Impact of private equity investment in health care

Loren Adler, Associate Director of the USC-Brookings Schaeffer Initiative for Health Policy, joins Yahoo Finance to discuss the health care sector.

Video transcript

JARED BLIKRE: Private equity money has flooded the medical industry in recent years, particularly in physician practices and staffing companies. But could that new money be driving unexpected financial burdens on those needing medical services? A new report says it might. And here to discuss it is Loren Adler, Associate Director of the USC-Brookings Schaeffer Initiative for Health Policy, plus Yahoo Finance's Anjalee Khemlani. Lauren, thank you for joining us here today. Can you break down some of the findings of this report? Because I know that any time we talk about profits and medicine, it's raising eyebrows.

LOREN ADLER: Sure, no, thanks for having me. You know, it has been-- it's an interesting report. And to look into sort of this big surge over the last decade or so, I think the movement of private equity money into physician practices has made a lot of headlines in recent years, particularly with the surprise billing debate, where we had, you know, strong evidence that the rise of these private equity staffing companies in emergency medicine or anesthesia, in particular, really was resulting in additional patient costs and really getting surprise bills, in particular. And we have seen that at least get closed with the No Surprises Act that's set to take effect next year.

But, you know, in our analysis of the data here, there really seems to be a new shift into some of the office-based specialties, like dermatology, GI, and ophthalmology, where the evidence base is much more nascent. But certainly, there are fears of some of the same increases in patient costs, especially given some recent evidence that we discuss, really finding quite negative patient outcomes in the nursing home sector, which has, obviously, been sort of a big-- getting a lot of press in the-- with COVID and everything.

ANJALEE KHEMLANI: And Loren, I'm so glad you brought that up because I know that that's something we've talked about, is where the evidence has come from when it comes to the nursing home sector and how that can play a role in what we understand, especially for hospital-based or group-based practices and how that really impacts the long-term view of this.

And on one hand, we have some states that have gotten down to encouraging more transparency for these private equity deals. But what could, really, the country do largely? Is it supposed to be, or should it be, a state by state sort of determination on how to address this? Or is it something that needs to be addressed federally, and how can they, if so?

LOREN ADLER: Sure, so my view is, really, there are-- this is largely a federal issue to deal with. Obviously, states have some tools that can be useful on these fronts in terms of transparency or especially price regulation or looking at consolidation, right? A big part of the drive for private equity money in physician practices is primarily about creating and consolidating companies, coming into particularly these office-based specialties that hadn't really gotten a lot of interest from the hospital sector.

So they were pretty fragmented at the time being. Private equity money can come in, consolidate markets a fair amount, and use that pricing power to jack up prices. That is sort of an easy way to make money in this space. But that really is-- largely comes back to the federal antitrust agencies and the Federal Trade Commission, who, to be fair, is certainly looking into this and has made a lot of noise more recently about looking at these smaller deals that have often gone under the radar.

So, a common tactic here is, you buy one big platform company, they call it. And then you buy a lot of small practices that are add-ons, which often have sort of evaded the eyes of the agencies because these deals are relatively small. Hopefully, we can kind of look into those a little bit more and look more holistically at the company when they are trying to do these sorts of mergers, given the plethora of evidence we have that that sort of consolidation can harm consumers, either through higher prices or lower quality.

And then, you know, I think where we come down is that a lot of this can come down to, there are a host of market failures and payment loopholes that sort of litter our healthcare system. And really closing those can be the first step to removing the low hanging fruit that private equity likes to take advantage of in these sectors.

ANJALEE KHEMLANI: I want to dig into that a little bit because definitely looking at the loopholes and just sort of how that fits into the larger conversation that's happening about healthcare right now, we're talking more technology, you know, fancier devices and products. And all of that put together also puts pressure on the systems and increased costs, generally speaking.

So, looking at it from the broad spectrum, are we in a different sort of-- are we in a shift, really, in how healthcare services are being provided? And maybe the sort of tug of war happening right now is more of a philosophical question. But in sort of this, like, brand awareness environment, is that going to play a role, do you think, in how this sort of sorts itself out?

LOREN ADLER: I think that's certainly possible. And part of this is people sometimes talk about whether you want to somehow target private equity in particular. But it is-- one, it's sort of hard. Private equity can pretty easily sort of change the format of the exact financing. So it is somewhat hard to really target regulation that well.

And, you know, another point we make here is there's been a lot of consolidation in healthcare over the last decade. And it's not all driven by private equity. We have a good chunk of evidence that health system acquisition of physician practices are just sort of two practices merging and joining together. Hospital consolidation, payers are buying practices, you know, all of that can have some similar negative outcomes potentially.

But, you know, you make a good point that there also is a need for investment. And particularly, as we move more towards some risk bearing, the physician practices and the hospitals want to take some risk on, need to invest in new technology and all of that. There is a reason why the private equity money is attractive as well. And that's where it comes in handy, that if you remove sort of the low hanging fruit that we think is pretty clearly negative for consumers, maybe you can still leave open the opportunities where it probably might be more of a net positive, right?

I think of the example of primary care, where, certainly, there have been a number of developments and advancements that have been good for patient quality, right? A lot of these new primary care practices respond to your emails more quickly, have telehealth, have services that patients really do find attractive. But at the same time, there is also a lot of evidence that they are upcoding and taking advantage of Medicare Advantage payment rules and things like that, which is really just sort of siphoning taxpayer money without much positive benefit accruing to patients.

JARED BLIKRE: Well, Loren, we thank you for breaking it down. Loren Adler, Associate Director of the USC-Brookings Schaeffer Initiative for Health Policy. Also, Yahoo Finance's Anjalee Khemlani.