Private Equity and the Corporatization of Health Care

Mark A. Hall is the Fred D. and Elizabeth L. Turnage Professor of Law at Wake Forest University. Erin C. Fuse Brown is the Catherine S. Henson Professor of Law at Georgia State University. This post is based on their article, forthcoming in the Stanford Law Review.

Six decades ago, Nobel economist Kenneth Arrow wrote a seminal article justifying various “nonmarket social institutions” that shielded health services from normal market conditions. Subsequent generations of scholars, including one of us, viewed several of Arrow’s positions as anachronistic barriers to pro-social market innovations in health.  For a discussion of Arrow’s theories and evolving health care markets, see this symposium.  Recent developments, however, put Arrow’s insights into new light, showing that he may have been as prescient as he was analytic.

Over the past decade, private equity investment in physician services has emerged as a driving trend toward the financialization of health care, with investors mining health services organizations to extract wealth. The primary goal of financialized health care is profit, while the quality of the patient care is a secondary concern. This obviously challenges a number of the professional and ethical norms that Arrow noted distinguish medical providers from general profit-seeking businesses. Among those is the “corporate practice of medicine” doctrine, which in many states prohibits nonphysicians from owning or controlling businesses that provide licensed clinical services.

Private equity differs from other forms of health services investment in three critical ways. First, these are lay investors who are not subject to professional or institutional norms keyed to the higher ethical goals of medical care. Second, PE investors use a “leveraged buyout” model that finances the bulk of the purchase price with debt that is secured by the acquired enterprise itself. Third, private equity investors typically aim to reap very significant profit rewards over a relatively short term compared to other forms of investment. Thus, private equity investors are drawn to areas of health services where they see the potential to exploit market dysfunctions or regulatory “loopholes” more fully than have established professional groups or conventional health care institutions.

A leading example is the practice known as “surprise medical billing,” which private equity-led physician groups used increasingly over the past decade as a key tactic to increase their payment rates by several fold. Surprise medical bills occur when insured patients unexpectedly receive care from an out-of-network health care provider that they did not choose, such as in an emergency or when an out-of-network specialist (such as an anesthesiologist) provides services at an in-network facility. Such surprise bills force insurers to pay substantially more while also exposing innocent patients to sometimes-crippling financial debt.

Although Congress recently outlawed the most common instances of surprise medical billing, it did not eliminate the practice entirely.  Moreover, private equity investors have found other veins of gold. These include targeting practice areas that have particular payment rules that are subject to exploitation, or assembling previously independent physician groups into a much larger network that asserts its market power more aggressively when bargaining with health insurers. The potential financial rewards are seductive enough to have produced a gold rush of sorts of private equity capital investment in health care.  In 2021, 733 such deals amounted to $77.5 billion investment, mainly just to acquire existing clinical enterprises.

To better understand the challenges this trend poses and how law and public policy might respond, we wrote  Private Equity and the Corporatization of Health Care, forthcoming in the Stanford Law Review, and building on our prior work with the Brookings Institution. The abstract reads in part:

The incursion of private equity is the latest manifestation of a long trend toward the corporatization and financialization of medicine. Private equity pools investments from large, private investors to buy controlling stakes in companies through leveraged buyouts or similar arrangements that use the companies’ own assets to finance debt. These investors seek to earn handsome profits by rapidly increasing revenues before selling off the investment. Private equity’s incursion in other sectors is raising significant concern, but especially so in health care, where the drive for quick revenue generation threatens to increase costs and lower quality arising from consolidation, overutilization and up-coding, constraints on physicians’ clinical autonomy, and compromises in patient care. Policymakers attempting to counter these threats can barely keep up.

Like a cloud of locusts, private equity moves so quickly that by the time lawmakers become aware of the problem and researchers study the effects, private equity has moved on. Moreover, it remains unclear whether private equity investment is fundamentally more threatening to health policy than other forms of acquisition and financial investment—whether by publicly traded companies, conglomerate health systems, or health insurers. Even if private equity is not uniquely harmful, it is extremely adept at identifying and exploiting market failures and payment loopholes. Thus, the article’s central claim is that the influx of private equity into health care poses sufficient risks to warrant an immediate legal and policy response. Public policy should be targeted primarily at correcting the market failures and closing the payment loopholes that attract PE investment, and only secondarily aimed at curbing private equity investment per se.

As the paper explains, we already have many legal tools with the potential to address the threats of health care financialization, including antitrust oversight, fraud and abuse enforcement, and state laws regulating the terms of physician employment and the corporate practice of medicine. Enhanced antitrust oversight should come in the form of either federal or state authority to review serial acquisitions that amass significant market power through a string of smaller transactions, each of which, standing alone, falls below the current antitrust radar but which, cumulatively, constitute substantial market consolidation. Fraud and abuse enforcement would target business practices that seek to increase health services revenue by rewarding those who generate more business, even if clinically unjustified. Employment law could make PE acquisition of physician practices less attractive by restricting the use of non-compete or anti-disparagement terms.  And, longstanding corporate practice prohibitions could be invoked or revived to ensure that licensed professionals maintain both clinical and operational authority.

To adequately adapt these existing laws, legislative or regulatory amendment may be needed in some instances. In others, new laws may be needed to close payment loopholes or correct market distortions. A leading example is the recent enactment of the No Surprises Act, which curtails surprise out-of-network medical billing.  If such efforts fail, however, to curb the potential abuses of unbridled profit maximization, we may see renewed calls to fundamentally rethink the market orientation of the U.S. health system.

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