) when you had been keen to associate yourself with the Pitchbook piece?
And nowhere do you say that your work does not come to these conclusions and therefore suffers from the same flaws.
Second, no where does my intro nor Appelbaum’s carefully written letter insinuate motive. Your name is mentioned only as the author (if you are not, you appear to be taking credit for the piece nevertheless, perhaps as the supplier of the analysis on which Pitchbook relied). The only other mention of you is your failure to respond to Apppelbaum when she tried to engage you.
Your accusations along those lines are a straw man, so much so that they have a guilty look. Your strident tone is self-discrediting.
You are taking personal offensive and making wild claims about the post attributing motive, when the issue is the analysis.
It is even more self-discrediting to see you carry on about being attributed as the author of the Pitchbook report, with which you clearly and strongly tried to associate yourself. Most people would be happy with that sort of mistake, of being presented as the author of a report promoted by a prominent data/analytics shop like Pitchbook, and would simply ask the citation be corrected.
You can’t have this both ways. Either their methods depended on your work or they didn’t. Your next reply strongly indicates they did, otherwise you would not be so invested in the headline claim. But now that it is encountering criticism, you can’t take the heat. This is part and parcel for policy debates. If you aren’t prepared to deal with close scrutiny and engage with those of different views and the in-depth research over many years to back it up, you should steer clear of public policy analysis.
I will change the attribution as author and replace it with something fitting the relationship you depicted to me in your e-mail.
> I included the Pitchbook report in the subject line of a pitch for a 5,000 word article
Not in in the subject line of mail that I saw (“Fwd: The End of the Private Equity Health Care Takeover Panic (article for publication)”.
In your pitch, you wrote: “Before Pitchbook published its analysis, I submitted a more academic version of this to Health Affairs Forefront, the blog for the Health Affairs family of journals.” I read this passage to mean that your article was parallel to, if not derivative from, Pitchbook piece, in that both expressed the same thesis, with your piece having more backup (as fact of a data attachment suggests).
NOTE About that data, your commment reads:
“[O]ther” with respect to what is not clear; Pitchbook? FAIR? Substack?. That’s not quite the same as what your email pitch is:
Although “competing” with what is also unclear. Indeed, to this exasperated reader, this entire controversy is a tangle of unclear referenets.
Here’s the link to the published article I promised to post.https://cepr.net/report/structural-determinants-of-health-hospitals-unequal-capital-investments-drive-health-inequities/
Congress and staffers should each read the document and the column, and follow up with their state legislature contacts, too. More people becoming aware of the disingenuous presentations and denominator issues means more people who can push back for the benefit of patients everywhere.
This is welcome news. Thanks for this post. Passing legislation like Waren’s is such a prolonged effort it would make sense to establish a few ground rules. Something PE execs can learn beginning in kindergarten. Corporate Crimes Against Healthcare? = PE profiteering is the quintessential “blood funnel” if ever there was one. And PE’s excuse that their skim is “only 3%” of their revenue is irrelevant. That 3% could be the only thing keeping them in business because it is virtually guaranteed by society as everything else fails due to extraction and exploitation.
I have extreme views about Private Equity in general. In re healthcare: I do not think Private equity as a purely profit driven ‘enterprise’, has any legitimate role. I look around here and in so many other instances and flash back to the Black Hand thug in the early parts of The Godfather. He just wanted to “wet his beak.” PE, Pharmacy Benefits Managers, excess administrators in schools and universities all busily bobbing and bobbing and wetting their beaks. What value do they add?
Advanced degrees, for what that’s worth. Paging Dr. Jill.
I was a prosecutor for 32 years and spent the last 3 of them investigating worker’s compensation and health provider fraud. My own anecdata is in line with Professors Applebaum and Batt’s findings about the “denominator effect” in regional health care vs. national data. There is nothing defamatory in pointing out this essential flaw in looking at national data rather than regional health care market distortions.
One of my last major investigations involved an essential health care service provider that operated in key markets in 21 states — that was in bankruptcy after a leveraged buyout by a firm headed by a certain former Treasury Secretary and TurboTax user. The level of distortion, extortion, and outright fraud that I and my investigators discovered effecting the regional markets the company operated in was staggering.
Apparently it was so staggering that I got called into a windowless conference room and ordered to drop my investigation by my elected-official boss’s management team. The buyout-shop spun the company off a few weeks later. Local governments, investors, employees, and patients all got stuck with losses.
Mr. Canham-Clyne needs to stop foaming at the mouth about “the Democrats” attacking Private Equity in health care. All of the players in my little drama were from that party. In my personal experience (most) “Democrats” just love all that PE campaign cash…
I am a little late to commenting, but there is a major flaw in Yves’ opening paragraph where she states “Pitchbook, the premier publisher of private equity industry data…” Pitchbook is a shill operation for PE and VCs. Every time I have dealt with them on topics where I have deep knowledge, trying to be helpful, they basically brushed me off if what I was trying to teach them contradicted with a storyline they were pushing, which every single time had an undercurrent of VC and PE good, criticism of them and what they wanted to do not allowed.
I bet that PE and VC firms are also their most important customers.
Sorry, your depiction is sufficiently incomplete so as to be inaccurate.
The main use of Pitchbook is within the industry, to provide granular data on total investments, which strategies are getting so many dollars, which PE firms have the most assets under management, etc. Even though to your point, Pitchbook may occasionally publishe reports intended to influence policy, this is not a significant part of their total activity, and certainly not where they make money, unlike PE organs that are set up solely for the purpose of publishing industry-flattering, like the American Investment Council.
This is why, in the Appelbaum note, she criticized them for being sloppy about analysis. In their main business, they are touting the accuracy of findings from their own proprietary database.
I don’t know in what context you were attempting to engage Pitchbook. However, even with journalistic outlets that profess to have a commitment to accuracy, they pretty much never make corrections or changes unless they made a clear, substantively important, and highly visible mistake, and then only rarely.