Below is an excerpt from the Financial Times.
What has been driving these nasty surprises? Outsourcing is clearly part of it. But that’s hardly new: hospitals have been contracting out specialised services for decades as they strive to save costs.
A better place to look for clues is in the backwaters of the financial markets. The prices of junk bonds issued by “physician services companies” have been sliding in the past month as their owners weigh the possibility and costs of political intervention. These point to the real source of the problem: private equity’s silent colonisation of parts of the healthcare profession.
A recent paper by two US academics, Eileen Appelbaum and Rosemary Batt, shows how private equity activity has driven up healthcare costs for American consumers. The problem lies in the interplay of buyout strategies (which pile leverage on to companies and emphasise financial returns) and the business of treating people, where sick patients have no power to shop around and outcomes come first.
Private equity has acted as a consolidator in healthcare services, building some of the biggest US physician services groups such as Envision, HealthTeam and AirMedical Group. Take Envision, for instance. It has flipped between public and private ownership since 2005, when it was first taken private by Onex (since last year it has been owned by KKR). The group employs 70,000 staff and spans critical services such as emergency rooms, radiology, and anaesthesiology.
Such businesses are well designed for extracting the sort of outsize returns that private equity demands. “Emergency medical services are a perfect buyout target because demand is inelastic, that is it does not decline when prices go up,” write Appelbaum and Batt. Moreover, demand is large: almost 50 per cent of medical care comes from emergency room visits, according to a study by the University of Maryland.
The deals physician service groups strike with hospitals are, of course, less than transparent to the public, along with the rest of their financials. But a study by Yale University of the billing practices of EmCare, Envision’s physician staffing arm, showed that when it took over the management of emergency rooms, it nearly doubled patient charges compared with those levied by previous physician organisations.
Which raises the question why hospitals go along with these arrangements. Well, some have struck joint-venture deals with physician companies, splitting the extra revenues these entities stick on patients. But for many, they don’t have the resources or the industry clout to combat surprise billing on their own.
To be fair, the healthcare sector is not the only one providing public goods where buyouts have led to questionable outcomes. An even worse case is higher education, in the so-called “for profit” US college sector.
According to a 2019 study looking at 88 buyout deals, not only did tuition costs rise after colleges were taken into private equity ownership, but educational outcomes declined as owners focused on marketing at the expense of education. Student debts rose, as did the number of subsequent defaults. Leaving the taxpayer, predictably, to collect the tab.
Congress is now looking at legislation to curb predatory “surprise billing” in healthcare, possibly benchmarking charges to the rates paid by insurers for similar treatments, or creating some sort of arbitration scheme. Perhaps a fix can be found.
A bigger question though is whether such sectors are really appropriate for ownership by what Appelbaum and Batt call “for-profit corporations on steroids”. Buyout bosses might find it easy to extract value from sectors in which customers are trapped (medicine) or quality is opaque (education), generating short-term gains for themselves at whatever cost to the public, but it’s a very queasy activity. And it is one that gives more credence to the arguments of Elizabeth Warren and others, that private equity too often delivers outcomes that go against the public good.