Healthcare is dragging its feet on moving from fee-for-service to value-based medicine. Private equity firms buying up high-cost physician specialty practices will further hinder this much-needed evolution.
If policymakers want to expand value-based care—and Trump administration officials say they do—then they need to hit the pause button and take a closer look at the private equity buyout phenomenon. A trend once limited to dermatology, ophthalmology and dentistry is spreading rapidly among practices that are among the costliest in medicine, including orthopedics, gastroenterology and urology.
Anyone who doubts private equity takeovers can financially harm patients and subvert cost control should take a closer look at the balance-billing fiasco. Most of the “out of network” services that lead to large balance bills emanate from the nation’s emergency departments, which in many areas of the country have been taken over by private equity-owned firms.
EmCare, picked up as part of KKR’s purchase of Envision Healthcare Corp. for $5.6 billion last year, has flipped between private hands and public ownership several times since 2005. TeamHealth was repurchased in 2016 for $6.1 billion by the Blackstone Group, which previously owned it from 2005 to 2009. According to Yale University researchers, both companies’ business models depend on increasing service volume and raising rates in EDs after they’ve refused to sign contracts with insurers.
The private equity business model in healthcare parallels other industries: Use highly leveraged private capital to roll up a number of small firms into one entity, with the private equity firm providing collective management. In addition to hefty fees for arranging the transaction (generally 1% to 2% of the purchase price), the private equity firm typically demands a 20% return on its investment after paying interest on the debt.
After three to seven years, assuming all goes well in achieving the promised efficiencies, the private equity firm and its junior partners (who are the specialty physicians in this latest wave of takeovers) earn a windfall by taking the company public or flipping it to another set of private equity investors. If things don’t work out as planned, the firm cuts its losses and declares bankruptcy (most of its capital will have been recouped through the 20% annual returns).
The management company has two paths to achieve its financial targets. It can either reduce costs sharply or look for ways to increase revenue. Since specialty physicians took a pay cut to finance their share of the deal, they have a powerful incentive to ignore cost control and value-based approaches to treatment. Instead, they’re more likely to ramp up prices and volume to drive the increases in revenue that will guarantee their eventual payout. While most specialty societies offer lip service to value-based care, their members still earn most of their hefty salaries from fee-for-service medicine. This is especially true in areas of the country where value-based medicine has made little headway.
Private equity buyouts offer these specialists an attractive alternative to dealing with the gatekeepers at insurers, hospital systems and primary-care practices, which, when they take on risk-bearing contracts, impose rules for curbing overutilization.
“We’re not in the business of telling doctors how to practice medicine. We’re in the business of taking away roadblocks and making the practice easier and better for providers,” the managing director of one private equity firm told Modern Healthcare senior reporter Harris Meyer in his InDepth report.
It’s hard to see how that’s going to help the U.S. achieve a less-costly and higher-quality healthcare system. The government should require greater disclosure of the prices, utilization and outcomes at all physician practices so payers and other providers can properly assess the full impact of private equity buyouts.