Is private equity helping or hurting healthcare?

Some view third-party investment in physician practices as a vital trend that offers economies of scale that make healthcare more efficient. Others believe it fosters monopoly control while driving up prices. But nearly everyone agrees that further consolidation within the U.S. healthcare market is coming.

The Chicago-based American Medical Association is in the midst of a yearlong effort to quantify the impact that venture capitalists, private equity firms and other outside entities have on the way doctors treat their patients. The study rolls on as the number of physicians who work for themselves continues to shrink. According to a report by Accenture, the share of U.S doctors in independent practice has plummeted to 33 percent in 2016 from 57 percent in 2000.

"The days of Marcus Welby are behind us," said Anthony LoSasso, professor of health policy and administration at the University of Illinois at Chicago's School of Public Health. "The uncertainty over healthcare policy in Washington is probably driving the integrated healthcare delivery systems and large hospitals to bulk up almost as a counterweight to the uncertainty they face. They know that if you are bigger, you are in a better position to survive whatever may come your way."

LoSasso also said that while "private equity" has negative connotations in some quarters, third-party investment can bring both efficiency while providing a higher level of management knowledge and sophistication.

"I think the jury is still out on whether those larger systems can translate that scale into quality improvements," he said. "What I do know is they can translate that scale into price increases. That means insurers are going to have to pay more, which translates on the consumer side into higher premiums."

But the jury is in for Marni James-Carey, executive director of the Association of Independent Doctors.

"We know that when corporate medicine takes over the practice of independent medicine, costs go up, quality goes down, and patients and doctors lose," she said. "We don't need a study for any of this. We just need common sense to prevail.

"This is all about capturing market share so you can have more bargaining power with payers, and get more money in reimbursement for the same procedure. That's what causes costs to go up," she said.

Craig Garthwaite, director of the Health Enterprise Management Program at Northwestern's Kellogg School of Management, said recent pricing controversies in the pharmaceutical industry (think Martin Shkreli) have left some consumers fearing a repeat performance by large-scale physician practices. But PE firms have helped turn around several poorly run healthcare industry players, and have a clear role to play going forward, he said.

"Some see private equity firms as really for-profit for-profits, for lack of a better term," Garthwaite said. "These are firms that are often not involved in the medical field, but move in because they see an attractive investment opportunity.

"To date, we see this more in pharmaceuticals rather than in providers," he continued. "Outside companies realized a glaring market imperfection in pharmaceuticals, and found that if they were willing to price to the limit of their monopoly power, they could make an exceptional amount of money. So people might be worried that the same thing could happen with providers."

Dr. David Meltzer, a practicing hospitalist and director of the Center for Health and the Social Sciences at the University of Chicago, sees merit in the AMA's effort.

"These sorts of changes deserve careful scrutiny," Dr. Meltzer said. "The examples in pharma clearly demonstrate what market power is about, and represent extreme examples of the general concern about market power. I think the AMA is highlighting something that is clearly a valid concern."

"Is private equity helping or hurting health care?" originally appeared in Crain's Chicago Business.