Ep 7. The scourge of private equity ownership of hospitals (and physician practices)

In this episode, Dr. Anthony Paravati and Dr. Amar Rewari discuss the aggressive expansion of private equity (PE) in the U.S. healthcare system, highlighting its detrimental effects on quality care and patient safety. They explore how PE firms prioritize profits over patient care, leading to significant financial burdens on healthcare facilities. Through various case studies, they illustrate the negative consequences of PE ownership, including hospital closures and reduced services. The conversation also addresses the regulatory gaps that allow PE firms to operate with minimal oversight, ultimately calling for action to protect healthcare quality.

Introduction to Private Equity in Healthcare

Welcome back to Value Health Voices, where we bring health policy and healthcare finance to life in a way that's accessible and engaging. I'm Dr. Anthony Paravati and today we are tackling what I believe is one of the most urgent threats to the US Healthcare system. That is the aggressive expansion of private equity ownership of healthcare facilities, hospitals, emergency departments, and clinics here in the United States.

And I'm Dr. Amar Rewari. As physicians and policy experts, Anthony, we typically maintain a pretty measured tone on this show, but I think today's topic demands something a little different. The evidence we'll share demonstrates that private equity's business model is fundamentally incompatible with quality healthcare. I know it's a bold statement, but as we get into it, it's quite damning.

During just the 2010s, PE firms spent more than $1 trillion acquiring healthcare assets. From hospitals to physician practices to emergency staffing companies. A few years ago during COVID, PE investment in healthcare hit an all-time high. 515 deals valued at $151 billion in a single year.

Yeah, it's pretty nuts. That was 21 or 22, one of those two years. It's not just about numbers. It's about patients' lives and the lives and really the sanity of the healthcare workers who take care of those patients. We're going to get into the details right after the intro music. Let's get into it.

Senate Investigation Findings

So Amar, a recent Senate Budget Committee investigation is really illuminating about this topic. This investigation was led by Senators Whitehouse and Grassley. This report revealed disturbing patterns of PE firms prioritizing quick profits. Everybody likes profit, but quick profits, no long-term interest in the sustainability of the facilities they acquire. They favor these quick profits, of course, over patient care and over safety. You and I wanted to talk about this for a while because as physicians we've dedicated our careers to taking care of patients and to health policy and we feel we have an obligation to sound the alarm.

The Private Equity Business Model

I agree. And before we dive into some of these specific examples, I wanted to maybe educate our viewers and listeners a little bit about how private equity typically works when they're trying to acquire these healthcare assets. I have a finance background, as do you, Anthony. Firms create investment funds with money from investors like pension funds and endowments and other types of institutional investors. Then they use this money combined with debt to acquire healthcare organizations with the goal of selling them at a profit within about three to seven years. And this is what you hear of as leveraged buyouts.

Yeah, exactly. It's a great game if you can play it, to buy things with other people's money. You mentioned Amar, the time horizon of three to seven years, that's very short to be able to actually create value, which is why most of the time they destroy value. It's crucial to understand about PE is that these firms operate in a very predictable way. When they make acquisitions, they typically finance about 70% of the purchase with debt. This is just on average. That debt is not carried by the private equity firm themselves. It's actually loaded onto the healthcare organization that they've acquired.

Financial Extraction Mechanisms

So obviously if 70% of it is purchased through debt, then 30% is equity that the PE firm puts up. The PE firms require the entities they acquire to pay them annual management fees. In addition to the management fees, they extract additional funds from these organizations through dividend recapitalizations, which are essentially just the PE firm paying itself from the funds that the acquired entity has. Often what actually happens is the PE firms have the entity take on more debt in order to make these dividend payments.

All of this for those who maybe are peripherally around finance. They may have at some time heard the 2 and 20 phrase mentioned in private equity. The 2% is a typical management fee. It doesn't have to be. It could be 1.5, it could be 1, but 2% is a typical management fee. Then 20% of the profits would be paid like in a dividend or performance fee to the private equity firm from the entity that they've acquired and are now managing. So that's how that all works.

Impact on Hospital Operations and Patient Care

When the hospital now has to service these massive debt payments and pay off these management fees you alluded to, that's money. Money that's not going to patient care, whether it be for staffing, for equipment maintenance, service contracts, quality improvement, expanding service lines, community health programs. All this requires money that's being funneled elsewhere.

This is why we made the bold statement that we made at the beginning is we know what it takes to run hospitals, to run departments, and it certainly requires a lot of funds to be up to a care standard. And their approach is a little different.

Obviously if you're trying to provide care to the community, they're also only really cherry-picking the payers that are going to be worthwhile. They're oftentimes excluding some of these lower payers, whether it be like the state charity care programs, because they're not profitable.

Targeted Medical Specialties

Yes, there are certain fields in medicine that have been very attractive to PE buyers. They're not buying full-service hospitals. They've had a great appetite for ophthalmology, a strong appetite for dermatology practices. Emergency departments, this is a separate episode, but just to bring up, private equity ownership of emergency departments, especially standalone emergency departments, had a huge role to play in the No Surprises Act. That's a topic for another day.

Case Study: Prospect Medical Holdings

No, you're exactly right. Another case study we can talk about is the Leonard Green & Partners ownership of Prospect Medical Holdings, which was from 2010 to 2021. I think this perfectly illustrates how PE's emphasis is on driving up profits and not investing back into the organization, which then causes these organizations to have to close in the future. Maybe you could walk us through this example.

This is an interesting one from a few years ago. The numbers are really staggering. During their ownership period, Leonard Green, which is a PE firm, extracted over $424 million in those dividend payments I was talking about from Prospect Medical Holdings. That is a holding company that Leonard Green & Partners created as a vehicle for these purchases. So they extracted this more than 400 million in dividends. To pay these dividends, Prospect was forced to take on a massive amount of debt. When the parent company, Leonard Green, exited in 2021, Prospect was drowning in liabilities.

The Collapse of Nix Health System

Let's break this down with a specific example. The Nix Health System in San Antonio, Texas, when Prospect Medical Holdings acquired them in 2012, it was a profitable system. But within just seven years under the private equity ownership, the system completely collapsed.

We can go through the timeline. PMH acquired Nix for 48 million bucks in 2012. From 2014 to 2015, they really started their clinic closing spree which resulted in going up in smoke about 5,600 outpatient visits that they were performing across those clinics. A few years later, that's when their earnings, EBITDA—earnings before interest, tax, depreciation, amortization—plummeted to a negative $30 million from a profitable system. Then in 2019, complete system closure and a thousand employees being laid off.

What's really troubling is that whenever Nix showed even signs of some financial improvement, which is tough to believe that they even had that during that period, but they actually did. That operating margin was not reinvested in operations. It all was directed to the private equity firm in the form of more dividends.

Another similar story played out in Pennsylvania with the Crozer-Keystone Health System. They promised to keep all hospitals open for 10 years. They invested 200 million in capital improvements, but instead, within eight years of the acquisition, two hospitals closed, emergency departments closed, critical services were cut, and they faced multiple investigations by the Department of Justice. This is really dangerous in terms of the conditions that people are trying to deliver care in these systems.

Case Study: Apollo Global Management and LifePoint Health

We got more. There's more. We wouldn't be making the episode if that was the only example. Let's turn to Apollo Global and their role in rural health care. Why don't you kick that off, Anthony?

An example of Apollo Global Management's activity in acquiring healthcare facilities is with their ownership of LifePoint Health. The Senate investigation that we cited previously spends a lot of time going through the details of Apollo's run with LifePoint. They spoke at a fair amount of length of a particular facility called the Ottumwa Regional Health Center, and talked about how there was a direct connection between the actions of the ownership to patient harm.

Broken Promises and Service Cuts

There were seven major promises, claims by ownership, which is again Apollo Global Management, that ended up broken. That area needed physicians badly. So physician recruitment was a hot button topic there in that acquisition. In order to convince regulators to let them make the acquisition, they promised to spend seven and a half million dollars recruiting about two dozen physicians. They did spend some money. They spent six million. But during that time spending that money to recruit physicians, they actually lost physicians. So there was a net loss in specialist capital investment.

That's another one. They had publicly committed to spending 5% of net patient revenue, let's say their operating margin, on routine capital expenditures. But they failed to meet this essentially over the period of six years. Repeated failures to spend that promise.

In terms of their service maintenance, they discontinued several services. Even though in 2010 they dropped their pediatrics clinic, 2013 pulmonology, 2014 chemo, 2018 home care. Obviously this caused patient satisfaction scores to plummet and they actually ended up being one of the worst ranked hospitals in the country on a patient satisfaction basis.

It's interesting that they closed chemotherapy services. If you're closing infusion services, you know that you don't care and, or are incompetent. One caveat if we want to be charitable about it is we don't know whether they were freestanding infusion centers versus hospital on-campus departments. We can give them a little bit of charity in that regard, but I think their larger track record is maybe not worth that charity.

Staffing Shortages and Safety Concerns

Fair enough. I guess I could talk a little bit about some of the staffing crisis. What we read was by 2023, nurse vacancies had increased to just below 100 positions. Total number of employee vacancies had passed 100. Turnover hit about 42% and then the ED wait times became the longest in the state of Iowa. Apparently even because of all this lack of staffing, there was patient safety issues including some tragic cases around sexual assaults that occurred at that facility.

Steward Health Care and Real Estate Investment Trusts

It's just crazy. It really is. This report talked a lot about the two ownership structures that we just cited. There's another one that's been in the news pretty regularly, even in a part of the country that you don't see a ton of private equity activity. That's Massachusetts. The Steward Health Care system. Their headquarters is in Dallas.

Their approach involved essentially transferring, so acquiring hospitals into a REIT, a real estate investment trust, and then essentially paying rent. So they'd buy and then they would sell into this REIT and then Steward would pay rent for these facilities to their own REIT they still controlled. This was a tool that was used to rapidly expand. At one point someone I know who was in investment banking said hey, have you ever heard of this Steward system? They're growing really fast. Do you think it'd be good to do business with them? Of course I looked into them and my recommendation was no.

But they got into the news because they had multiple hospital closures, including in the Boston area. It's one thing to close a hospital in rural Kansas or somewhere where there's not the media spotlight, but having multiple facilities close and even centrally in the city, that caused a big blow up. Obviously the governor in Massachusetts and several people there said, yeah, we're not allowing this to the extent we can. We are going to quash private equity ownership of full-service hospitals anyway in the Commonwealth of Massachusetts.

Leveraged Buyouts and Sale-Leasebacks

We'll get into what some states may be doing later on in the episode. But Anthony, maybe you could talk a little bit exactly how private equity firms take the value out of these healthcare organizations. Let's talk about the LBOs, the leveraged buyouts.

Let's talk a little more about the Apollo case and the acquisition of LifePoint Health. That was done back in 2018, and this is a big deal. Apollo acquired LifePoint for $5.6 billion and 1 billion was equity, so even lower than what we quoted earlier as an average of 30%. So 1 billion equity and the remaining 4.6 billion obviously was then debt. That was of course, debt not held by the private equity firm, but held by the health system.

This debt structure resulted in significant interest payments. Annual interest obligation of $679 million. That was obviously a massive drain on the hospital's funds. Therefore that's when really LifePoint was not able to maintain its investment in its services and care. Quality of care declined from that period.

That's the LBO strategy. Another way that these PE companies make money off of these acquisitions is the sale-leaseback strategy. Exactly like you were talking about. LifePoint also sold real estate of their hospitals to a trust for $700 million. The hospitals had to pay rent to operate in their own buildings. So at Ottumwa alone, their first year rent was a little over 4 million. Then rent kept escalating annually after that. But obviously the hospital earnings couldn't keep up to match those and cover those payments. So they had to use most of the sale proceeds to pay down the acquisition debt rather than reinvest in the hospitals.

It's interesting the parallels with the Steward deal. In all these quotes and interviews out of the staff at their facilities, really sounds like it could have been this exact same story. So that really wasn't as singular of an event as it was described as. That was going down again in Massachusetts and also other locations. Pennsylvania too, actually. Steward owns some hospitals.

Let's go through the management fee piece again. In this particular example, Apollo was receiving $9.2 million annually in management fees and they had slapped a 1% transaction fee on all their acquisitions. That's just another, that's not even part of the 2 and 20 we talked about earlier. That's another percent in fees and additional fees were loaded onto things like loans that they facilitated. All while there's consistent evidence of services not being able to provide care to patients. It really was a steep decline year over year in the closure of programs and all the key quality metrics, readmissions, going nowhere but down.

Regulatory Gaps and Oversight Challenges

You brought up the Massachusetts example, but there is a lack of comprehensive oversight of this PE healthcare takeover across the country. I think it's worthwhile for our listeners to understand a little bit about the current regulatory framework and why it's failing.

There's a lot of gaps. To start off, no federal requirement for PE firms to disclose their ownership of healthcare facilities. The CMS, the Center for Medicare and Medicaid Services, has no way themselves of tracking PE ownership in their provider databases. The combination of these two gaps makes it impossible to have any kind of systematic monitoring of quality and safety specifically of PE owned facilities. These are the gaps in federal monitoring of private equity owned facilities.

There are some current investigations though. The Senate Homeland Security Committee is investigating PE involvement in emergency departments. We've talked a lot about emergency departments in a few of our episodes. Multiple state attorney generals are examining the private equity hospital ownership and FTC. Department of Justice are also looking into PE's role in healthcare consolidation. But PE firms continue to operate in the shadows while all this is still happening.

Academic Studies on Private Equity Impact

Movement in that direction was picking up speed in the prior administration. Obviously, it remains to be seen the extent to which it'll be a priority in the current one. One thing that is a bit of an impetus for this government interest in private equity's impact on hospital operations and the quality of care at those facilities is with some of the academic evidence that has recently come out.

Let's talk about that. There was a Harvard study that had looked at increased rates of complications. They saw mortality rates were increased by 10% at PE owned nursing homes, that patient transport times had increased almost close to 20% under PE emergency service ownership. Healthcare costs had risen on an average of 38% at PE owned physician practices and that staffing levels had decreased by about 1.4% after the PE acquisition.

The Harvard study was a major deal. We'll link that in the show notes. We will actually even on our LinkedIn page, make a direct post about that and break this study down further. There's another study done at the University of Pennsylvania and that study compared facilities with PE ownership versus other ownership structures and found that PE ownership leads to increased use of high-cost coding. So upcoding. That's in billing practice where you are delivering a service and you are seeking to bill the highest possible thing you can bill for the services you provided.

Their diagnostic testing generally cost more to work up the same types of conditions in comparison to the non-PE owned facilities. There were higher rates of hospital admissions and readmissions and greater likelihood of out-of-network billing, which can be extremely expensive for patients. All this occurred while they tracked a reduced amount of investment into equipment, into staff and into maintenance of their facilities.

Voices from the Front Lines

There's a human impact to all this too. We were able to pull some quotes from the front lines from healthcare workers who have been affected by this PE ownership. From an employee satisfaction survey from the Ottumwa Group, one quote was that, "We are asked to analyze budgets and line items repeatedly searching for ways to decrease our annual spend due to LifePoint budget cuts. Nobody believes that LifePoint cares about them at all." Another employee wrote, "I've acquired a $1 raise off of my start rate in six years of working here. Inflation is destroying me. I'm eating one meal a day and working 12 hour shifts."

That's brutal. It's really sad to hear. There's plenty of others in this report, but we found that to be a poignant one. So we wanted to cite that from Prospect's hospitals. Let's take a couple from there. Number one: "Leadership's actions show that patient safety is not a top priority. They say so, but the bank account doesn't back it up." And then a second quote: "We have a lot of old equipment in spaces that are not conducive to safe and efficient care."

Proposed Policy Solutions

It's very sad and it's good to hear from the actual people with direct quotes. So it kind of puts it a little bit more into perspective besides just the numbers and the academic evidence we're citing. It's not just hurting patients, it's hurting staff and staff morale as well. And they're concerned that they're operating in dangerous situations. So given everything we've discussed, what policy changes need to be made? What needs to be done going forward?

Right now it's investigation here, investigation there. Difficult, as we described, for relevant government entities to curate data on a large scale to demonstrate similar findings to what these academic studies were able to do. A big piece of this is transparency. We don't have mandatory disclosure of PE ownership. We don't have any kind of structure for the regular reporting of quality metrics within these PE owned hospitals. Of course, if they accept Medicare dollars and depending on their relationships with payers there is going to be some quality metrics, but not a comprehensive way of analyzing their performance.

Then a public disclosure of all the financial transactions and extractions that occur in these facilities. You could take it a step further and put frank restrictions on some of the types of transactions and ways that the private equity ownership extracts funds from these facilities. So you can limit dividend payments, you can put a cap on the amount of debt to EBITDA that these facilities are allowed to amass. Not the facilities doing it, the ownership. So that the ownership is allowed to put a limit on how much debt they can load onto the hospital or hospital system and mandatory capital expenditure requirements to say, yeah, this money can't just finish out in your pockets. It has to be used to invest in the facilities.

We can talk about quality safeguards. You have thoughts on that?

Because you mentioned quality earlier, I was just thinking, I think it would be helpful if CMS had enhanced oversight over quality in these PE owners as well as looking at mandatory staffing ratios and regular safety culture assessments. In aviation, they're probably one of the most stringent when it comes to high reliability organizations. They pioneered it. So culture around high reliability I think would be beneficial.

It would be. It's interesting because in aviation everybody involved has aligned interests. They want to survive. They have the same goals. Here we have a situation, and it's not unique to private equity ownership in health care, but a lot of times in health care the mission, the goals are not aligned. That makes achieving highly safe or high reliability systems difficult to achieve. A prerequisite is having that aligned goals.

Another aspect of a potential comprehensive approach to helping the situation or at least achieving some kind of improvement is, you know, these hospitals, a lot of these acquisitions, they do have to pass evaluation by various local government entities, whether they are the states that they're in or health districts. So there's these promises made, but then no enforcement on the back end of these community benefit agreements that the hospital acquirers have to agree to. Also there could be better local representation on hospital system boards. So these are people who don't have financial interest in the facility or in the ownership structure, but who have a personal interest because it's their community.

Lobbying Efforts and Call to Action

Right, like patient advocates on the board. I agree with you with everything you mentioned as possible solutions. However, we know PE has big money, so they spend big money on lobbying Congress every year. It's about 20 to 100 million annually spent by these PE firms to lobby Congress to prevent a lot of this oversight and financial restrictions.

It's a lot. I have to say I thought it would be even more than that, but it's quite a bit. We'd have to go back and look. I'm sure it's a growing amount if we looked year over year. We wanted to make this episode. Neither one of us work in private equity, neither one of us work in PE owned health systems. But we are physicians, we are healthcare leaders. We do have an understanding of these financial topics and certainly an understanding of possible policy prescriptions that could help reduce the amount of really the taking advantage that these firms are of desperate hospitals and desperate communities.

We wanted to make an episode about this for those reasons. If you take, I'm sure there are counterexamples, but in large part, I think it's pretty clear private equity ownership is not compatible with quality care that these communities deserve.

This Senate report that we cited a lot throughout this podcast, it was a bipartisan committee and this was their findings. It's pretty damning evidence about all the detriment that these PE acquisitions are causing on health care. I think there are some things our listeners can do. Get to know your local representatives, whether it be to the state or federal level, and contact them and tell them about more PE oversight.

If you do work in an organization where you are owned by PE, if you can collect any data or document any quality and safety concerns and share that. I don't know specifically any of any legislation pending right now on the federal level around PE transparency, but if there's any state legislation that is in your state, support that. Tell your local representative or support that and engage in your community, especially if you're in a community where there is a PE owned healthcare system. Advocate that local community leaders need to be present and overseeing this.

Conclusion

Those are great points. Speaking about this episode in comparison to our past episodes, we try to be neutral, be analytical and provide really a balanced view on many of the things that we cover. In this episode we've made some more pointed comments, made some conclusions that may be different from our past approach. But private equity's expansion into health care, especially in the communities where it's been rampant, is an existential threat to access to high quality health care for those geographies. That's why we think it's important.

We've also posted some more resources on our LinkedIn page for people who want to learn more, specifically the full Senate investigation report and some of those academic studies we mentioned from Harvard and UPenn.

We've covered a lot. We've covered a couple of classic examples. We've mentioned the Senate report, other federal efforts, state programs. It's been quite an episode and we'll be back again in two weeks. We usually make these episodes two weeks apart. Amar, what do you say we see who we can piss off next time?

Yes. Very well. Until then. Ciao, ciao.