Your bone fracture, my cash flow: the consequences of private equity in health care

A recent article in Modern Healthcare describes how private equity firms are starting to snatch up specialist physician groups that promise rich revenues, such as orthopedists, dermatologists, and ophthalmologists.

Naturally, this is about adding value, not adding to bank accounts. Because whether it’s physicians or hospitals, health insurers or drug companies, no one in health care ever does anything except in the best interest of patients.

The Modern Healthcare article notes that Cincinnati’s Beacon Orthopaedics interviewed 15 private equity firms. Although the orthopedists declined to discuss finances, there was no need: what drove its final choice was the “ability of physician leadership to continue to manage and be advocates for the care of our patients,” the group’s president said.

Critics carp that capturing economic advantage is driving the merger mania that’s enveloped insurers, hospitals, pharmaceutical companies, drugstore chains, and others throughout health care. However, a new American Hospital Association report, contradicting most independent economists, concludes that hospital consolidation actually lowers costs and improves quality.

It’s insurer consolidation that’s driving up prices, AHA president Rick Pollack told reporters, raising the specter of powerful insurance companies demanding to pay higher prices while mega-hospital chains manfully resist.

The private equity push illustrates how physician groups are being pulled into the market share pursuit. Beacon Orthopaedics’ next goal, its president said, will be “consolidating” the orthopedic surgery market “in the best interests of our patients.”

In an overview of private equity deals, The Street financial website wrote: “While there is much to admire about private equity firms … the pursuit of outlandish returns has many times brought out the absolute worst” in some transactions.

What will happen in medicine? Nearly 200 dermatology practices have been acquired by private equity firms over the past six years, a recent JAMA Dermatology study found. Will the new managers bring economic efficiency or will they boost utilization of high-cost services and deploy aggressive billing tactics? Like everything else in medicine, there will undoubtedly be variation.

In some cases, according to MarketWatch, another financial website, “doctors report pressure to upcharge when billing health insurers and to sell products and procedures, while financial firms skimp on medical supplies and employees.”

Private equity cash may not inevitably be malignant, but the growing size of the infusion bears monitoring. Private equity deals in all of health care rose 50% in 2018 to $63.1 billion, according to Bain & Company. An Annals of Internal Medicine analysis predicted that acquisition of physician practices will accelerate.

The dollars-per-doctor numbers are alluring. In 2015, each U.S. physician supported an average of $3.2 million in direct and indirect economic output, according to a report for the American Medical Association. As a group, physicians created an eye-catching total of $2.3 trillion in direct and indirect economic output.

“In addition to their key role as caregivers, physicians also remain the economic engines of health care,” concluded the latest Merritt Hawkins Physician Inpatient/Outpatient Revenue Survey.

“Your bone fracture, my cash flow,” may not be as catchy as “First, do no harm,” but it certainly seems to capture the spirit of our times.

Michael L. Millenson is president, Health Quality Advisors, LLC and can be reached on his self-titled site, Michael L. Millenson

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