State legislatures across the country are beginning to consider and debate the pros and cons of passing laws aimed at regulating private equity’s role in the healthcare industry. According to an article in the Wall Street Journal on April 18, 2024, 12 states have already passed legislation regulating private equity involvement in healthcare. Most of these laws require some form of pre-transaction notice and review by the State Attorney General’s Office. With the next legislative session not too far off, it will be interesting to see if Oklahoma policymakers weigh in on this issue.
The scrutiny of private equity is getting more intense, in large part due to the bankruptcy of Steward Health and the resulting media coverage that has led the federal government to open an investigation. The Steward Health saga started in 2010 when Cerberus Capital Management purchased an unprofitable Massachusetts hospital chain. Cerberus then went on a buying spree that eventually made Steward the largest private for-profit hospital chain in the nation. Steward is now in deep financial trouble and had to file bankruptcy on May 6, 2024, arguably in part due to liabilities assumed while Cerberus was still in charge, including failure to pay vendors.
So what is private equity and why are some states wanting to regulate it? Private equity describes investment entities or partnerships that buy and manage companies before selling them at a profit. The sole purpose of private equity is to create value or increase the net worth of a company to make a profit. Generating a profit is not a bad thing, but how a private equity company creates that value may have negative consequences, such as through dramatic cost-cutting. Private equity firms do not intend to own the acquired business for a long time. According to the private equity info blog, in 2023 the average holding period was only 5.6 years. This means disruptive changes could be made in a relatively short period of time for acquired healthcare providers and the private equity buyer will not be around to deal with the long-term consequences. As in the Steward Health situation, the result of the private equity transaction appears to have saddled the hospital chain with unsustainable debt.
The other side of the coin is that acquisition by a private equity firm can make the company more competitive, depending on the motives and expertise of the private equity company. It’s possible that a private equity firm could bring expertise to the table that was unavailable before, or make hard decisions, or take aggressive but needed actions, that prior management was unwilling to take, which result in improved overall financial position and long-term outlook.
The private equity industry has grown rapidly in recent years due to high stock prices and low interest rates. According to an article published in Health Affairs, over 6,000 physician practices have been acquired by private equity in the last decade. As private equity transactions have proliferated, so have fears that their profit-driven motives will result in, or have already resulted in, higher charges, higher costs, and a negative impact on the quality of healthcare provided.
The chair of the Federal Trade Commission has stated that “[w]hen private equity firms buy out healthcare facilities only to slash staffing and cut quality, patients lose out ….” Consistent with this sentiment, the FTC has taken aim at private equity affiliated providers. For example, it initiated a lawsuit against U.S. Anesthesia Partners, Inc. and a private equity firm in 2023 alleging antitrust violations related to a multi-year anticompetitive scheme to consolidate anesthesia practice in Texas, drive up the price of anesthesia services, and increase their own profits.
The two states that most recently passed bills targeting private equity transactions with healthcare providers are California (a blue state) and Indiana (a red state), although ironically, California Governor Newsom recently vetoed the bill. So, although historically this type of legislation has been considered by predominantly those states considered “blue” states, there are “red” states also evaluating whether this is an area in need of regulation to preserve access to affordable healthcare.
A truncated version of this article first appeared in the October 10, 2024, issue of The Journal Record. It is reproduced with permission from the publisher. © The Journal Record Publishing Co.
