Private Equity in Healthcare

In the early 1970s my father funded his new O&P practice with a loan from a family friend. He used those funds to personally provide orthoses and prostheses to patients and continued with that focus until he sold his business 20 years later. This model for financing O&P businesses, with clinician owners of small practices directly involved in the daily operations of the business (known colloquially as mom-and-pop facilities) formed the backbone of the O&P profession in the United States for many decades. This structure provides the capital necessary to fund the establishment of the business and sufficient profit to provide clinician owners and employees with a competitive income. Profit margins in O&P have traditionally provided income above those minimum requirements, resulting in options for growth of mom-and-pop facilities through organic expansion or acquisition of other independent practices. Even in most regional businesses, daily operations and ultimate decision-making authority is retained by individuals intimately familiar with the unique features and challenges of O&P practice. In recent years, a different model of financing healthcare businesses has emerged, with established practices being acquired by investors with no direct connection to O&P. While common in other industries and professions for many years, private equity (PE) investment in medical practices increased significantly after 2000. 1 According to Gondi and Song, “From 2010 to 2017, the value of private equity deals involving the acquisition of a healthcare-related company (most involving physician practices and hospitals) increased 187 percent and reached $42.6 billion, while the number of healthcare deals increased by 48 percent.... In 2017, the value of private equity deals in healthcare totaled $42.6 billion globally, up 17 percent from 2016. The number of deals also increased to 265, from 206 in 2016. Healthcare deals comprised 18 percent of all private equity deals globally in 2017.” 2 Many healthcare providers have strong opinions about this development, but until recently, research on how this type of financial arrangement affects practitioners, practices, and patients has been lacking. This article describes research on PE investment in healthcare that can provide insight on how this business model may impact O&P. How It Works According to Gondi and Song, “Private equity firms use capital from institutional investors to invest in private companies with potential to return a profit. That potential is realized if private equity firms manage to add value to the company and subsequently sell their stake at a price higher than the purchase, typically within three to seven years.” 2 These deals “are expected to deliver 20 percent-30 percent returns.” 2 Gondi and Song describe characteristics of healthcare markets that make them attractive to private equity investors, including geographical fragmentation, which allows for consolidation and economies of scale, the recession resistance of healthcare, and inefficient delivery systems in traditional practices. 2 These characteristics certainly apply to the O&P market. Borsa et al.’s description of PE firms entering “fragmented markets through an ‘anchor investment,’ in which an initial ‘platform practice’ is acquired and then used to acquire more practices in a region and to consolidate them” has been common in O&P for some time. 1 This business model is a significant change from the traditional model of healthcare delivery. For PE investors, the business itself is the product, and potential future buyers are the ultimate consumer. While PE investors profit from the sale of healthcare goods and services at the core of the healthcare practice while they own it, the end goal is to increase the value of the business itself. Strategies to achieve this objective include reducing costs, improving efficiency, and increasing prices and volume. 2 These strategies are implemented by owners of businesses of any size and structure to remain solvent and maximize profits. However, concerns have been raised about how they are implemented by PE investors to maximize short-term profit with less regard for the long-term effects on patient care. Concerns A focus on short-term profit can conflict with product and service quality and long-term goals in a business of any size. Gondi and Song raise the concern that “the need for private equity firms to achieve high returns on investment (often at least 2.5 times) in a rapid timeframe (approximately six years on average) may conflict with the need for investments in quality and safety. Additionally, the need for generating returns may create pressure to increase utilization, direct referrals internally to capture revenue from additional services, and rely on care delivered by unsupervised allied clinicians.” 2 In a commentary on PE investment in nursing homes, Batt and Appelbaum report that “PE-owned homes shifted resources away from patients. Frontline nurses spent fewer hours with patients, and to compensate for lower staffing, the homes made 50 percent greater use of antipsychotic drugs (drugs associated with higher mortality rates). They also spent more money on things unrelated to patient care, such as monitoring fees.” 3 They point out that “PE firms have financial expertise, not healthcare expertise, and they are not bound by the Hippocratic Oath as doctors and other healthcare professionals are…. And if something goes wrong, the PE firm can walk away.” 3 Mom-and-pop business owners (and individual clinicians) may have mixed motives, but most healthcare providers are guided by their ultimate responsibility to patients and their frequent encounters with patients serve as reminders of that priority. Research In 2020, Bruch et al. reported on a study of “204 hospitals acquired by private equity firms from 2005 to 2017 and 532 matched hospitals not acquired by private equity” in which they examined “changes in hospital income, use, and quality measures associated with private equity acquisition.” 4 The quality measures evaluated related to heart failure, acute myocardial infarction, and pneumonia.” 4 They found “increases in annual net income, hospital charges, charge to cost ratios, and case mix index.” (Case mix index is a measure of disease burden.) The PE hospitals treated fewer Medicare and more uninsured patients. (Uninsured patients are often charged more since they do not benefit from the lower rates negotiated by the practice with insurance companies.) The authors made several observations about what their data suggests, including the PE hospitals seeing more patients with private insurance, increased charges for services, and reduced operating costs. The results of the study indicated that the PE goal of increasing the value of the hospital was achieved. Regarding the increased case mix index, they suggested that this may be due either to the hospitals treating sicker patients or more complete and aggressive coding. In 2023, Kannan et al. compared “data from 100 percent Medicare Part A claims for 662,095 hospitalizations at 51 private equity–acquired hospitals…with data for 4,160,720 hospitalizations at 259 matched control hospitals (not acquired by private equity) for hospital stays between 2009 and 2019.” They assessed “hospitalizations from three years before to three years after private equity acquisition.” 5 Key findings are listed in Figure 1. The authors commented that “the small decrease in in-hospital mortality at private equity hospitals” may be explained by “shifts in patient mix toward younger and fewer dually eligible beneficiaries admitted and increased transfers to other hospitals.” 5 While it is possible that the increase in post-surgical infections was caused by treating sicker patients, the researchers commented that “our findings revealing they treated younger Medicare beneficiaries (especially for sepsis) and fewer dually eligible patients (attributes less susceptible to coding intensity) suggest a healthier patient pool.” 5 The increase in hospital-acquired conditions may be related to reductions in staff and changes in clinical staff composition (common cost-reduction approaches in PE hospitals), which have been shown to affect the incidence of adverse events. In 2023, Borsa et al. reviewed 55 empirical research studies that evaluated the health outcomes, costs, and quality in PE-owned healthcare practices in 16 medical settings in eight countries. Most of the practices were in the United States with nursing homes, hospitals, and dermatology practices being the most common settings. 1 “Across the outcome measures, PE ownership was most consistently associated with increases in costs to patients or payers. Additionally, PE ownership was associated with mixed to harmful impacts on quality…. No consistently beneficial impacts of PE ownership were identified.” 1 While they were unable to draw definitive conclusions about health outcomes, the researchers stated that “although these findings are inconsistent, the greater prevalence of harmful impacts and studies finding solely harmful impacts suggest that PE ownership may have mixed effects on quality of care, and that there is more evidence to show that PE degrades it. However, the results were less conclusively harmful when only the 14 studies with moderate risk of bias and one qualitative case comparison were reviewed.” 1 Conflicts can exist between business and clinical goals, or between different business goals. “Among studies that found mixed impacts of PE ownership, there were often trade-offs within related quality measures, such as improvements in one domain of patient experience but not in another, increased staffing of lower skilled clinicians with reduced staffing of higher skilled clinicians, or increased availability of appointments for privately insured patients with reduced availability for patients receiving Medicaid.” 1 The relationship between labor costs and quality is a common challenge in any clinical business, but in healthcare, decreased provider availability and skill has a direct impact on patients’ health and quality of life. Borsa et al. stated that “one of the main impacts on quality associated with PE ownership was a decrease in nurse staffing or a shift to lower nursing skill mix, which could be pursued as a means of keeping operating costs low.” 1 An emphasis on financial metrics may result in viewing the role of providers simply as a cost and not essential to the achievement of clinical goals. Application to O&P There is no research on the impact of different funding or business models on the practice of O&P, but the experiences of individuals who have practiced within these structures can provide insight. Some benefits of larger organizations and increased capital are obvious. The significant research contributions and advocacy for payment for advanced components made possible by the financial resources and expertise available in larger organizations benefit practitioners and patients in all practices. O&P has benefitted greatly from this type of investment by large companies. Common cost-cutting measures, such as staffing reductions and reliance on fewer certified and licensed practitioners (perhaps even more likely in O&P due to the lack of licensure requirements in most states) can be expected to affect employee and patient satisfaction and perhaps even quality of care. Decision-making quality often degrades with increased distance from the impact of those decisions on practitioners and patients. Ultimately, practitioners are responsible for and feel the weight of the clinical decisions they are required to make or make independently. When clinicians who see these impacts daily are supported and empowered to make decisions in the best interest of their patients, improved outcomes can be expected. Making it more difficult for practitioners and staff to maintain a patient focus could challenge productivity and retention. Clinicians recognize the difference between earning a profit by providing clinical care directly to patients (as my father and many other clinician owners have done) and maximizing short-term profit to increase owner income and inflate the value of a business in anticipation of its sale. Because of the dedication of individual clinicians, quality care will continue to be delivered to patients who require O&P services regardless of business structure. Owners of businesses of any size have the opportunity to support practitioners in a way that promotes the welfare of patients, which often requires greater emphasis on clinical rather than short-term financial priorities. John T. Brinkmann, MA, CPO/L, FAAOP(D), is an associate professor at Northwestern University Prosthetics-Orthotics Center. He has over 30 years of experience in patient care and education. References Borsa, A., G. Bejarano, M. Ellen, and J. D. Bruch. 2023. Evaluating trends in private equity ownership and impacts on health outcomes, costs, and quality: systematic review. BMJ 382. Gondi, S., and Z. Song. 2019. Potential implications of private equity investments in health care delivery. JAMA 321(11):1047-8. Batt, R., and E. Appelbaun. 2021. Private equity in health care: Profits before patients and workers. LERA for Libraries . Bruch, J. D., S. Gondi, and Z. Song. 2020. Changes in hospital income, use, and quality associated with private equity acquisition. JAMA Internal Medicine 180(11):1428-35. Kannan, S., J. D. Bruch, and Z. Song. 2023. Changes in hospital adverse events and patient outcomes associated with private equity acquisition. JAMA 330(24):2365-75.

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