The media and some lawmakers have also documented how private equity fund managers have systematically targeted key sectors of the healthcare industry, resulting in higher prices, lower quality of services and increased risks to patients.
Two of the academic leaders who have contributed most to documenting these misconducts are Eileen Appelbaum, co-director of the Center for Economic and Policy Research, and Rosemary Butt, professor at Cornell University’s Department of Industrial Relations. Appelbaum and Butt wrote the groundbreaking book “Private Equity at Work,” a multifaceted study of how the industry operates. Appelbaum has been active in documenting the impact of private equity profiteering in the healthcare industry, publishing extensive data-driven analyses to inform commentary for the press and policymakers.
I have long admired Appelbaum and Butt’s work. Its hallmarks are its rigor and fairness. Both scholars read the academic literature very carefully, and frequently point out that, despite stronger arguments from industry advocates and sometimes the academics themselves, their analyses offer limited conclusions at best, or even (if you look closely at the statistics) results that contradict the narrative’s findings. They always carefully and thoughtfully explain how they arrived at these conclusions.
It’s no surprise to hear that the private equity industry has fallen on hard times in the healthcare space and is trying to fight back. PitchBook, a leading publisher of private equity industry data, recently published a report by independent journalist John Canham Klein. Quantifying PE investments in healthcare providers. A notable finding is that, as measured by revenue, only 3.3% of hospitals, clinics and other healthcare providers are backed by private equity, making private equity too small a participant to wield any influence.
This argument is false on its face. As anyone who has done competitive or deal analysis knows all too well, what matters with regards to pricing power (and the ability to effectively raise prices by other means, such as reducing the quality of offerings) is the relevant market, not the industry as a whole. In the case of healthcare, nearly all “buyers” are geographically constrained. The relevant market for any kind of service, such as diagnostics (e.g., MRIs and clinical labs) or dialysis, is located within a reasonable driving distance of the patient’s home or clinic.
Below is a lengthy rebuttal of the Pitchbook report by Eileen Appelbaum: We also include a recent paper by Appelbaum, Butt, and research assistant Emma Curtin, “Structural Determinants of Health: Unequal Hospital Capital Investments Drive Health Disparities,” which explains the complexities of conducting segment-related economic research properly and how financial decisions (in this case, hospital investments) affect health outcomes.
Appelbaum told me that she had tried to negotiate with Canham Klein and had sent him some of the papers she and Butt had written. He never replied.
I hope that readers will spread this revelation far and wide.
Open letter to PitchBook:
On July 8, PitchBook published a research report called “Quantifying PE Investments in Healthcare Providers,” with the goal of “presenting relevant and objective information to contribute to future fact-based discussions.”
One of its main takeaways was that “PE-backed providers represent less than 4% of the U.S. healthcare provider ecosystem by revenue.”
As a data-driven organization, the article makes a fundamental error in analyzing its own data: it uses the entire healthcare system as the denominator, rather than the local healthcare market that PE firms control. This error makes private equity seem absolved of complicity in the problems it has created through its relentless pursuit of profits.
In my view, this report is part of a PE counterattack against the increasing attention the PE industry and business leaders are receiving from regulators. This report seems to say, we are so small and our economy is so large, how can we affect healthcare costs or limit patient choice? There is nothing to see here. Regulators should just ignore us.
This PitchBook analysis falls victim to what I call the “denominator effect.” A few examples might clarify the problem. There are thousands of PE deals, most of them acquisitions of small companies by small PE funds, but the bankruptcy rate is low. There are hundreds of large leveraged buyouts, but the bankruptcy rate is 20%. PE may own a small percentage of anesthesiology practices nationwide. But in Houston, and in Texas, WCAS owns most of them, and has contracts with 7 of the 10 major hospitals/health systems in Texas. These practices have raised prices and are under investigation by the FTC. PE owns a small fraction of the 5,000 hospitals in the U.S., but tell that to the people of eastern Massachusetts who are reeling from the bankruptcy of Steward, which was owned until recently by Cerberus, and the closure of 8 hospitals, 4 of which are safety-net hospitals. Massachusetts officials are scrambling to find health care for these residents.
PE-owned enterprises employ as many or more workers as unionized workers. Does this have a small or large effect on labor standards?
I think the claim “we’re small, so we’re harmless” is disingenuous. The concrete examples are misleading too. Why are PE investments in nursing homes close to zero? Because corrupt practices have driven many PE-owned nursing homes into bankruptcy, and patients were more likely to die in PE-owned nursing homes before the pandemic because the quality of care declined. This has put these investments under more scrutiny, a finding that has pierced the consciousness of PE firms. Why do PE investors shy away from remaining out-of-network billing opportunities to get quick cash? Because, with the help of many of us concerned about price gouging, they were able to end surprise billing of patients for out-of-network services at hospitals and elsewhere. Now that Envision has gone bankrupt and KKR has lost millions of dollars in limited partners, the business model no longer looks so attractive.
The argument that PE represents a small portion of the national medical market and can therefore be safely ignored is not tenable because the medical market is local. The widespread availability of reproductive health care in California is of no comfort to a pregnant woman in Mississippi.
PE firms monopolize certain areas of care in local health care markets, raising prices, lowering quality, and enriching their partners, executives, and principals with taxpayer and insurance funds that should be going to patient care.
Oversight of the healthcare industry by Congress and federal agencies is long overdue. Senator Elizabeth Warren’s new bill, the Corporate Crime in Healthcare Act, seeks to hold accountable the private equity and other financial firms that are ruining and enriching healthcare companies. This bill will repay the ill-gotten profits that have enriched the owners and executives of these companies. This bill could lead to more taxpayer money being spent on actual patient care and less focus on extracting the most wealth from healthcare companies during the 3-7 year period they own them, without any regard for the company’s future.
Eileen Appelbaum
Co-Director
Center for Economic Policy Research
Copy of structural determinants of health
