More Barbarians at the Gates: Private Equity Puts Primary Care in Play

Yves here. Via the work of the Health Care Renewal website, we’ve warned of the push for corporatized medical care and the danger that poses to patients. Here is another push to extract profit from bodies, that of private equity’s new appetite for primary care practices. More and more med school graduates are turning away from primary care because it is less lucrative than the specialties. Those aspiring doctors who want to buck that trend will find it even harder to get started, since one of the traditional routes has been to take over (which often means buy out over time) an established practice. If private equity firms start hoovering them up, it will be even harder for newbie primary care doctors to get established.

By Roy Poses, MD, Clinical Associate Professor of Medicine at Brown University, and the President of FIRM – the Foundation for Integrity and Responsibility in Medicine. Cross posted from the Health Care Renewal website

There are still some idealistic physicians who enter primary care practice as a calling.

The usual informal definition of primary care is care which is continuous, coordinated, comprehensive and compassionate.  The official definition used by the American Academy of Family Physicians (AAFP) is:

Primary care is that care provided by physicians specifically trained for and skilled in comprehensive first contact and continuing care for persons with any undiagnosed sign, symptom, or health concern (the ‘undifferentiated’ patient) not limited by problem origin (biological, behavioral, or social), organ system, or diagnosis.

Primary care includes health promotion, disease prevention, health maintenance, counseling, patient education, diagnosis and treatment of acute and chronic illnesses in a variety of health care settings (e.g., office, inpatient, critical care, long-term care, home care, day care, etc.). Primary care is performed and managed by a personal physician often collaborating with other health professionals, and utilizing consultation or referral as appropriate.Primary care provides patient advocacy in the health care system to accomplish cost-effective care by coordination of health care services. Primary care promotes effective communication with patients and encourages the role of the patient as a partner in health care.

Private Equity Firms are Buying Out Primary Care Practices

However, an article this week in Modern Healthcare described how primary care in the US is getting a rude surprise.  Apparently, primary care practices are now “in play,” (using the terminology for the classic 1987 movie Wall Street, in which Gordon Gekko declared that greed is good).

The argument was that there is

a small but growing number of investments that private-equity firms are making in primary-care physician practices that are ahead of the curve in offering new care delivery and payment models. Investors see an opportunity in being early participants in value-based care, even as the business case is still unclear given mixed results in Medicare’s payment and delivery reform demonstrations so far.

But the niche is well-suited for private-equity firms, which feed on uncertainty, said Todd Spaanstra, a partner at Crowe Horwath, an accounting and consulting firm.

This is not about quality of care, it is about the idea that business people think that “value-based care” and “risk-based contracting” are the current rages, and so there is money to be made investing in entities that seem to fit in with these fashions.

said Slava Girzhel, managing director at KeyBanc Capital Markets. ‘There’s a lot of discussion about private-equity investing in risk-based models, and I do think we’ll see more of that.’

Continuous, coordinated, comprehensive and compassionate care may suffer when the time horizons are not that long, and the owners of the practice are ultimately looking to sell it.

The long-term opportunity for private-equity firms is the ability to sell these managed-care-savvy medical groups to insurers or health systems, which may pay a premium for the care-coordination expertise and data analytics these practices offer.


The typical private-equity investment timetable is short—about five years. At that point, the firm would probably look to sell the practice, ideally to an insurance company or a health system, said Dan Hosler, a principal at private-equity firm Sterling Partners.

Furthermore, why private equity may be interested in primary care now, continuing interest will depend on the numbers, not on the benefits to patients

This is an area where there are winners and losers,‘ said Dr. Andrei Gonzales, director for value-based reimbursement initiatives at McKesson Health Solutions. ‘It’s everyone trying to get a slice of the pie that’s getting smaller.’

What Happens When the Barbarians are at the Gate

Conspicuously absent from this article was discussion of aspects of the private equity modus operandi which are even more at odds with primary care values than the short time horizon noted above.  We previously warned about the perils of private equity employing physicians (look here.)  The main points were:

–  Private equity is just the new name for leveraged buyout firms (the type of firm described the book, Barbarians at the Gate.)

–  Therefore, when they buy out firms (e.g., the primary care practices discussed above), they use borrowed money.

–  But they leverage in two senses.  Once firms are bought, the private equity owners makes the firms take out further loans, and the money from them may go back to the owners, usually in the form of a special dividend, to pay down the debt originally incurred by the private equity owners.  This leaves the bought out firms heavily in debt, but frees the private equity firm from its original debt.  If the firm is eventually sold, the new buyers take over the debt.  In a worst case scenario, however, the bought out firm goes bankrupt, the private equity’s firm stock in it becomes worthless, but the private equity firm need not be responsible for its financial obligations.

–  If the private equity firm desires more money while it still owns the acquired firm, it may sell parts of it off.

–  To make the finances of the acquired firm look more attractive to the next buyer, the private equity firms often undertakes short term cost cutting measures that may involve layoffs, increased workload on remaining workers, etc.

Other dark aspects of private equity are discussed on the Naked Capitalism blog here.


Primary care physicians thinking about selling their practices to private equity ought to think at least twice before doing so, assuming the physicians are serious about upholding the values of primary care.  Private equity firms are in it for the money, and in the relatively short term.  Private equity firms are unlikely to care about the mission of primary distinct from the ability of primary care practices to make the firms richer.  Therefore, practices owned by private equity may well not provide the best possible care for their patients.  In any case, the physicians working for such practices may be answering to owners who are very explicitly only in it for the money.  They will have become corporate physicians, possibly in the most pessimistic sense of the term.

In general, Dr Arnold Relman reminded us that physicians used to shun the commercial practice of medicine (look here).  Physicians and other health professionals who sign on as full-time employees of large corporate entities have to realize that they are now beholden to managers and executives who may be hostile to their professional values, and who are subject to perverse incentives that support such hostility, including the potential for huge executive compensation.  It is not clear why physicians seem to be willing to sign contracts that underline their new subservience to their corporate overlords, and likely trap them within confidentiality clauses that make blowing the whistle likely to lead to extreme unpleasantness.

Things are likely to be even worse for corporate physicians who are employed by firms owned by private equity. Because of the way private equity operates, primary care practices owned by such firms are liable to be very unstable.  At best, they are liable to be sold to totally new owners in a relatively short time frame, and those owners are likely to be those who will pay the highest price, not necessarily those who will provide the best stewardship for the practices.

Furthermore, primary care practices owned by private equity are likely to end up heavily indebted and subject to strict cost cutting measures that may decrease care quality, decrease access, increase patients’ out of pocket costs, and demoralize providers.  Practices acquired by private equity may be broken up and sold as separate pieces.  Should the debt be too high, and the cost cutting not be sufficient, such practices could end up bankrupt and possible completely defunct.

Do not say I did not warn you.

Physicians need to realize that to fulfill their oaths to put patients first, they have to reduce the influence of rich and powerful organizations with other agendas, like health care corporations, and especially corporations owned by private equity.  The metastasis of private equity into primary care should make us all rethink the notion that direct health care should ever be provided, or that medicine ought to be practiced by for-profit corporations. I submit that we will not be able to have good quality, accessible health care at an affordable price until we restore physicians as independent, ethical health care professionals, and until we restore small, independent, community responsible, non-profit hospitals as the locus for inpatient care.

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  1. Jesper

    Animal testing of the practice has been done in Sweden – PE-owned veterinary clinics.
    The result has been that the PE-owned clinics overcharge and over-treat. While the ‘market’ (the uninsured and insurance companies vs clinics) resolve the issue the patients (or rather the owners of the patients) are the one paying the price.

    & PE-owned clinics for people… They have people employed whose single job is to maximise the charge to the public health system. They also have people who crunch the numbers to select patients, profitable patients are treated and the less profitable patients are referred to the publicly owned clinics. Regulators do still care what happens here but since customers (used to be patients but that is the newspeak-term) can legally be referred away.
    The most amazing thing is that despite all this and having the public guaranteeing payment there are still bankruptcies among the PE-owned clinics for people. Does say something about their business-savvy.

    1. Mel

      “Does say something about their business-savvy[?]”

      It might. Cui bono? When the bancruptcy was over, who had gotten theirs?

  2. Disturbed Voter

    Putting medicine on a profitable basis was the Devil’s own work ;-) In the end, the money men won’t be happy … having seduced doctors into serving Mammon, doctors being pill pushing quacks in many cases … until doctors work for minimum wages just like the rest of us. Profit maximization leads to instability and collapse, as any system dynamics person could tell you … all feedback loops that are stable, have to have a moderating element.

  3. rich

    Sunday, April 26, 2015
    Ex-Medicare Chief to Join Board of LifePoint Hospitals

    Bloomberg reported:

    Marilyn Tavenner, who resigned as head of the Centers for Medicare and Medicaid Services earlier this year, is returning to the hospital industry.

    Tavenner is joining the board of LifePoint Hospitals Inc., which operates more than 60 hospitals in 21 states. Before she began state government work in 2006, Tavenner had worked at the largest for-profit hospital chain, HCA Holdings Inc., for 25 years.

    LifePoint’s SEC filing on Tavenner’s appointment failed to show LifePoint’s HCA roots. HealthTrust and LifePoint were both spun off from HCA in 1999. Later HCA sold out to KKR, a private equity underwriter (PEU)..

    LifePoint paid its non-employee directors about $300,000 in cash and stock in 2013, according to the company’s 2014 proxy filing.

    Board compensation for 2014 averaged $340,000 according to the company’s 2015 proxy filing. It’s a pretty good first gig for an ex-public servant.

    Alongside Tavenner on LifePoint’s board are private equity underwriters from Gridiron Capital and Fenway Partners. The company’s proxy statement included:

    The Company competes for executive talent with numerous smaller private equity-backed hospital management companies located in the Nashville area, including Iasis Healthcare Corporation, Ardent Health Services, Capella Healthcare, Inc. and RegionalCare Hospital Partners, Inc., as well as dozens of other investor-owned healthcare service providers.

    Private equity is pervasive in healthcare and behind its many distortions. LifePoint’s newest board member knows PPACA inside and out. She will help LifePoint navigate a more prosperous route in her many roles:

  4. Garrett Pace

    I love the ad showing on the Gekko video screenshot. A pleasant inducement for the need-for-greed set.

  5. Keith Egly

    I am wondering how they get this done as the law stipulates that a physician needs to be the majority stakeholder in a health care organization. Are they leaving the existing primary care docs as majority stakeholders?

    1. Lambert Strether

      Do you mean “majority shareholder”? “Stakeholder” seems to be one of those words that pops up suddenly and is all over everything like kudzu, like “startup,” or “founder,” or “innovation.”

      1. barrisj

        And let us note of course the obligatory appearance of “disruption” whenever some newish “model” is introduced that monetises or commodifies a basic human need.

    2. bruno marr

      That’s easy to resolve. The medical corporation (currently small; but being swallowed by larger fish) that I use has a medical doctor as its CEO. (He attends to no patients; but was recently honored as Doctor of the Year!)

  6. diptherio

    A little OT, but related. The other day I was watching a webinar on cooperative economic development and saw a presentation by a woman from Gilded Rogue, a triple-bottom-line private equity company. You can imagine I was skeptical at first, but apparently it is actually possible for PE to serve a purpose (apart from making the GPs fabulously wealthy…). GR’s overall strategy is to purchase a company, improve their profitability by providing some professional consulting, get them B corp. certified, and then sell the now-more-profitable B corp. to the employees through an ESOP. Cool stuff.

  7. Ivy

    There is a certain parallel between today’s healthcare industry and the old time telephone business.
    For those of a certain age, recall the original Fun with Dick and Jane movie from the 1970s. That provided many funny scenes, including the one where they hold up a phone company office, because “everyone hates the phone company”.

    That sentiment can be expanded to include healthcare. The new industry is where the dieting occurs in treatment and patient care, and the life insurance line about You’re betting you’ll die and they’re betting you’ll live takes on new meaning.

    Of course, that whole living beyond one’s means vibe applies to the country now and not just to Dick and Jane. See them run.

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  8. Beans

    This has been going on in dentistry for many years now. While I have tremendous respect and appreciation for what Dr. Poses and HCR renewal have done, they do not appreciate the deep darkness that accompanies PE ownership of med/dental offices. Ultimately, it will not be the PE guys who lead the new grads to signing employment contracts instead of going the private practice route – it will be their friends, professors and colleagues within medicine who have embraced the PE way of doing business. Viewing others as a means to greater profit isn’t a mentality confined to Wall Street. As doctors come to view retier tactics colored with “greed is good” policies found in the ACA, I fear Dr. Poses will find many enemies to his message within his profession. See below for a taste of what we private dentists face.

  9. John B

    “The long-term opportunity for private-equity firms is the ability to sell these managed-care-savvy medical groups to insurers or health systems, which may pay a premium for the care-coordination expertise and data analytics these practices offer.”

    I like the term “care coordination expertise.” That likely has less to do with medical skill than with marketing. When a primary care physician diagnoses a patient with a problem that might need a specialist, that patient probably will go to whomever the primary doctor refers them to — which after PE sells out will just happen to be docs in the same corporate “health system.” Regardless of the specialist’s skill, or whether the patient really needs to see one. There’s a law against accepting kickbacks for referrals, but if a doctor just uses “care-coordination expertise” to send a patient to a related entity, that should be no problem.

    As so often with private equity, the business model involves finding new ways to bend the law — or, thanks to those confidentiality clauses, to break the law and make sure nobody can prove it.

  10. sunny129

    ‘Physicians need to realize that to fulfill their oaths to put patients first, they have to reduce the influence of rich and powerful organizations with other agendas, like health care corporations, and especially corporations owned by private equity.’


    1. Physicians are NO longer in drivers’ seat, long time ago when they accepted 3rd party payment!

    2. Medical ethics demands that patient’s interest come first, but Business Ethics demands subservient to the BOTTOM LINE!

    MEDICINE has become lucrative business. Sheeple think MORE is better!

    3. Perverted Financial incentives inherently built into the ‘fee for service’ promote specialists over primary care!

    4. No one is practicing, Cost effective Evidence based (EBM) Medicine. It won’t materialize until tort reform happens!

    5. Number of people (non-Medical specialists) who don’t lay a hand on a patient but dictate, control and direct the physicians how to diagnose and treat the their insurance clients – aka you & me, are multiplying taking resources away from Medical/Health care!

    6. Many a time, DOING NOTHING is the ‘right and sane’ medical decision, but no one gets paid for that advice! There is no CPT code for that!

    Great disconnection between PERCEPTION by so called CRITICS and the HARD REALITY in Medical/HealthCare

    Been there and done that!
    Retired Diag Radiologist.

  11. Pepsi

    When does this end, or where does this end? How can we free ourselves from these creatures?

    1. Kathryn Barbour

      Can we now start a chain of medical clinics based on the Cuban model? They would probably be happy to send us some doctors & nurses to train the new staff.

      1. Dana

        Precisely, Kathryn. The Cuban health care model is what came foremost to my mind, as well.

        Working in the fields of science and medicine, myself, I’ve become increasingly appalled by signs of indoctrination of students in medical schools in France, of all places, which once had what was considered one the highest quality medical healthcare systems in the world. – Sadly, the corporate private takeover of health care is coming to Europe as well.

        What is insidious in all of this is that honest, dedicated doctors who do their utmost to understand the nature of their patients’ illnesses and provide appropriate, specific personal care can now be taken to court for neglect and have their licences revoked if treatment doesn’t comply with established medical protocol.

        The core of the problem is that that medical school systems have buckled to the prerequisites of the pharmaceutical industry.

        Meanwhile, Cuban researchers are making major headway in the treatment of actual disease as opposed to symptoms, regarding cancer in particular. Russia is progressing in this process as well …

  12. impermanence

    Private equity is just the latest and great something for nothing scam…until the next one comes along.

  13. Lune

    I have a feeling (and a hope :-) that this will end badly for PE. Physician practices aren’t like manufacturing. They’re more like law firms and finance shops. That is, there is very little capital required (office space, IT, and some medical equipment) and the “product” is the people who work there. PE works in capital-intensive industries where their access to cheaper capital allows for cost efficiencies, and also where they can leverage and/or raid the capital stock of a company (be it pension funds, factories, heavy machinery, real estate, etc.) to fund special dividends for the owners. There’s very little of that stuff in a physician practice.

    At the end of the day, what do you “buy” when you buy a physician practice? Unless they have investments like real estate (they own their own office building), or equipment like a lab or an xray machine, there’s very little you’re buying. When new physicians “buy out” a practice, it’s more like a goodwill payment to the retiring physician in exchange for him referring his current patients over to the new guy (the new guy in turn maintains all the old charts, etc. that might legally need to be preserved for years).

    1. bob

      I dunno. Lots of equipment in most doctors offices I have been to. All of that can be levered, and the rents extracted via leases on that equipment.

      “Prescription- an EKG ($1200?) which we can do here and and MRI/cat scan ($4k) which is available though our affiliate.”

      Welch Allyn, GE…they all sell lots of medical equipment.

      1. Lune

        That’s actually not much capital, especially compared to revenue. Think of it this way, can a typical factory generate $500,000 gross revenue from a capital/asset base of $100,000? And yet a primary care physician’s office can do that easily. This is mainly because the primary asset of a primary care office is the physician’s training. The value of that (easily several hundred thousand dollars) is far higher than the capital goods purchased to keep an office running (This does not include hospitals, which can be capital intensive, and which are required for e.g. surgeons). Until P.E. can figure out a way to leverage and extract a one-time dividend from that asset (the medical equivalent of Bowie bonds?), I don’t think there’s much one-time value to strip mine from a physician practice.

  14. PEUReport

    Dental clinics ended badly for The Carlyle Group’s Church Street Health Management. PPACA is a redux of reform in the mid 1990’s, only Uncle Sam is leading the charge vs. employers. Goldman Sachs approached our local multi-specialty clinic for a buyout. Physicians got pretty heady with attention from the big boys.

    Private equity looks for industries Uncle Sam purposely disrupts. They buy in at distressed prices and sell for a multiple of the original investment (after milking the affiliate for dividends and management fees). Very few primary care practices are solo anymore. PEUs look to buy large primary care group practices or companies employing primary care physicians, which includes private hospitalist companies.

    For more on Church Street’s implosion and dinged quality record:

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