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Private equity growth threatens quality, costs of health care


Lawmakers must act to reduce incentives for PE firms to acquire medical practices

Private equity’s (PE) role in primary care is growing and could harm both the quality and cost of care unless legislators and health care policymakers act to slow its growth.

In a session titled “The Role of Financial Profit in Medicine” at the American College of Physicians’ 2022 Internal Medicine Meeting Jane Zhu, MD, MPP assistant professor of medicine at Oregon Health and Sciences University and an adjunct Senior Fellow at the Leonard Davis Institute of Health Economics at the University of Pennsylvania

outlined how private equity deals are structured and earn profits for their investors. A typical strategy, she said, is for firms to purchase a “platform practice” in a geographic area, then “roll up” smaller practices either in the same or related specialties into the platform practice.

Such practice consolidation brings PE firms several advantages, Zhu said. Among these are economies of scale, greater negotiating leverage with payers, and the opportunity to sell it at a higher price and thereby increase investors’ returns.

Erin C. Fuse Brown, JD, MPH, a professor at Georgia State College of Law and director of the Center for Health Law and Society, presented data showing that the number of PE-owned physician practices, which had been growing slowly since 2010, increased dramatically beginning in 2015. Among primary care practices, two-thirds of PE acquisitions occurred between 2015 and 2020.

Fuse cited several reasons why PE investments in physician practices is potentially harmful to doctors, patients, and the health care system. PE investment usually increases market consolidation, leading to higher prices and potentially reducing care access and quality.

In addition, practices acquired by PE firms often face pressure to increase their revenue through overutilization, up-coding and more aggressive risk coding. Finally, doctors working for PE-acquired firms often face greater scrutiny of their clinical decision-making, and are subject to onerous policies such as gag orders and noncompete agreements that limit their future employment options.

Why are practices willing to sell to PE investors? “The short answer is that there are a lot of factors contributing to the challenges of independent practices staying independent,” Fuse said. Among these are rising technology and regulatory compliance costs, and the financial uncertainties brought about by risk-bearing payment models, and the preferences of younger doctors to be salaried employees rather than independent practice owners.

Given those challenges, Fuse explained, the only choices for independent practices are to sell themselves either to a hospital system or to private equity. “Essentially what we’re asking practices to do is choose if you want to be eaten by a shark or eaten by a bear, but you’re going to be eaten either way,” she said.

Hospitals can offer advantages such as more secure employment and regular work hours, Zhu said. On the other hand, PE firms generally will pay more to buy practices, sometimes as much as 12 times its valuation, and enough to persuade practice owners to sell to them.

outlined four broad policy levers” legislators and policymakers could use to slow PE’s encroachment into health care. These include:

  • Closing payment loopholes by, for example, changing Medicare Part B’s method of paying for physician-administered drugs and increasing the Medicare Advantage coding-intensity adjustment,
  • Stepping up antitrust enforcement through actions such as lowering the financial threshold of deals that might trigger Federal Trade Commission oversight,
  • Increasing fraud and abuse enforcement to address upcoding, unnecessary care and self-referrals; and
  • Better enforcement of state employment and corporate practice of medicine laws, including restricting the use and terms of physician non-compete agreements, and “non-disparagement” gag clauses for patient care or fraud and abuse

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