How Private Equity Deals Are Reshaping Your Health Care

JOEL BERVELL: My guest on this episode of The Dose is Dr. Zirui Song, M.D, Ph.D. He’s a general internist at Massachusetts General Hospital, where he practices primary care, and serves as associate professor of health care policy and medicine at Harvard Medical School. Dr. Song’s research focuses on the health and economic implications of financial incentives, public policies, and other changes in the health care system. Most recently, he and his team have focused on the impact of private equity investing in health care, and that’s what we’ll talk about today.

Just to get a sense of the scope of this issue with some recent data, over 6,000 physician practices are owned by private equity, up from just about 800 in 2012. Meanwhile, as of 2021, 22 percent of nonprofit hospitals in this country are currently owned by private equity, while 80 percent of physicians are employed by a hospital system or corporation, up from 60 percent in 2019 — a pretty steep climb in recent years. So in other words, medicine is an attractive target for private equity. It’s highly profitable, and Dr. Song’s research focuses on how that investment is impacting patients. But I’ll let him explain.

Dr. Song, thank you so much for joining with me.

ZIRUI SONG: Thank you so much, Joel. It’s a pleasure to be here. Thank you for having me.

JOEL BERVELL: So I’ll just kick it off with some questions. In January of this year, Massachusetts became only the second state in the nation to enact legislation that subjected private equity firms to stricter scrutiny and imposed liability in their health care transactions and holdings. Indiana was the first, and we can talk about that too, but I want to start with where you are, in Massachusetts. Can you tell us a little bit about that?

ZIRUI SONG: Sure. Our state legislature here in Massachusetts passed a piece of legislation that enables several state agencies greater oversight authority over the private equity transactions in our health care system. They designed several new policy instruments whereby the Division of Insurance, the Health Policy Commission, the Office of the Attorney General, and a state health data infrastructure agency can all request documents and information around private equity transactions in the health care system. These documents or this type of information can include financial information related to the transaction, the financial health of the organizations acquiring health care providers, and the companies doing the acquisition. They are, in this legislation, allowed to ask for this information in both public settings and longitudinally going out to as far as five years after the acquisition.

I would just also note here that every private equity transaction is different and can differ quite substantially. As my colleagues and I have shown in some of our recent work, private equity acquisitions are not monolithic. They really do have important differences across types of providers acquired, such as hospitals versus physician practices, across geography and across time as the firm’s strategies might change or adapt. Obviously, as in many cases, not just private equity transactions or private equity acquisitions, when community hospitals close, especially in suburban and rural settings where a single hospital may be the only option for a given community, that closure portends important reductions in access, but also other hospitals in the neighboring region having to pick up the extra patient needs that they may not be in a great position to service right away. So that’s definitely a generalizable and important lesson for communities and policymakers.

Another is the nature of the transaction itself. By buying hospitals or nursing homes or facilities, by using a large share of the acquisition price financed by new debt and placing the debt obligation on the acquired entity, a private equity transaction can place additional financial pressures on the acquired entity. The strategies used to generate returns for investors and make an acquired entity more financially sustainable, such as cutting costs, which often in health care involve cutting labor or raising prices, which we’ve seen in many studies, or in some cases increasing the volume of services delivered, those are also generalizable lessons that we can take across different transactions. But what may not be generalizable is other terms of the deal that are generally not observable to researchers, unknown to the public, and before, a law like the Massachusetts state law that you first asked about, lacked any policy tools to reveal.

So there are important details buried in those terms of the deal. Who the creditors or debtors are? What are the terms of the debt? At what point are there dividend recapitalizations that may not be part of the initial transaction but may unfold as time goes on? Who really manages the clinical entity? Who has responsibility for the patient care, making decisions about clinical leadership? Who makes decisions about the sale of the buildings and the real estate, or further investment decisions? There are a lot of these nuances that make every private equity transaction different from each other. So while we should appreciate the common lessons and the generalizable teachings by studying different transactions, we should also just take note that they are quite different from each other often and are not monolithic.

JOEL BERVELL: That’s such an important point. Looking more at your research, a lot of your recently published research looks at health outcomes for patients in hospitals and practices that are owned by private equity firms. What prompted you in the first place to kind of head in this direction with your research?

ZIRUI SONG: Well, I had the great pleasure of working with many colleagues over the last few years on this general topic area. Some of the first were colleagues who were students at the time. For example, the initial paper that Joseph Bruch, Suhas Gondi led, that we worked on and published in JAMA Internal Medicine, found that after private equity acquisition on average across the country, there was roughly a 27 percent increase in net income reported by these hospitals compared to similar hospitals that were not acquired by private equity firms. And that was driven by a seven to 16 percent increase in hospital charges. Not all hospitals increase their charges the same way, but that generally was sort of a price effect in explaining the increase in net income.

We also learned there that there was a slight increase in the patient mix where Medicare or publicly insured patients began to be admitted a little bit less on the margin. Medicaid stayed the same actually. So what that suggested was that commercially insured patients were being admitted a little more on the margin to substitute for Medicare patients. We also in that work studied process quality measures, things like: Did patients receive a discharge summary when they were discharged from a hospital? For patients who came in with a heart attack, did they receive an aspirin, a beta blocker? It turns out that many of these process quality measures can be, I’m not saying they always are, but can be akin to box-checking exercises by a hospital that on discharge, if you automate the discharge summary being printed, you can meet that quality measure. It may not actually get at the clinical quality of care that a patient or family or a public official may care about.

So that motivated the subsequent work that you’re asking about led by another great colleague, Dr. Sneha Kannan, who’s an ICU specialist and a physician at the University of Pittsburgh and faculty member there, that studied changes in hospital-acquired adverse events after these private equity acquisitions compared to hospitals that were not acquired. It was in that work where we found this rather large increase in hospital-acquired complications or adverse events compared to the hospitals that were not acquired, driven by central line–associated bloodstream infections and a relative increase in falls where the hospitals not acquired had a decline in patient falls, but the hospitals that were acquired did not have that decline, as well as a doubling of surgical site infections.

JOEL BERVELL: So just kind of summarize that second paper you just mentioned. Essentially what you’re saying is that when a private equity firm acquires a hospital, on average, there’s an increase in hospital-acquired adverse events despite the fact that, like you’re saying, that there’s a lower pool of Medicare beneficiaries. It’s the same amount as Medicaid, but lower pool of Medicare beneficiaries. So meaning that there’s technically worse care that’s going on within those inpatient services.

ZIRUI SONG: What we actually found was that the Medicare patients admitted to these hospitals were on average a little bit younger and also on average less likely to be dually eligible for Medicaid.

JOEL BERVELL: Okay.

ZIRUI SONG: What that suggests is that a Medicare population less dually eligible for Medicaid probably means a Medicare population of patients that is less disadvantaged, because Medicare beneficiaries who are dually eligible for Medicaid tend to have lower income, tend to be more socioeconomically disadvantaged. So when you think about a younger population that was admitted to begin with, and one that is less disadvantaged, it made it further striking that adverse events, preventable harm increased relative to the control group.

Now, admission decisions are controlled by hospitals, and we see this as a direct extension of the earlier work where the patient mix changed a little bit. This later work involved 100 percent of the Medicare inpatient admissions. So, it did paint what we thought was a relatively more complete picture of the Medicare population, even though we were not able to study commercially insured patients in this study. These preventable adverse events occurred even after the transfers of patients out of the hospital.

JOEL BERVELL: Wow.

ZIRUI SONG: So in addition to younger and less disadvantaged patients being admitted, and after you account or take away those patients who were transferred, the patients who remained, who were already younger to begin with, less socioeconomically disadvantaged to begin with, and on average healthier because patients who are transferred away tend to be sicker patients as opposed to healthier ones than among that even-healthier subset, we found this rather concerning increase in patient adverse events.

JOEL BERVELL: Thank you for diving into that because I think it provides some really interesting context about how insurance status versus how sending someone off to a different hospital can change that pool that you have within, yet you’re still seeing increased adverse events.

ZIRUI SONG: Yeah, and let me give you also one final argument here.

JOEL BERVELL: Yes, please.

ZIRUI SONG: That is often used in defense of private equity acquisitions actually for this particular study, which is that we also found in this Medicare population, the average mortality rate also declined a little bit after acquisition relative to the hospitals not acquired. So one potentially easy interpretation is that, well, the private equity acquisition seems to have saved lives, but if you take into account what we had just gone through, which is that these patients admitted were already younger, less socioeconomically disadvantaged, and the sickest among them were already transferred out to other hospitals, the remaining healthier subset, we would expect them to be more likely to walk out of the hospital alive. So that finding did not surprise us, and it was not counterintuitive for us. It was just that even among that healthier subset of the admitted patients, we found this rather concerning increase in adverse events, which did not lead to death, thankfully, but were still harmful to patients and still preventable.

JOEL BERVELL: Absolutely. I want to move on to the appetite right now for private equity and looking at deregulation that may be happening in the future. So right now, as we all know, the economy is pretty volatile, very unpredictable. Do you see health care remaining a target for private equity? When we look at the early targets, a lot of them were mostly highly profitable practices that included dermatology, ophthalmology, urology, gastroenterology, radiology, fertility, places that have a lot of revenue in some aspects. Is there more profit to be had in other specialties? Where do you think private equity might be going in this current economy?

ZIRUI SONG: It’s always difficult to predict the future, but it appears that private equity acquisitions of physician practices will continue to pick up speed. The reason is that what we’ve learned in the last few years suggests that physician specialties, many of which have rather high-priced or profitable outpatient procedures that are generally quick to do, such as biopsies or endoscopies or outpatient surgeries or skin procedures, eye procedures, and so forth. The pattern of acquisition seen across these specialties suggests that across the other specialties that also feature these high-priced, outpatient, relatively fast procedures, there remains substantial opportunity for acquisition and consolidation.

As many scholars have noted in the private equity space, acquisitions of physician practices tend to start with a platform acquisition of a rather large practice of a given specialty in a given area. After that occurs, subsequent roll-up acquisitions of similar practices of the same specialty in the same area occurs. And that roll-up strategy allows a private equity firm or any corporate owner to consolidate market power, and therefore, as some of our studies have shown, negotiate for higher prices off of commercial insurers. So has the appetite for that slowed down? The data does not suggest it slowed down. In fact, it has accelerated in recent years rather quickly.

If you think about in suburban communities and in many parts of the country where specialty practices remain quite fragmented in the outpatient setting, it looks like the opportunities for roll-ups and consolidation are rather prevalent. So based on the current trends, one would probably guess that further acquisitions will take place and potentially even accelerate in some specialties. We’ve observed, for example, that behavioral health, mental health care, primary care, women’s health are other areas that feature both procedures and office visits largely, nonprocedures or tests and imaging. Those have increasingly been acquired in recent years as well. You could also look to hospices that are increasingly acquired by private equity across the country.

You still have nursing home acquisitions, you still have hospital acquisitions that are going on, and you increasingly also see medical devices, durable medical equipment, telehealth, and other parts of the delivery system, including newer stages of discovery such as the life sciences, devices, small molecules, and drug development that are also receiving private equity investment and backing. So it really is not just isolated to frontline health care delivery. But in frontline health care delivery, we have this sort of additional concern that if staffing cuts occur or if resources and supplies were not available for patients when they’re needed, that the patient harm is perhaps more immediate.

JOEL BERVELL: Absolutely. When we look at the current environment, it seems like we’re moving towards deregulation in a lot of ways. Will that accelerate kind of private equity moving into different areas? What does an environment of deregulation do to this entire kind of ecosystem?

ZIRUI SONG: Yeah, it’s a great question. Private investments, this type of private equity investment in the health care system, did not really begin until the mid 2000s, whereas the private equity model of this debt-financed acquisition of mature businesses really took off in the 1980s. So for about 20 to 25 years, this model of acquisition, using investor dollars with a big portion of borrowed money or debt to buy a company, largely ignored health care. It went through the service sector, manufacturing, telecommunications, grocery stores, newspapers, and now single-family homes, and many other entities in society or sectors of our economy before it reached the health care frontline delivery system.

Of course, the health care system is unique for various reasons, the presence of health insurance and asymmetric information and market power. And to be fair, private equity is only one of the types of acquirers. There are many nonprofit health care systems and other for-profit owners of health care providers that also acquire physician practices and other hospitals and grow their footprint. Ultimately, in general with acquisition and consolidation, prices go up. If you ask the general question, who in society at the end of the day pays for higher prices in our health care system? Well, ultimately it turns out to be either taxpayers or workers’ wages in a very broad sense.

JOEL BERVELL: Absolutely. I mean, speaking of that, private equity is really good at pitching the benefits in higher paydays that doctors often see when a practice is sold, even despite, as you mentioned, these increases to consumers in different ways. But do you see resistance amongst physicians? Is there a tension internally at some hospitals or practices when it comes to private equity potentially coming into different spaces?

ZIRUI SONG: Yeah, that’s another great question, and I can’t speak for my physician colleagues who have been approached or had to think through potentially selling a practice to a private equity firm. I think these are very challenging and often personal decisions about one’s career, about one’s management and clinical goals. We often see that physicians, more senior or closer towards the end of their practice, careers and who are also more likely to be owners of a physician practice, are more likely to be the ones who are approached. The buyout can be quite financially generous and make a lot of sense for a person who’s looking to ramp down their practicing careers and potentially move out of the role of managing the day-to-day, the HR, the schedules, and everything for a practice which is time-consuming and effortful.

In comparison, younger physicians, who are more likely to be doing the frontline work of seeing patients generating the revenue, coding the claims, billing the claims, seeing the patients — that generation, broadly speaking, of physicians is often not in the position to receive the buyout, but rather is in the position of potentially receiving the pressure to generate additional revenue to meet the financial goals. So receptivity to this kind of acquisition, which if I interpret was part of your question, I think really depends on the seniority in the role of a physician in a practice, and I would say analogously in a hospital or nursing home or other type of facility.

One of my colleagues, Jane Zhu from Oregon Health and Sciences University, she and her colleagues did a really interesting survey of about 1,400 physicians from the American College of Physicians database, and they asked physicians how they felt about being acquired by private equity firms relative to other forms of ownership. In their study last year in JAMA Internal Medicine, they found that, relative to independent practice where the physician would stay independent of any corporate ownership, a majority of physicians, if I recall, roughly about maybe 55 percent or so, so a small majority above 50 percent, responded that they felt private equity ownership was worse or much worse relative to being independent.

JOEL BERVELL: Interesting.

ZIRUI SONG: But relative to being owned by hospitals or health systems or other corporate owners, being owned by private equity was not seen as as negative. There was still a large percentage of physicians who responded worse or much worse, but that went from the majority down to less than 50 percent. Physicians were more likely to report that these other forms of corporate or health system ownership appeared to be roughly the same or on par with private equity ownership.

Jane and her colleagues also surveyed these physicians on how they felt about the impact of private equity on other goals or priorities the physicians had, things like physician well-being, patient well-being, quality of care, access to care, long-term stability of the organization, and health equity. And on these outcomes, physicians’ responses suggested that if it was about health care innovation or investments in potentially new technologies, the private equity backing or private equity investment was more welcomed. It was seen as less negative. But for the other aims that we just listed, in general the private equity ownership was seen as more negative.

Ultimately, many physician practices, many hospitals, many nursing homes are in need of capital. They are looking around for further dollars to finance all sorts of goals, whether it be care delivery or investments in additional people or electronic medical records. So when we think about where they can get those dollars, is it from the Medicare fee schedule? That seems less likely. Is it from the Medicaid fee schedule? In many states that seems less likely just given the financial state that Medicaid programs are facing. Is it from commercial insurers? Well, if they gather more market power and consolidate and negotiate for higher prices, they could obtain that from commercial insurers. And indeed, we see that as an effect of private equity acquisition.

But if these three avenues are closed, how else can a physician practice or let’s say rural hospital obtain the financing they’re looking for, the capital? Well, it turns out that private equity firms may present themselves as one source of this capital with yes, some strings attached, but ultimately it is a source of capital that’s available. So you can start to sort of see and understand why private equity acquisitions might be appealing for health care providers on the ground, on the front lines.

JOEL BERVELL: Absolutely. You’ve kind of characterized this for the physician health care provider landscape. How about amongst consumers? Is there consumer awareness, pushback? I think today it’s pretty common to hear folks talking about how the health care system is broken, but is there awareness that private equity is even a player within the health care system?

ZIRUI SONG: So I do think public awareness is increasing. I think one of the barriers or obstacles to general awareness in previous years were policy levers that were absent to make these acquisitions more transparent. This is exactly what many policymakers are aiming to correct: to increase the transparency and the disclosure of information behind these acquisitions so that state officials and policymakers and the public can be more aware of these acquisitions. If you look at the status quo, as of about last year, the threshold for federal disclosure of a private equity type of acquisition was $119 million, and acquisitions of physician practices and nursing homes and hospices and many such smaller acquisitions fell below the $119 million threshold. So, many of these acquisitions previously were not needing to be disclosed from a federal perspective. And when they were then turned around and sold, let’s say three or five or seven or nine years later, that second handoff, that second transaction was also not disclosed to the public. So in many cases, across communities, across the country, patients could have their physician or hospital be bought and then be sold without them knowing either transaction.

JOEL BERVELL: Wow.

ZIRUI SONG: Many state officials see this as the first step towards protecting patients and the clinicians on the ground by just bringing more transparency into these transactions. And that’s what the Massachusetts law tries to do in several different ways, it’s what the Indiana law tries to do, and it’s what many other states, about 10 states or so to date, have debated in the state legislature about doing.

JOEL BERVELL: I mean, you just mentioned perfectly, kind of segue into my next question about Massachusetts versus Indiana. How significant is it that the two states that have enacted legislation so far aimed at oversight of private equity are Indiana, a red state, and then Massachusetts, a blue state?

ZIRUI SONG: Well, I think we can take from these two examples, and not to overgeneralize, just as you said, that states with different makeups or compositions of the legislature can arrive at similar directions of policy action. And that may be encouraging to some, it may be simply just an insightful fact, but many other states have or are currently walking along sort of the same or similar path. So you can almost think of it as a two-step process that all of these states are trying to take. There are many other states that perhaps are in earlier stages of sort of rowing in this direction. It’s a long journey. It’s taken states like Indiana and Massachusetts some time to discuss the issues, to talk about and debate the evidence, and then to come up with the appropriate policy levers for intervention — and all, I would say, while respecting the need for private capital in the health care system and towards this ethos of how do we do more to prevent the bad but encourage the good.

JOEL BERVELL: Absolutely. I kind of want to end with this kind of broad question. We’ve talked about so much, I’ve learned so much just talking to you today right now. But want to end with, are you optimistic or pessimistic about health care and private equity? And is there potential for good outcomes?

ZIRUI SONG: Well, I think private equity is a piece alongside other big changes such as the transition of hospital care into the outpatient community or the patient’s home, or the development of artificial intelligence into frontline health care delivery, into diagnostics, into patient management, and other major changes in health insurance. When you put all of that together, the private equity story begins to seem a little bit smaller relative to all of these other changes. Honestly, I think it’s fair to hypothesize that if private equity were not present today, there would be other actors, such as other financial institutions, maybe even hedge funds or other for-profit hospital systems or nonprofit systems, that would do similar types of acquisitions with similar effects on health care prices and potentially even volume.

So I think a more nuanced answer is probably somewhere in the range of, we’d have to balance and weigh the pros and cons of what is gained through consolidation and what is lost through consolidation. And if the world walks towards the direction of further consolidation, then what type of consolidation are we as a society willing to bear? Is it consolidation with staffing cuts, with the sale of land and buildings, or without staffing cuts and with further protections on the front lines? But I do want to stress that the private equity acquisition piece is one part of a much larger, unfolding story.

JOEL BERVELL: Mm-hmm. Well, Dr. Song, thank you so much for this absolutely insightful conversation. Thank you so much for joining me on The Dose.

ZIRUI SONG: It’s my pleasure. Really honored to be here with you. Thanks so much for having me.

JOEL BERVELL: Thanks.

This episode of The Dose was produced by Jody Becker, Mickey Capper, and Naomi Leibowitz. Special thanks to Barry Scholl for editing, Jen Wilson and Rose Wong for art and design, and Paul Frame for web support. Our theme music is “Arizona Moon” by Blue Dot Sessions. If you want to check us out online, visit thedose.show. There, you’ll be able to learn more about today’s episode and explore other resources. That’s it for The Dose. I’m Joel Bervell, and thank you for listening.