What’s the impact of private equity’s increasingly large footprint in medicine? The results so far have not been promising. 

We dissect: what is private equity, the recent bankruptcy of the largest emergency medicine staffer in the US and how that impacts clinicians, can corporations practice medicine, The American Academy of Emergency Medicine has jumped into the fray, does profit-driven medicine ever serve patient care, HCA has been accused of naughty deeds, performance metrics versus the one metric that really matters, the No Surprises Act, and physician unions, 

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Guest Bio: Leon Adelman, MD, MBA, FACEP, FAAEM is an emergency physician and co-founder of Ivy Clinicians, a software company that simplifies the emergency medicine job search through transparency. Dr. Adelman is the author and publisher of the Emergency Medicine Workforce Newsletter, which explores the business of emergency medicine. As medical director at Tennova Healthcare Clarksville and Johnston Health UNC (large rural EDs in Tennessee and North Carolina), Leon led emergency department teams to exceptional patient-centered outcomes. Leon is a graduate of Brown University, the University of North Carolina School of Medicine, the Harvard-Affiliated Emergency Medicine Residency at Beth Israel Deaconess Medical Center, and the University of Tennessee Haslam College of Business. Leon is married to an emergency nurse and has two adorable dogs.

 

We discuss

What does ‘venture capital/private equity’ in medicine really mean?

About a quarter of emergency departments now are staffed by a medical practice that is owned by a private equity company. 

Here’s how private equity works (using the analogy of buying a house)

Buying a House (Investing in a Company)

1. Spotting an Opportunity: Imagine you see a house in a neighborhood that looks run-down and undervalued, but you believe has the potential to be much more valuable with some repairs and upgrades. Similarly, private equity (PE) firms look for companies that may be underperforming, have untapped potential, or could benefit from a capital injection or management expertise.

2. Leverage: Instead of buying the house entirely with your own money, you take out a mortgage, putting down only a fraction of the house’s price and borrowing the rest. In PE, this concept is called ‘leverage’. Firms will use debt (loans) to finance a large part of the acquisition of a company. By using leverage, PE firms can amplify their returns. However, it also increases the risk – if things don’t go according to plan, not only can they lose their initial investment, but they also have debt to repay.

3. Making Improvements: After buying the house, you invest more money and time to fix it up, hoping to increase its value. Similarly, PE firms might streamline operations, expand the business, or make strategic changes to the company they’ve acquired.

4. Selling the House (Exiting the Investment):

Making Money – If all goes well and after all the improvements, you manage to sell the house for a lot more than what you spent (purchase price + repairs + mortgage interests), you make a profit. Similarly, after improving the company, PE firms aim to sell it (or take it public through an IPO) at a much higher valuation than their total investment (purchase price + additional capital + interest on debt).

Losing Money – On the other hand, if the neighborhood’s property values go down, or if there are unforeseen structural issues with the house, you might be forced to sell it at a loss. Similarly, if the company doesn’t perform well, faces unforeseen challenges, or if there’s an economic downturn, the PE firm might not recover its investment when selling the company. And because they used leverage, they still owe the debt they took on, which can lead to significant losses

Benefits and Criticisms:

Proponents of private equity believe that just like renovating a house can increase its value, PE firms can bring expertise, resources, and a longer-term vision to companies, leading to their growth and better performance.

Critics, however, argue that the use of heavy debt can make companies more vulnerable, especially in economic downturns. Similarly, just as over-leveraging when buying a house can lead to financial distress if you can’t pay the mortgage, over-leveraged companies can face significant financial challenges if they don’t generate enough cash flow.

The challenge we’re facing in healthcare is that we’re not dealing with houses, we’re dealing with people’s lives. When you hyper-financialize medicine, you start getting into some challenges.

The largest emergency medicine staffer in the US, Envision, recently went bankrupt.

Envision was the largest staffer of emergency medicine (it used to be called EMCARE). They then grew into a nationwide multi-specialty practice all over the country with over 400 emergency medicine contracts. 

When Envision was bought by KKR, a private equity company, for $9. 9 billion, they saddled Envision with about 6 billion of debt. 

While Envision was making money and still had money in the bank, they still had to pay their employees and their doctors.

They couldn’t keep up with their debt and filed for bankruptcy in May 2023.

What happens with all of those clinicians and hospitals when the staffing company implodes?

Envision is now going through a managed restructuring. Doctors are still working and getting paid but Envision now is no longer owned by KKR. KKR had to give up its ownership stake in Envision during this bankruptcy process.

The banks are now the owners of Envision. They don’t want to be in this business. They want to sell off this asset that they never really wanted to have. 

So who are the buyers/the next owners of these Envision contracts? Envision set up a joint venture with HCA Healthcare – the biggest private hospital system in the country (Envision contracts at HCA sites.) 

We don’t yet know about the other Envision contracts and who the buyers of those contracts will be.

A corporation cannot practice medicine in most states in the US (but can in some!).

38 states have corporate practice of medicine laws that essentially say a company like Envision, which is not a doctor, is not run by doctors, cannot practice medicine in that state. 

The American Academy of Emergency Medicine has a physician group that staffs a few ERs –  Envision took over one of their contracts

AAEM then sued Envision and KKR in California for the illegal corporate practice of medicine.

The American Academy of Emergency Medicine is suing Envision and their corporate entity for the illegal corporate practice of medicine 

Is there a functional difference between the old-school CMG (contract management groups) and modern-day private equity-owning medical groups?

Private equity in itself is no more good or bad than other corporate structures. The main differentiation is this: Is the primary goal financial profit for shareholders or care of patients? And the reason for the corporate practice of medicine laws in the first place was to protect this prioritization.

Does profit-driven medicine ever serve patient care?

There are ways that the profit motive can lead to good patient care. Leon gives the example of value-based payment or 90-day bundles for hip replacement, where you can make more money by keeping that person with the hip replacement out of readmissions and out of nursing homes and being back home and walking. 

There are structures where the profit motive really does work. It is not obvious that emergency medicine is one of them.

HCA has been accused of funneling patients into end-of-life care to improve hospital mortality metrics. 

A recent article on this in Fierce Healthcare outlined how HCA has pushed patients into end-of-life care to improve metrics that are directly connected to incentive payment calculations of top executives and hospital administrators.

Has private equity made universal healthcare impossible in the US?

Leon’s nuanced answer – Private equity might actually move us closer. It’s not the only financial or corporate entity in healthcare. What is different about private equity is its leverage. Interest rates are going up. Reimbursement is going down. If you are leveraged the way that private equity companies are leveraged that might not work very well in an economy like we have now with high interest rates and low reimbursement for physician care. As it falters, it may become clear to the populous that corporatization of healthcare doesn’t make sense. 

The group you want to work for sees physicians as the business rather than an expense to minimize

Quality of shift is a metric you rarely see on your monthly performance stats, but it should be at the top of the list

If doctors are treated well, have good shifts, and are ready for those shifts, they will provide that high level of care. A higher level of care will help maintain contracts and also keep those doctors with that group longer. 

That’s hard to achieve in a profit-first organization.

Would you ever wash your rental car? The downstream of not having ownership in a group

Consolidation in healthcare makes prices to patients go up and the quality of care not change. If quality does change, it’s more likely to change slightly for the negative. 

The No Surprises Act was set up to protect patients. It’s kind of a mess. 

The No Surprises Act, enacted in the U.S. in 2021, is federal legislation aimed at protecting patients from unexpected and exorbitant medical bills for out-of-network services without their knowledge or consent. Typically arising in emergency situations or from out-of-network providers working at in-network facilities, these “surprise bills” often left patients with significant unforeseen financial burdens. Under the Act, patients are only required to pay the in-network rate for these services, and providers and insurers must then work out any additional payment through a negotiation process or an independent dispute resolution system.

However, some critics argue that the No Surprises Act has fallen short of its intended goals. Despite its noble intent, the Act’s implementation has faced challenges like potential loopholes that might allow providers and insurers to bypass the law’s protections. 

Additionally, the burden of navigating the law and understanding one’s rights still largely falls on patients, who might be unaware of or unable to advocate for their protections. Concerns also arise about the potential for increased health insurance premiums as insurers may pass on the costs of the Act’s requirements to consumers. Furthermore, ambiguities in the legislation and the rules governing its enforcement have led to disputes and confusion among stakeholders, potentially undermining the law’s efficacy.

Physician unions. Can doctors go on strike?

In 2023, an emergency medicine group in Oregon unionized within a hospital-owned practice. 

Every physician was allowed to be part of that union, including those with management titles.

Physicians have realized you don’t have to go all the way to a strike in order to have leverage. One of the things that’s been talked about is documentation leverage – for example: if you don’t write critical care time, no patient is harmed. Non-strike moves give groups leverage.  

Residents at Elmhurst went on strike in demand of equal pay (and got it!) NY Times article 

Leon’s guess outlook for the emergency medicine job market in the coming years

Leon thinks it will be solid in the coming years. Attrition rates have been higher than expected and patient volume is up.