Happy Thursday, Hospitalogists! Given all of the hubbub around private equity in healthcare, M&A, and capital markets, there's quite a bit to catch up on in the space. The FTC held a workshop on March 5 around private equity in healthcare, and I had a chance to join and listen. But while eye-opening and informative, I didn't think it painted the full picture of compromise that we need with such a contentious topic. This post is going to be split into 2 parts and provides my perspective on PE in healthcare while summarizing the key findings from the FTC's workshop. Let's dive in, and if you have anything to add for Part 2 next week, feel free to scream at me afterwards. 🙂 Both parts will be published online next week in one cohesive essay for those of you 'read in browser' folks. Thanks to Care Continuity and WellSky for sponsoring today's newsletter! Welcome to Hospitalogy, my newsletter breaking down healthcare strategy, finance, M&A, and innovation twice weekly. Join 28,000+ executives and investors from leading healthcare organizations by subscribing here! |
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PRIVATE EQUITY IN HEALTHCARE |
Private Equity in Healthcare: Let's Find an Equilibrium |
Before we get started and you yell at me in my Hospitalogy email replies, I want you to know that the spirit of this conversation is to advance the conversation: to try and bring a thoughtful discussion to the current issues facing private equity in healthcare. Maybe you'll think this essay is naive - or shortsighted - I don't care. These are thoughts I've had for a while. Adding to the above, I'm not a lawyer, policy expert, or even a private equity guy. I'm a former healthcare consultant who happens to know how to write semi-coherently, and I've seen my fair share of both good actors and bad actors ACROSS the healthcare system. I'm hoping to add nuance to the conversation because of that lens. A sampling of some of the things I've come across: - I witnessed a PE-backed freestanding emergency room operator blatantly pursue an out-of-network, surprise billing strategy;
- I saw managed care organizations characterizing risk adjustment opportunities as M&A synergies;
- I observed, within a PE-backed physician practice rollup income statement, an expense line-item for referral kickbacks;
- On a due diligence call, I heard a director at a cancer care rollup excitedly mention that utilization was up in their facilities, which would positively influence their overall purchase price, despite the implication that this meant more people in their market were dealing with cancer diagnoses;
- I analyzed absurd projections and assumptions flowing through some shockingly big transactions.
With that being said, I desperately want to find an answer to the following: How do we find an equilibrium that… - Protects patients, clinicians, and communities from harm induced by over-indexing on profits;
- Allows for appropriate level of profit and reinvestment for all players (We are capitalists, everyone in America wants to make money, and healthcare is not immune to that);
- Facilitates more transparency in healthcare between key stakeholders (PE firms, providers, and policymakers)
- Incentivizes large capital investment in healthcare while also upholding core healthcare objectives like the quintuple aim (side note - is quintuple the latest iteration? Looks like there's about to be a 'sextuple' aim!)
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The Public Perception of Private Equity in Healthcare is Abysmal |
Those of you who have followed Hospitalogy for a while know I'm a sucker for a great fantasy series. Right now I'm reading through the Poppy War, a military fantasy trilogy based on mid-20th century China. Core to the novels is the magic system used, where so-called shamans can call various gods within their minds and draw power from them at risk of going slowly insane. The main character, Rin, is drawn to a particularly ancient and dangerous god: the Phoenix. A god full of never-ending rage and bloodlust whose only desire is to destroy and purge: - "Burn, kill, devour, consume, destroy. Exact your revenge," the Phoenix whispers into Rin's ear throughout the novels.
So since I'm insane, I couldn't help but see a loose parallel to healthcare. Many in healthcare - especially on social media - view private equity in healthcare as the Phoenix. A vengeful destroyer in healthcare pursuing selfish, ruthless gain at all costs. |
Of course, this metaphor is a bit overdramatic, but it gets the point across (I just like having fun with metaphors, alright? Work with me!) Working with the metaphor, the Phoenix has caused notable destruction in healthcare: The stories are eerily similar, and the bad actor playbook is familiar. PE firm comes in, raises debt, uses the debt to fuel acquisitions, makes aggressive changes to staffing or other important operating functions to juice margin, angers the clinicians, conducts some refinancing mechanisms in the background to irresponsibly extract more value, and then patients get harmed in the process. The facility gets run into the ground after the value extraction playbook ends. But as devastating as that story of the Phoenix is, and as common as this characterization is personified in mainstream healthcare media, the picture is incomplete. In reality, the Phoenix represents bad actors in private equity, but not private equity itself: |
Private equity, in a vacuum, is not good or bad, holy or evil. It's a tool. But too often, it's a tool used by people who lack integrity and take advantage of the healthcare system for financial gain. The problem lies in the simple fact that our healthcare industry is massive, and there exists regulatory complexity and lack of transparency that presents arbitrage opportunities and loopholes. Private equity has gained a reputation for being one of the worst offenders in this arena. But profiteering extends across healthcare. This dynamic brings us to where we are today, including the most recent March 5th FTC workshop and movement against PE. |
Takeaways from the FTC's Workshop on Private Equity in Healthcare |
Bottom line: The FTC hates private equity's guts. In an election year, stemming from action in 2023, HHS, FTC, & DOJ have already taken several sharp actions against private equity and larger-scale M&A: During the March 5th session on private equity in healthcare, folks on the line heard heartbreaking, inexcusable personal anecdotes from nurses, journalists, and policymakers, all with similar stories to tell, which I've paraphrased below: "Private equity came in. They bought our hospital/facility, and then they cut staffing. They didn't reinvest profits into new equipment or better working environment. Our complaints and worries fell on deaf ears, and ultimately, quality suffered. Patients suffered, and for that reason, private equity deserves to burn." Listen to the stories yourself. These are passionate clinicians who have been burned by the private equity phoenix. For them, there is no coming back - no rebirth - from that. It's clear private equity has brought this scrutiny upon itself. We've all seen the headlines and the typical 'bad actor' playbook. But apart from the absolute dunk fest on private equity (rightfully so in these cases), there were some interesting policies floated during the session which should give you a sense of where future regulation is headed. The following proposals stuck out to me and make sense: Increase ownership transparency - knowledge of who owns what, and when. In general, a core theme to all of this (and healthcare and general) is lack of transparency around…everything. Stronger antitrust enforcement - better understanding of local market competition, and better definitions of what 'harm' to competition and consumers looks like in healthcare. Better enforcement around fraud, waste, & abuse - self explanatory. If you do dumb stuff, expect to get caught. Preservation of clinical autonomy - counteracting the upward march of corporatization of healthcare, strengthening the corporate practice of medicine doctrine in states (Oregon is looking to do something here), and removing non-competes, which would cause some heartburn for everyone attached to a practice management firm. Overall, despite the constructive policy conversation, I left the workshop disappointed. While everyone's testimonies and emotions toward private equity were valid and authentic, I didn't hear a peep from anyone on the other side of the aisle. I wish we had heard from some PE folks, but it's not the setting for them to engage in. And herein lies one of the biggest problems in healthcare: the siloes, the tribalism, the difficulties in finding middle ground, and the mistrust present throughout. So next week we're going a step further in this newsletter. Next Thursday, we'll dive into the pros and cons of private equity from a (hopefully) objective perspective, and dive into potential policies I think make sense to explore in the arena - to find some sort of equilibrium. Hey, a guy can dream! But if you have a perspective to add, feel free to ping me and I'll include it next week. Resources: - Public recording of the FTC Private Equity in Healthcare workshop
- New merger guidelines from the DOJ and FTC
- Federal Trade Commission, the Department of Justice and the Department of Health and Human Services Launch Cross-Government Inquiry on Impact of Corporate Greed in Health Care
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- I managed to get another 18 in this week with my parents (crazy I know) and the swing is getting back into form. I'm a little off in certain areas, and my touch is still mostly gone, but fam we are getting there for the annual guys' golf trip in April.
- Like I mentioned, I'm on book 3 of the Poppy War series and really enjoying the military fantasy. The magic system is compelling, the story is engaging, and I'm looking forward to seeing how things end. If you've read it give me a holler!
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Thanks for the read! Let me know what you thought by replying back to this email. Lots of nuance with this topic. — Blake |
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