Making a “Killing” from Medical Care: When Profits Trump Patients
Updated: Jul 21
When I had been working in NYC, several different investor groups invited me to (tuna salad) lunches to provide them my opinion about the future of addiction and mental health services. They had (a lot of) money to buy medical practices, (high end) drug rehab programs, and sober homes, among other medical and addiction services. I was witnessing the scouting phase of what has become the flourishing control over medical services by investors, and the end of affordable, high quality, personal healthcare.
They were not interested in quality care. I thought they were like predators looking to bleed essential medical services of 15% annually, more or less, on the dollar. That’s 15% off of the money a program or practice needs to provide patients with more than ‘drive by’ care – but delivered in posh settings with a package of amenities. (I received no pay for my consultations, if you don’t count the sandwich).
These were investors hunting for opportunities to Monetize Medicine, a practice now flourishing in general medical services, not only in behavioral health care. The consequences of their shopping sprees are powerfully reported by the American Antitrust Institute, in collaboration with the UC Berkeley School of Public Health and The Washington Center for Equitable Growth. They examine the consequences of private equity (PE) funds (pooled money from high-net-worth individuals and institutional investors). Their findings should give us all a chill.
How private equity funds make money.
There are quite a few ways that PE fund managers make money. PE funds typically take a management fee of 2% of the money invested annually in the fund. When they divest of a holding, like a medical practice, they take 20% percent of the profits (see below) from the sale. PE fund managers also make money from the management and consulting fees they level against the companies and practices they have bought. These PE fund managers are experts in juggling money: they also arrange profitable business deals between their holdings or with affiliated companies.
How a PE fund is valued may need an MBA to best explain. Suffice here to say that a key measure is its earnings from the operations of running a business. If a fund meets its goal of, say, doubling or tripling its value (called a multiple) there is a lot of gold at the end of that rainbow. There are two quick ways to get to a very profitable ‘multiple’, no surprise, which do not take an MBA to understand: cut the costs of operating the companies they hold and ratchet up the revenue they generate.
How private equity funds damage the quality of the clinical services you and I receive.
How PE funds can damage a company, e.g., a medical practice they acquire, and reduce the quality-of-care we consumers (aka patients) is now quite clear. The greatest percentage of the cost of running a medical practice, addiction service, even a hospital, is its personnel, the people who work for the company. The game plan becomes:
Cut personnel costs by reducing staffing and replacing higher salaried positions with those that cost less (usually because of lower credentials).
Pump up revenue by speeding up the ‘conveyor belt’ that delivers patients to a doctor’s office so that more patients are seen per hour and per day – otherwise known as the 8-10 minutes of doctor time patients receive; tethering doctors to awful EMRs (electronic medical records) designed to optimize billing – one reason why doctors spend twice as much time on ‘paperwork’ than with patients; and finding ways to increase the procedures done, which pay more handsomely than talking with a patient.
When we have a choice of which hospital to go to for emergency and outpatient services, should we ask about hospital private equity, about who owns the hospitals? After all, hospitals owned by private equity firms are likely to care more about the bottom line than the lives and health of their patients, namely you.
Beware: Private equity control over medical care comes at a big price.
Private equity control over medical care is growing in number like kudzu. Their control increases the cost of healthcare; costs already unbearable to payers (like self-insured companies) and to patients and their families (that’s us).
The report concludes, among other findings, that:
That PE funds have gone from 75 acquisitions in 2012 to 484 acquisitions in 2021, a six-fold increase. Reading between the lines, this surely means that the PE Funds are making money, or sales would not be so brisk. When they make more money quality decreases and costs increase.
8 of the 10 physician specialties studied showed a significant price increase associated with the PE Fund acquiring a practice.
These price increases ranged from 16% in oncology to 4% in primary care and dermatology. PE acquisitions are also associated with per-patient expenditure increases for 6 of 10 specialties, ranging from 4% to 16% depending on the specialty.
When a single PE firm controlled > 30% of the market, the cost of acquiring a practice was higher, especially for gastroenterology (18%), obstetrics and gynecology (16%), and dermatology (13%). For consumers of health care that translates into higher premiums for health insurance.
The PE acquisitions examined in this report indicate the absence of any federal or state anti-trust oversight. No one is looking at the consequences, clinical and financial, of this unbridled medical marketplace. No agency has been involved or charged with protecting the interests of the public.
The caliber of the analyses in this report and their implications is exceptionally good. And should be difficult to ignore.
Geez, we already had the highest medical costs of any nation on the globe, with gaps in quality and access to care, while the US also sits low on a longevity list when compared to many other countries. We all need to be aware and troubled that PE Fund profits are from siphoning off money from healthcare and unconscionably putting it in the pockets of already rich people. Their making a killing from medicine is already diminishing its quality, increasing the costs, and widening the disparities in the delivery of US medical care.
Hunting for profits from medical services.
When large private equity firms start eyeing healthcare institutions as a source of profit, we should all be worried.
In order to understand the high cost of American healthcare, we must look beyond the question, “Why are insurance companies so greedy?” Greedy health insurance companies are a part of the problem, but they are only the tip of the iceberg. Healthcare private equity firms are a major driving force behind the exponential growth in healthcare costs.
The corporatization of American Healthcare may be the worst thing that has happened to medicine since I don’t know when.