The Fund supports networks of state health policy decision makers to help identify, inspire, and inform policy leaders.
The Milbank Memorial Fund supports two state leadership programs for legislative and executive branch state government officials committed to improving population health.
The Fund identifies and shares policy ideas and analysis to advance state health leadership, strong primary care, healthy aging, and sustainable health care costs.
Keep up with news and updates from the Milbank Memorial Fund. And read the latest blogs from our thought leaders, including Fund President Christopher F. Koller.
The Fund publishes The Milbank Quarterly, as well as reports, issues briefs, and case studies on topics important to health policy leaders.
The Milbank Memorial Fund is is a foundation that works to improve population health and health equity.
November 14, 2022
Health care costs
John E. McDonough
Jun 8, 2022
Oct 14, 2021
Back to The Milbank Quarterly Opinion
Over the past two decades, the financing phenomenon known as private equity has achieved growing prominence as a force in the American economy and in the United States health care system. Because private equity is a curious and obscure phenomenon to most Americans, numerous metaphors have been advanced over time to characterize its footprint and impact. Just last month, a Kaiser Health News video portrayed it as an octopus with tentacles invading every part of American health care. A 2019 article in The Nation used the headline: “How Private Equity Vampires Are Killing Everything.” A 2008 Wall Street Journal column compared private equity with pirates. You get the idea.
Here’s another metaphor, perhaps more benign, but equally threatening. Private equity firms are financial termites devouring the woodwork and foundations of the US health care system. As Laura Katz Olson documents in her new book, Ethically Challenged: Private Equity Storms US Health Care, “PE firms are gobbling up physician and dental practices; homecare and hospital agencies; substance abuse, eating disorder, and autism services; urgent care facilities; and emergency medical transportation.”
Giant private equity firms were the main actors who turned “surprise medical billing” into a national patient crisis that resulted in a new federal law to ban such billing to patients. After building footholds in hospital emergency departments, private equity firms have created so-called “obstetrics emergency departments” (OBEDs) for the primary purpose of squeezing more revenue from patients and their insurance companies.
Just as termites are characterized as “some of the most successful insects on earth,” private equity has become a growing and diversified part of the American health care economy. A reported 123 public equity deals in health care in 2010 ballooned to 1,171 such buyouts in 2020 at a price tag of $105 billion, including clinics and outpatient services, elder and disabled care, hospitals and other inpatient services, pharmaceuticals, infertility clinics, dialysis centers, hospices, and much more. Demonstrated results of private equity ownership include higher patient mortality, higher patient costs, fewer jobs, poorer quality, and closed facilities.
One might point the finger at the late award-winning economist Milton Friedman who wrote a consequential New York Times op-ed in September 1970, the title of which says it all: “The Social Responsibility of Business Is to Increase Its Profits.” Are there corporate obligations to workers, consumers, community, and/or the environment? “Subversive” and “nonsense,” concluded Friedman.
For an op-ed, even in the New York Times, Friedman’s message had long legs. In the mid-1970s, sympathetic academics developed “agency theory” to provide a conceptual model to advance “shareholder power.” One widely-used approach was to make corporate executives more shareholder-friendly by paying them more in stock options and less in salaries. Executives began to reap the same financial rewards and setbacks as the owners of company stock. “Maximizing shareholder value” or MSV became and continues to be a mantra in many C-suites, in consulting firms starting with McKinsey, and in business schools.
The 1980s saw a new trend of US financial market deregulation and the arrival of leveraged buyout companies (LBOs) that used junk bonds and other shady devices to buy out firms that could provide large and quick profits to activated owners. The notorious RJ Reynolds-Nabisco LBO of the late 1980s (portrayed in the 1992 best-seller Barbarians at the Gate) put a damper on the field until its re-emergence in the late 1990s and early 2000s in the form of private equity.
In the 2000s, private equity firms began getting familiar with the health sector, learning to appreciate its regular and reliable cash flows from patient visits, especially the government-funded kind via Medicare and Medicaid. A private equity fund, infused with investments from public and private pension funds, money market investors, and wealthy individuals, buys up individual medical firms, mostly with new debt. The private equity fund owners then recoup their modest initial investments, requiring newly acquired entities to pay off the new debt from existing operations and from management fees assessed on them. Private equity firms “roll up” similar practices—dental service firms were one early target—and then sell off the larger entity within three to seven years for an outsized profit. These are familiar moves across the private equity sector.
Because individual “rolled-up” firms cost much less than the $200 million threshold to capture the attention of the US Federal Trade Commission (FTC), the eyes of regulators never noticed. Other familiar moves include downsizing staff, pushing patients to accept more and more expensive services, upcoding bills to obtain higher reimbursements, and increasing employee workloads.
From its 19th century battles over physician licensure to the reform of American medical education following the 1910 Flexner Report, US medical care has always regarded itself as different from the rest of the economy. Physicians and hospitals wanted, and still want, to get paid as much as possible while upholding moral and ethical obligations to patients. This can be seen in the push throughout the 20th century for state laws to ban the “corporate practice of medicine.” Those bans were intended to isolate medicine from shareholder-driven market competition by establishing barriers to protect US medical care from investor-owned corporations.
Over the past 45 years, however, the US economy became heavily financialized, more rapidly and decisively than in our peer nations. Just as General Electric’s Jack Welch transformed his company from a goods manufacturer to a financial services company, so have financial flood waters now penetrated every corner of American health care. Private equity is winning, and any health care organization is a potential takeover target. Patients and patient visits become commodities and data points to be exploited for high profits. As Appelbaum and Batt write, private equity’s “financial intermediaries view healthcare organizations as vehicles for extracting wealth.”
How bad does this get in the real world? Consider Noble Health, a private equity-backed Kansas City startup launched in 2019. In rural Missouri, Noble acquired Audrain and Callaway Community Hospitals in the early days of the COVID-19 pandemic. In March 2022, all hospital services ceased with the furlough of 181 employees. Notes Kaiser Health News, “…venture capital and private equity firm Nueterra Capital launched Noble in December 2019 with executives who had never run a hospital, including Donald R. Peterson, a co-founder who prior to joining Noble had been accused of Medicare fraud.”
Or consider the fate of St. Joseph’s Home for the Aged in Richmond, Virginia, as retold in The New Yorker. A New Jersey private equity firm called the Portopiccolo Group bought the home, “reduced stuff, cut amenities, and set the stage for a deadly outbreak of COVID-19” that included a doubling in patient deaths. The numbers of stories of private equity-generated health system harm grows rapidly. And if the health part of the business goes bust, as occurred in 2019 at Philadelphia’s now closed Hahnemann Hospital, the underlying real estate still offers rich rewards.
One step forward is to generate broader awareness of private equity’s impact on US health care. Dr. Arnold Relman, late editor of the New England Journal of Medicine, presciently wrote in 1980 of an emerging “medical-industrial complex.” As “vast new funds were moving into medical care,” wrote Relman, “the health care system was rapidly changing from a professional service primarily devoted to the care of the sick into a lucrative and competitive marketplace for investors and investor-owned corporations.”
A second direction requires greater transparency and more thorough disclosure about the investments and activities of private equity firms. The US Securities and Exchange Commission, the Federal Trade Commission, and other regulators are now moving to engage private equity in the interests of sunshine and consumer protection. Current disclosure requirements are inadequate. Particularly in the health care space, more aggressive enforcement of the federal Small Claims Act can be important, especially in Medicare and Medicaid. State governments also have tools to protect state, regional, and local health care systems.
Senator Elizabeth Warren’s (D-MA) proposed Stop Wall Street Looting Act (SB 3022) would impose structural reforms to increase transparency, protect worker, community, and customer rights, reform private equity taxation rules, and more. With only five Senate co-sponsors, and 16 for a House companion bill (HR 5648), the issue currently lacks momentum.
Private equity is not the only force in US health care needing reform. Health insurers, hospitals, drug makers, pharmacies, and others have placed financial interests ahead of patient needs. No other part of the system, though, is designed so thoroughly to maximize short-term financial benefit to shareholders above all else. Action is overdue to stop the rot.
John E McDonough is a Professor of Practice at the Harvard T. H. Chan School of Public Health
John E. McDonough, DrPH, MPA, is a professor of public health practice at the Harvard University TH Chan School of Public Health in the Department of Health Policy and Management. Between 2008 and 2010, he served as a senior adviser on national health reform to the US Senate Committee on Health, Education, Labor, and Pensions, where he worked on the writing and passage of the Affordable Care Act. Between 2003 and 2008, he was executive director of Health Care For All, a Massachusetts consumer health advocacy organization, where he played a leading role in the passage of the 2006 Massachusetts health reform law. From 1985 to 1997, he was a member of the Massachusetts House of Representatives where he cochaired the Joint Committee on Health Care. His articles have appeared in the New England Journal of Medicine, Health Affairs and other journals. He has written several books including Inside National Health Reform in 2011 and Experiencing Politics: A Legislator’s Stories of Government and Health Care in 2000, both by the University of California Press and the Milbank Fund. He holds a doctorate in public health from the University of Michigan and a master’s in public administration from the Kennedy School of Government at Harvard University.
Get the Latest from the Milbank Memorial Fund
An endowed operating foundation that engages in nonpartisan analysis, collaboration, and communication, with an emphasis on state health policy.