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.