Corporate investors are changing the healthcare industry

Funding for private equity investments in healthcare has reached record heights, fueling growth across many sectors of the industry as regulators seek more information about their investments.

The annual value of private equity deals nearly tripled from $ 41.5 billion in 2010 to $ 119.9 billion in 2019, according to data White paper from the University of California at Berkeley and the American Antitrust Institute. Corporate investors, including CEOs of firms such as Black stone and General Catalyst Partners appears in Modern Healthcare’s 100 Most Influential People in Healthcare– provided healthcare companies with the capital to scale up and invest in new technologies, but also opposed the drive to maximize profits against the core mission of healthcare.

“There has been an explosive growth in private equity deals in the healthcare sector,” said Richard Scheffler, professor of health economics at the University of California, Berkeley, and co-author of the white paper, adding that he won’t be surprised if investment rises by 30% to 40%. in 2022 thanks to unexpected shocks in the stock market. “These firms sit with capital and have to do something with it. But the nature of these PE firms creates some ethical dilemmas when it comes to helping. “

Home health and outpatient care firms were the primary target of emergency firms, according to the report, with associated buyouts more than doubling from 2016 to 2020. In addition to increasing the number of medical practitioners, private capital has also invested in the hospital sector, pharmaceuticals and medical equipment.

According to the latest data from S&P Global, the 25 most active private equity firms currently hold approximately $ 510 billion in uninvested cash.

“It’s more of a question of where PE firms aren’t investing in healthcare,” said Timothy Apple, managing director of Avalere Health. “They have the capital to build scale where it doesn’t exist today and use it to grow businesses, negotiate higher rates, and implement (risky) programs that family providers can’t do.”

In general, private equity allows funds and investors to buy directly from private companies. The general partner usually provides about 2% of the fund’s capital; the remainder is funded by institutional investors and banks.

“Since private equity tends to use fairly high levels of debt to increase ROI, this stability is an attractive risk mitigation characteristic,” said David Kaplan, director of corporate ratings at S&P Global.

Private equity funds typically have a 10-year duration, and the investment income of a PE firm is calculated as a multiple of earnings before interest, taxes, depreciation and amortization.

Competing targets

The meteoric rise in external investment in health has reignited debate over whether competing goals – achieving short-term return on investment and providing optimal care – can coexist. Conflict is less pronounced in areas such as digital health or the supply chain than in supplier sectors. Consider the recent $ 30 billion acquisition of a controlling interest in Northbrook, Illinois, medical device supplier and distributor Medline, by the Blackstone Group, Carlyle, Hellman & Friedman and GIC.

For example, LifePoint Health is a privately held hospital network of 87 institutions. The Brentwood, Tennessee-based company is targeting the acquisition of home health care provider Kindred Health, which has been acquired by TPG Capital, Welsh, Carson, Anderson & Stowe and insurer Humana.

“This is the culmination of a long process of privatization of medicine, based on the theory that medicine, like any other market, must be driven by investors and market opportunities,” said Dr. David Blumenthal, president of the Commonwealth Foundation.

Primary and specialty care providers such as orthopedics, dermatology and ophthalmology remain top targets for corporate investors. Consolidation of these markets distributes the fixed costs of information technology, marketing, legal and other administrative costs among the combined medical groups. These services are in high demand as populations age, and expanding market share and better data analytics give them more room to negotiate better rates with insurers.

Fragmented and less efficient hospital specialties such as emergency care, anesthesiology and radiology are attractive for similar reasons, experts say.

“When we talk to PE firms, they are interested in the culture of the doctors who work there. They want to make sure there’s consistency, ”said Rick Kees, partner and senior health analyst at accounting firm RSM. “They will also look at the geographic regions that are seeing growth and, to some extent, the composition of the payers as they seek to take on the risk. They have better access to capital and therefore a greater risk appetite due to value-based care. ”

The goals of direct investment in commercial primary health care companies and specialist medical groups need to be differentiated, Blumenthal said.

PE companies believe that primary care physicians can open up a treasure trove of waste in the health care system and compete with the payment system by eliminating unnecessary care and charging more reasonable rates. They can boost demand in the currently undervalued primary health care sector through better compensation models, Blumenthal said.

Bringing together groups of specialist doctors is a way to better control well-paid services by monopolizing the local market and charging higher fees, he said.

“This is very different from the rationale for primary health care – to improve the performance of the system, save money and reward those who make it better,” Blumenthal said. “Some investment in PE may be positive, some may exaggerate the problems that already exist in healthcare.”

Regulators in the dark

Regardless of the investment strategy, private equity firms are not required to publicly disclose their finances, leaving industry overseers in the dark. This has raised concerns that some PE firms will cut staff at the expense of patient health in order to increase profits.

Private shareholder-owned ambulance helicopter carriers are exploiting an “inelastic market,” charging nearly double as much as aircraft carriers that are not part of a private or public company, according to a study by the USC-Brookings Schaeffer Initiative for Health Policy. …

Regulators also interviewed PE-supported companies that provide outpatient services, including firms such as TeamHealth and Envision, which has emergency departments and other hospital services and outpatient surgery centers.

“When TeamHealth was bought for $ 8 billion, the only way I saw it was a worthwhile investment was by leveraging the inelastic demand for emergency care,” said Glenn Miller, a health economist at the University of Southern California. “It makes you wonder – are these PE-based transactions solely to exploit market disruptions in the healthcare system?”

ASC Southwest’s Primary Care Physicians, who are part of TeamHealth, filed claim against Molina healthcare in 2020, claiming that Molina was underpaid for its Texas-based doctors for out-of-network care. It’s a common strategy among PE-backed emergency doctor hiring companies to stay out of insurer networks and resort to litigation, industry observers say. TeamHealth said in a statement that the jury ordered Molina to pay $ 17.5 million in penalties for its “unfair and deceptive” actions.

A duopoly of emergency room doctors in Texas could hold back wages, Miller said.

“Monopsony buyers may be able to raise the prices of insurance plans, but they won’t be able to pass that on to doctors,” he said. “The doctor might ask for a promotion, but the staffing company might say, ‘If you don’t like this, go and go to Montana.’ Over time, independent doctors will lose their bargaining power. ”

In the hospital sector, direct investment is mainly aimed at financially stable commercial institutions with a higher cost-to-cost ratio, which is a new innovation. to study published in the Department of Health. The researchers found that in all types of hospitals, privately owned hospitals accounted for 11% of all discharged patients as of 2017.

Hospitals supported by investment in PE showed higher operating margins growth than hospitals without investment in PE. This is in part due to the fact that from 2003 to 2017, the ratio of total staff decreased by 0.4%, compared with an increase of 5.6% among hospitals without private sector investment during this period.

“There is some caution we need to have about all of this. Will the practice be able to cut costs as quickly as possible in order to obtain attractive EBITDA? Asked Paul Keckley, industry consultant and managing editor for the Keckley Report. “Then you get hungry practices that cut staff – it’s operationally difficult.”

Attention from Capitol Hill

The private equity investment caught the attention of Congress, which called for more transparency and regulation. Policymakers requested more information on how the nursing home ownership model affects patient outcomes, pointing to studies that link the short-term PE health improvement model with poorer outcomes.

“Apart from the lack of a regulatory framework, you do not have a system that could monitor what is happening. “The market is ahead of scientists and regulators,” Melnik said. “There will be a conflict between purely profit-driven organizations and more and more direct healthcare services.”

While private firms can cut overhead costs by streamlining back-office tasks, among other things, lawmakers have criticized some of their tactics that could increase costs. Leveraged buyouts can make it more costly for providers to pay off debt and require health systems to, for example, sell hospitals. Some firms sell real estate to suppliers and require them to rent it out or force them to buy goods and services from other businesses owned by the firm. Providers may also have to pay management fees to the PE firm that owns them.

The Medicare Payments Advisory Commission has proposed minimum reporting criteria or ownership metrics associated with private company investments in healthcare to enable policymakers to compare ownership structures and assess impact.

Regulatory authorities can take the path of antitrust supervision, although, according to experts, it is much more difficult to reverse the already concluded deals. Or, state or federal authorities may try to regulate their activities with price caps or legislation similar to the No Surprises Act for Unexpected Medical Bills.

“We just need more transparency. We pay too much for not knowing whether it benefits or harms us as consumers, ”Melnik said.

Experts believe the volatility of the COVID-19 pandemic has likely pushed some healthcare companies to close deals sooner than otherwise. The value of private and venture capital deals is expected to rise because there is more money on the sidelines, observers say.

“Expect more activity in 2022,” Kees said. “The only thing that will continue to be an obstacle is labor problems.”

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