PESP healthcare director presents at national AHCJ conference

This March, PESP healthcare director Eileen O’Grady presented at the annual Association of Health Care Journalists (AHCJ) conference in St. Louis. More than 550 people joined together for the Health Journalism ’23 conference, representing over 300 organizations.

In the panel titled “How private equity investors are reshaping health care,” Eileen joined Bob Herman (STAT, Reporter), Fred Schulte (Kaiser Health News, senior correspondent), and Yashaswini Singh (Johns Hopkins University, Health Economist) to discuss how PE works within the healthcare system and what it means for patients and the entire sector.

In her presentation, Eileen shared insights on

• Why does PE invest in healthcare?
• Common PE tactics in the sector
• Impacts of PE ownership in healthcare 

Here’s a summary of what Eileen presented to a room full of healthcare journalists:

Why does PE invest in healthcare?

• We have an aging population, which is a key driver of growth in healthcare spending. Therefore, we have a growing number of people in their 60s and living well past 80, which is when healthcare gets more specialized and more expensive. PE firms want to cash in on those opportunities. 
• Healthcare is often considered recession resistant, or at least less sensitive to market downturns. This is because regardless of economic instability, people still need to access healthcare and thus will spend money on it.
• There are many aspects of the healthcare industry that are fragmented, creating opportunities for PE to do what it likes best: consolidating companies through roll-ups.
• Relative to other industries, Medicare, Medicaid, and other payers are relatively predictable and consistent sources of revenue.
• Finally, investors have seen that healthcare consistently outperforms other asset classes. Healthcare has been shown to be really profitable for private equity

Common PE tactics in the sector

• Roll-ups: One of the most common tactics involves roll-ups, a term that refers to when a PE firm will buy multiple small healthcare companies in a similar market and combine into one larger company. This is fairly straightforward consolidation and is particularly popular in sectors that are relatively fragmented. In recent years PESP has seen PE firms gobbling up mental health providers or eye care companies—places where historically there has not been a lot of consolidation.

• Sale-leasebacks: Another tactic is called sale lease-backs, where a PE firm sells off the real estate of a company they own and mandates their subsidiary company lease it back from the real estate entity that now owns the land. This is especially common in PE-owned hospitals where the real estate is quite valuable. The private equity firm sells the real estate under a hospital—usually to a real estate investment trust (REIT)—leading to a situation where that hospital is now paying rent to a third party. This tactic is popular because it is an easy way for PE firms to generate quick cash out of a hospital.

• Fees: Private equity firms often charge the companies they own fees in the form of management fees, monitoring fees, transaction fees, etc. that are paid regularly back to the PE firm. These fees are paid regardless of whether the PE firm provides a service to the portfolio company they own. Fee structures are fundamentally extractive—the fees can amount to millions or even tens of millions of dollars a year that the PE firm is just siphoning out of the company it owns.

Impacts of PE ownership in healthcare 

Thinking about how the private equity business model impacts quality of care, the most important thing to remember is that a private equity firm’s top priority is to double or triple their investment in just 4-7 years​.

True, the intense focus on profit is not unique to PE; this goal is seen at all kinds of companies including, unfortunately, at nonprofit providers. Still, private equity amplifies and exacerbates these kinds of extractive tendencies. So what does this look like in terms of impact on the sector?

If PE firms are trying to increase cash flows as much as they can over a handful of years, they are going to need to cut costs. Of course the largest cost at most healthcare providers is their staff. So, many times PESP observes the following actions:

• Reduced staffing, or filling beds without adequate staffing ratios​
• Underpaying employees, resulting in high-turnover and understaffing ​
• Over reliance on unlicensed staff to reduce labor costs ​
• Failure to provide adequate training​
• Cutting services/programs ​
• Failing to invest in maintaining facilities, which can lead to unsafe or squalid living conditions
• Surprise medical billing
• Medicare/Medicaid fraud
• Closures and bankruptcies