Ethically Challenged: Overview
Private Equity (PE) firms, which have pervaded all aspects of our lives, do not manufacture products or provide services. Instead, they buy and sell businesses, using considerable debt and other people’s money, with the sole aim of earning supersized profits in the shortest time possible.
With its voracious appetite, and trillions of dollars at its disposal, the PE industry is now encroaching on our medical needs, well-being and even dying. If you are addicted to opioids don’t be surprised if PE is your treatment center, or if its helicopter is swooping you up at a crash site. It can be your dermatologist, dentist, or gastroenterologist. You may be at its mercy if your child has an autism spectrum disorder, or you depend on kidney dialysis.
In Ethically Challenged: Private Equity Storms U.S. Healthcare, Laura Katz Olson relates how PE firms are gobbling up physician and dental practices; home care and hospice agencies; substance abuse, eating disorders and autism services; urgent care facilities, and emergency medical transportation. With a sharp eye on cost and quality of care, Olson investigates the PE industry’s impact on these essential services. Throughout the book, she points out that its tool kit relies on piling up massive debt on its investment targets and requiring them to pay it off. PE firms also bleed these enterprises with assorted fees and dividends for themselves.
The first book to address private equity and healthcare, Ethically Challenged raises the curtain on an industry notorious for its secrecy, exposing the dark side of its maneuvers. Olson tackles the dynamics that enable financial engineering and other predatory PE tactics, and the consequences for healthcare businesses, clients, taxpayers, front line workers and society at large. She argues that public pension funds, which provide the preponderance of equity for PE buyouts, tend to ignore the inconvenient fact that their money may be undermining the very health care system their workers and retirees rely on.
Ethically Challenged: Annotated Table of Contents
Chapter 1 describes the essential elements of the private equity toolkit, including its use of debt to siphon outsized profits. I argue that the industry has been carefully crafted to meet its own pecuniary needs, without regard to its portfolio companies, labor, the community, or anything else that stands in its way. The goal is to squeeze as much money as possible out of its purchases and enhance their value for resale. Through financial wizardry, along with assorted fees and dividends charged to the portfolio companies, PE has generated the most lucrative Wall Street enterprise in the U.S., and indeed the world, that is propped up mostly by public pension assets.
The chapter details alternative tactics used by the PE industry for its rapacious value building objectives, such as leveraged buyouts, growth equity investing, acquisitions and consolidation, and secondary buyouts, where enterprises are tossed back and forth like volleyballs. I show how PE employs additional ruses to maximize returns, including reimagining its configuration, broadening investment areas and types of deals and listing its firms on public exchanges. As I make clear, the eye is always on the end game, and the clock is ticking for the shop to exit its portfolio businesses at strong valuations. However, not a few are relinquished through bankruptcy. I also explain the catch 22 faced by pension fund managers; the enticements for founding owners to sell their places; other professionals within the PE ambit who share pieces of the financial bonanza; and the tax havens that render the entire exploit possible. I end by briefly discussing who gains and who loses from what the industry has sown.
Chapter 2 provides an historical background to the private equity alternative market. It first examines the emergence and dramatic growth of leveraged buyout shops during the 1980s, as well as their use of junk bonds, financial engineering, and sharp cost-cutting strategies to bring in huge earnings for themselves. The chapter provides examples of the profiteering and greed of the era that contributed to the downfall of companies such as Anchor Hockings in Lancaster, Ohio and NJR Nabisco by the infamous KKR of “Barbarians at the Gate”. It describes the rollercoaster years of the 1990s, when the cyclical nature of the economy exposes the volatility of PE leveraged buyouts. I argue that GPs were able to adapt to changing conditions as they continued to generate great fortunes with which to line their pockets, if not necessarily the portfolio companies.
The chapter next addresses the free flowing, covenant lite loans just prior to the Great Recession, abetted by large commercial banks, and the subsequent stream of Chapter 11 filings when the economy crashed in 2008. It then details the flourishing of the PE industry as it recovers: the nation witnesses more shops, funds, and transactions; surging investment capital; larger vehicles, including mega-funds; and high valuations, concomitant with greater debt. The section moves on to detail a few of the high-profile bankruptcies (Toys ‘R’ Us, Gymboree, Necco—of sweetheart candy fame, Claire’s, and Bumblebee Tuna) and warns that there will be more to come.
The final section highlights the revolving door between PE players and top government officials that guarantees the industry an utmost friendly political climate. I note that these direct relationships are buttressed by healthy lobbying and campaign contributions. The chapter ends by commenting on the mounting criticism against PE practices, the congressional hearing “America for Sale?, the “Stop Wall Street Looting Act,” proposed by Senator Elizabeth Warren and other Democratic senators, and the stalled bipartisan attempt to stop ‘surprise medical bills.’
Chapter 3 first investigates the exploding growth of PE investments in health, especially middle-market companies. After exploring some of the factors propelling this development, including high return on investments, resilience to business cycles, reliable revenue sources, and advantageous government policies, the next section discusses the malfunctioning U.S. health system, rising costs, and the shift from non-profit to commercial enterprises. It argues that the situation has worsened with the entrance of PE into the sector.
The chapter then considers PE’s consolidation of health industries, the ongoing quest for greater market share through add-ons and mergers, and the high valuations of acquisitions. It notes that despite PE claims of greater efficiency and cost-effectiveness, limited competition has led to lean and inadequate services, worse patient outcomes, less transparency, fewer choices for consumers, and higher medical fees. Over-leveraged companies can also face precarious financial conditions and end up in bankruptcy. The next section analyses two health cases where the PE shops filed for Chapter 11 but still came out on top. Sector. The chapter next analyzes a few health mega-deals, both past and present, such as Surgery Partners, Envision, LifePoint Health, Kindred Healthcare and HCA. The final segment outlines the large scope of health-related PE investments, ranging from core services and niche businesses to animal health and products, health food alternatives, and nutritional supplements. I conclude that the PE industry is re-shaping our healthcare system but not for the better.
Chapter 4 begins by critically evaluating how private equity firms are quietly and steadily purchasing specialized physician practices. It explores the lure for the PE shops, especially the sector’s steady revenue flow, even during an economic downturn, increasing demand for services and ultimately the potential for a strong return on investments. The section reviews the currently high valuations of doctor offices and the sometimes-detrimental strategies to boost sale prices when offloading them to a subsequent buyer. The section also addresses the enticements for doctors who accept PE offers, such as the financial windfall, and the promise—often misleading—that they can relinquish their burdensome nonmedical back-office functions and spend more time practicing medicine. It then turns to the structuring of the PE buyouts through Management Services Organizations (MSOs) that sidestep prohibitions against corporate ownership of medical practices or employment of doctors. It ends with an assessment of the troubling effects on patient care and society at large.
The next nine sections probe, in turn, selected specialties that are receiving heightened PE attention: dermatology, ophthalmology, orthopedics, gastroenterology, urology, dialysis facilities, fertility clinics, urgent care centers and medical staff outsourcing. For each niche, the chapter addresses issues pertaining to market conditions, motivations for the PE firms, incentives for physicians, deal making and financing details, PE strategies, and the real-life consequences of leveraged buyouts. The segments all point out the main portfolio companies and platforms acquired by PE shops, along with their ongoing acquisitions and mergers and consolidations. Wherever possible, I have interviewed experts in the various fields as well as physician-owners and report their first-hand accounts.
Chapter 5 scrutinizes PE ownership of Dental Services Organizations (DSOs), one of the first health care sectors to inspire PE investments. It explores the history of the early buyouts, and exposes the adverse effect on patients, such as providing needless procedures and substandard treatments. It argues that Medicaid-funded care of children became a major target for PE, profiting the financial buyers at the expense of low-income kids. At the same time, a number of these highly leveraged chains declared bankruptcy, leaving young dentists, their assistants, and patients to fend for themselves.
The chapter next tackles the PE toolbox for extracting windfall profits from dental practices, and the ongoing ill effects on patients and the larger community. It also addresses the reasons that dentists sell their practices to PE firms and the subsequent consequences. The final section discusses the extent of PE engagement in the profession and delineates the ownership trajectory of several chains. It homes in on the misdeeds of specific DSOs, many of which are still acquiring and scaling dental practices today.
Chapter 6, which first centers on home care agencies, explores the reasons for their rapid expansion, the recent appeal to GPs, and the financial bonanza for them. I argue that the progressive takeover of the sector by PE firms, and their large-scale consolidations, will have detrimental effects on frail elders and children dependent on them for their well-being; it will lead to higher charges for families and taxpayers as well. The chapter next takes up the PACE program, which has recently been opened to commercial players. Intended to keep elders at home, the government-funded initiative portends a financialized approach to all-inclusive care for the needy older population it serves. The segment then tackles hospice establishments, which PE firms are increasingly targeting for their portfolios. I explore the extent to which for-profit owners exploit the Medicare-supported benefit that is intended to allow the terminally ill to die as peacefully as possible.
The chapter next zooms in on certain home care and hospice enterprises that have undergone a succession of PE takeovers, including mega-mergers of long-standing places and the recent gold rush in platform purchases. It explores the impact of these investments and consolidations both financially and on the populations they serve. The chapter also examines, in turn, publicly traded chains and PE influence over them; social impact investing; and two newly converted non-profit entities in the domains.
Chapter 7 scrutinizes addictions, beginning with substance abuse. It takes up the ongoing role of private equity firms in amalgamating the rehabilitation industry, increasingly supported through taxpayer dollars. It also speaks to the jarring disparity between evidence-based treatment and how the PE-owned chains actually provide services. The subsequent segment deals with companies that were purchased by PE shops in the early twenty-first century and their history of unsavory practices, quick turnovers, extreme debt, and elevated returns. It then investigates a few of the places launched later that are taking advantage of the opioid crisis and enhanced federal funding to combat it.
The final sector focuses on eating disorders (EDs) and why the PE industry has recently moved in on the area, including more free-flowing money, limited government oversight and oversized returns. It then investigates single specialty ED businesses, followed by chains that have acquired ED treatment centers as part of their larger enterprises. Throughout I show how PE firms have reaped financial gain at the expense of their food-challenged, largely female patients.
Chapter 8 surveys PE buyouts of autism spectrum disorders (ASD) treatment facilities. It first portrays the ASD landscape, including symptoms of the disorder, its incidence, types of treatment, the comparatively recent flow of dollars from the government and commercial insurance, and the scarcity of services relative to need. It then turns to the lure for PE firms, especially strong and quick rates of return and the sector’s plethora of “mom and pop” shops, as well as the appeal to founder-owners who stand to gain a fortune from the elevated valuation of their businesses. The section ends by describing the large disparity between the gains of PE owners and the adverse impact on the ASD children they serve. I contend that autism services suit the PE model because there is a lack of clinical standardization or political oversight, allowing GPs to grow and impose “efficiency” measures that foster exceptional rates of return on the backs of their young clients.
The ensuing segment paints a picture of the several PE-owned chains, beginning in 2004, that led the charge in demonstrating the enormous value of the autism market. I lay bare, for each one, its acquisition and consolidation activities, mounting debt, cost-cutting tactics, and general lack of advantages—and often disadvantages—for the beneficiaries the businesses serve. I also highlight, where relevant, the misdeeds that abound in many of these enterprises. The final part portrays the dizzying whirl of more recent PE buyouts, taking their cue from the earlier evidence of massive rates of return. These, too, have their share of malfeasance.
Chapter 9 provides evidence for the answer to a 2016 New York Times headline: what happens ‘When You Dial 911 and Wall Street Answers?’ It starts by describing the ground ambulance terrain, its history, and appeal to GPs. The section sketches the human costs of PE ownership, including worse response times, less supplies on hand and more aggressive billing practices than other private or government providers. The chapter subsequently takes on the air medical transportation industry, and its monopoly control by PE firms. It depicts lax federal regulation that has permitted exorbitant fees, including ‘surprise’ medical bills, and lack of sufficient safety measures. Next, the section disentangles the transaction histories of the main PE-owned medical transport chains, the bankruptcy of several of them, and touches on one family-held air transport company that is not for sale.
Chapter 11 concludes by recapping the secrecy of the PE industry and its lack of accountability to any public agency or, for that matter, anyone else. Nevertheless, this book has parted the curtains sufficiently to gain insights into its penetration of the health care sector and a host of legal and illegal harms PE has perpetrated. It shows that the PE appetite for outsized earnings, and the toolkit used to obtain them, enriches the shops but does not serve the needs of their clients in their medical and health portfolio companies: drug addicts, alcoholics, children with autism disorders, girls with eating disorders and elders at the end of life are mere commodities to be bought and sold for financial gain.
The chapter summarizes the parties that are complicit in PE’s hijacking of our health care entities: public pension funds; founder-owners; insurance companies; and big banks. But none have aided and abetted PE expansion in health care more than government policies, which also fail to control any misdeeds. The section argues that the PE industry has been moving full steam ahead in their highly lucrative investments, including more transactions, growth in deal size, and ever-increasing capital commitments by public pension funds.
The chapter then visits the sudden emergence of the Covid-19 pandemic and its concomitant financial turmoil. It contends that though the heavily leveraged PE chains are experiencing precarious circumstances, GPs are creative and flexible: they are capitalizing on the downturn and have even grabbed a share of the federal relief funds meant to assist small businesses. The book ends by calling for the federal and state governments to curb the spread of the PE industry in health care through such means as placing stringent regulations on its practices, removing tax havens that enables its maneuvers, and providing more social services instead of subsidizing those offered by financial buyers. Unless political leaders stop them, PE firms have no intention of curtailing their ever-growing consolidation of U.S. health and medical services.