Amid Coronavirus Crisis, New Study Examines Growing Private Equity Role in Health Care

A new study published by The Institute for New Economic Thinking (INET) examines the role of private equity in the US health care industry as PE investments reached a historic high of $100 billion in capital in 2018, and as health care costs continue to rise. The study, "Private Equity in Healthcare: Who Wins, Who Loses?" by Rosemary Batt and CEPR's Co-Director Eileen Appelbaum, notes that private equity firms' growing investment in health care is problematic in part because the firms are almost completely unregulated under state or federal law, and therefore transparency and accountability is lacking.

"The heightened role of private equity firms in US health care should alarm consumers, policy makers, and really, everyone," Eileen Appelbaum said. "Americans are spending ever more on health care, and private equity owned physician firms have exacerbated medical debt through high surprise medical bills. As patients with coronavirus pour into emergency rooms and hospitals, private equity firms have even more opportunities to make outsized returns on the backs of sick people."

Batt and Appelbaum focus on four segments where private equity firms have been particularly active: hospitals, outpatient care (urgent care and ambulatory surgery centers), physician staffing and emergency room services (surprise medical billing), and revenue cycle management (medical debt collecting). In each of these segments, private equity has taken the lead in consolidating small providers, loading them with debt, and rolling them up into large powerhouses with substantial market power before exiting with handsome returns.

"Private equity's growing market power is particularly worrisome as we face a prolonged health and economic crisis," Rosemary Batt said. "Their business model of buying out providers and loading them with excessive debt creates instability throughout the health care system at a time when we most need increased capacity and stability."

Batt and Appelbaum's study states:

As we face a Coronavirus-induced health and economic crisis of uncertain duration, policy makers should be particularly concerned about private equity's heightened use of debt to buy out healthcare providers and take them private, with no regulatory oversight. After the 2008 crisis, highly leveraged companies whether publicly- or privately-owned, faced serious financial distress. And a disproportionate percentage of private equity owned companies went bankrupt compared to other comparable publicly-owned companies.

"The Covid-19 crisis is already taxing the US healthcare system; debt-induced financial instability will exacerbate the crisis," Batt and Appelbaum write.

Their study details how private equity's focus on generating cash flow and exiting investments in a five-year window puts pressure on doctors to increase the number of patients they see each day, to overprescribe diagnostic tests or perform unnecessary procedures, or to save on costs by using shoddier but less costly supplies and devices.

Appelbaum and Batt are also co-authors of Coronavirus and the Implications of Private Equity Buyouts in Healthcare, and were recently featured at The Hidden Costs of Healthcare, a special two-hour event hosted by INET on their groundbreaking research into the role private equity firms play in surprise medical billing.