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Private Equity: The Metastasizing Disease Threatening Health Care

December 18, 2023

An op-ed by Emily Stewart, Community Catalyst and Jim Baker, PESP

In 2010, when purchasing Prospect Medical Holdings, the private equity firm Leonard Green & Partners made numerous lofty promises to state regulators around expanding services, capital investments, and modernization. They assured regulators they would not only maintain hospitals but would increase the quality of care.

Over the course of its 10-year ownership, Leonard Green broke many of the promises made to regulators. Instead, Leonard Green and Prospect’s minority owners took approximately $658 million in fees and dividends from the safety-net hospital chain, in part by saddling it with debt and using the proceeds of the loans to pay themselves. They withdrew this money from Prospect even as many of its hospitals suffered deteriorating financial conditions and quality concerns: Between fiscal years 2015 and 2020, Leonard Green continued to profit while the hospital company took a $603 million cumulative comprehensive loss.

Now, more than 10 years after Leonard Green’s purchase, Prospect is seeking to sell off hospitals, laying off workers and cutting or reducing critical services. Despite the hospitals’ distress, Leonard Green has profited immensely while the communities that Prospect services—which desperately need quality and affordable health care—have  suffered. Leonard Green literally took the money and ran.

The Challenge

This is not an isolated incident. Rather, it is the norm when it comes to the increasing trend of private equity investments in the health care system. Communities across the country are littered with stories similar to Prospect, where rich private equity firms make millions while patients suffer. The problem has metastasized.

Private equity firms such as Leonard Green increasingly make up a substantial portion of investment in US health care companies, touching virtually every sector of the industry. Asset managers have record levels of available capital earmarked for health care investment; as of 2019, private equity firms had $29.2 billion in capital waiting to be invested in the health care industry.

At least 386 US hospitals are currently owned by private equity firms. That represents 9 percent of all private hospitals and 30 percent of all proprietary for-profit hospitals. Over a third (34 percent) of private equity-owned hospitals serve rural populations, which are already experiencing a lack of access to quality care.

This trend has produced troubling impacts for patients and workers across the country. We have seen private equity firms aggressively loot safety-net hospitals, strip out valuable real estate, cut critical but less profitable services, and exploit government funding programs designed to support and stabilize health care access. The consequences have been borne by health care workers and the communities they serve. Private equity’s hospital profiteering has resulted in dangerous conditions, closures, and reduced access to services, declining quality, and fraud.

Despite the growing threat they pose to critical health care services, private equity firms are largely able to operate in the shadows. And aside from a few recent actions by the Federal Trade Commission (FTC), Washington—under Democratic and Republican administrations—has largely been asleep at the wheel, or has willingly looked the other way.

A Better Path Forward

It doesn’t have to be this way. Washington can and should take action. And there are simple and commonsense moves policymakers can take now to reign in private equity and demonstrate that they will protect people over private equity profits.

For starters, Congress could create joint liability for private equity firms and their portfolio companies as modeled by the Stop Wall Street Looting Act. Requiring shared liability for private equity firms would prevent the practices that harmed the communities served by Prospect Medical Holdings. Requiring private equity firms to share in the responsibility of the debt and other liabilities accrued under their leadership would prevent them from making huge profits while they are saddling hospitals and nursing homes with debts that ultimately impact worker pay and cut off care to people.

The FTC could also more aggressively evaluate mergers and acquisitions involving private equity. It could take a more proactive approach in evaluating the claims that private equity-owned companies are making and do more to look into the anti-competitive practices of many of these private equity firms. The FTC’s recent first-of-its kind antitrust enforcement lawsuit against US Anesthesia Partners and its private equity owner Welsh Carson Anderson & Stowe is an encouraging sign in this regard.

And other federal agencies, like the United States Department of Health and Human Services (HHS) and its Center for Medicare and Medicaid Services (CMS), could do far more to promote transparency about private equity-owned health systems and the impact of that ownership. For example, from CMS star ratings to other assessments of quality and access, the federal government could be providing on a regular basis information on where private equity is involved in health care and cross-reference that involvement to quality. Doing so would address one of the challenges we see: There isn’t enough public information and clarity about the impact private equity’s growing role is having.

Lastly, Congress should close tax loopholes, such as the carried interest loophole, that make it easier for private equity to make money off of cutting care at hospitals. By allowing management feeds to be taxed as capital gains, the carried interest loophole in particular allows private equity firms to pay taxes at half the rate workers in the health systems they manage pay. This makes no sense and is an example of our nation’s laws and policies rolling out the red carpet for harmful practices that undercut the goals of our health system. Indeed, in many ways the work of reigning in private equity’s harmful impact on health care is about eliminating the incentives that make it possible for private equity investors to make so much profit off of practices that harm people’s care.

It is clear the problem is not the lack of solutions, but rather the lack of political will to take on private equity. We know private equity will fight any and all efforts to reign in the practices that offer them the easiest money. They have already launched an aggressive ad campaign in Washington DC to fend off even the most common sense reforms. In the face of that, it’s worth reminding every policymaker in Washington DC that our health system needs to be about people’s wellbeing first and foremost.

Unchecked private equity is, simply put, a metastasizing disease threatening health care in this country. And unless Washington wakes up, and soon, more people and workers, like those associated with Prospect Medical Holdings, will suffer.



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