Mutually Exclusive: Massive Profits or Solid Healthcare?

 

It’s just what private equity does. Buy an asset, often supporting the leveraged acquisition debt with the cash flow from the acquired company, cut costs to the bone and raise prices as high as the market will bear… and maybe flip the resulting reconfigured company into a public offering. The expected rates of return, assuming the new version of the company can survive with all the changes, are generally multiples of 100%. Recently, private equity has focused on the often very limited (and hence not in a competitive market) healthcare facilities available in smaller cities and towns. By rolling up smaller segments of local hospitals into larger multistate corporations, private equity has made a killing, maybe literally. Even entire hospital chains and multistate medical practices. But especially ERs.

Emergency rooms at hospitals across the land are particularly vulnerable. Staffed for possible emergencies, they often have available doctors to deal with obviously fluctuating demand. But if reasonably expected spikes in usage are factored out of the funding structure, cost-cutting is easy. Staff and prepare your ERs only for average conditions and lay off entire departments of doctors, especially expensive specialists, cut support staff and even the footprint of the facility itself… while substantially jacking up the price of everything for patients. Congress did take a bite out of some of this price gouging – banning surprise fees for out-of-hospital physicians unilaterally engaged by the hospital when a desperate patient (often unconscious) really has no choice it the matter – but there is plenty of gravy in private equity reconfiguring of the ERs they acquire.

Let’s be perfectly clear, these private equity takeovers of medical operations almost never benefit patients or enhance their care. The hospitals call it prudent “outsourcing.” Private equity calls it “profitable.” Very profitable. They’ll tell you this kind of outsourcing is all about leveling off and seriously reducing costs for the hospital. Not exactly… Writing for Guardian (UK), October 25th, and having just experienced the downgrade in healthcare in one of these “outsourced to private equity” emergency rooms in Santa Fe, New Mexico, journalist Clayton Dalton drills down on this growing phenomenon: “Why would a hospital fire an entire department of doctors?... The emergency room at the hospital, Presbyterian Santa Fe medical center, would be taken over by a company called Sound Physicians. Sound is a contract management group, or CMG. It’s a for-profit corporation, owned in part by a private equity firm.

“Private equity-backed CMGs now operate a quarter of all ERs in the US. The rise of the CMG reflects growing private equity investment in healthcare generally, up more than 20-fold since 2000… The pitch is that CMGs can bring business savvy and financial resources to a struggling clinic or department. They argue that this is exactly what American healthcare needs: seasoned investors bringing an infusion of capital and business acumen.

“Last fall, a local newspaper published a story about Presbyterian’s plan. An administrator stated that Sound was brought in to ‘consistently provide physician coverage’ so that the ‘community has access to care when they need it most.’… ‘I literally laughed when I read that,’ John Wagner told me. Wagner has worked in private equity and investment banking for over 20 years. I reached out to him after he published a letter in the Santa Fe New Mexican criticizing the privatization.

Private equity investors often expect a several hundred per cent return on their investment, Wagner explained in his letter. ‘Where do you think those earnings come from, tip jars?’ he wrote. ‘Nope. They’re extracted from overextended doctors, underpaid nurses, and from our community … Sound Physicians is here for profit, nothing more or less.’

“‘I’m glad you contacted me,’ Wagner said when we spoke, ‘because I know what private equity does when they get involved in a company.’ The first thing investors look at is operating expenses, called Opex. ‘They know that every dollar they take off of operating expenses becomes earnings.’… Let’s say you run a lemonade stand, he explained, and you sell lemonade for a dollar. If Opex is 60 cents per glass, your profit is 40 cents. ‘If you can find cheaper lemons, and you sell that lemonade with Opex of 55 cents,’ he said, ‘your earnings go up by that nickel.’… ‘So we’re the lemons?’ I asked… ‘Yes, you are!’ Wagner said.

“Research suggests he’s right: a recent paper found high physician turnover after private equity takeovers, with that turnover offset by physician assistants and nurse practitioners, who are less expensive but have less training. This could affect quality of care, as some studies have found that these changes may increase patient costs, with worse health outcomes. Kaiser Health News uncovered a document from one CMG that specifically promoted this tactic to cut costs.

“If return on investment is your goal, the arithmetic is simple – slash payroll, drive down Opex, make more money… ‘Everything is about saving money for the company, even when it compromises patient care,’ one physician employed by a CMG wrote online. ‘Physicians treated just like business expenses and numbers,’ wrote another.” So if you wonder why healthcare in this country continues to skyrocket, here’s one good reason, and while the Biden administration is making a little headway in getting pharmaceutical companies to allow Medicare to use its bargaining power to drop drug prices in another obvious sector, so far that is relegated to a very short list of essential prescription drugs. US drug prices are absurdly more expensive than the same drugs overseas.

Speaking of overseas, none of this happens anywhere else in the entire developed world. There isn’t another developed country on earth with higher per capita healthcare and prescription drug costs that the United States. No one else even comes close. Healthcare remains one of the most consistent profit centers in our entire country. Why? Because every developed country on earth has universal healthcare… except us. Medical care there is a public sector responsibility, not passed off to profit-seeking investors.

We are never going to have cost-sensitive quality healthcare system until Americans actually get that universal coverage. Even extremely conservative GOP President Richard Nixon proposed that we adopt such a system for all Americans, but his own party shot him down. Every year, average Americans face a declining lifestyle at an increasing cost, while the richest in our land have never made more money or owned more wealth. Healthcare in the US is just an open sore example that exploitative profit-seekers want to keep untreated and festering.

I’m Peter Dekom, and US healthcare practices are the poster children for a two-tiered economy: one for the rich and the other for everyone else.