Bloomberg Businessweek “First, Do No Harm” “Maximize Free Cash Flow” “How Private Equity Is Ruining American Health Care” by Heather Perlberg pp52-57
Private Equity (PE) and Wall Street are now engineering medical practices and hospitals to maximize profits. In fact, PE has bought up $10B in physician practices, physician staffing companies, surgery centers over the last five years. For a few reasons, Dermatology practices have been targeted because the market is growing, the procedures are less risky and there is less governmental regulation regarding "self-referral". It is estimated that PE ccurrently owns 10% of all dermatology practices.
If you have ever been involved in a private business exit then the steps involved are very similar except this is also about patient health and lives not just investor returns. Generally speaking, until recent times, collecting revenue and profiting from medicine was exclusively the domain of licensed physicians but lawyers devised a way for investors to get involved by splitting accountability. Investors are responsible for the non-clinical assets and physicians are responsible for the actual practice of medicine. Under this umbrella, PE buys a practice or practice(s), drastically cuts costs and sells to other investors after realizing a 20-30% profit within three to five years.
Some physicians would argue that “You can’t serve patients and investors” but investment firms counter saying these claims are “overblown”, that as investors they “give doctors a financial shelter” and that their involvement has “expanded care to more patients”. All claims are not surprisingly unsubstantiated as investment firms shelter themselves by mandating Non-Disclosure-Agreements and by keeping their financials private. For the cited report, Bloomberg Businessweek spoke off the record to physicians, other employees, investors, reviewed court filings and gained access to some company records. Below are the steps typically experienced when practices sell to PE.
1) Marriage-Although non-clinical and clinical are mandated as separate SILOs, doctors and other report undue influence by investment groups. Examples include the following. Dangerously slowing procurement, substituting critical and non-critical supplies, substituting physicians for allied healthcare providers, fudging on supervision of allied healthcare providers, pushing an increased number of sometimes unnecessary procedures, pushing for higher priced procedures and upcoding-adding more procedures to invoices beyond what was performed. Typically, much like the big stores at the ends of each mall, PE will buy a successful “anchor” practice for up to $100M and then loop in smaller groups to create a regional entity. They leverage buying power and push insurers for higher reimbursement as much as $25-$125 more per patient visit. A solo physician joining the group might receive $2-$7M but with 30-40% of that as equity. They get multiyear non-compete-agreements, lower pay and help with recruiting
2) Growth-PE uses marketing including Social Media to grow by announcing new physicians and patient coupons for treatments. In some cases, as modern businesses do, PE puts in Management Scorecards and employee cash bonuses for meeting financial objectives. This encourages staff to go beyond “strictly addressing patient’s medical needs”. Such incentives can lead to all the practices mentioned above. Billing for unnecessary procedures or procedures not actually performed is simply put medical fraud. PE, take advantage of the lack of Stark Regulation (Self-Referral) for dermatopathology laboratories, by urging their physicians to refer biopsies only to PE-owned anatomic pathology laboratories. Of all reported excessive biopsies in dermatology, 25% are reportedly associated with PE owned laboratories. Some physicians don’t trust these laboratories and some suggest PE tends to “look away” at incompetency and lack required transparency when errors are confirmed.
3) Synergy-push through as much as double the number of patients per physician, slow procurement, substitute for lower priced materials without medical consultation, force individual physicians to discuss cases with a manager or medical director and increase the number of visits per procedure-more reimbursement if you split a procedure into two visits rather than one. Increase use of allied health providers and relax required physician oversight.
4) Rolling Up the Roll-Up. This step is selling to the secondary market-another PE firm that pushes harder to achieve cost cutting and increase revenue. As the limits are pushed not surprisingly there is fallout. Unavailable supplies or supplies of inferior quality can affect patient care adversely. Poorly supervised allied healthcare providers can perform too many biopsies or cut large margins around the suspected lesion leaving the patient with big scars. Poor pathology can lead to unnecessary surgery.
5) Sell-Off. PE, using such an approach, realize some failures especially when quality issues are brought to light. There is no secondary or tertiary market for blemished practices-those offices are closed and the patient lists are sold. Sometimes this leaves the primary investors and those funding them with the purchase debt and debt incurred during their management. In the case cited this was $377M. For those entities that "make it" the goal is to sell to the largest investment groups like KKR, Blackstone and Apollo Global Management.
As PE look beyond investing in dermatology to urology and gastroenterology some are voicing concern. These disciplines are far more invasive than most dermatology. According to Dr. Jane Grant-Kels, a veteran dermatologist and professor, “It’s ultimately going to backfire” “There’s a limit to how much money you can make when you’re sticking knives into human skin for profit”.