Private equity firms typically buy privately owned companies and restructure them to maximize profits for investors. Private equity has been expanding its presence in the healthcare industry in recent years, with firms buying up hospitals, nursing homes, medical practices, ambulance providers and companies specializing in medical debt collection.
A new study examines how both healthcare spending and patient visits changed among private equity-acquired medical practices compared to independently owned medical practices from 2016 to 2020. The researchers found that private equity-acquired medical practices charged 20 percent more, on average, per insurance claim, and saw a nearly 40% increase in new patients compared to independently owned practices. Joining us now is Jane Zhu, a primary care physician and an assistant professor of medicine at Oregon Health & Science University, who co-authored the study published in JAMA Health Forum earlier this month.
The following transcription was created by a computer and edited by a volunteer:
Dave Miller: We start today with the financialization of healthcare. Private equity firms are buying up all kinds of pieces of the American healthcare system - hospitals and hospice centers, nursing homes and rehab facilities, ambulance companies and medical billing groups. They’re also focusing on medical specialties. That is what an OHSU doctor and researcher focused on for a new study that was recently published in JAMA Health Forum. Jane Zhu is a primary care physician and assistant professor. She joins me now. I think we should start with the basics here. What does private equity mean?
Jane Zhu: So as its name suggests, private equity is a source of private investment in a company that isn’t publicly traded and these firms are typically funded by institutional investors, ones that you and I might know about, so pension funds, university endowments foundations. And their entire goal is to make a profit, to invest in companies, sell it at a higher price than they bought it for, and beat the market in terms of gains.
Miller: Why are these firms interested in health care as a sector? What’s attractive about health care?
Zhu: One thing I should say is that private equity investment in health care isn’t new. But in more recent years, this activity certainly has accelerated and expanded in the ways that you described in the opening. It actually might be easier to identify sectors where private equity isn’t active, to be honest, than where it is active. But the quick answer here is that there’s money to be made and the long answer is that there’s probably a ton of factors that allow for these conditions to happen.
One important factor is that the healthcare landscape is quite fragmented and private equity firms often use these opportunities to consolidate very quickly and leverage economies of scale under unified management and practices. A second factor, I think, probably contributing to this is that health care is just a strong sector in terms of financial performance and growth. And while this has been tempered a little bit by COVID, an aging population with chronic illnesses means that there’s always gonna be a demand and a really high demand for healthcare services. And I think a third factor in this, sort of, pool of things going on is that there’s a lot of ongoing policy payment and delivery reforms at the federal and state levels. And that creates opportunities for investors to leverage new innovations and responses to these reforms.
Miller: How significant is private equity overall in the US healthcare system?
Zhu: It’s hard to really put a finger on the scope. I think we published earlier data that really suggests that at least in physician practices, penetration is growing. It’s currently on the order of about 6-7% of physicians in certain specialties like gastroenterology and dermatology. But that might vary across specialties. Listeners might know that in specialties like anesthesia and emergency medicine, for example, a lot of physicians actually work for physician staffing or management companies that contract with local hospitals.
And some of the nation’s largest staffing companies like Team Health and Envision, which employ tens of thousands of positions, are actually owned by private equity firms. And so this is certainly something that is growing in scope and something that is worthy of further investigation.
Miller: But for other doctors, say some dermatology group, a private practice group, would a doctor in that group go from being an owner of some kind of incorporated business to being an employee?
Zhu: That’s right. So the way that private equity works is that essentially, when they come in and they invest, they may restructure the ownership to some extent, whereby the older owners are bought out. Maybe they get to keep a little bit of equity, and then younger employees often become salaried. They may have some structures in place depending on how those private equity arrangements are shaped [in order] to have some production bonuses or some small piece of equity in the company still, or the practice still.
And that is one key advantage. That sort of draws younger physicians in. But I will say, in private equity activity in general, there is a concern that there is some generational divides, that younger physicians who want to be practice owners in the future may have these opportunities pulled out from under them when their practices sell to different ownership structures.
Miller: And they would also lose some sense of autonomy or freedom, which I imagine is maybe one of the reasons why they sought private practice to begin with?
Zhu: In general, there’s lots of changes in the health care system and in the workforce composition. There are concerns and trends now that younger physicians tend to want to be employed and salaried employees in larger healthcare systems and healthcare organizations. But there’s certainly other physicians who are looking for certain opportunities like this. I’ll say that my interest in this subject really came out of a personal story.
I graduated from medical school about 10, 15 years ago. And at the time, when we were looking for opportunities, we started hearing from colleagues and friends that a lot of the job opportunities that were out there, was some time talk about private equity coming in and buying the practices that our friends and colleagues were considering. And there were so many uncertainties involved in this, so little transparency, that this became sort of a talk of the town.
Miller: You know we’ve been talking about the buying up piece of private equity. But often when private equity is discussed or the effects of private equity, that’s just the first third of the story that I’ve heard about. Often it’s safer for newspapers. It’s buying up a company, somehow extracting the value from it, which often means firing people and then selling it. Are medical groups also being sold after, somehow, rich investors have gotten their money?
Zhu: It’s a great question. So essentially private equity, as I mentioned earlier, their whole goal is to sell the company later for a higher price than they bought it for. But you know, I think when they come in, one of the fundamental concerns about private equity is that their goal is to maximize profit. So they acquire companies for pretty short periods of time in this lifespan of a medical practice, typically on average 3 to 7 years, before they sell to another entity.
And that second buyer might be another private equity firm or often, and nowadays, they sell to bigger companies and corporations like Optum. And so you know, that is certainly something that is of concern to physicians. The other thing that you mentioned is that these deals are often financed with debt, borrowed money. And that’s meant to enhance expected returns. And when you think about it, how much money are they expecting? Like where are they trying to find the profits in these physician practices or these healthcare entities?
They’re expecting returns of more than 20% annually. That’s a pretty big margin there. And so at the heart of this issue in my mind is that private equity has a goal of extracting value for investors, finding all these different ways to extract value, margins of 20% or more in these physician practice, and that might be fundamentally at odds with the goals of patient care and specifically, what constitutes value for patients in the health system at large.
Miller: So let’s turn to some of your findings because it puts some meat on the bones of what you’ve just been talking about. Among your findings are that the volume of patients seen goes up or is higher in medical practices that are owned by private equity firms as opposed to those that are independently owned. Why is that?
Zhu: We looked at changes in utilization amongst other measures and we found that private-equity (PE) acquired practices saw a 26% increase in total unique patients and nearly 40% increase in visits by new patients. And even though, to some extent, I was expecting these findings, I was really surprised by the size of those changes. We also found a 16% increase in the total number of encounters. So not just office visits but also labs, imaging and procedures. So, you know, overall these findings suggest that patients are coming back more often and PE practices are capturing more new patients.
Obviously our study wasn’t designed to lend any visibility into the specific mechanisms for these changes, but some reasons why that might be happening is that there could be managerial or operational changes. For example, expanded practice hours or better marketing to get patients or getting more referrals if the private equity companies are expanding to buy up competitors. The other potential reason is that private equity practices, as they expand, may be hiring more ancillary staff like nurse practitioners and physician assistants who can expand provider capacity and get those patients in.
Miller: Is there a way to know if the increase in services and the increase in patients, if this is in the interest of patients? I mean, it could be, I suppose, that in the past people weren’t getting labs often enough. And so cancers weren’t being caught or lesions weren’t being tested and biopsied or too many labs are now being ordered and a lot of visits are extraneous? How do you figure that out?
Zhu: Right. So Dave, you’ve definitely hit on the key question here, which is, are these increased services reflecting, meeting the population demands and needs or is this really an over utilization of services or unnecessary care that doesn’t actually benefit patient health? And that is a key question that we have not yet studied and that is actually analysis that’s underway.
Miller: I’m just curious. So is it possible in a broad way to answer that question? I guess I’m just wondering that because I’m thinking, for example, about going to a dentist and a dentist could say ‘hey, do you want to do this thing today’? And I have no idea if I should do that thing. And I imagine the more complicated you get in terms of medical specialties, the less any of us really knows if we’re being upsold or not. And how, in a broad way, can you even answer those questions?
Zhu: We certainly looked at some of the utilization patterns in our studies. So you know, for example, when we looked and dived into specific specialties, within the specialties we looked at (dermatology, GI, and ophthalmology) we found an increase in certain types of services, for example, screening colonoscopies. The question here is are people getting screening colonoscopies more often than they should be? Or are they getting screening colonoscopies as they should? That is a really tough question to answer honestly. And you know, research on quality of care is notoriously difficult to study. And so I think the questions you raise are really important. I think there are certainly well founded concerns about this. But the data is not quite there yet.
I will say though that there is additional evidence in other sectors of healthcare work, private equity is active, so hospitals and nursing homes. And the evidence there is a little bit more robust. In those sectors, private equity acquisitions are also associated with increased utilization. But we also see other changes that might happen. For example, service lines that hospitals offer may end up sort of tending towards more profitable services like procedures rather than mental health services. In nursing homes, what happens after private equity acquires nursing homes is that there are decreases in staffing, there’s increases in antipsychotic prescriptions or sedation, and there’s even a 10% mortality increase in Medicare patients in these nursing homes. These are few and far studies overall, but it is providing a little bit more evidence so that we can pursue these questions more robustly.
Miller: You found that these private equity firm owned groups are actually charging more. They’re asking for more reimbursements from insurance companies. Are these firms, then overall, driving up the cost of healthcare in the US?
Zhu: We did find that. And it was actually quite surprising in terms of the size of these changes too. So practice is charged. We found that practice is charged insurance about 20% more per claim, which averaged to about $71. And then they also increased, on average, the allowed amounts per claim, which is really the negotiated price that insurers will pay for a particular service. So they charge more and they got paid more. And I think the question is what happens when there’s higher spending? I think the main thing, and the takeaway here, is that higher spending ultimately will be borne by the patients, potentially in the form of higher insurance premiums, in higher out of pocket costs and copays. Where this ends is sort of hard to tell. But certainly higher spending when there is no need for higher spending is a concern for the health system at large.
Miller: If someone goes to a dermatology clinic, is there any way for them to know who owns that clinic, if it’s the doctors they’re seeing or CalPERS?
Zhu: This is something that I’m particularly concerned about because of the research that we’re doing in this space. I’ll just say there is definitely a need for greater transparency here. Private equity firms aren’t required to announce acquisitions at all. And so a lot of the transactions that take place are voluntarily offered by private equity firms in the form of press releases. And so the data that we have available probably underestimates private equity activity already. So the question about patients is a really good one. Not only do most patients not know when their doctor’s office gets bought out by a corporation or a private equity firm or whatnot. But even my friends and colleagues, whose practices get bought out, they’re working there [and] they may not know until the actual transaction happens due to the use of nondisclosure agreements.
Miller: You looked at national data, but do you have a sense for how much this is happening in Oregon?
Zhu: It’s a great question. Our data, when we looked at penetration for private equity acquired practices across different states, there are certain markets where there’s a lot of penetration up to upwards of 30% of practices in a given area for a particular specialty. The states that have the greatest activity here are states like Texas and Arizona and Florida. Oregon tends to have, from our research, a lot less activity. And I think there’s a couple of reasons for that. The main reason is actually that Oregon is paying attention to, monitoring, and regulating healthcare mergers and acquisitions. In fact, last year, the Oregon Legislature just passed a bill that established a Healthcare Market Oversight office and that gives the Oregon Health Authority the power to weigh in on proposed mergers and acquisitions and health care in order to address some of the things that we’re seeing with private equity activity.
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