The role of private equity in driving up health care prices

HEALTH rivate investment in U.S. health care has grown significantly over the past decade thanks to investors who have been keen on getting into a large, rapidly growing, recession-proof market with historically high returns. Private equity and venture capital firms are investing in everything from addiction treatment facilities to physician practices. In 2018, the number of private equity deals alone reached almost 800, with a total value of more than $100 billion.

While private capital is bringing innovation to health care through new delivery models, technologies and operational efficiencies, there’s another side to investors entering health care. Their common business model of buying, growing through acquisition and selling for above-average returns is cause for concern.

Take the phenomenon of surprise bills: invoices a patient unexpectedly receives after being treated by an out-of-network provider at an in-network facility. They’re driven, at least in part, by investor-backed companies that remain out of network and can therefore charge high fees for

Purgently or unexpectedly needed services. Private equity firms have been buying and expanding the specialties that generate most surprise bills — emergency room physicians, hospitalists, anesthesiologists and radiologists.

To blunt growing bipartisan political support for protecting patients from surprise bills, various groups have lobbied against legislation that would limit the practice. They include Doctor Patient Unity, which has spent more than $28 million on ads and is primarily funded by large private-equity-backed companies that own physician practices and staff emergency rooms around the country. Their work seems to be having an impact: Efforts to pass protections have stalled in Congress.

Physician practices have been a popular investment for private equity firms for years. According to an analysis published in Bloomberg Law, 45 physician practice transactions were announced or closed in the first quarter of 2019. At the current pace, the number of deals to buy physician and dental practices will surpass 250 this year, far exceeding 2018 totals. Yes, these investments can provide independent physicians and small practices with an alternative to selling themselves to hospitals and can help them deal with administrative overhead. But, at least in some cases, the investors’ strategy appears to be to increase revenues by price-gouging patients when they are most vulnerable.

Surprise billing isn’t the only problem. Private-equity-owned free-standing emerging rooms are garnering scrutiny because of their proliferation and high rates. The majority of free-standing ER visits are for nonemergency care, and their treatment can be 22 times more expensive than treatment at a physician’s office.

Private investor-backed companies that hurt consumers are not likely to perform well in the long term. Unlike many other markets, health care is both highly regulated and highly sensitive to the reality or appearance of victimizing the sick and vulnerable. Consumer outrage leads quickly to government intervention. Investors would benefit most if they solved the health care system’s legion of problems by delivering high-quality services at affordable prices and eliminating waste. Those who try to maximize their short-term profits by pushing up prices without adding real health care benefits are likely to find that those strategies are unsustainable.

Lovisagustafssonisanassistantvicepresidentatthecommonwealthfund,whereshanoor Seervaiisaseniorr esearchassociateandcommunicationsassociateanddavidblumenthalis president.