‘System on steroids’: Study delves into impact of private equity on health care

A single private equity firm owned more than half of practices in 13% of urban markets in 2021, while in 28% of markets, a single firm held 30% of practices, according to a recent study by the American Antitrust Institute.

“Private equity is like the system on steroids,” Sherry Glied, Ph.D., dean of the Wagner School of Public Service at New York University, told the New York Times. “Every time there’s an opportunity for making money, private equity is going to move faster than everyone else. And consolidation is the way to do that.”

Over the past several decades, a significant number of physicians have transitioned from working in small practices that they own to working in larger practices that are owned by corporate entities, such as hospitals, health systems and insurers. This transition occurred in part because care delivery has become more complex, offering opportunities to generate more revenue by better managing clinical and financial processes, particularly under value-based reimbursement contracts. The larger practices also are in a more favorable position when negotiating pricing with large private insurers with significant bargaining power. Finally, the growing disparity between Medicare fees for physician care and hospital outpatient care has left many physician practices financially vulnerable.

In the past decade, another investment model has entered this space, namely private equity funds, which pool money from high-net-worth individuals and institutional investors to acquire physician practices. The impact on competition of this practice is not well understood, which is why researchers conducted the study.

The study reached a number of conclusions about the impact of private equity, or PE.

• PE acquisitions of physician practices are increasing. PE firms increasingly have been acquiring physician practices across a number of physician specialties since 2012, increasing from 75 deals in 2012 to 484 deals in 2021, or a more than sixfold increase in only 10 years.
• PE firms are amassing high market shares in local physician practice markets. At the local level, individual PE firms are acquiring competitively significant shares of physician practice markets.
• PE acquisitions are associated with price and expenditure increases. In 8 of the 10 physician practice specialties studied, statistically significant price increases were associated with PE’s acquisition of a practice.
• Price increases associated with PE acquisitions are exceptionally high where a PE firm controls a competitively significant share of the local market.
• Increased attention to the competitive impacts of PE in physician markets is urgently needed. The vast majority of the PE acquisitions studied took place without federal antitrust scrutiny and with limited state antitrust scrutiny. The market share and price results reported indicate that more scrutiny of PE’s impact on competition is warranted.
• Changes to the Hart-Scott-Rodino requirements of federal antitrust law, reimbursement policies and tax policies are needed. At a minimum, federal antitrust reporting requirements must be adapted to modern business models, including PE, to ensure regulators have the information they need to evaluate the competition impacts of these deals.

Private equity’s role in health care provider markets is an ongoing and evolving challenge, and there are no signs that PE’s interest in health care markets is waning, the study found. Although the pandemic caused a temporary leveling off in overall PE investment, PE investments in physician practices have resumed their previous pace as the pandemic has abated. PE funds still are sitting on enormous stores of uninvested capital, physician practices have been financially and psychologically battered by the COVID-19 crisis and all of the incentives that drive providers away from independent practice and toward other ownership models persist.

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“Now is the moment for policymakers to act,” the study concluded. “The steps already taken by policymakers are having considerable impact and should be continued. PE funds and their legal advisors are already responding to the scrutiny of PE by the antitrust agencies. Anecdotal reports suggest that PE firms are abandoning many of their most problematic deals because of this scrutiny. But more needs to be done if current progress is to be translated into lasting change.”