A couple of weeks ago, the Federal Trade Commission (FTC) held a three-hour webinar on the problems with private equity in healthcare. In this article, I want to briefly explain what private equity is, talk about why I think it’s often a poor fit for professional corporations, and close with a story demonstrating that purported experts often have no idea what they’re talking about.
Equity is just a fancy term for ownership. Private equity funds are a group of investors seeking to buy parts of a company, hoping to make money. Sometimes, they assume that providing the company with additional capital will allow the company to expand. It might be expansion in a current area or franchising an idea to more locations. Sometimes, the belief is that the company they seek to purchase runs inefficiently, and by improving its operations, profits will grow. In that case, the investors may seek layoffs, salary reductions, and other cutbacks.
There are two different legal barriers that often complicate private equity investment in healthcare.
First, when it comes to physician practices, most states have a corporate practice of medicine. Only individuals licensed to practice medicine can own the company. But there’s a commonly used workaround to this: establishing a management company that provides administrative services to the practice in exchange for some portion of the profit. In addition, many hospitals and other organizations are nonprofits.
While there are certainly times when private equity can make sense, I think it is very rare that it is a wise strategy for a professional entity like a medical practice, because it seems to me that it will be hard for both the investors and the professionals to come out ahead. Most professional entities don’t actually return profit. Any money that the organization makes is paid out in the form of compensation or salary to the owning physicians. If a professional entity is sending profit to an outside investor, by definition, it is lowering the payment to its working professionals.
I struggle to see how selling to private equity is likely to offer a good result for both the investors and the professionals owning a professional corporation.
The three-hour FTC conference was basically the government’s declaration of war on private equity in the healthcare industry. The session featured government officials, academics, and employees of organizations that have been purchased by private equity.
The presenters were overtly hostile to the notion that private equity could be a useful tool in the context of healthcare. I think it is safe to say that the FTC, U.S. Department of Justice (DOJ), and U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) will be making private equity an enforcement priority.
This was three hours of people saying that, when it comes to healthcare, private equity is bad.
One of those people was an academic who was introduced as an expert on private equity in healthcare. I’m afraid I have to question that. She mentioned that most healthcare is now paid for on a value-based reimbursement model. While I think the number is increasing, I am a bit skeptical of that claim. But it was her next statement that really drew my attention. She offered the example of hospice as an area with value-based care. She said hospices were paid a paid a flat rate, and (I’m not making this up), the reason for this was that it gave hospices an incentive to “keep patients healthy.” I guess that’s one way to look at it?
I don’t know all of the pros and cons of private equity. But I know this: private equity in the healthcare world should prepare for careful scrutiny.
There is a lot of talk lately about the need to follow orders given by a member of law enforcement. I would like to explore
EDITOR’S NOTE: Gloryanne Bryant has more than 40 years of experience in her field and is an independent HIM Coding and CDI Consultant who works
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