The stealthy takeover of the healthcare industry by private equity companies

The stealthy takeover of the healthcare industry by private equity companies

Zion Gastelum, age 2, passed only days after dentists at a clinic linked with a private equity business conducted six root canals and crowns on his baby teeth.

His parents filed a lawsuit against the Yuma, Arizona Kool Smiles dentistry facility and its private equity owner, FFL Partners. They asserted that the unnecessary treatments were performed as part of a business effort to increase revenues by overtreating Medicaid-enrolled children from low-income households. According to the lawsuit, Zion died after being diagnosed with “brain damage caused by a lack of oxygen.”

In the lawsuit, the family stated that Kool Smiles “overtreats, underperforms, and overcharges.” The action was resolved last year on private terms. FFL Partners and Kool Smiles neither commented nor denied liability in court documents.

Following a breakthrough year in 2021, when the deep-pocketed firms invested $206 billion in more than 1,400 health care acquisitions, private equity is working swiftly to overhaul the American health care system.

Seeking quick returns, these investors are purchasing eye care clinics, dental management chains, physician practices, hospices, pet care providers, and tens of thousands of other medical care providers. In certain hospitals, private equity-backed groups have even established “obstetric emergency units” that can charge pregnant mothers hundreds of dollars more for standard perinatal care.

According to a KHN investigation, as private equity expands its reach into the health care industry, evidence is accumulating that this expansion has contributed to higher prices and poorer care quality. Since 2014, KHN discovered that corporations owned or managed by private equity firms have agreed to pay more than $500 million in fines to settle at least 34 cases brought under the Misleading Claims Act, a federal law that penalizes false billing submissions to the federal government. The majority of the time, the owners of private equity have avoided culpability.

In 2021, private equity firms will control more than two-thirds of the market for medical services such as anesthesiology and gastroenterology, according to new study conducted by the University of California, Berkeley. And KHN discovered that in San Antonio, more than two dozen gastroenterology practices are run by a private equity-backed organization that charged a patient $1,100 for her portion of a colonoscopy – roughly three times what she paid in a different state.

Not just prices are subject to criticism.

Whistleblowers and harmed patients are resorting to the courts to pursue charges of misbehavior and other unethical corporate practices. The lawsuits argue that certain private equity firms or companies in which they have invested have increased their bottom line by breaching federal false claims and anti-kickback statutes or by employing other profit-enhancing tactics that could be harmful to patients.

Mary Inman, an attorney who protects whistleblowers, stated, “Their model is to achieve short-term financial goals, and in order to do so, shortcuts are necessary.”

In the meantime, federal regulators are almost blind to the incursion, as private equity often acquires practices and hospitals under the radar. Over ninety percent of private equity acquisitions or investments fall below the $101 million threshold that initiates an antitrust inquiry by the Federal Trade Commission and the United States. Justice Administration.

Increasing growth

Wealthy individuals, pension funds, and college endowments are among the investors that private equity firms pool. They invest this capital in businesses they intend to flip for a substantial profit, often within three to seven years, by improving their profitability.

According to PitchBook, private equity has invested over $1 trillion in nearly 8,000 health care transactions during the past decade.

Fund managers who support the agreements frequently assert that they have the skills to minimize waste and revitalize inefficient or moribund enterprises, and they highlight their role in helping to finance breakthrough treatments and technology that are anticipated to benefit patients in the future.

Critics see a much darker picture. They contend that the playbook of private equity, while effective in some industries, is not appropriate for health care, where human lives are at stake.

In the health care industry, private equity firms have a propensity to find legal ways to charge more for medical services, such as cutting services that do not generate a profit, reducing staff, or hiring personnel with less training to perform skilled jobs — actions that critics say put patients at risk.

In a series of pieces published this year, KHN examined a variety of private equity incursions into the health care industry, ranging from the marketing of America’s best-selling emergency contraceptive pill to investing in the burgeoning hospice care industry and even funeral homes.

On top of well-publicized takeovers of hospital emergency room staffing firms that resulted in exorbitant “surprise” medical bills for certain patients, these transactions involved the acquisition of entire regional hospital systems.

Laura Olson, a professor of political science at Lehigh University and opponent of the sector, remarked, “Their primary objective is to generate enormous riches.”

Hot places

Private equity firms have similar appetites for acquisitions, according to a KHN review of 600 deals by the 25 firms that have invested most frequently in health care, according to PitchBook.

KHN discovered that 18 of the firms feature dentistry enterprises in their portfolios and 16 list centers that offer cataract treatment, eye surgery, or other vision care.

Fourteen have acquired holdings in animal hospitals or pet care clinics, an industry where increasing concentration has recently prompted an FTC antitrust investigation. According to reports, the CIA is also probing whether U.S. In some regions, Anesthetic Partners, which operates anesthesia practices in nine states, has become too dominant.

The private equity industry has attracted to companies that treat autism, drug addiction, and other mental health disorders. The companies have expanded into ancillary services such as diagnostic and urine testing, as well as software for handling billing and other elements of medical practice.

According to recent research made available to KHN by the Nicholas C. Petris Center at UC-Berkeley, private equity currently dominates a number of specialty medical services, including anesthesiology and gastroenterology, in a few metropolitan areas.

According to Petris Center data, although private equity is involved in only 14% of gastroenterology practices nationwide, it controls approximately three-quarters of the market in at least five metropolitan areas across five states, including Texas and North Carolina.

Similarly, private equity-affiliated anesthesiology practices possess 12% of the market nationally, but have acquired more than two-thirds of the market in five states, including the Orlando, Florida, area, according to the statistics.

According to Yashaswini Singh, a researcher at the Johns Hopkins Bloomberg School of Public Health, these expansions can result in increased pricing for patients.

In a study of 578 physician practices in dermatology, ophthalmology, and gastroenterology that was published in September in JAMA Health Forum, Singh and her team linked private equity takeovers to an average increase of $71 per medical claim filed and a 9% increase in longer, more expensive patient visits.

In an interview, Singh stated that private equity firms may design protocols that send patients back to physicians more frequently than in the past, which can drive up expenses, or order more profitable medical services, regardless of whether they are required, to increase profits.

Singh stated, “There are more questions than answers.” Indeed, it is a black hole.

In some instances, according to Philadelphia health care attorney Jean Hemphill, private equity has simply taken advantage of the reality of managing a modern medical practice in the face of rising administrative expenses.

Private equity firms claim to handle billing, regulatory compliance, and scheduling, enabling physicians to concentrate on practicing medicine. (The physicians may also receive a substantial settlement.)

“You can’t do it on a large scale like Marcus Welby used to,” Hemphill remarked, alluding to a 1970s television serial about a compassionate family physician who made house calls. She stated, “This is what leads to larger organizations.” It is a more efficient method of doing so.

However, Laura Alexander, a former vice president of policy at the non-profit American Antitrust Institute, which worked on the Petris Center research, expressed alarm over the growing dominance of private equity in certain markets.

Alexander stated, “We are still in the stage of determining the scope of the problem.” “It is evident that these transactions require a great lot more transparency and scrutiny.”

“Revenue maximization”

Private equity firms frequently take a “hands-on” approach to management, placing their representatives on the board of directors and influencing the hiring and dismissal of key personnel.

Attorney for whistleblowers in Philadelphia, Jeanne Markey, stated, “Private equity exerts enormous control over the operations of health care companies it invests in.”

In 2015, Markey represented medical assistant Michelle O’Connor in a case filed by a whistleblower against National Spine and Pain Centers and its private equity owner, Sentinel Capital Partners.

According to the lawsuit, in only one year under the leadership of private equity, National Spine’s patient load doubled as it evolved into one of the nation’s largest pain treatment chains, treating more than 160,000 patients across 40 sites in five East Coast states.

According to the lawsuit, O’Connor, who worked at two National Spine clinics in Virginia, stated that the mega-growth goal resulted from a “corporate culture in which money takes precedence over the provision of acceptable patient care.”

She mentioned a “revenue maximization” policy that required medical staff to visit at least 25 patients every day, up from 16 to 18 people per day prior to the takeover.

According to the lawsuit, the pain clinics reportedly defrauded Medicare by billing up to $1,100 for “medically useless and often worthless” back braces and up to $1,800 for “medically unnecessary and often worthless” urine drug tests.

National Spine paid the Justice Department $3.3 million in April 2019 to settle the civil complaint of the whistleblower without admitting wrongdoing.

According to court documents, Sentinel Capital Partners, which by then had transferred the pain management chain to another private equity firm, paid no portion of National Spine’s settlement. Sentinel Capital Partners had no comment.

In another whistleblower instance, a drugstore in South Florida operated by RLH Equity Partners made a “extraordinarily high” profit on more than $68 million in painkillers and scar creams billed to the military health insurance program Tricare.

The lawsuit claims that the drugstore illegally remunerated telemarketers who drove sales. According to the lawsuit, one physician admitted giving the creams to dozens of people he had never met, evaluated, or even spoken with.

Los Angeles-based RLH contested the Justice Department’s assertions. In 2019, RLH and the drugstore settled the matter for a total of $21 million. Neither party accepted fault. Michel Glouchevitch, managing director of RLH, told KHN that his company cooperated with the investigation and that “those responsible for any problems have been sacked.”

In many fraud prosecutions, however, private equity investors escape free because the fines are paid by the companies they own. According to Eileen O’Grady, a researcher at the non-profit Private Equity Stakeholder Project, the government should impose “further examination” of private equity firms whose holdings violate the law.

She stated, “Nothing like that exists.”

Questions about quality

It is difficult to determine if private equity influences the quality of medical care.

Robert Homchick, a Seattle-based health care regulatory attorney, stated that private equity companies’ stewardship of health care holdings is “very variable,” making it difficult to generalize about their success.

“Private equity has some terrible characters, but so does the [health care] business as a whole,” he stated. I believe it is inappropriate to paint them all with the same brush.

However, preliminary research paints a disturbing picture, which has taken center stage this year.

On the night of Vice President Joe Biden’s March State of the Union address, the White House issued a statement accusing private equity firms of “buying up faltering nursing homes” and putting “profits before lives.”

The covid-19 pandemic underlined the “tragic impact” of nursing home staff reductions and other cost-cutting measures, according to the statement.

According to the White House, more than two hundred thousand nursing home residents and employees had died from covid in the preceding two years, and research had connected private equity to inflated nursing costs and increased patient mortality rates.

Some injured patients are resorting to the legal system in an effort to hold companies accountable for what they perceive to be carelessness or practices that prioritize profits over patients.

Dozens of lawsuits attribute patient suffering to the sale of Florida medical device manufacturer Exactech to Texas private equity company TPG Capital. In February of 2018, TPG purchased the device company for approximately $737 million.

In August 2021, Exactech recalled its Optetrak knee replacement system, warning that a packaging defect could cause the implant to loosen or fracture and cause “pain, bone loss, or recurrent swelling.” In the lawsuits, more than three dozen patients accuse Exactech of covering up the defects for years, including, according to some lawsuits, when “full disclosure of the magnitude of the problem… could have negatively impacted” Exactech’s sale to TPG.

Linda White is suing Exactech and TPG, which she claims is “actively involved” in the business of the device company.

In June 2012, White had Optetrak implants placed into both of her knees at a hospital in Galesburg, Illinois. According to her lawsuit, the right implant failed and was replaced with a second Optetrak implant in July 2015. This one too failed, and in January 2019 she had it removed and replaced with a device manufactured by a different manufacturer.

White’s left knee Exactech implant had to be removed in May 2019, according to the pending lawsuit in Illinois’ Cook County Circuit Court.

Exactech stated in a statement to KHN that company performed a “extensive examination” after receiving allegations of “unexpected implant wear.”

According to Exactech, the issue dates back to 2005 but was first detected in July of last year. “Exactech denies the allegations in these lawsuits and plans to defend itself forcefully,” according to the statement. TPG has refuted the charges in court filings without commenting.

“Invasive techniques”

In the past, private equity business strategies have been linked to scandalously poor dental care at some clinics serving low-income children.

In early 2008, a television station in Washington, D.C., aired a shocking report about a local branch of the dental chain Small Smiles that included video of children strapped to “papoose boards” resembling straightjackets before being anesthetized to undergo unnecessary procedures such as baby root canals.

After five years, a U.S. The Senate report cited the television exposé to express alarm over the “corporate practice of dentistry in the Medicaid program.” The Senate report emphasized that most dentists turned away Medicaid-enrolled children due to low payments and posed the question of how private equity could profit from providing such care when others could not.

The answer, according to the paper, is “volume.”

In 2010, Small Smiles paid $24 million to the authorities to settle various whistleblower claims. According to the Justice Department, at the time it was providing “business management and administrative services” to 69 clinics countrywide. It subsequently declared bankruptcy.

However, accusations that volume-based dentistry mills damage impoverished children continued.

According to the 2018 lawsuit filed by his parents, Zion Gastelum was connected to an oxygen tank “that was empty or not operating properly” following questionable root canals and crowns, and placed under the supervision of poorly trained staff members who failed to recognize the error until it was too late.

The lawsuit alleges that Zion never regained consciousness and died four days later at the Phoenix Children’s Hospital. According to the Maricopa County medical examiner’s office, the cause of death was “undetermined.” According to the lawsuit, an investigation by the Arizona state dental board concluded that the toddler’s care fell below acceptable standards.

The dental management company Benevis LLC and its connected Kool Smiles clinics agreed to pay the Justice Department $24 million to settle False Claims Act litigation less than a month after Zion’s death in December 2017. From January 2009 to December 2011, the authorities asserted that the chain provided “medically unnecessary” dental treatments, including baby root canals.

In their lawsuit, Zion’s parents blamed corporate billing rules that threatened to dismiss or reprimand dental staff “for producing less than a fixed dollar amount per patient” for their son’s death.

According to the lawsuit, Kool Smiles billed Medicaid $2,604 for Zion’s treatment. FFL Partners did not reply to calls for comment. It said in court filings that it did not give “any medical treatments that damaged the patient.”

Covering songs

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, dealmakers must report planned mergers to the FTC and the antitrust division of the Justice Department for examination. The objective is to prevent transactions that impede competition, which can result in higher pricing and inferior services.

The current threshold for reporting transactions is $101 million, which prevents government oversight of more than 90% of private equity investments in health care companies.

According to an analysis by KHN of PitchBook data, only 423 of 7,839 private equity health care transactions from 2012 to 2021 were known to have met the current criteria.

In certain transactions, private equity acquires a controlling stake in medical practices and employs doctors. In other instances, particularly in jurisdictions where corporate ownership of physician practices is prohibited by law, the private equity firm assumes a variety of management responsibilities.

Thomas Wollmann, a scholar at the University of Chicago, stated that antitrust regulators may not learn about significant deals until “far after they have been finalized” and that “it’s very difficult to break them up after the fact.”

In August, the FTC targeted what it termed a “growing trend toward consolidation” among veterinary medicine chain pharmacies.

As part of a proposed $1.1 billion takeover of a competitor, the FTC ordered the Luxembourg-based private equity firm JAB Consumer Partners to divest from certain clinics in the San Francisco Bay Area and Austin, Texas.

The FTC stated that the transaction would eliminate “head-to-head” competition, “increasing the likelihood that customers will be forced to pay higher prices or endure a decline in the quality of the relevant services.”

JAB must obtain FTC approval before purchasing veterinary clinics within 25 miles of its Texas and California properties.

The FTC declined to comment on whether or not it plans to increase scrutiny of health care mergers and acquisitions, nor did it specify how much market consolidation is too much.

Betsy Lordan, an FTC spokesperson, told KHN: “Every case is fact-specific.”

Lordan, who has since left the agency, stated that regulators are considering revisions to regulations governing mergers and are reviewing approximately 1,900 responses to the public comment request issued in January 2022. At least 300 of the responses were from physicians or other health care professionals.

Few industry observers anticipate that the concerns will diminish; they may even intensify.

Investors are flush with “dry powder,” which is industry jargon for funds waiting to fuel a transaction.

About 100 investment firms are members of the Healthcare Private Equity Association, which claims the firms have $3 trillion in assets and are pursuing a vision of “building the future of healthcare.”

Long-time critic of private equity and professor at Cornell University Rosemary Batt is alarmed by such talk. She forecasts that investors seeking enormous profits will accomplish their objectives by “sucking the wealth” out of an increasing number of health care providers.

“They are always looking for new financial techniques and tricks,” stated Batt.

This article was contributed by Megan Kalata of KHN.

KHN (Kaiser Health News) is a national news organization that delivers in-depth health-related journalism. KHN, with Policy Analysis and Polling, is one of KFF’s three primary running programs (Kaiser Family Foundation). KFF is an endowed nonprofit organization that provides information on national health issues.


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