Private equity in healthcare services adversely affecting patient outcomes
Do you guys agree/disagree with these articles? Personally, it seems hard to disagree with real data indicating that a lot of PE activity in the healthcare space is a societal negative. Increasing operational efficiency seems to be a codeword for lowering hospital staffing to dangerous levels and finding ways to increase billing rates. But, I have no experience in PE (working in trading) and this is just what I've gleaned from media.
edit:
forgot links
Not in this market but if you're familiar with Abraaj's healthcare fund, you'll see direct correlation with underinvested hospitals in places that needed them the most. Portfolio taken over by tpg but they are unwilling to invest more.
This is a complicated issue that could be addressed in a much longer essay than the below.
My perspective is that media coverage of PE, especially healthcare (HC) PE, has a negative bias. Arguments are often made through anecdotes and motivated reasoning. PE, broadly speaking, backs roughly 10,000 companies. Even if 1% of PE investors are bad actors, you will have 100 anecdotes to choose from. When it comes to HC, those anecdotes are typically relatable and obviously abhorrent, eliciting outrage. I don't believe anyone would condone the behavior. That said, anecdotes are not data.
As a PE investor, think about whether bad patient outcomes is good for your business. You should always be thinking about building a valuable business for the next buyer. HC investors focus deeply on patient outcomes and compliance. Nothing can sink a HC business faster than a revoked Medicare license. Therefore, these anecdotes are rarely the intended outcome. Also, doctors have been getting sued for way longer than PE has been involved in HC businesses. There will always bad actors in every profession. Incentives and human nature. A common anecdote for negative PE behavior is centered around skilled nursing facilities and the stories are bad. But the stories also ignore all the terrible behavior from the facilities not backed by PE. Perhaps there is a deeper root cause issue, like lack of funding from Medicaid?
The more interesting question is: should there be a profit motive in healthcare. The answer is not obvious and many Americans struggle with the idea that HC is a business. I believe that the incentives of capitalism results in intelligent and motivated people entering the HC industry, which leads to better outcomes and more innovation. However, HC is also commonly viewed as a public good and the stakes are high so HC needs to be tightly regulated (it is). What will be more effective is better alignment of interests through value-based care as opposed to fee for service. This transition is already underway.
It is indeed an interesting question and I do agree with you that capitalism drives long-term efficiency. If an owner can generate a return and management can benefit from a MIP, they are incentivized to improve the efficiency of the business. Sure, you can run an underinvested business and just milk it for cash / profits but this will most likely bite you when a potential buyer of the business conducts a proper DD.
I also believe that private healthcare is a huge benefit. I live in Sweden, where healthcare is free. However, we also have state-subsidized healthcare insurance where the government pays a large part of the amount that the insurance company owes the doctor. As such, healthcare insurance in Sweden is very cheap (I pay $30 a month) and even someone in their 50s would only pay $100-200 a month. Public healthcare in Sweden works perfect if you suffer from anything that is life-threatening. Meanwhile, if you suffer from anything that is not lethal, such as back pain, issues with headaches etc. you will have to wait for many months before getting to see an expert. With healthcare insurance, you are guaranteed an appointment within 14 days but almost always get one within 1-2 days.
Having suffered injuries both when having insurance and when not having insurance, I could never ever go back to public healthcare. It's a shame that there is a difference and the ideal situation would be if public healthcare was better. However, I believe it is very difficult to run any public authority with great efficiency because it's extremely difficult to attract smart people. Smart people who are good at their jobs would rarely seek employment at a government authority given the huge discrepancies in compensation. With that said, I do believe that private healthcare is a necessity if you want to have efficient care unless you create an incentive for smart and talented people to come work for public authorities.
Absolutely disagree (as someone in HC PE, but at a fund that doesn't invest in traditional HC services). A lot of the "bad actors" are megafunds investing in large hospital chains, so their impact is outsized compared to some LMM fund buying up PT clinics or ABA therapy businesses.
Look up Cerberus / Steward Healthcare / MPT. Clear cut example of misaligned incentives leading to human suffering (and death!) due to PE greed. $3B sale leaseback -> $500M dividend recap -> Steward struggles under new lease expense load -> Cerberus exits @ 3.0x MOIC -> Steward starts closing down hospitals due to excessive debt payments.
Similar story with Leonard Green / Prospect. $1.6B sale leaseback to MPT -> $650M dividend -> multiple hospitals closed and Prospect on the verge of bankruptcy.
Cherry on top, MPT shareholders come out holding the bag on these absolutely inflated real estate purchases b/c MPT CEO's incentive plan is driven by transaction volume, not profitability! Look at MPT stock price over the last 3-5 years.
Apollo / Lifepoint is another terrible hospital deal. I'm not sure there was an MPT deal there but they executed a $1B dividend recap in '21 and utterly gutted caretaker budget and basic patient spend.
And this isn't even going into peripheral services businesses like vet, dental, primary care, ABA services, home health/infusion where LMM and MM investors can and have caused immense damage to local communities. Looked at a home health business at my previous fund with the thesis of taking a Medicaid-focused home health business near the border and converting the patient mix to commercial... the impacts of a move like that on the local community are pretty clear. And this was at a fund that supposedly cared about patient outcomes!
Think the verdict in PE investment in hospitals and HC services is pretty clear at this point.
Agree that many of the culprits are the larger firms but you also see some new LMM and MM players moving down-market and even trying to play up the ESG / responsible-investing angle (Vistria tries to ham this up real hard). Ascend Partners, founded by a duo of ex-Warburg HC investor and CityMD cofounder, targets PPMs specifically catered towards serving 'underserved communities.' What they don't let on is that most of these clinics and centers are likely falsifying claims / numbers like its their job. Will get super messy down the road is my guess and tough to watch these communities suffer more in the long term. Not a good look.
100% agree with this. PE should be banned from certain types of hospitals transactions.
Sure, might be profitable and improve operational efficiency.
But it’s dangerous to patients. Period.
I mean, the first link actually did look at data, not anecdotes.
They used a pretty clever IV design to show that PE ownership increased nursing home mortality rates by 11% for the group of people that went to the nursing home closest to them.
My dad's hospital was co-invested by TPG but they haven't meddled. Idk why. Weird
Because coinvest is a completely different strategy than buyout where you are buying the entire thing, making improvements/increasing profits and selling it... coinvest is buying a small sliver and basically passive investing for a PE firm, you're not actively managing it like you would if you owned the whole thing yourself
Nice. Understandable. TPG bought around half of it - the other half was bought/ co-invested by a local conglomerate. They bought it from previous private owners which had switched hands multiple times already.
Link to articles?
Sorry, I don't know how I forgot to link them in:
https://www.nytimes.com/2023/07/10/upshot/private-equity-doctors-office…
https://www.nber.org/system/files/working_papers/w28474/w28474.pdf
FWIW, there's this nice book called 'PE at work' by Appelbaum and Batt, that's on my reading list. It's an academic study that seeks to survey whether PE adds operational value, on average.
Most PE shops are a societal negative - any thing they can do to make an extra dollar, they'll do it.
I worked at a healthcare fund for ~2 years and I can't remember one IC meeting where we asked if a company actually helped produce better outcomes for patients. I'm not saying that PE is directly correlated with negative patient outcomes, but I am not sure it's a main focus of the fund. Anecdotal evidence is never good but as a sector-specific fund I'm not sure prioritizing patient outcomes correlated with strong returns (which we had).
I will add that we did care about hospital staff turnover in lens that higher turnover means increased operational costs, but again not necessarily meaning its bad for the patients. I recall a specific example where we looked at an ABA business and were more concerned about the operational expenses than if the patients were being cared for.
Used to work at a PE HC Portco during the pandemic. Didn't speak with any C-suite people but I remember a few of them getting into a heated debate over an issue that could affect patient care (both were medical doctors, never heard the details but I remember overhearing one of them getting very heated in a conference call very late at night - we had a large floor and I think he assumed everyone left at that point, I was still there finishing up work).
I always wondered if the PE firm tried influencing the management team to make a decision (I knew the situation was vendor related, won't go into detail but it was a company wide issue). I never got that visibility on who started the discussion amongst senior management / C-suite but I knew we were PE-backed. Never had the guts to ask since I probably wasn't supposed to even overhear the call.
Sorry for the bump but I have a question, was staff turnover (epecially physicians and other clinicians) an ongoing issue for portfolio companies you worked with?
Thinking of a business / entrepreneurhip idea that revolves around this in investor-backed HC companies like PE-backed PPMs etc. Feel free to PM me if you aren't comfortable sharing it here.
I didn't cover any of our PPMs but the main issues that I recall included misalignment of growth incentives (i.e., if we owned a dental practice, the dentist himself may not have wanted to strive for the organic growth goals we set out) and turnover in certain business (mainly ABA, which makes sense). I wouldn't say it was an issue that effected all of our business though, but we did see it more often when looking at new potential targets.
The incentives for PE vs. healthcare outcomes are completely contrasting concepts.
It’s common sense - lower staff who are already spread thin are just focused on churning vs. providing quality care.
Biggest issue is that medicine in the US is reactive vs. preventative.
My 2 cents - Funds shouldn’t be barred by law from investing in the healthcare space but they should definitely be held accountable and liable to the greatest extent of the law.
People are quick to call for more law but fail to understand the legal precedent that sets as well as the unintended consequences of restricting capital to an industry as vital to society as healthcare is. Law directing capital flow is not the road we should go down.
Funds and investment managers need to be held accountable for deaths or injury that are proven to be caused by negligent behavior. We’ve got all the law we need to address the issue.
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