As private equity firms make it rain on healthcare companies, some in the industry worry that patients will pay the price.
Kohlberg Kravis Roberts & Co.'s announcement June 11 that it's buying Nashville-based physician staffing firm Envision Healthcare for $9.9 billion surprised few people in the industry, given private equity's insatiable interest in healthcare companies.
It comes on the heels of TPG Capital and Welsh, Carson, Anderson & Stowe joining forces with insurer Humana in April to buy Mooresville, N.C.-based hospice provider Curo for about $1.4 billion. The same trio struck a deal in December 2017 to buy home health provider Kindred Healthcare.
Some industry stakeholders fear that as private equity firms take over more healthcare companies and consolidate different corners of the market, patients will lose out on choice and prices could creep higher. Moreover, there's worry that what little price transparency is now available will diminish as public companies are taken private.
The value of private equity deals in healthcare across the globe reached $42.6 billion in 2017, up 17% from $36.4 billion in 2016, according to a report by Bain & Co. The number of deals increased nearly 29%, from 206 in 2016 to 265 last year.
That surge has put the American Medical Association on alert. The organization's House of Delegates last week adopted a resolution to study the impact of corporate investors—including private equity, public companies, insurers and health systems—taking a majority or controlling stake in companies that manage physician practices.
"We have to decide whether the goal of a healthcare system is to increase profits, because private equity firms are selecting those parts of healthcare where they can see a profit because their goal is to make profit," AMA President Dr. Barbara McAneny said. "The consolidation of various parts of the healthcare industry has been shown to increase prices and decrease choice, and if you're lucky, quality stays about the same. This is just the next wave of that consolidation."
Experts say companies that provide outpatient services—including firms like Envision, which staffs emergency departments and other hospital services and operates ambulatory surgery centers—are ripe for private equity deals.
Medical specialty providers that remain fragmented, including dermatology, ophthalmology and dental care are also attractive targets. Not only do insurers generally pay higher reimbursement rates for those services, patients seek care from those specialties on a regular, recurring basis, said Brad Haller, a director in West Monroe Partners' M&A practice.
Consolidating those markets in a certain region allows private equity firms to take out administrative costs by scaling sales and marketing operations, information technology or legal work across the combined medical practices, he said.
Fragmented hospital-based specialties including emergency care, anesthesiology and radiology are attractive for the same reasons, said Kara Murphy, a partner at Bain & Co. The country's aging population is also a driving force, she added, as evidenced by the Kindred and Curo takeovers.
Partnering with a private equity firm would help healthcare companies and physician practices grow stronger and add services they otherwise wouldn't have the capital to build, said Tom Wylly, senior partner at Brentwood Capital Advisors in Brentwood, Tenn.
As medical practices grow larger, they also have a better ability to negotiate with health insurers, he said.
But others fear some private equity firms will exploit patients to grow profits. Yale health economist Zack Cooper has argued that firms like KKR, which also owns air ambulance provider Air Medical Group Holdings, could take advantage of firms providing services that patients aren't able to forgo in an emergency despite their high costs.
But Envision CEO Chris Holden insisted the company, which has come under fire for sending patients big, surprise medical bills, will continue in its mission to secure payer contracts for its physicians so patients aren't saddled with out-of-network bills.
"Out-of-network is not a strategy of the company," he said. "One of the most significant benefits of the relationship with KKR is continuity of our strategic vision and strategic plan. They very much support where we're headed and want to continue on that pathway."
