Private equity firms now control many hospitals, ERs and nursing homes. Is it good for health care?

In March, as the coronavirus gripped the nation, veteran emergency room doctor Ming Lin was growing concerned. Lin felt his facility, PeaceHealth St. Joseph Medical Center in Bellingham, Washington, was unprepared for the pandemic, so he went to his superiors for help.

Frustrated by their response, Lin took to social media, criticizing the hospital’s operations in a series of posts.

Days later, the hospital removed Lin from the rotation in the emergency department. He had worked at PeaceHealth for 17 years.

Under typical medical industry practice, Lin’s case would have been subject to peer review, experts said. But Lin’s employer wasn’t PeaceHealth. It was TeamHealth, a physician practice and staffing company that provides the hospital with emergency room services. TeamHealth is owned by Blackstone Group, a finance giant.

When a private staffing firm teams up with a hospital, the right to due process can disappear. Lin’s case was never heard.

“One of the objectives is to point out any deficiencies in the system that may harm the patient,” Lin told NBC News. “Because private equity has taken over health care, it has made that difficult.”

Blackstone, which bought TeamHealth in 2016 for $6.1 billion, is what’s known as a private equity firm, a type of financial entity that buys companies and hopes to sell them later at a profit.

Over the past decade, private equity firms like Blackstone, Apollo Global Management, The Carlyle Group, KKR & Co. and Warburg Pincus have deployed more than $340 billion to buy health care-related operations around the world. In 2019, private equity’s health care acquisitions reached $79 billion, a record, according to Bain & Co., a consulting firm.

Private equity’s purchases have included rural hospitals, physicians’ practices, nursing homes and hospice centers, air ambulance companies and health care billing management and debt collection systems.

Partly as a result of private equity purchases, many formerly doctor-owned practices no longer are. The American Medical Association recently reported that 2018 was the first year in which more physicians were employees — 47.4 percent — than owners of their practices — 45.9 percent. In 1988, 72.1 percent of medical practices were owned by physicians.

In some parts of the health care industry, private equity firms dominate. For example, TeamHealth, owned by Blackstone, and Envision Healthcare, owned by KKR, provide staffing for about a third of the country’s emergency rooms.

This has been a seismic shift. During the 1900s, most hospitals were owned either by nonprofit entities with religious affiliations or by states and cities, with ties to medical schools. For-profit hospitals existed, but it wasn’t until recently that they became nearly ubiquitous.

For the past 20 years, private equity has been a source of immense wealth for the executives overseeing the entities. Most of those who head major private equity firms are reported to be billionaires, like the two men atop Blackstone: Stephen Schwarzman, a close adviser to President Donald Trump, and Hamilton “Tony” James, a major donor to Democrats.

The impact private equity has had on employees and customers of the companies it has taken over, however, isn’t always beneficial. To finance the purchases, private equity owners typically load the companies they buy with debt. Then they slash the companies’ costs to increase earnings and appeal to potential buyers down the road.

In the business of health care, the drive for profits can run counter to the goal of helping patients and protecting workers, critics say.

Research shows, for example, that when private equity firms acquire nursing homes, the quality of care declines markedly. And when COVID-19 hit, hospitals associated with private equity firms were early to cut practitioners’ pay and benefits because the operations could no longer generate profits on elective surgical procedures postponed during the pandemic. The heavy debt loads typically associated with private equity-owned businesses hinder their ability to withstand profit downturns.

Finally, some medical professionals say, private equity’s growing involvement in health care in recent years has contributed to shortages of ventilators, masks and other equipment needed to combat COVID-19, because keeping such goods on hand costs money. And to private equity, that’s like putting dollar bills on a shelf.

Private equity firms have jumped into health care with both feet. Apollo Global Management, a $330 billion investment firm overseen by Leon Black, owns RCCH Healthcare Partners, an operator of 88 rural hospital campuses in West Virginia, Tennessee, Kentucky and 26 other states. Cerberus Capital Management, a $42 billion investment firm run by Steve Feinberg, owns Steward Health Care; it runs 35 hospitals and a swath of urgent care facilities in 11 states.

President Barack Obama pats outgoing Treasury Secretary Timothy Geithner on the back in January 2013. Geithner is now president of Warburg Pincus, which owns Modernizing Medicine.Pablo Martinez Monsivais / AP

Warburg Pincus, overseen by former Treasury Secretary Timothy Geithner, owns Modernizing Medicine, an information technology company that helps health care providers ramp up profits through medical billing and, to a lesser degree, debt collections. The Carlyle Group owns MedRisk, a leading provider of physical therapy cost-containment systems for U.S. workers’ compensation payers, such as insurers and large employers.

Private equity’s laser focus on cost cutting and operational efficiencies can benefit consumers, economists say, if lower costs are passed on to end users. Problems arise, however, when the push for profits reduces quality. That can be especially harmful in health care, in which patients’ lives are on the line and it is difficult for consumers to comparison shop by analyzing quality of care.

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Mark Reiter is residency program director of emergency medicine for the University of Tennessee and past president of American Academy of Emergency Medicine, an advocacy group for practitioners. “Private equity-backed health care has been a disaster for patients and for doctors,” he told NBC News. “Many decisions are made for what is going to maximize profits for the private equity company, rather than what is best for the patient, what is best for the community.”

Representatives of every firm identified in this article declined to respond to broad criticisms of private equity in the health care arena.

Dr. Mark Reiter.Courtesy Mark Reiter

As for PeaceHealth St. Joseph Medical Center, spokeswoman Bev Mayhew said it removed Ming Lin from the emergency department rotation because “his actions were disruptive, compromised collaboration in the midst of a crisis and contributed to the creation of fear and anxiety among staff and the community.” She said his case wasn’t subject to peer review because he still has privileges at the hospital.

A TeamHealth spokesman said it continues to employ Lin and had offered to place him “in another contracted hospital anywhere in the country.”

‘Physician Extenders’

Private equity firms have targeted health care investments for an array of reasons, most having to do with their potential profits.

First, health care drives a huge part of the nation’s economic output — almost 20 percent of gross domestic product. In addition, health care is a fragmented business with many small operators like physicians; private investors often find outsize gains in industries in which they can create economies of scale through consolidation.

Ever on the hunt for efficiencies, private equity has brought changes to traditional health care practices, experts say. One example: the use of so-called physician extenders, like nurse practitioners, to see patients instead of actual doctors.

Because such extenders have less training under their belts, their costs are well below those associated with physicians. In general, employing three extenders equals the cost of one physician, said Robert McNamara, professor and chairman of emergency medicine at Temple University and chief medical officer of Temple Faculty Physicians.

Dr. Robert McNamara.Daniel Burke

Private equity-owned firms also use practitioners with less experience or training to save money, say doctors associated with the American College of Emergency Physicians and the American Academy of Emergency Medicine.

In February, a patient arrived at the Calais Regional Hospital emergency department in Calais, Maine, near the Canadian border. He required intubation — the insertion of a breathing tube down his throat — but the doctor was unable to perform the procedure and had to call in local paramedics for help. The patient recovered.

The doctor worked for Envision Physician Services, the KKR-owned company that had taken over staffing of the emergency department two weeks before the incident.

DeeDee Travis, the hospital’s spokeswoman, said that the doctor is no longer in rotation at the hospital but that his move had nothing to do with the incident. She said rural medicine requires the use of all resources, including local paramedic staff.

Assessing the impact of private equity on the overall quality of care has been difficult, in part because ownership by the firms is relatively new. But in February, four academics at the University of Pennsylvania, New York University and the University of Chicago published an in-depth study analyzing care at private equity-owned nursing homes. The findings were stark.

“In the nursing home setting,” the study said, “it appears that high-powered profit maximizing incentives can lead firms to renege on implicit contracts to provide high quality care, creating value for the firms at the expense of patients.”

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Looking at data from 2000 to 2017 from over 18,000 nursing homes, the academics found “robust evidence of declines in patient health and compliance with care standards” after private equity concerns bought facilities. And when private equity firms’ purchases of nursing homes were compared with those bought by other for-profit entities, such as nursing home chains, the private equity-owned properties resulted in greater quality declines, the study concluded.

On April 2, well into the COVID-19 crisis, Steward Health Care, owned by Cerberus Capital, created a firestorm. It suspended intensive care unit admissions at Nashoba Valley Medical Center, a hospital in rural northeastern Massachusetts, and redeployed equipment and staff elsewhere to meet COVID-19 demand, according to a memo from the president of the facility. Hospitals aren’t supposed to close such units without first notifying state authorities and holding community hearings.

Audra Sprague, a longtime registered nurse at the facility, said the move “completely took out an entire level of service. Anybody that needed ICU care, we didn’t have one, we couldn’t keep you.”

Darren Grubb, a spokesman for Steward, said that the suspension has “not impacted patient care” at the facility and that state officials had “validated that the ICU at Nashoba Valley remains adequately staffed and equipped to care for clinically appropriate patients.”

Sprague said she is proud to serve patients in the same hospital where her grandmother was a nurse. She said that the facility had previously been owned by a private company but that patient safety and staff treatment had worsened since Steward took over. So she joined the nurses’ union.

“Even when you say something is unsafe, there’s little change that comes out of it,” she said. “They’re not going to do a single thing that doesn’t benefit them first and foremost.”

Grubb called Sprague’s view a “baseless, selective, hyper-generalized claim.”

Doctors as owners in name only

For more than a century, company ownership of doctors’ practices was barred under the Corporate Practice of Medicine doctrine, which was enshrined in most state laws. The doctrine and the laws hold that only individual physicians should be licensed to practice medicine, not corporations. But in the years leading up to COVID-19, the laws were rarely enforced.

“The states realized a long time ago that this is a real problem — fiduciary duty to shareholders rather than patients,” Reiter said. “These corporations are not taking an oath to do what’s best for their patients, and they thought it would be better if doctors owned their own practices.”

In response to the laws, private equity firms have structured their health care investments with physicians as owners, but in name only, McNamara said. Staffing companies like TeamHealth, for example, use what he called sham professional associations with doctors to get around prohibitions against the corporate practice of medicine.

McHenry Lee, TeamHealth’s spokesman, said the company’s “organizational structure is fully compliant with long established laws and precedents.” Referring to the American Academy of Emergency Medicine, Lee said the company has prevailed while facing judicial scrutiny “initiated or funded by AAEM, where Dr. McNamara has made identical charges.”

In a typical emergency room, McNamara said, the usual physician group charges three to four times the Medicare rate. TeamHealth is charging six times, he said.

Last fall, United Healthcare, the giant insurer, canceled coverage at 500 hospitals with TeamHealth-run emergency rooms, largely because of high costs, a company spokeswoman said.

“A small number of providers are driving up the cost of care for the people and customers we serve,” she said. “This is particularly evident with private equity-backed physician staffing companies like TeamHealth.”

United Healthcare provided NBC News with examples of TeamHealth costs far exceeding median charges for specific emergency department procedures. A patient visiting an emergency department with chest pains, for example, would face a median charge of $340, United Healthcare said, versus a TeamHealth bill for $976. Stitches on a minor cut would be $200 at the median rate, compared with $888 from TeamHealth. And the median rate for a broken arm is $665, while TeamHealth’s charge is $2,947.

Lee of TeamHealth declined to comment on the figures.

Envision Healthcare is a physician staffing, emergency medicine and billing services company bought for almost $10 billion by KKR in 2018. Envision’s website says it provides emergency medicine at 650 facilities in 40 states.

Before the acquisition, Envision acknowledged in a 2014 securities filing that its contracts with physician groups might run afoul of laws barring the corporate practice of medicine, as well as fee-sharing arrangements between doctors and companies. It could be subject to civil or criminal penalties, and its contracts with affiliated physician groups “could be found legally invalid and unenforceable,” Envision said in the filing.

A flurry of such cases didn’t arise. But today, Envision’s business has collapsed, again a result of postponed elective operations. Carrying $7.5 billion in debt, the company recently hired restructuring advisers and may file for bankruptcy.

Aliese Polk, a spokeswoman for Envision, said the company is experiencing the same financial problems that many other health care providers are and is “focused on fighting the COVID-19 pandemic, deploying significant resources to front-line clinicians caring for sick patients.” She declined to discuss its previous warnings about possible legal violations in its business model.

Congress and private equity health care

Even before the COVID-19 crisis, private equity-owned health care operations had come under criticism from members of Congress and outsiders.

TeamHealth, for example, was featured last year in a report by MLK50 and ProPublica for aggressively suing poor patients who had been unable to pay their emergency room bills. After the report, TeamHealth said it would stop the practice. The TeamHealth spokesman didn’t respond to a question from NBC News about why it sued patients.

Surprise emergency care medical bills have also emerged as a problem at private equity-run Envision. Patients can be ambushed by such bills when they visit an emergency department in a hospital that is in their insurance network but whose doctors work outside the network, charging separately for their services.

Polk of Envision declined to discuss surprise billing.

Congress tried to address the problematic practice with legislation last year. But as the bill gained traction, Envision and TeamHealth quietly backed a purported grass roots organization called Doctor Patient Unity to advocate against the legislation, according to The New York Times. Doctor Patient Unity funded a $28 million media blitz against the bill, the report said, which didn’t pass.

Doctor Patient Unity didn’t respond to an email seeking comment. Representatives from TeamHealth and Envision accused insurance companies of causing problems for patients seeking emergency care and said they didn’t support the legislation because it would have benefited insurers at the expense of patients.

Emily Maddoff and Chet Waldman, lawyers at Wolf Popper LLP, are fighting surprise medical bills in six class-action lawsuits in state and federal courts across the country. A unit of Envision is a defendant in three of the cases.

A class-action case involving a patient in California has a final settlement hearing scheduled for June. If approved, the deal would provide 100 percent relief to the plaintiffs.

“We should not be running our health care system as a profit-making operation on steroids,” said Eileen Appelbaum, an authority on private equity and co-director of the Center for Economic and Policy Research, a left-leaning think tank in Washington, D.C. “Health care is not so much anymore about taking care of patients. It’s way more about making money.”