Beyond the Byline: Private equity's interest in healthcare draws congressional scrutiny

Modern Healthcare hospital operations reporter Alex Kacik and politics reporter Jessie Hellmann discuss why Democrats want more information about the role private equity and chain ownership of nursing homes plays in patient outcomes.

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Music Credit: Coffee by Cambo

Alex Kacik: Hello. Welcome back to Modern Healthcare's Beyond the Byline, where we offer a behind-the-scenes look into our reporting. I'm your host, Alex Kacik. I write about hospital operations for Modern Healthcare. Today I'm talking with Jessie Hellmann, our politics reporter to talk about private equity interest in the post-acute space. Thanks for joining me, Jessie.

Jessie Hellmann: Thanks for having me.

Alex Kacik: So private equity firms are investing more in healthcare. They're rolling up specialty practices. They're investing in risk-bearing primary- care providers, also in the behavioral health space, home health, urgent care, and long-term care facilities, and other areas where they think they can generate a return on investment. It seems wherever there's fragmentation, they look to scale operations to spread costs over a wider asset base. But this has prompted concerns about what impact this investment is having on operations of these various healthcare entities. I'm curious, Jessie, what's caught Congress' attention at this point?

Jessie Hellmann: So Congress paying attention to private equity investment in healthcare isn't something that is new. We know private equity has been investing in healthcare at an increased rate over the past 10 years, and they did look at the issue about 10 years ago. I think what spurred them to take another look is the pandemic and the impact of COVID on nursing homes. We saw 20% of COVID deaths happening in nursing homes, despite the fact that nursing home residents are only about 1% of the population. So lawmakers are wondering what impact if any private equity investment in the skilled-nursing industry is having on patient health outcomes?

Alex Kacik: To give you a little insight into our reporting process, we often try to talk with private equity firms and they aren't really compelled to disclose any of their investment strategies. Our colleague Tara Bannow has a story coming out this week that's looking into how private equity firms are investing in urgent-care facilities. Typically, they eye like a three- to five-year turnaround time where they'll become investors in some sort of, let's say a post acute, whether it's hospice or assisted living and skilled nursing and try to sell it for a profit over that time period. And then they have a variety of strategies to try to cut costs and increase revenue. When it comes to the post-acute sector, there's been a gradual transition from not-for-profit ownership to for-profit entities. And plus we're seeing private equity increasingly take on majority ownership of these facilities. But we haven't seen a lot of data on how private equity investment impacts outcomes.

We got a little bit of insight February from a working paper that looked at how investment, private equity investment, correlates to patient outcomes. That was published in the National Bureau of Economic Research. What did that paper show Jessie?

Jessie Hellmann: So I think the working paper caught the attention of a lot of members of Congress who just felt very disturbed by the results. The working paper concluded that going to a private equity-owned nursing home increased mortality for patients by 10%. And some of the reasons the authors gave are staffing reductions. One of the ways private equity can try to turn a profit at nursing homes is by cutting staff. Other studies have shown generally that having a higher staff-to-patient ratio can lead to poorer health outcomes. So that's one of the reasons they gave. Another reason potentially is higher use of anti-psychotic drugs in nursing homes owned by private equity, which can also increase mortality in the elderly population.

Alex Kacik: Yeah. And like you said, we've seen this cost-cutting strategy play out. And when there are fewer people on staff and let's say they're looking at their caseload goes from six to 10 or 12. It just gets hard for them to manage and care for each one of those patients. Staffing being typically around half of these entities' expenses. That's often where they'll eye some cost cutting and potential return there as they look to boost their margins. But it's interesting you brought up anti-psychotic drugs in your reporting, you showed that at times private equity firms could also contract with subcontractors that have related businesses. So I don't know if that's related to technology or maybe staffing management. I thought that was an interesting development where they seem to be double-dipping of sorts.

Jessie Hellmann: Yeah. That's something Congress wants to learn more about.There's a bill introduced last year by Ways and Means Committee Chairman Richard Neal which significantly increases the amount of information private equity and other investors with controlling interest in health entities have to report to the IRS. And a big part of that information they're looking for is on these related-party transactions. One of the ways private equity can make money off of an investment in a nursing home is by contracting with a related entity that is also owned by the private equity firm. It can be a staffing service, it could be a pharmacy, and just overcharging for those services. Congress wants to know how often that's happening, both because that's money that's not going to patient care. But also if these nursing homes are participating in Medicare and Medicaid, which most are, they want to know where that money is going.

Alex Kacik: And on the real estate side, I've seen some sale lease-back transactions too, where previously these companies will own outright the real estate assets, and then they'll sell them and then lease them back from another entity. It's one way they can develop some quick cash and providers can reap the sale proceeds and they also get the benefit of not having to do all the maintenance and infrastructure to those buildings. But it also creates somewhat of a disconnect at times between building and facility management and operations. So yeah, I imagine that how these contracting trends and strategies are playing out, they'll be taking a look at all these different types of investment strategies in ways that they're maybe trying to generate a return. I imagine this will be all under congressional purview if this bill goes through.

Jessie Hellmann: Yeah. So health investors with controlling interest would have to report gross receipts, acquisitions, real estate payments, leases, and any payments to entities related to the provider. So Congress is really just trying to get a better understanding of private equity involvement in healthcare, specifically with nursing homes. But also, I know as we've talked about other areas they're investing in, urgent care, stuff like that.

Alex Kacik: Yeah. And I'm wondering, just the historical context of this.You mentioned, Congress looked into this some 10 years ago. I Imagine the pandemic and the related effects have prompted them to look at this again, as they try to understand how those intersected private equity investment and how these healthcare companies operated during the pandemic. But has there been a lot of movement here over the years? It sounds like private equity in general has been able to maintain relative secrecy or just isn't obligated to report a whole lot. So I'm just wondering if you could shed some light on some of the historical context when it comes to how Congress has looked and intervened in any of these private equity deals.

Jessie Hellmann: So about 10 years ago, Congress looked at this issue and required that private equity report more information in Medicare cost reports. Those are not public, which makes it hard for researchers, and journalists, and the public to know exactly what is in these reports. And as you noted, transparency hasn't improved much over the years. So I think they're hoping to take another look at the issue, maybe bring down the hammer a little harder. And then after that, once they have a greater feel for the landscape of the investment and the healthcare space, I think that is when they will look about what they should do about it. If it does affect patient outcomes, I'm sure they're going to want to do more work on that specifically.

Alex Kacik: Sure. And you're looking at patient outcomes. You're also looking at better control healthcare costs, which many say are at this point increasing at an unsustainable rate, accounting for almost a fifth of our GDP and running $3.8 trillion in the total U.S. bill in 2019. And another way to get at those costs, Congress is also looking into consolidation across healthcare, specifically between hospitals and hospital acquisitions of physician practices. I know Sen. (Amy) Klobuchar has a related bill in the works that would increase some of the regulatory oversight and increased funding. So they could add more employees to, not only do new investigations, but also retrospective studies on how these mergers affected these local markets.

The FTC has asked insurers for claims data regarding hospital physician deals and transactions. And states like California are also weighing legislation that would prompt more oversight of smaller transactions. I'm curious, do you see any overlap, as Congress looks at private equity? I know we watched that subcommittee hearing that was a couple of weeks ago and some senators have questions, not only about the effect on cost, but also regarding private equity investments. Do you see some overlap here on how they're trying to tackle some of these pernicious and long-standing issues related to increasing costs and potentially harmful effects of competition?

Jessie Hellmann: Yeah. I think there are questions about how private equity affects hospital consolidation. And experts at that hearing noted that we just don't know yet. There's not a lot of data on the issue. And so I think that's really what Congress is trying to get at, but I also think separately Congress is hoping to do more on the issue of hospital consolidation outside of the private equity space. And I think that shows a willingness to address the issue of rising healthcare costs and what the source of that is. And that's how much we pay for services.

Alex Kacik: Yeah. This week I'll have a story that's looking at why some hospitals are looking to separate from their parent companies and trying to analyze how expenses and revenue changed after mergers. At least the four or five cases that we studied, a lot of times expenses and revenue increased at a similar rate, which lends itself to the conclusion that a lot of times these entities get bigger, but not more efficient. Looming over this too is Xavier Becerra, the new HHS secretary, and (Vice President) Kamala Harris, who both served as California's attorney general. And they were tough on hospital mergers during their stints. So behind all these deals, I imagine there's increased interest on how the Biden administration will view some of this potential and by competitive activity and these investments coming from outside healthcare.

Jessie Hellmann: Some members of Congress are also looking at what they can do about what they say are anti-competitive contracts between insurers and providers, where they say all-or-nothing provisions that require an insurance plan have all of a system's providers in their network, or none at all, are unfair. So I think that that's another area we're going to see Congress potentially acting on, is some of these contracts.

Alex Kacik: Great, Jessie. Hey, well, thank you so much for sharing your time and insight. We look forward to keeping up with that story and what else you got coming out of the Hill.

Jessie Hellmann: Thank you.

Alex Kacik: All right. Thank you all for listening. If you'd like to subscribe and support our work, there's a link in the show notes. You can subscribe to Beyond the Byline, wherever you listen to podcasts. And you can stay connected with our work by following Jessie and me and Modern Healthcare on Twitter and LinkedIn. We appreciate your support.