Private Equity Flouts State Regulations by Buying Medical Practices

It’s so routine for private equity firms to run roughshod over the law that industry publications don’t even bother pointing out the misconduct.

An example is a new article in PE Hub, Why PE firms are buying orthopedic and ophthalmology practices . Mind you, private equity firms buying up medical practices is hardly new. For instance, some private equity firms were acquiring outpatient surgery centers years ago. Roy Poses at Health Care Renewal pointed out in 2015 that private equity was targeting primary doctors’ practices. And as Wolf Richter wrote later that year:

A report by Bain and Company found that last year, healthcare buyouts by PE firms – not corporate M&A – in North America soared nearly 60% year-over-year, to a new record of $15.6 billion, across 80 mostly smaller deals, with only two deals above $1 billion.

The new thing is that PE firms are targeting primary care groups.

“It’s a land-grab right now,” Todd Spaanstra, a partner at Crowe Horwath, an accounting and consulting firm, told Modern Healthcare in April. Part of the reason why they’re chasing after primary care practices is because specialty practices have become targets of publicly traded corporate entities that have been driving up prices beyond what PE firms are willing to pay.


The PE Hub article describes some but not all of the rationale for private equity firms snapping up speciality practices. They are targeting ones that combine insurance-covered procedures as well as more highly paid ancillary services, such as Lasik, or for dermatologists, lucrative vanity procedures, like Botox and injections to plump up sagging faces. As the article elaborates:

A case in point is the investment in CORE Institute, an orthopedic practice, by Frazier Healthcare Partners and Princeton Ventures. When the deal was announced in January, CORE’s chief executive, David Jacofsky, an orthopedic surgeon, summed up the attractiveness of the sector: “Musculoskeletal care is the fastest growing segment of inpatient hospital admissions in the U.S. This exponential growth is expected to continue for the foreseeable future.”

While details of the CORE deal were not announced, well-run orthopedic and ophthalmology practices can fetch premium valuations consistent with recent dermatology transactions, implying multiples of trailing 12-month EBITDA of 10x or more.

And while larger practices are generally valued more aggressively than smaller ones, investors appear to have an appetite even for those that employ only a handful of doctors.

A typical strategy PE firms employ is to partner with an established practice group and augment that investment by acquiring and rolling up smaller practices to establish regional and national brands.

These larger groups are better positioned to confront changes in the evolving healthcare landscape and to offer significant resources to doctors who wish to focus on the delivery of care. These structures enable doctors to recognize some economic benefits while maintaining ownership and the ability to work in “democratic” physician-led practices.

Nowhere is there mention of what Rosemary Batt pointed out by e-mail: private equity firms had earlier been buying hospitals, but found that state regulators imposed standard of care requirements on them as part of approving the sale that meant that the private equity firms weren’t able to engage in the cost-cutting measures they had in mind. So their attention has turned to the high-margin ancillary services. They are buying them up….with the intent of selling them to hospitals.

Given how state regulators did intervene in the sale of hospitals, their complacency in the face of what in many states is an illegal practice, that of non-MDs owning a medical practice, is surprising. As one industry participant wrote:

The practice of non-doctors owning doctor practices raises regulatory compliance issues in many states, as it is generally a requirement that physician practices must be owned by physicians.

PE firms are just openly flouting these regulations all over the place. They do so via “structuring,” where they own a parent company that has all of the economic benefits of owning a practice as well as the control, while nominally leaving the doctors in place on the filings with state authorities. This is an open and notorious practice – there is no way that state regulators don’t know about it in general, and I have a hard time believing that it complies with the letter of the law in many states.

If a doctor who owned a large practice died and his non-doctor widow tried to step into his ownership shoes via the same legal structure, I am sure that the authorities would land on her like a ton of bricks, but where it’s OK when the PE guys do it. It’s also an example of the general practice used by business with respect to regulation that if they are out of compliance with the letter of the law, argue that it’s the form, not the substance that matters, or if they get the desired result with the opposite, it’s the substance, not the form argument, make that one instead.

And if you think that our source is exaggerating about the fact that regulators have an enforcement double-standard, with the big dogs getting big breaks, he added this anecdote:

A relative manages the New York state portion of a multi-state women’s health retail chain that has offices in the NYC area and is owned by her brother, a gynecologist. For many years, one of their daughter-in-laws who lives in another state maintained a New York state medical license solely to preserve the option of stepping into the ownership of the New York portion of the business to preserve her mother’s income should something happen to her mother’s brother (he has been in poor health for a long time).

At one point, at a family meeting on the topic that included lawyers, I inquired about “structuring” the legal entities so that the mother-in-law could achieve economic ownership while letting a non-family member doctor act as formal owner.

The strong consensus of the lawyers was that, given the political vulnerability of the business as a provider of abortion services, they thought that it would be extremely unwise to attempt to claim to the regulators that such a “structured” arrangement was legal.

Now readers might argue that the abortion services made this case different, but the business at hand is located in communist New York City in the hardly right wing state of New York. It’s not as if women’s choice is a hot-button issue in this state. The real subtext seemed to be that if anyone wanted to meddle in a deal like this (say an angry ex-employee or patient who had access to savvy lawyers) that they’d have good odds of succeeding.

And that’s before we get to the reason that these prohibitions exist in the first place. Regular readers have seen Roy Poses at Health Care Renewal chronicle how the corporatization of health care, which is having MBAs and bean counters determine how medical services are provided, has undermined care. From one of his many posts:

We have posted about the plight of the corporate physician.  In the US, home of the most commercialized health care system among developed countries, physicians increasingly practice as employees of large organizations, usually hospitals and hospital systems, sometimes for-profit.  The leaders of such systems meanwhile are now often generic managers, people trained as managers without specific training or experience in medicine or health care, and “managerialists” who apply generic management theory and dogma to medicine and health care just as it might be applied to building widgets or selling soap.

We have also frequently posted about what we have called generic management, the manager’s coup d’etat, and mission-hostile management.
Managerialism wraps these concepts up into a single package.  The idea is that all organizations, including health care organizations, ought to be run people with generic management training and background, not necessarily by people with specific backgrounds or training in the organizations’ areas of operation.  Thus, for example, hospitals ought to be run by MBAs, not doctors, nurses, or public health experts

Furthermore, all organizations ought to be run according to the same basic principles of business management. These principles in turn ought to be based on current neoliberal dogma, with the prime directive that short-term revenue is the primary goal….

A constant theme of managerialism, and the neoliberalism that underlies it, is economic efficiency.  The usual narrative is that efficiency means providing better goods and services at lower costs. Instead, managerialism and noeliberalism may mean decontenting goods and services so as to lower costs to the organizations providing them, but not necessarily providing more value to consumers.  In health care terms, managerialism and neliberalism may lead to less accessible, more mediocre health care that increase revenue to the organizations providing it, as implied by the physicians’ comments above.  Making the US the most commercialized, managerialist run, and arguably neoliberal health care system among the developed countries has not led to lower costs, better access, or better health care quality.

Mind you, the resulting crapification is a feature, not a bug. From a 2013 post:

Dr. David Edelberg, describes a recent presentation by a large insurance company. They’ve apparently been hosting similar sessions with physicians in the Chicago area in large medical practices. Here are the key bits (emphasis original):

The speaker at these evenings is always a physician employed by the insurance company. His/her title is medical director (I begin to think there must be dozens and dozens on their payroll) and he always begins by reassuring the audience that he was in clinical practice himself so he understands something of what physicians–especially primary care physicians–are facing. I view this physician more as a “Judas steer,” the animal that leads an innocent but doomed herd of cattle through the slaughterhouse corridors to the killing floor.

The health industry hopes that individual medical practices and small medical groups will ultimately disappear from the landscape by being financially absorbed into larger groups owned by hospital systems.

And here’s what to expect:

Physicians are expected to spend a limited amount of time with each patient, and are encouraged to see as many patients as possible during a workday. The insurance companies, sometimes with the token cooperation of a few physician-employees, create vast books of patient-care guidelines to which they believe their physicians must be “accountable” (remember this word, it will crop up again). These guidelines might mean documented Pap smear and mammogram frequency, weight management and exercise, colonoscopies for patients over 50, and getting that evil LDL (bad cholesterol) below 99 by any means possible…

If the chart audit system discovers that a physician, for whatever reason, is an “outlier”–that she’s either not following the guidelines exactly or not getting the results anticipated for her patient population—she’ll be financially penalized. A quick example of what might occur: if your LDL is 115, you may be on the receiving end of a statin sales pitch from your doctor, not because bringing it down to 99 will improve your longevity, but because your refusal to do so will impact her financial bottom line.

So private equity is doing its part to speed up this sorry trend. While it appears to be too late to harass complicit state regulators with letters asking them to explain why they are refusing to enforce the law, the possibility of single payer represents an even bigger monkey wrench to private equity’s exit plans. The combination of reimbursed (medically necessary) with vanity and anti-aging or “performance” related treatments that don’t have a solid research foundation won’t turn out to be a tidy rollup if the way one part of the business operates is subject to a regime change.

In the meantime, patients should keep their eye out for changes of ownership in the practices they visit and seriously consider switching doctors in the event of an ownership change. My primary MD struck out on her own, despite the high costs and risks of doing so when her small practice was sold. She told me the reason was that she would have rules imposed on her that would undermine what she thought was a good standard of care. That confirms other doctors have seen the sort of MBA-imposed changes that Poses and Edelberg warned about. Having a doctor you like is no protection if that doctor is hamstrung by profit-minded overlords.

Print Friendly, PDF & Email


  1. jackiebass

    Where there is a huge pot of money, investors will go after it. Two big pots of money targeted by investors are education and health care. Where I live there isn’t that big of a pot in education so investors have stayed away. Health care is a different case. We used to have two non profit hospitals. Almost all doctors had there own practice or were part of an independent group of doctors. The two hospitals were forced to merge into one health care service by NY state. Once that was complete, practices were bought out and doctors were forced become employees of the hospitals health care system. MBA’s were hired to manage the system. In my opinion the quality of care has gotten poorer. A primary care doctor used to schedule 30 minute appointments. Now they schedule 20 minute appointments, with most of the time taken up by a nurse or other people. You are lucky to see an actual doctor for 5 minuets. You used to be able to call and get in to see a doctor that day or in a day or two. Now if you wish to change an appointment it usually takes several months wait time. When you call they will tell you to go to the emergency room if you can’t wait. I no longer feel like a valued patient but simply another person. Unfortunately there are only two health care systems in the area and both use the same business model. Because of how they treat their doctors , many are leaving , either retiring or moving out of the area.Especially specialist. The infections disease specialist left in February. So far there is no replacement for him. Dialysis services were sold off to a private company as well as emergency room services. Health care has become just another money making business. No wonder it’s no surprise that the US pays more for less.

    1. Moneta

      Third pot of gold already in Wall Street’s hands: pension plans.

      And they want the profits and cash flow from education and healthcare.

    2. lyman alpha blob

      No wonder it’s no surprise that the US pays more for less.

      Indeed. The practice described here sounds very much like house-flipping to me. ‘Investors’ (vultures is more like it) buy up property they don’t want for themselves solely to turn a quicj buck and by the time it’s actually sold to someone who wants to live in the home, they wind up paying a huge mark up after all the flippers have taken their vig.

      Sounds like the same is happening here with the end result being hiring prices, either to the hospital or to the insurance company, for those who are sick.

    3. wilroncanada

      Minuets: an unintended pun. The doctor becomes some kind of song and dance man.

  2. McWatt

    One of my doctors sold his suburban practice to the Hospital he was connected too. Meanwhile he was
    encouraging all his patients to visit his city practice that he hadn’t sold. Nice!

  3. Quanka

    Seems like another case of PE chasing assets with inflated values. These Masters of the Universe are all a bunch of idiots of you ask me. They just assume health care costs will rise in perpetuity – they perceive no risk where there is in fact major risk. The highest margin, least regulated parts of the health care industry will be the first ones to go down (in terms of limiting profits). You think dental practices are going to churn out 20% profit in this economy forever?

    But I suppose it doesn’t matter as long as they financially engineer their way out with a sale to another group of idiots (hospital MBAs).

    1. DH

      Our healthcare system costs are 50% higher than the next highest large OECD country (Switzerland is in between the other OECD countries and us – when have we ever been more expensive than Switzerland for anything?) . Something is going to have to give in our healthcare system, or our labor and corporations are simply going to be priced out of the world markets. I don’t think there has been anywhere near enough discussion on the role that healthcare costs have played in sending jobs overseas. Companies can pay their workers the exact same payroll hourly wage and still have substantial cost savings in other countries because their healthcare insurance costs are small there compared to the US. It is a factor in our company where I have been flat out told by our Canadian branches that they don’t want to use US-based staff because the overhead burden on payroll is much higher than for the Canadian employees – that factor is independent of any US-Cdn dollar exchange rates. As a result, the profits on using a US employee are far lower than using a Canadian-based one because the billing rates are based on Canadian overhead rates.

      People in countries like Canada can quit their jobs and start up new small businesses and healthcare insurance barely shows up on their radar screen as a concern, while in the US it can be the primary deciding factor for that employee not quitting.

      So either healthcare spending has a day of reckoning coming, or our entire economy does. I think US per capita healthcare spending is going to have to be a third-lower a decade from now compared to today if we are to thrive. That would simply pull us even with the top ranks of OECD healthcare spending. We would still be in the upper decile.

    2. Moneta

      They don’t need to think this growth will last. They are just seizing any opportunity to collect mega bonuses right now.

  4. jefemt

    One more lobby group with self interest to pressure more of the same status quo vis-a-vis our current byzantine system. It does seem if the collective we prevail and go single payor, these geniuses, along with all of the hospitals and others that habve madly been consolidating /monopolizing, might end up losing their shirts if cost controls and top-down comes to the fore.
    My over-simplified view: single payor, all-in through taxes. Mandatory monthly premiums, tiered progressive premium scale based on gross incomes.
    Mandatory annual blood work, physical, dental.
    Mandatory out of pocket, no co-pay, no reimbursement, no obfuscation for first $3K annual expenses per person. Shop services in a true open marketplace. See a nurse practitioner, PA, Naturopath, Chinese herbalist, or a schmancy credentialed Mayo MD. YOUR choice, your money, your “pain at the pump”
    After this threshold, your income-tax based monthly premiums, along with all other 350 million Americans, kicks in to cover 100%.
    No more separate systems for congress, the military, vets, oldsters. All-in. We the people.
    This would ideally be complimented by a severe income tax reform: tiered progressive income tax, simple percentages on gross income, from each and every source, NO deductions, no hidey-holes, no nuthin.
    So simple all the accountants would be available to audit the military spending for the last 20 plus years. Or start to do full life-cycle analysis of goods and services in terms of their carbon and ecological impacts.
    I’d have, on the back of the one page tax return form, a place where in its simplest form the government departments are laid out, and you– the taxpayer– chooses where your money goes.
    Adjusting over say a ten year period… such that in first year, 10% of budgets are directed by citizen taxpayers, 90% to general fund, so that the tone and direction of preferences is reflected as a warning that some departments may be on their way out to shuttering… by year 10, 10% goes to general fund, and 90% is citizen-directed.
    In this day and age, there is no reason for ‘representative’ democracy. We have the technology and need direct democracy.

    Maybe a new party: CARP Citizens Achieving Reformed Politics.
    Or, CRAP Citizens Reforming Abhorrent Politics.

    Dream on….

    1. shinola

      I probably should leave this alone, perhaps I misunderstand, but…

      “Mandatory out of pocket, no co-pay, no reimbursement, no obfuscation for first $3K annual expenses per person”

      Take a working couple with 2 children. Their combined pre-tax income is @$60k per year. Deductible of $3k for 1 person would be a strain on their budget; 2 deductibles even more so & 3 or 4 deductibles in one year would be a severe blow for amiddle-middle class family. What about a single parent with 2 children making $30-$35k per year?

      And this:

      “Shop services in a true open marketplace”

      Way back when I was majoring in Econ. (mid ’70’s) medical care was used as the prime example of marketplace theory’s failure (“inelastic demand” meets tight supply). As one prof. put it “People will pay nearly anything if their life or health depends on it.” The “true open marketplace” does not apply to medical services. This is why PE is buying up practices.

      Maybe the above is sarc. and I just missed it…

      1. Yves Smith Post author

        Yes, plus the other issue is patients are for the most part incapable of evaluating whether their doctor is any good. They rely on proxies like bedside manner which may not be valid indicators of their clinical judgment.

  5. divadab

    Won’t it be great when single payer medicare for all is implemented and all these greedy bastards lose their shirts on their investments in profiteering on the misery of sick people?

  6. Matthew Cunningham-Cook

    To me this is about vertical data integration more than anything else. More vertical integration=more data to collect on individual patients=easier to target for medical rentseeking.

    The funny thing is private equity fund-sponsoring public pension funds then being amazed at the increases in cost for their retiree health plans.

    1. Yves Smith Post author

      No, the data is no good. We’ve written on this extensively. Electronic health records are designed for billing purposes and are terrible for medical record keeping/diagnostic purposes. They’ve been deemed the biggest risk to hospital patients by a major research group, for instance.

      1. ChrisPacific

        I remember this from my brief stint working in medical IT. We had to create an app that generated a medical summary for patients. It was supposed to be a clinical summary of medical conditions, issues and the like (such as allergies) that might be important for the physician to know about. In practice it was drawn from the billing system, because that was the only data we had available in electronic form.

        It’s fair to say the physicians were not happy with it. My clearest memory of the implementation was a doctor brandishing a list (three pages, in small type) at my manager and saying angrily: “There is nothing wrong with this patient!”

        It could have been fixed, but that would have required a comprehensive overhaul of medical systems and processes and how clinical data was captured. Nobody in management had an appetite for doing this, or trusted their IT team to deliver it even if they did. They even didn’t trust them to work with the clinicians to gather requirements, so it became something of a self-fulfilling prophecy.

  7. DH

    Professional licensing of individuals and corporations is done on a state-by-state basis. Many states require professionals to own business like medical practices, engineering firms, and land surveying practices. Depending on the timing and history of the licensing laws, there are some grandfathering clauses where firms that pre-existed the licensing laws were allowed to retain their original corporate status and don’t have to meet current partnership rules. In many cases, the certificate of the grandfathered ownership structure is worth more money than the actual firm itself at the time of sale because it allows a large corporation to own it. They can then fold other acquisitions and hires in under that corporate umbrella.

  8. flora

    Yikes! Thanks for the warning.


    “…the possibility of single payer represents an even bigger monkey wrench to private equity’s exit plans.”

    #MedicareForAll sounds better and better with beneficial ‘side effects’.

    1. Allegorio

      Single payer is overrated. Consider the case of Dr. Salomon Melgen, Senator Menendez’s best friend, who overbilled medicare $6 billion, yes $6 billion. Congress has allocated very little money for Medicare fraud investigation. Hence Senator Menendez’s indictment for corruption. Medicare for all will still be a gold mine for the greed monkeys, hence the buying up of medical practices by hedge funds in anticipation of single payer.

      The gold standard is a national health care system as in the British NHS. If my doctor or dentist is going to be an employee, I’d rather have him employed by a well supervised non-profit government health care system than a price gouging corporate medical practice.

      A national health care service needs to be part of the discussion about health care reform. Even if limits are put on medical reimbursement, it could result in crapification of care as opposed to cost management in a single payer system. The political right is right about one thing namely that wherever the government pays the bills cost inflation and corruption are inevitable.

      Single payer is still part of the neo-liberal paradigm, privatization of services. It is time to put to rest the Reaganite shibboleth that the government can’t do anything right. In the case of natural monopolies, and medicine is one, it is only the government that can manage them equitably. A government enterprise is accountable to it’s clients, citizens, in way private enterprise can never be. That is the whole point of neo-liberalism, dodging accountability.

      1. Allegorio

        The 6 billion figure comes from an article, claiming he paid back that amount. I cannot verify it. The actual amount of fraud he has been convicted of is in the range of $100 million. Can no longer find the article that claimed the $6 billion figure. $100 million is bad enough. That is for just one medical practitioner.

  9. EoH

    I would put it that resource extraction is the primary goal, with economic efficiency as a current rationale to hide it.

    One sees manegerialsm everywhere. Its proponents sell management, often with the slightest experience, because that’s what they have to sell. It’s a variation on Donald Trump’s addiction to superlatives because, regardless of topic, Donald is always talking about himself.

    My pet example of the proliferation of managerialism is in higher education. Assistants, assistant administrators, administrators, vice presidents, assistant vice presidents, deans, deanlets and “chiefs of staff” have metastasized in the bodies of colleges and universities. Their common background is one devoid of teaching or a commitment to student welfare. Mimicking the forms, jargon, reports, efficiency and compensation of business is their goal.

    The consequence is to impose on undergraduate and graduate education (and government and public service), the priorities and methods of for-profit businesses and thereby erasing its cultural competitors.

    1. Jeremy Grimm

      You’ve described the spreading disease of managerialism very well.

      I can’t help alluding to C.W. Mills concept of a Managerial Demiurge although I am growing to suspect more lies behind managerialism than this alone. There is a tie between the spread of neoliberalism and managerialism. I don’t know yet quite how to characterize that coupling. Is managerialism a tool of or a component of or an opportunistic fellow traveller of or a “practical” — practical in the sense of practiced, actualized in execution — manifestation of a true-believer’s faith in neoliberalism.

      1. EoH

        Managerialism certainly is a tool in imposing a cultural outlook, a far narrower one than higher education or patient-centered medicine traditionally tolerated. It limits society’s options, along the lines of if all you have (or can imagine) is a hammer, then all your problems look like nails. If the problem is budgetary, cut programs, fire staff, increase prices, over-promise and under-perform, take home job security and bonus. Patient lives and health, students, faculty, public trust don’t apply.

        Those priorities and that nearly empty toolbox might work for a private firm. They won’t work in the public sector, in providing health care or higher education, unless one is trying to undermine them. But to the managerialist, those are just different colored nails.

        1. Jeremy Grimm

          I wish you were right that they — higher education or patient-centered medicine — assured that all truly were well. Not sure how to read the rest of your response to my rant — and not sure whether you read my comment carefully … . For all I can tell you may be agreeing with me. My hammer and nails —what’s left after all is said and done won’t build much of anything. Please be more “plain”. I am just a poor old retired person trying to make sense of the world — or what color nails are you playing with? I’m not playing with nails or colors.

  10. Jeremy Grimm

    I suspected something like this — capture of the medical profession — was an intended end in the Medical Industrial Complex but I never realized how far this capture was already underway. I already have a very high regard for Medicine and the Medical Arts and a very low regard for the current and past crops of low-lifes who joined into the gang of medical doctors during my lifetime but even that low regard is greatly diminished. These vermin are destroying what remains of the last of the most august of ancient professions. Soon only the oldest will remain and it is already well along the road to full capture.

  11. Beans

    What is not mentioned but very real is the huge problem of over treatment – especially in PE dental clinics. Dental is unique from medical in that dental bills are derived from doing dental work – not just ordering labs and imaging and giving prescriptions – but actually doing often irreversible treatment to teeth.
    PE dental clinics set mandatory production ) amounts for their employee dentists – if they don’t produce, they will get a performance review post haste with the regional chain manager – often a HS grad – who will clarify the production expectations of the dentist. The dentist is at risk of losing their job, or in the case of foreign dentists, their H1B visa sponsorship.
    PE ownership of healthcare is terrible on so many levels. The abuses are well documented. Oversight agencies are well aware and do nothing. I have had extensive experience as a whistleblower and as an activist – the more exposure of PE healthcare abuses the better, so glad to see this kind of article posted on NC!

    1. Yves Smith Post author

      You aren’t kidding. One of my cleaning women had her dentist perform 5 root canals on her with some sort of BS excuse that it would be “dangerous” for her if she didn’t. I won’t bore you with the details, but it was clear none of them were warranted.

      1. JBird

        Five of them?

        Torturing people for profit is what it was. I don’t think I am being hyperbolic; that is evil.

  12. Allegorio

    This is hedging the fact that Single Payer Health Insurance is inevitable. With private insurance companies out of the picture the next big “take” are medical practices in general. The government will no longer be subsidizing insurance companies but medical practices. It is time to realize single payer is another sop to the corporate looters, and advocate for a national health care system like the British NHS. I personally would feel much better with well supervised health care providers than the wild west greed monkeys that now run the medical profession. If doctors and dentists are going to be employees, I’d rather have them employed by government non-profits. Get the profit motive out of medicine, please!

    1. Beans

      That is an interesting perspective, Allegorio. With Aetna’s CEO publicly speaking fond words for single payer, it definitely is cause for concern.
      If you believe the “Rules for Rulers” line of reasoning, the rapidly growing block of people supporting single payer are ones that a number of interested parties would like to lay claim to.

Comments are closed.