All Basics
Term & Definitions
Physicians and healthcare personell must understand the broader financial forces at play behind their practices and hospitals. When financial forces such as private equity (PE) or large health systems buy your practice, a hospital, a local lab, imaging or stand-alone surgery centers…the way you and your patients interact with those places changes. It affects your ability to practice the clinical medicine you desire, creates hurdles for your patients, and increases the pressure on your staff. It starts with understanding the basic language of healthcare finance and asking questions of leadership regarding transparency of ownership of your practice, hospital, and ancillary services.
Private Equity: Private equity is an investment class where firms raise capital to acquire and manage private companies or take public companies private, with the goal of ultimately selling them for a profit
Business Consolidation: The term business consolidation refers to the combination of different business units or companies into a single, larger organization.
Leveraged Buyout: A leveraged buyout (LBO) involves buying a company primarily using loans, often using the profits and assets of the company they buy as collateral if they can’t pay the loan back.
Leaseback or Sale-Leaseback: A sale-leaseback enables a hospital to sell an asset such as the land of the hospital to raise capital, then lets the company lease that asset back from the purchaser. This allows the company to have both the cash and the asset needed to operate its business. However, for the hospitals in the long term, it costs them their assets & leaves them with rent rather than ownership of their own land, increasing their debt.
Private Equity in Healthcare
Both formal private equity firms as well as large “non-profit” health systems can act in similar ways. Eventually, private equity firms publish their deals online, making it somewhat easier to track. “Nonprofit” healthcare system financial activity obscures itself within the overall budget, making it harder to discern the timelines of acquisitions or selling of “parts” of the healthcare system without physician or patient awareness. For all intents and purposes, any type of large-scale business consolidation in healthcare has the same effects on patients and physicians —regardless of ‘for-profit’ or ‘non-for profit’ money. Private equity firms simply remain more transparent about their true intentions of a high profit, while others hide behind closed doors.
Private equity firms own 8.5% of all private hospitals, and they specifically own 22.5% of for-profit hospitals. A handful of firms back all of them. Prominent examples include the Steward Healthcare System acquired by Cerberus Capital, Hahnemann acquired by Tenet, and Community Health Systems acquired by Lenoard Green. (6). The playbook remains the same across the board. The firm or for-profit healthcare system buy a hospital on high debt using the hospital itself as leverage against itself, split apart the hospital system, often into the “real estate” aspect and the operations, cut critical services that do not reimburse as highly, up-code, and exploit public health insurance to maximize revenue often fraudulently. When it's no longer profitable enough for them, or the system can’t sustain the amount of debt the firm took to acquire it, they declare bankruptcy, pay a minimal fine and move on. It occurs across general hospitals, behavioral health, and inpatient rehabilitation centers.
Numerous studies demonstrate the negative effect of private equity acquisition of hospitals on the quality of patient care. Notably, the involvement of private equity may increase falls by 27%, central line infections by 37.7% despite placing fewer central lines, and doubling surgical infection rates although they handle a lower volume (5).
Private Equity & Healthcare Quality
Numerous studies demonstrate the negative effect of private equity acquisition of hospitals on the quality of patient care. Notably, the involvement of private equity may increase falls by 27%, central line infections by 37.7% despite placing fewer central lines, and doubling surgical infection rates although they handle a lower volume (5).
Earlier this year, Surgery Partners, a publicly traded for-profit company on the NASDAQ stock exchange, reported a record-breaking $3.1B in revenue, with additional significant interests. Financial players buy surgical centers because they fit perfectly into their model to acquire more, merge, and raise prices. It comes with a cost to patient quality — studies citing a 2.7 increase in 30 day mortality with no observed changes in rate of complications for common inpatient surgical procedures (3,4).
Private Equity & Healthcare Cost
Private equity penetrates many surgical or procedural heavy specialties by buying up all the local clinics. Typically, physicians or hospitals may sell a practice to them for “outsourcing management and billing” and they may name themselves as “MSAs” or “practice management.” The private equity firm pays a large amount of cash to the physicians up-front. However, physicians may be unaware of the effect on patient prices and the healthcare system years after acquisition, mainly through the avenue of increasing prices by decreasing competition. In certain markets, a single private equity firm owns upwards of 30% of all the local practices in an area, more than violating anti-trust laws. Who pays? Literally, the whole system.
We find private equity encroaching on every aspect of care, including our ancillary services such as ambulances. KKR owns significant shares in air ambulances, resulting in fast price increases & surprise bills sometimes amounting to $20,000 for patients (7).
Resources for your education:
Family Practice Opinion
A2Z Healthcare
Grand Rounds: the Healthcare Dollar
Airtable - PE Hospital Tracker
Sources:
Investopedia
Commonwealth Fund - The Dose. Episode: How Private Equity Deals are Reshaping your Health Care.
Kannan S, Bruch JD, Song Z. Changes in Hospital Adverse Events and Patient Outcomes Associated With Private Equity Acquisition. JAMA. 2023;330(24):2365–2375. doi:10.1001/jama.2023.23147
High air ambulance charges concentrated in private equity-owned carriers