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From the CEO’s Desk | The Case Against Private Equity Ownership of Hospitals and Physician Practices
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Understanding Private Equity: What Goal?
Private equity (PE) refers to investment firms that acquire companies to improve their financial performance and eventually sell them for a profit. These firms often look to improve and sell the purchased practice on a timeline of 3 to 8 years, during which they aim to achieve a favorable return on their invested funds. On the other side of the General Partners (GPs) who manage the firm are institutional and individual investors who, as Limited Partners (LPs), commit capital to the fund to realize favorable financial returns. This leads to an important question: what impact does private equity ownership of provider organizations have on the goals we desire as a society – that is, improved care quality, reduced patient cost, and increased access to services?
The Conflict Between the Private Equity Profit Motive and Patient Care
Non-profit health systems and private medical groups hold fiduciary responsibilities to the patients and public they serve and to the organization that employs them. Private equity firms have added fiduciary responsibility to the organization’s partners and investors. This focus on financial returns for investors creates conflicts and pressure that can undermine the “patient and community first” mentality needed by the organizations we entrust to deliver our healthcare.
The pressure to achieve outsized returns on the purchase and eventual sale of private equity-owned physician practices can lead to cost-cutting measures that negatively impact patient care. In my experience, most private physician practices are already highly efficient organizations filled with doctors and other providers who work many hours each week taking care of patients. It is difficult to generate significant reductions in private physician practice costs (of which their compensation is a main component of the organization’s expenses) or improvements in provider productivity. Investor expectations for returns can result in inappropriate and ill-advised reductions in staff, limitations of low-margin but essential services, and overutilization of high-revenue procedures.
A Personal Experience
Many years ago, I was invited by a group of private physicians to visit a practice that had sold to a private equity group. The physicians were contemplating selling their practice to the same PE group and wanted to visit a site to consider the implications. After the visit, when asked my opinion, I questioned the ability of PE investors to make the physicians’ practice substantially more profitable through new efficiencies. They were, after all, already known as a highly respected and efficient group of doctors. My reasoning was simple. It would be unlikely that a private equity transaction would yield meaningful or substantial gains in efficiency or reduced cost. It therefore seemed reasonable that the new owners may seek to drive significant returns on their investors' capital by (1) growing through acquisition of similar practices or (2) increasing reimbursement by negotiating higher rates of payment for care. The former creates no obvious positive impact on the delivery of care for patients. The latter would only increase the cost of care to patients in the form of higher prices. It could also run afoul of FTC antitrust regulations. Either way, the desired outcomes of improved care quality, reduced patient prices, and increased patient access seemed unlikely.
Like many other groups, the physicians ultimately proceeded with the sale. A few years later the practice was sold again, at which time many outstanding doctors left the group and relocated to other markets. The PE firm and its investors may or may not have made some money, but it seemed that none of the goals important to patients or the community were achieved. For the doctors, some senior physicians near retirement finished their careers with a bolus of funds from selling the practice. Their junior partners ended up with less control of their practice, reduced salaries, and stringent non-compete agreements that left them with very few options locally.
Conclusion – Don’t Do It! (Sell to Private Equity That Is)
While private equity may play a constructive role in developing healthcare technologies and infrastructure, its involvement in owning and operating hospitals and physician practices poses significant risks and highly suspect benefits. The inherent tension between the profit objectives of non-provider investors can lead to outcomes that are detrimental to both healthcare providers and the patients and communities they serve.
Safeguarding the integrity of our healthcare system requires ensuring that those who own and manage medical institutions are focused on the well-being of patients and their hospital or practice organization. Adding fiduciary responsibility to serve the interests of distant investors who do not understand the consequences of the PE firms’ management actions is a road I prefer we no longer travel. The idea didn’t make much sense to me when it first arose many years ago. It makes even less sense to me now.
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