Countering the Influence of Private Equity for Physician Groups

By Nathaniel Arana, CEO, NGA Healthcare
LinkedIn: Nathaniel Arana
LinkedIn: NGA Healthcare

As a society, we should all be concerned about the increasing rate at which private equity firms are acquiring physician groups. Over the last decade, private equity firms have invested nearly $1 trillion in approximately 8,000 healthcare deals, encompassing a wide spectrum of medical services, from fertility clinics to neonatal care, primary care to cardiology, hospices, and everything in between.

The consequence? Healthcare has shifted towards a profit-driven model where physicians have minimal influence on the treatment plans for their former patients. Instead, decisions are made by profit-focused administrators, neglecting patient outcomes. A tragic example is the case of Zion Gastelum in Yuma, Arizona. Two-year-old Zion Gastelum tragically passed away shortly after undergoing root canals and crowns on six baby teeth at a clinic associated with a private equity firm.

His parents filed a lawsuit against the Kool Smiles dental clinic in Yuma, Arizona, and its private equity investor, FFL Partners. They alleged that these procedures were performed unnecessarily, driven by a corporate strategy to maximize profits by overtreating children from lower-income families enrolled in Medicaid. Zion’s demise was attributed to “brain damage caused by a lack of oxygen,” as per the lawsuit.

A recent investigation by Kaiser Health News has shed light on the detrimental impact of private equity in healthcare. As private equity delves deeper into the healthcare sector, mounting evidence suggests that this penetration has led to higher costs and reduced quality of care. Companies owned or managed by private equity firms have been obligated to pay fines exceeding $500 million since 2014 to settle at least 34 lawsuits under the False Claims Act, a federal law penalizing fraudulent billing submissions to the federal government. In most cases, private equity owners have managed to evade liability.

One might argue that physicians are to blame for selling their practices. In reality, health insurance payers have compelled physician groups to sell their practices due to inadequate reimbursement rates. Unlike other businesses, medical practices cannot simply raise their prices; they must negotiate with health insurance companies, a daunting task. The American Medical Association has revealed that the primary reason physicians sell their practices to any entity is the need for higher reimbursement rates to sustain financial viability. Isolated, they struggle to effectively negotiate these rates with insurers.

Private equity often portrays itself as a savior, luring physicians with promises of reduced workload, higher earnings, and improved work-life balance. However, physicians frequently encounter increased burnout, akin to employed hospital physicians. They are excluded from clinical decisions and referrals, and pressured to utilize unnecessary ancillary services. Most physicians ultimately leave after 3-5 years, which coincides with the typical length of these buyout contracts.

Many physicians also discover that the promised pay increases fail to materialize. Health insurance companies are aware that negotiating with private equity firms leaves them with limited leverage, leading to reluctance. Insurance companies understand that this consolidation can result in private equity dictating healthcare service prices, further dissuading negotiations. Consequently, physicians are left with practices they no longer own, corporate control over medicine, reduced clinical outcomes, and often, the same or lower pay than before they sold their practice. In this situation, the sole beneficiary is typically the private equity firm, aligning with their primary objective.

So, what can physician groups do? The most critical step is to regularly negotiate reimbursement rates. If you haven’t negotiated these rates in the last three years, you’re already facing a 15% or even higher deficit, depending on local inflation rates. Insurance payers count on these groups not to negotiate, using it as a cost-saving strategy while they increase premiums significantly beyond inflationary rates.

After initial rate negotiations, practices should review these rates annually and request yearly cost-of-living increases. This approach eliminates the need to fight for a 15% increase three years down the line, allowing for smaller raises over three years with less effort.

Insurance payers are becoming more discerning about private equity’s influence and are reevaluating their support for private practices. Some payers are increasingly willing to assist private practices and raise rates if the physician group is not backed by private equity. More insurance payers are demanding disclosures of ownership to determine if a practice has private equity involvement. While this development is promising, physician groups must still take the initiative to negotiate. The process has become challenging, and we encourage physician groups to seek the assistance of consultants or companies with expertise in this endeavor.

Private equity’s presence is undeniable and rapidly reshaping our healthcare landscape. Physician groups must respond effectively. Many physicians end up regretting selling to private equity once they witness the cutthroat business tactics employed by these companies—disrupting and profiting from an industry. Private equity’s primary aim is to maximize profits, not forge partnerships, even if it means sacrificing physician groups and the quality of care. As stakeholders in healthcare, physician groups and others must take a stand and adopt measures to safeguard against this corporate-owned healthcare approach.