HOW PRIVATE EQUITY VULTURES HAVE CORRUPTED U.S. HEALTH CARE Part 1

This is the second in a series of posts on how the U.S. health care system has been privatized and financialized so that profits rather than patients have become the perverse and pervasive priority. The result is a system that has very high costs and poor outcomes because there is a fundamental conflict between caring for patients and delivering value to investors. The first post in this series presented an overview of the for-profit U.S. health care system. This one focuses on the role of the extreme capitalism of private equity firms.

(Note: If you find my posts too long to read on occasion, please just skim the bolded portions. They present the key points I’m making. Thanks for reading my blog!)

An important piece of the for-profit privatization of the U.S. health care system is the role of private equity (PE) “investors.” “Investors” is in quotes because these financial manipulators aren’t investing in anything except their own short-term profits. They are not investing in the companies they buy; they are looking to maximize their short-term profits and have no qualms about the companies going bankrupt – in some cases that is their plan.

The private equity model involves using mostly borrowed money to buy a company. The debt and interest of the borrowed money are then made the responsibility of (and often an overwhelming burden for) the purchased company. This forces the purchased company to engage in (often severe) cost-cutting to be able to make the payments on the debt. This cost-cutting typically involves major cuts to the number of and compensation for employees, as well as reductions in the quality of the company’s products or services. In addition, the company’s assets, such as real estate, are often sold off to raise money to pay for the debt or provide payments to the private equity buyer. The success or failure of the company is largely irrelevant as long as the PE firm can extract a high return. PE firms regularly use bankruptcy to get rid of costs and liabilities while, nonetheless, holding onto their questionably acquired gains.

U.S. laws and policies aid and abet this process by granting tax benefits to having debt, including the very high levels of debt that private equity buyouts create. PE firms are also much more loosely regulated than publicly owned companies or mutual funds that sell shares to the public. Given their private ownership, PE firms have basically no requirements for public disclosures or transparency. And PE firms have learned how to expertly manipulate the bankruptcy laws to shortchange workers and customers (in the examples here doctors, nurses, and patients) while preserving benefits for themselves.

For the last 20 years, private equity firms have been buying health care companies. The PE model of maximizing profits with no regard for the purchased company or its customers or employees, means that this has undermined the quality, access, timeliness, and affordability of health care for many Americans. PE firms’ health care system purchases include hospitals, home care and hospice providers, diagnostic and imaging labs, pharmaceutical and medical device companies, dialysis and fertility clinics, physicians’ practices, and urgent and specialty care centers. In 2018, there were 800 PE health deals representing over $100 billion in value. The subsequent cost-cutting has led to the loss of 1.3 million jobs since 2009.  [1] Many communities have lost their local hospital or other medical services providers creating health care deserts that require people to travel tens or hundreds of miles to get medical care, including emergency room services.

For example, in 2006, a consortium of three private equity firms bought Hospital Corporation of America (HCA). To maximize profits for its PE owners, HCA manipulated billing to garner unwarranted revenue and refused to serve patients who didn’t pay in advance. Physicians in other PE-owned hospitals or clinics have been pressured to maximize patient volume by, among other things, restricting the time they spend with each patient. They have also been pressured to push products and treatments, some of which were unnecessary, while being required to be parsimonious with medical and other supplies. This is all typical of the revenue maximization and cost cutting that occurs under PE firm ownership, maximizing profits at any cost. Emergency room (ER) physicians also report being pushed to inappropriately admit patients when hospital beds were open and being asked to meet quotas for the number of admissions.

Here's how a not atypical acquisition, in June 2019, of a community hospital played out in Watsonville, California. A PE firm, Halsen Healthcare, bought the community hospital for around $40 million. The hospital’s real estate was immediately sold to an Alabama real estate investment trust called Medical Properties Trust for $55 million. The hospital then had to pay $5 million a year to rent back the property. Under PE ownership, the hospital immediately stopped paying vendors and quickly ran out of essential supplies from printer paper to hospital gowns to surgical supplies. Within six months, doctors at the hospital were not getting paid; some quit. Halsen also stopped paying nurses’ health insurance premiums and froze employee’s retirement savings accounts. Sometime in the spring of 2020 it stopped paying rent. Somehow, the hospital managed to limp along until it filed for bankruptcy in late 2021, when, among other things, it owed $40 million on unpaid rent and loans. [2]

Similarly, Steward Health Care and its private equity owner, Cerberus Capital Management, did several hospital real estate transactions with Medical Properties Trust using real estate investment trusts (REITs). REITs are specialized investment vehicles that receive tremendous tax advantages under U.S. tax laws. Their use by PE firms for hospitals’ real estate allows the PE firms to extract hundreds of millions of dollars from each hospital purchase, but typically leaves the hospitals financially crippled. Between 2015 and 2021, Medical Properties Trust did hospital REIT transactions with at least seven PE firms for over a dozen hospitals or hospital chains. Investigations have revealed schemes and scams, as well as outright criminality, that have enriched PE firms and friendly CEOs of the hospitals they own. The CEO of Medical Properties Trust itself is still making about $16 million a year even though the price of the company’s stock has declined nearly 75% since January 2022. Meanwhile, countless hospitals whose real estate is owned by Medical Properties Trust and its REITs have gone bankrupt or slashed services and employee pay to make rent payments.

My next post will describe some other parts of the health care system that PE firms have bought and the effects this has had on patients, doctors, nurses, and other health care workers.

[1]      Feng, R., 6/3/22, “The pain profiteers,” The American Prospect (https://prospect.org/culture/books/pain-profiteers-mariner-olson-reviews/)

[2]      Tkacik, M., 5/23/23, “Quackonomics: Medical Properties Trust spent billions buying community hospitals in bewildering deals that made private equity rich and working-class towns reel,” The American Prospect (https://prospect.org/health/2023-05-23-quackonomics-medical-properties-trust/)