Federal regulators, clinicians make their case against private equity in healthcare

Federal regulators are weighing new safeguards against exploitative dealmaking by private equity firms within healthcare—and, so far, they aren't signaling any reprieve for the corporate investors experts say are behind withering care standards and preventable bankruptcies.

Back in December, the Biden administration announced a sweeping, multiagency effort to clamp down on what it described as “corporate greed in healthcare.” That push was preceded by legal challenges against PE-backed physician roll-up schemes and ownership transparency requirements for several types of providers, and in recent months involves new data sharing between agencies as well as specific leadership roles focused on healthcare competition.

The government went a step further on Tuesday as the Federal Trade Commission (FTC), the Department of Justice’s (DOJ's) Antitrust Division, and the U.S. Department of Health and Human Services (HHS) together issued a new request for information surrounding healthcare dealmaking.

Specifically, the government said it wants to hear from the public on PE, health system, private payer or other healthcare-related asset manager deals that “may increase consolidation and generate profits for firms while threatening patients’ health, workers’ safety, quality of care, and affordable health care for patients and taxpayers.” They’re also seeking feedback on healthcare deals that potentially would not be noticed by regulators under the current premerger notification framework along with firsthand accounts from patients and workers who saw changes in their facilities following a merger or acquisition.

The inquiry follows a multidecade uptick in PE involvement within the healthcare industry. A study published this week in Health Affairs, for instance, found that the number of PE-owned physician practice sites rose from 816 in 2012 to 5,779 in 2021 and that single PE firms had gained “significant” market share in dozens of metropolitan statistical areas thanks to their acquisitions.

Regulators lay out enforcement priorities

The information gathering kicked off later that afternoon with a virtual public workshop on private equity in healthcare hosted by the FTC. It featured comments from FTC commissioners and DOJ and Centers for Medicare & Medicaid Services heads in addition to testimonies and Q&As from academic researchers, clinicians and other stakeholders.

Both the policymakers and the public, near unanimously, painted PE as an exploitative and damaging force on care.

In opening comments, FTC Chair Lina Khan said that PE healthcare acquisitions “has been top of mind” for the regulator and that it has heard “an outpouring of concern” within the last two years alone.

Though she acknowledged that PE “can sometimes be an important source of capital” for small or midsized companies, and that “some” PE firms will take a long-term view of generating value, she pointed to a general trend in which increased financialization and pursuit of profits supplant clinicians’ medical judgement. Khan also drew attention to specific PE tactics—debt-financed strip-and-flip deals, market roll-ups via serial smaller acquisitions, and reducing competitive incentives among rivals through minority stake purchases or interlocking directorates—that she said regulators already have the tools to address.

“Firms of all types should be on the notice that we’re on the lookout for these strategies and will continue to deploy the full scope of our authority to protect the American public from anti-competitive and unlawful tactics,” she said.

Assistant Attorney General Jonathan Kanter, of the DOJ’s Antitrust Division, followed Khan by highlighting specific enforcement wins, including the resignation of 15 interlocking directors from 11 different corporate boards, and promised that “more than anything, we will stay laser-focused on the intermediaries that sit between you and your doctor.”

Other officials from HHS outlined cases of healthcare fraud and warned that unchecked consolidation has increased Medicare costs and drives thousands of monthly complaints from beneficiaries.

“For example … private Medicare managed care plans receive over $400 billion per year and cover over 50% of the Medicare population—and its growth has attracted more private investment,” Christi Grimm, HHS inspector general, said during the workshop. “It’s important that this investment supports well-run managed care plans that both comply with Medicare rules and ensure enrollees have access to cost effective, high-quality services for enrollees. … When investors’ conduct jeopardizes patient safety or crosses the line into fraud, [the Office of Inspector General] and our law enforcement partners are exploring the best ways to hold them accountable.”

"The worst experience of my professional life"

More explicit criticisms of corporate ownership came during firsthand accounts on the “human impact” of PE in healthcare.

In one testimony, a registered nurse and supervisor from a rural community hospital—who opted to testify anonymously “due to concerns about potential workplace retaliation”—said it was “evident” that their hospital had become “chronically understaffed” and unsafe since being acquired by a PE firm over a decade prior.

They detailed an incident where a psychiatric patient being held in the ER escaped his bed and entered an adjacent room where he used his thumbs to “gouge out” the eye of another elderly patient, who later died of her wounds. The nurse said that there was no security guard on staff and that panic buttons hidden at nurses' desks “historically” haven’t led to responses within 15 minutes.

“After that incident, ER nurses were given de-escalation training with the assumption that the handyman maintenance staff will act as security. Hiring a full-time security guard is simply too expensive,” they said before describing other incidents of sexual harassment and preventable patient deaths.

Jonathan Jones, M.D., president of the American Academy for Emergency Medicine, said that he has worked in multiple hospitals and employment models over his career, “and I can definitively say that working under a PE-backed managed group has been the worst experience of my professional life. More importantly, it’s also been the worst possible experience for my patients.”

He detailed a large community hospital he worked in where ED staffing had recently switched to a PE-controlled group, which led to staffing reductions “outside what is considered safe by any of the emergency medical specialty societies.” Physicians who said that changes were unsafe were told they “could stop complaining or we would be terminated,” he said.

Jones eventually decided to leave, but, “given that the same PE that group staffed four other emergency departments in the city, and had a commanding share of the market in general, I had to leave my city as well.”

In reaction to these and other provider testimonies, FTC Commissioner Alvaro Bedoya said it was clear PE was interfering with the goals of clinicians and healthcare.

“I fear that PE threatens to turn the Hippocratic Oath on its head,” Bedoya said. “So many of the warnings and allegations that we’re hearing today … stem from situations where PE is taking control away from doctors and medical professionals.”

"Heads, I win, tails, you lose"

Between breakdowns of the extensive body of academic data linking PE to worsened outcomes, healthcare and business policy researchers floated their ideas on how the administration should rein in exploitative investors.

They noted that several practices outlined during the course of the day aren’t exclusive to PE. Rather, PE often moves more quickly than other types of for-profit businesses to exploit legal “loopholes” for the benefit of their investors, said Erin Fuse Brown, a law professor at Georgia State University.

“When we think about crafting these policy responses … the polices themselves should be somewhat agnostic as to the type of owner,” she told regulators. “If it’s the same risk, it should apply equally no matter who is pulling the lever.”

On the other hand, Brendan Ballou, an attorney, DOJ special counsel and author, said there are cases in which PE equity acquisitions are “qualitatively different” than those of traditional healthcare players. He said that it is “very hard” to hold PE firms conducting a roll-up strategy responsible for the portfolio companies it acquired.

He also noted that PE firms' profit incentives aren’t always aligned with the goals of a healthcare company, and highlighted scenarios (akin to the now-scrutinized Steward Health Care) in which a transaction fee paid directly to a PE firm can justify a hospital’s decision to sell off its real estate and become saddled with regular rent payments to the new owner.

“What that means is private equity firms often have a ‘heads, I win, tails, you lose’ sort of business model, where it makes sense, actually, for them to lever the company up and cut staffing in the hope of ambitious growth or increased profitability,” he said. “If things go well, that's great. But if things go poorly, often nothing bad will come [to the PE firm].”

The expert panel said they were generally encouraged by regulators’ recent actions to address PE exploitation, including adjustments to premerger notification requirements that empower the FTC block “platform” companies from acquiring rivals should that lead to reduced competition.

As for potential policy solutions, Brown described HHS’ moves to increase ownership transparency as “a fundamental starting point” that will act as the “bedrock principle” for future interventions. From there, she encouraged collective antitrust enforcement and competition policy across the agencies; fraud and abuse enforcement; new policies “to protect the clinical autonomy of the workforce,” such as physician noncompetes; and the closing of specific payment loopholes being “exploited by private equity to increase revenues.”