As regulators seek more information about their investments, private equity financing in the healthcare sector has reached a record high, driving growth in many areas of the industry.

The value of annual private equity transactions has almost tripled, from US$41.5 billion in 2010 to US$119.9 billion in 2019. white paper From the University of California, Berkeley and the American Antitrust Institute.Corporate investors-including executives from similar companies Black stone and General catalyst partners Appear in The 100 most influential people in modern healthcare—— Provided funds for healthcare companies to expand their scale and invest in new technologies, but also contrasted their efforts to maximize profits with the core mission of healthcare.

“Private equity transactions in the healthcare sector have exploded,” said Richard Scheffler, professor of health economics at the University of California at Berkeley and co-author of the white paper, adding that if investment increases by 30% To 40%, he will not be surprised that 2022 will benefit from the windfall of the stock market. “These companies are sitting on capital and have to do something with it. But the nature of these private equity firms creates some ethical dilemmas in terms of providing care.”

According to the paper, the main targets of private equity companies have been family health and outpatient care, and the number of related acquisitions has more than doubled from 2016 to 2020. In addition to increasing the practice of doctors, private equity also invests in hospitalization departments, medicines and medical equipment.

According to recent data from Standard & Poor’s Global, the 25 most active private equity firms currently hold approximately US$510 billion in uninvested cash.

Timothy Epple, managing director of Avalere Health, said: “This is more like a question of where private equity firms have not invested in healthcare.” “They have the funds to create scale in places where there is no scale today, and use it to grow their business and negotiate better. And promote (risk-taking) plans that family operators cannot do.”

Broadly speaking, private equity allows funds and investors to directly purchase private companies. General partners usually provide about 2% of the fund’s capital; the remaining funds are provided by institutional investors and banks.

Standard & Poor’s head of global corporate ratings, David Kaplan, said: “Because private equity usually uses a fairly high level of debt to increase the rate of return on investment, this stability is an attractive feature to reduce risk.”

Private equity funds generally have a maturity date of 10 years, and the investment return of a PE company is calculated as a multiple of the earnings before interest, tax, depreciation and amortization.

Competitive goals

The surge in external investment in healthcare has reignited debates about whether competing goals—generating short-term investment returns and providing the best care—can coexist. Compared with the supplier sector, conflicts in areas such as digital health or supply chains are less obvious. Consider the recent acquisition of a majority stake in Medline, a medical equipment supplier and distributor based in Northbrook, Illinois, by Blackstone Group, Carlyle, Hellman & Friedman, and GIC for $30 billion.

For example, LifePoint Health is a private equity-backed hospital chain with 87 facilities. The Brentwood, Tennessee-based company aims to acquire Kindred Health, a post-acute and home health service provider purchased by TPG Capital and Wales, Carson, Anderson and Stowe, and insurance company Humana.

Dr. David Blumenthal, President of Commonwealth Fund, said: “This is the culmination of the long process of privatization of medicine. The theoretical basis is that medicine, like any other market, should be driven by investors and market opportunities.”

Primary care and specialty providers such as orthopedics, dermatology, and ophthalmology are still the main targets of corporate investors. Integrating these markets will allocate the fixed costs of information technology, marketing, legal, and other administrative expenses to UMC. With the aging of the population, these services are in great demand. The expansion of market share and better data analysis give them more ability to negotiate better rates with insurance companies.

Experts say that for the same reason, scattered and less efficient hospital specialties, such as emergency, anesthesiology, and radiology, are also attractive.

“When we talked to private equity firms, they were very interested in the culture of the doctors working there. They wanted to ensure consistency,” said Rick Kes, a partner and senior healthcare analyst at the accounting firm RSM. “When they want to take risk, they will also look at the geographic area of ??growth and the payer mix to some extent. They have easier access to capital and therefore have a higher appetite for risk because it is related to value-based care .”

Blumenthal said that private equity should have different goals for for-profit primary care companies and groups of specialist physicians.

He said that PE company believes that primary care doctors can open up a treasure trove of waste in the healthcare system by eliminating unnecessary care and charging more reasonable rates, and compete with a fee-for-service system. Blumenthal said they can stimulate demand in the currently underestimated primary care sector through better compensation models.

He said that the formation of a team of specialist doctors is a way to better control reimbursement services through local market monopoly and higher fees.

“This is very different from the basic principles of primary care-to make the system work better, and to spend money to reward those who do better,” Blumenthal said. “Some PE investments may be positive, and some may exaggerate existing problems in the healthcare sector.”

Supervisor in the dark

Regardless of the investment strategy adopted, private equity companies do not need to publicly disclose their financial status, which leaves industry regulators ignorant. This has raised concerns that some private equity companies will lay off employees at the expense of patients’ health to increase profits.

Research by the USC-Brookings Schaeffer Initiative for Health Policy shows that helicopter ambulance operators owned by private equity take advantage of an “inelastic market” and charge almost twice that of air ambulance operators that are not privately owned or listed companies .

Regulators also questioned PE-backed companies that provide outpatient services-including companies like this one Team health And Envision, which staff the emergency department and other hospital services, and operates an outpatient surgery center.

University of Southern California health economist Glen Melnick said: “When TeamHealth was acquired for $8 billion, I think the only way to invest is whether they can take advantage of the inelastic demand for urgent care.” Makes you wonder-are these PE-driven transactions purely to take advantage of market failures in the healthcare system?”

ASC Primary Care Physicians Southwest, a subsidiary of TeamHealth, submitted a copy litigation be opposed to Molina Healthcare In 2020, Molina was accused of paying its doctors in Texas for out-of-network care. Industry observers said that this is a common strategy of PE-supported emergency doctor staffing companies-not participating in the insurance company network and resorting to litigation. TeamHealth said in a statement that the jury ordered Molina to pay $17.5 million in punitive damages because of its “unfair and deceptive” practices.

Melnick said the duopoly of emergency physicians in Texas could kill wages.

“Monopoly buyers may push up the price of medical plans, but they cannot pass it on to doctors,” he said. “Doctors can ask for a raise, but the personnel company has the right to say,’If you don’t like it, leave and go to Montana.’ Over time, independent doctors will lose market power.”

In the field of hospitals, private equity is mainly aimed at financially stable for-profit institutions with relatively high costs. This is a new learn Published in the discovery of health affairs. Researchers found that among all hospital types, as of 2017, hospitals acquired by private equity accounted for 11% of all patient discharges.

Compared with hospitals without PE investment, hospitals supported by PE investment have higher operating profit margins. Part of the reason is that from 2003 to 2017, the ratio of full-time employees fell by 0.4%, while hospitals without PE investment increased by 5.6% during the same period.

“We should be cautious about the whole thing. Will practice cut costs as soon as possible to obtain attractive EBITDA?” asked Paul Keckley, industry consultant and executive editor of the Keckley Report. “Then you will get some hunger practices that are shortening staff time-operationally, it’s very difficult.”

Attention from Capitol Hill

Private equity investment has attracted the attention of Congress, which has called for greater transparency and regulation. Policymakers requested more information on how private equity nursing home ownership models affect patient outcomes, and pointed to studies linking PE’s short-term turnover model to worse outcomes.

“Besides there is no regulatory framework, you also don’t have a system that can monitor what is happening. The market is leading academia and regulators,” Melnick said. “There will be this conflict between purely profit-oriented entities and frontline medical services that will increasingly emerge.”

Although private equity firms can reduce management costs by simplifying back-office tasks and other strategies, legislators have criticized some of their strategies that may increase costs. For example, leveraged buyouts may make it more expensive for suppliers to repay debts and require the health system to sell hospitals. Some companies sell the real estate of their suppliers and require them to lease it back or force them to purchase goods and services from other businesses owned by the company. Providers may also need to pay management fees to the PE company that owns them.

The Medicare Payment Advisory Committee recommends minimum reporting standards or ownership indicators related to private equity companies’ health care investments to allow policymakers to compare ownership structures and assess impact.

Experts say that regulators can take the anti-monopoly supervision route, although it is much more difficult to dissolve completed transactions. Or state or federal authorities can try to regulate their activities through price caps or legislation, similar to the “no accident law” on accidental medical bills.

“We just need more transparency. We have paid too much, and we don’t know whether it is good or bad for us as consumers,” Melnick said.

Experts say that the volatility of the COVID-19 pandemic may prompt some healthcare companies to reach deals earlier. Observers say that the value of private equity and venture capital transactions is expected to rise because more cash is on the sidelines.

“Expect more events in 2022,” Case said. “The only thing that will continue to be a headwind is the labor issue.”