- Ethically Challenged, Daniel Scott, Journal of Health Politics, Policy and Law, V. 48, no. 5, October 1, 2023: 825-828. Full Review Below
In her sharp and deeply alarming Ethically Challenged: Private Equity Storms US Health Care, Laura Katz Olson likens private equity to an omnivorous and “clawed” beast sucking up businesses across the spectrum of US consumer markets. Olson shows that private equity, far from a picky eater, has begun to aggressively gobble up a greater and greater share of the health care sector over the past decade, often to the detriment of patients and providers. However, the unceasing litany of private equity deals and their outcomes, combined with the deeply obfuscatory nature of their activity, leaves one to wonder if private equity is truly a landbound beast replete with claws and gnashing teeth. Instead, Olson paints a picture of a ravenous leviathan lurking just below the surface of the dark and ominous waters of capital markets, its many tentacles fleetingly breaching the surface. She makes a convincing case that private equity will go wherever there is profit to be extracted, devouring passing ships seemingly at random.
Private equity is an alternative investment class wherein limited partners— the investors—provide capital to general partners—the firms—to invest in the acquisition of private companies. Less commonly, the fund is used to gain control of a public company and take it private. Private equity makes its money in numerous ways. Private equity funds generally hold a company for years before it is sold, when the proceeds are distributed to investors. Funds sell companies to other companies, or they can take the company public and list it on the stock exchange. Either way, this is only one source of income for both investors and firms. Investors also receive periodic dividends through numerous strategies, such as adding additional debt to the acquired company to fund such dividends; by capturing tax deductions given to the acquired company; or through more mundane operating profits. Private equity funds make money throughout the investment period using their customary “two and twenty” fee arrangement: firms receive 2% of assets under management as an annual management fee, and they receive an additional 20% of profits above a certain predefined benchmark. While fees are high and invested funds are illiquid for the life of the investment, private equity more than makes up for this by providing returns far above what can be found in more traditional forms of investment.
While the habitat of such a leviathan is difficult to map, Olson does an excellent job pulling together what information she can on this notoriously secretive sector’s (Stiglitz 2019) forays into health care. Indeed, her book represents one of the first such efforts to do so for a topic that is surprisingly understudied within academic circles. Ethically Challenged pulls together much of the investigative journalism done on various acquisitions, combines it with available PitchBook data, and seeks to supplement it with interviews of the founder-providers whose offices compose most private equity acquisitions.
Olson acknowledges facing difficulties in her data collection. First, PitchBook only has access to certain kinds of data regarding the private equity sector, and much of the most important information is kept confidential by the firms. In addition, only certain very large funds have any specified reporting requirements. Given that many health care private equity funds increasingly focus on relatively small companies (generally based on their earnings before interest, taxes, depreciation, and amortization, or EBITDA) and that purchase price is generally some multiple of EBITDA, most acquisitions fall below these reporting requirements. Second, in conducting founder interviews, she points out that most sign restrictive nondisclosure agreements at the point of sale.
Olson ties her thorough, detailed analysis into a broader theory of neoliberal governance, particularly its role as an engine of financialization. As she raises concerns throughout the book about the transformation of patients into commodities, she shows that the gaps in the data are themselves indicative of the neoliberal governance technologies of showing and hiding. This fact is particularly evocative of the neoliberal state’s strategy of perpetuating systems of artificial competition (Foucault 2008). These are in effect “show” markets with “show” customers, touting competition and the reification of consumer choice while engaging in processes of “creative destruction” (Harvey 2007). Olson notes that private equity’s activities as documented in Ethically Challenged certainly suggest such a self-congratulatory sense of inevitable progress through open competition, despite two ways in which the sector’s activities contradict this messaging: first, private equity functions as a major driver of consolidation and regional monopolies in a given market; second, the state plays an essential role as both a source of income and a primary customer of private equity.
What does it mean for the state to be both funder and customer? Olson draws out the multiple, complicated, and contradictory enmeshments that private equity firms have with the state. First, firms often acquire providers who derive a large proportion of their reimbursement from Medicare and Medicaid funds, whether those are tied to dental care, elder care, substance abuse, eating disorders, neurodevelopmental disorders, behavioral health concerns, or ambulatory care. Likewise, these firms take advantage of the labyrinthine US tax code to claim various—and generous—tax deductions that are then redistributed as dividends to their partners. These tax deductions include those provided for the debt payments used to fund provider acquisitions, those provided for unpaid and obscenely high balance bills (Appelbaum 2019), and investor dividends being taxed under the lower capital gains tax. It is this combination of direct and indirect subsidies that has made the “magic” of high returns for private equity investment possible.
Second, public funds have historically provided a large proportion of the capital for firms through their role as limited partners. University endowments and public pensions make up a significant proportion of the limited partners engaged in private equity investments, particularly during the crucial period of private equity’s reemergence in the late 1990s through to the 2010s. While other limited partners, such as high-net-worth individuals, corporations, and sovereign wealth funds, have started to make up a larger share of investments, the immensely important role of these public limited partners in the early expansion of private equity cannot be understated. It is these numerous enmeshments that make the hidden nature of private equity, demonstrated by Olson’s difficulty in accessing primary sources of data, so tantalizing. Representing a common theme of welfare state scholarship, such a grow-and-hide regime of public financialization of health care seems to be an alarming new direction for the “shadow welfare state” (Gottschalk 2000).
Olson’s work challenges an oft-repeated refrain among private equity firms and their various hangers-on. Lamenting bad coverage by news outlets, advocates strategically and persuasively deploy choice anecdotes in making their case for greater involvement of private equity in health care provision. Citing an endangered rural psychiatric office or a distressed public inner city hospital, private equity collects and deploys these stories to forestall critique and to demonstrate their “value add” to a distressed health care system. Olson relentlessly exposes the corollary of these positive anecdotes: a litany of horrendous acquisitions, lies to providers, mass layoffs, and liquidations that demonstrate a fundamental lack of concern for the quality or availability of health care.
Ethically Challenged presents an excellent mapping of the many tentacled entity that is private equity and its entrance into health care. It also provides several directions for future researchers to explore. While the wide-ranging narrative is necessarily limited in the amount of attention it can provide to any single area, this is not a fault; instead, it demonstrates the sheer scale of private equity engagement in the health care sector. The book is also eminently accessible. Writing in clear, direct prose, Olson makes a convincing bid for further attention from academics, providers, and the entire community of people in the United States who rely on health care to live successful and fulfilling lives.
—Daniel Scott, University of Chicago
Daniel Scott is a Health Services Research Predoctoral Fellow at the University of Chicago. His current research explores the ways in which value is both collaboratively and differentially constructed between advocates of health policy reform and private equity investors. His earlier work has focused on the valuation and privatization of the urban commons in Mumbai as well as the framing of policy crises related to the diversion and illegal flows of opioids in the United States. dcscott@uchicago.edu
References
Appelbaum, Eileen. 2019. “The PR Campaign to Hide the Real Cause of those Sky-High Surprise Medical Bills.” Counterpunch, October 18. https://www.counterpunch .org/2019/10/18/the-pr-campaign-to-hide-the-real-cause-of-those-sky-high-surprise -medical-bills/.
Foucault, Michel, Michel Senellart, and Graham Burchell. 2008. The Birth of Biopolitics: Lectures at the Colle`ge de France, 1978–79. New York: Palgrave Macmillan.
Gottschalk, Marie. 2000. The Shadow Welfare State: Labor, Business, and the Politics of Health Care in the United States. Ithaca, NY: Cornell University Press.
Harvey, David. 2007. “Neoliberalism as Creative Destruction.” Annals of the American Academy of Political and Social Science 610, no. 1: 21–44.
Stiglitz, Joseph. 2019. “It’s Time for Congress to Do Something about the Economic Mess That Private Equity Giants Have Created.” Business Insider, December 7. https:// www.businessinsider.com/joseph-stiglitz-private-equity-impact-us-economy-jobs -wages-2019-12.
- “New Perspectives on Private Equity Performance and Impact,” Rosemary Batt, Finance and Society,” V. 9, no. 2, March, 2023: 71-74.
Full Review Below
A veritable industry of research and investigative reporting has emerged in recent years to
examine the growing role of private equity (PE) in the US economy and Main Street companies.
While private equity now has a global footprint, its largest imprint is still in the US (with $1.3
trillion in deal making in 2021). It particularly thrives in largely unregulated environments like the US and UK, where governments fail to require transparency or reporting on PE’s deal-making and financial practices. The regulatory vacuum provides huge opportunities for private equity – which refers to private investment funds or private pools of capital – to buy out companies, take control of boards of directors and top management, extract wealth by financial ‘engineering’, and sell them in a five-year period. The companies are often left in
financial shatters, with employees, vendors, consumers, and creditors bearing the costs.
Two new books are must reads for those interested in private equity: Jeffrey Hooke’s The
Myth of Private Equity: An Inside Look at Wall Street’s Transformative Investments (2021), and
Laura Olson’s Ethically Challenged: Private Equity Storms US Health Care (2022). These books
are based on sound scholarly research and designed to address the private equity business
model as one avenue through which financialization of our societies is occurring. They are
meant for a broad audience – from scholars and students in finance and society, management
and labour, and healthcare studies to policy makers and the general public. They analyze the
complexities of private equity’s financial engineering strategies and translate them into real
world implications and outcomes.
Hooke provides an important updated account of the PE business model – how PE raises
capital from investors (the limited partners that consist of institutional investors such as
pension funds and endowments, as well as high wealth individuals). He translates financial
jargon into lay language to explain how PE funds use investor money to buyout companies and
extract wealth. More importantly, he provides a damning critique of the private equity business
model and why the industry has created a ‘myth’ regarding the positive value of PE buyouts.
And his critique has great credibility. With over forty years of experience in investment
banking – including stints at Lehman Brothers, the World Bank, a global private equity firm,
and his own consulting firm – Hooke knows the industry and its actors inside and out. Note
that while PE funds are called ‘investment funds’, the majority of the PE capital is used to
simply buy out the shares of existing stockholders in order to take complete control of a
company. Whether any serious ‘investments’ in the company actually occur is questionable at
best, but as PE is non-transparent, we just don’t know.
Beginning with ‘A Day in the Life’, (Chapter 1), Hooke walks us through the landscape of
financial actors and institutions and how they interact. He continues with a similar walkabout
through various types of investment funds (private equity, venture capital, hedge funds) and
publicly traded stocks and bonds, showing how they are different or similar. This provides a
useful framework for those unschooled in finance capital 101. He then moves on to the guts of
the private equity business model, especially leveraged buyouts, in Chapter 3 (‘How Does the
Private Equity Industry Work?’). Hooke explains in lay terms how PE firms and their partners
make money, which I will not repeat here. But in brief, they use other people’s money to take
high risks by buying out companies through the use of high debt (which is loaded on the
company). Hence, they put very little of their own money at risk so if something goes wrong,
they can walk away virtually unscathed. They engage heavily in cost-cutting to service the
interest on the debt; and asset sales and other financial tactics to extract money (dividends for
themselves and their investors) from the Main Street companies they own. By doing this in the
first few years of ownership, they position themselves to exit the company within a five-year period. That way, they don’t have to worry about the long-term consequences of their short-term actions to extract wealth.
These chapters provide the backdrop for Hooke’s most important contribution: Laying
bare the myths of the PE industry’s assertions that it creates value, creates jobs, and creates
‘outsized returns’ (those that substantially beat the stock market) for its investors. Hooke
details the economic evidence that contradict PE’s assertions: That PE funds no longer beat
the stock market (as they did in the very early years of the industry); that the very high fees
they charge their investors (the ‘limited partners’) are not worth it; and that customers,
employees, and other bear the costs of PE’s extraction of wealth.
The final chapters seek to explain how and why this industry is so difficult to change –
with a discussion of the wide range of ‘enablers’ and ‘fellow travellers’ – investment banks,
industry analysts, institutional investors, politicians – who have helped institutionalize the
industry because the also have much to gain from it.
Moving specifically to private equity’s impact in healthcare, Laura Olson provides a deeply researched study of the penetration of private equity in US healthcare – with annual deal-making increasing by roughly twenty-fold between 2000 and 2020. Olson’s clearly written and accessible narrative tells us why we should all be morally outraged by PE’s extraction of wealth
at the expense of providers, patients, and communities. Like Hooke, she begins by
demystifying the financial terminology of private equity and explains how its creation and use
of buyout funds works (to their advantage) (Chapter 1). She continues with a brief history of
how and why PE emerged as an ‘alternative asset class’ (Chapter 2). The rest of the book
focuses on private equity’s activities in healthcare – its overall business model in healthcare
that has made it the leader in market consolidation and concentrated power (Chapter 3) and
its role and impact in specific segments: Physicians, (Chapter 4), Dentists (Chapter 5),
Homecare and Hospice (Chapter 6), Substance Use and Eating Disorder clinics (Chapter 7),
Autism Services (Chapter 8), and Medical Ambulances (Chapter 9).
Each chapter shows that the fundamental PE business model has consistencies across
segments: the initial buyout of a healthcare provider (say physicians’ practice) as the basis for
‘adding-on’ the buyout of other providers to create a large regional or national chain; the use of
substantial debt loaded on the platform; and cost cutting to create ‘efficiencies’ and to service
the debt. How PE increases revenues depends on the industry segment: For example, selling
-off real estate assets (when available) to pay themselves dividends; upcoding to garner higher
reimbursements in the case of government funding; targeting of high value-added services
that reimburse at high relative rates; or locating in high income suburbs to take advantage of
commercial insurance coverage. Each chapter also carefully chronicles how, when, and why
private equity moved into a particular niche market, who the PE and provider actors were, and
what changed as a result.
The guts of Olson’s book are the blow by blow accounts of PE buyouts of small providers
across different segments – again and again and again. The evidence, which at times seems
repetitive, drives home the central argument that private equity has deeply penetrated all
parts of the US healthcare system
The soul of Olson’s book is her unearthing of innumerable stories of PE buyouts in which
healthcare professionals, workers, and patients reported negative consequences. While some
physicians insisted that private equity made their management practices more efficient, many
more expressed regret that the PE buyout of their practice brought ongoing pressure to
increase patient volumes and sell products, systematic upcoding, and lost autonomy over
patient care decisions.
Her wide-ranging interviews across specialties and locations, many with founder-owners
who were bought out by private equity, provides credible evidence that the negative effects of
private equity are not due to a few bad apples. The business model that promises limited
partners ‘outsized returns’ drives cost cutting decisions that lead to understaffing, faulty
equipment, inadequate supplies, and in some cases negligence and abuse. Olson also
documents how PE owned services increase their revenues via unnecessary treatments and
drug prescriptions and overcharging for care.
The chapter on air ambulances shows how private equity firms have taken advantage of
loopholes in insurance coverage. As hospitals have outsourced emergency services, including
emergency rooms and medical ambulances, to third-party providers, the services are no longer covered by the hospital’s insurance contract. PE funds have led to way in charging out-of-network ‘surprise bills’ that are substantially higher than ‘in network’ charges. The most vulnerable suffer, including rural populations whose community hospitals have often closed,
and who consequently, must rely on air ambulances when medical crises hit. PE firms have
cornered two-thirds of the air ambulance market, typically charging $50,000 or more per trip –
over twice that charged by other carriers.
Olson brings together her narrative in a strong concluding chapter that synthesizes her
evidence from many corners of the healthcare landscape. She convincingly argues that PE’s
activities have led to industry consolidation, concentration of power, cost cutting, and wealth
extraction – all posing a serious threat to the viability of US healthcare and its ability to deliver
quality care at affordable prices.
The most vulnerable people – elderly, low-income, disabled youth, the mentally ill – are
often the victims. Private equity ownership in healthcare has contributed to what Dr Wendi
Dean calls, ‘moral injury’: Healthcare workers are not just overworked or ‘burned out’ – they
are injured by being pressured to act in ways that transgress their deeply held moral beliefs
and the very reason that they entered the healthcare profession in the first place. ‘Ethically
challenged’ PE firms have no place in healthcare.
Both books provide clear and accessible accounts of private equity and contribute
importantly to our understanding of its role and impact in the current economy and society.
While based on US data and examples, they provide lessons for those in countries around the
world who are concerned about the financial antics of global finance that often skirt existing
regulatory frameworks.
References
Hooke, J. (2021) The Myth of Private Equity: An Inside Look at Wall Street’s Transformative
Investments. New York: Columbia Business School Press.
Olson, L.K. (2022) Ethically Challenged: Private Equity Storms US Health Care. Baltimore, MD: John Hopkins University Press.
- Author Exchange: Healthcare Capitalism (between Laura Katz Olson and Peter A. Swenson: “Ethically Challenged: Private Equity Storms U.S. Health Care” and “Disorder: A History of Reform, Reaction and money in American Medicine”) New Political Science, vol 45, issue 1: 198-205.
- “Private Equity’s Playbook,” Review of Ethically Challenged: Private Equity Storms U.S. Health Care,” Stephen Gross, Lehigh Research Review, V. 7 October 18, 2022. https://www2.lehigh.edu/news/publications/research-review/vol-7-2022
- Review, Ethically Challenged, Jamie Morgan, ILR Review, V 76, no. 2, March 2023 https://journals.sagepub.com/doi/10.1177/00197939221110551 Full Review Below
Laura Olson’s excellent Ethically Challenged does exactly what one would expect from the title. It provides an exhaustive sector-by-sector, case-by-case exploration of private equity finance’s growing and mainly adverse effects on US health care. The book comprises nine substantive chapters and a brief introductory overview and conclusion. Chapter 1 provides a short account of standard private equity finance (PE) terminology and explanation of the business model. Chapter 2 sets out a brief history of PE and how it has adapted to and sought to influence in turn its regulatory and financing environment. This background is both necessary and useful because despite the pervasiveness of PE, its “alternative investment management” practitioners have worked hard to maintain a low public profile, preferring to divert attention to their individual businesses rather than the common agents that stand behind them. Practitioners also work hard to influence those who might, from both sides of the aisle, enact law that affects them. This strategy has avoided widespread “I can’t believe this is legal” sentiment while allowing industry representatives to control the narrative.
As Olson makes clear, for those unfamiliar, PE is a practice in which a financial management firm solicits a fund of capital, usually for 10 years, from investors (limited partners or LPs). The management firm provides the general partner (GP) who uses this “equity” in conjunction with debt (an LBO) to acquire companies or divisions that form a portfolio. A combination of financial restructuring (“engineering”) and operational restructuring are applied prior to “exit” from the investment, typically over three to five years. There are two main perspectives or groups of theory regarding the PE business model. One perspective places greater emphasis on operational restructuring: PE buys companies in need of ownership transition and growth capital or alternatively buys failing companies and turns them around. In both cases, the claim is that PE is adding value and realizes a capital gain on selling a leaner and more efficient company in the future. The other perspective places greater emphasis on the financial engineering: PE is looking for companies that are vulnerable to buyout but have some capacity to debt service, since it is the acquisition that is eventually liable for the debt used in part to buy it, and debt is key to capital restructuring of the acquisition and return on investment to LPs and GPs. In this case, the claim is that debt servicing dominates all other aspects of strategy, but crucially the main focus is generating returns to the fund and management firm. The portfolio company is simply a means to this end, and financial success of the fund is not dependent on improving the acquisition.
The first perspective tends to tell a tale of entrepreneurial wealth creation and the second of predatory wealth extraction. Olson’s book is very much of the second kind, which is by no means to suggest it misrepresents its subject. Chapter 3 explains how the PE model has been applied to US health care, and this chapter provides a template for the range of strategies applied to each sector in the subsequent chapters. In most sectors, US health care has a fragmented ownership structure and a complex administrative burden in terms of compliance with requirements of insurers and regulation for public and private provision. This circumstance in the context of the continual growth of the health care sector and the scope to exploit dependable income streams represents a profitable opportunity for PE. Instead of seeking to buy large companies and break them up to sell the parts for more than the original value, which has been a standard PE practice, the main strategy in health care has been consolidation or “buy and build.”
The PE firms look to acquire an initial platform company and then engage in mergers and acquisitions on the premise that once the company achieves a critical threshold in terms of scale, the value of the whole when exited is greater than the sum of the acquired smaller entities. The PE firms often appear as an attractive proposition to prospective sellers insofar as they offer to take on administrative burdens, in principle freeing health professionals to focus on patients, with the added incentive of offering lucrative financial inducements to founders and/or owners, such as premiums on the value of the business. However, following the standard PE “playbook” acquisition by LBO involves considerable debt. The portfolio company is required to free up cash flow to service that debt. Moreover, temptation is high for the GP to frontload repayments to their funds to reduce the risk that funds will not achieve financial targets and to access carried interest performance fees for GPs. GPs are thus highly motivated to engage in recapitalizations and refinancing to expedite dividend payments to funds; these activities also trigger various fees from portfolio companies. Hence, predatory wealth extraction.
The net effect, however, repeated in sector after sector, is greater debt loads, debt distress, and both a pressure and need for portfolio companies to cut costs. Crucially, cutting costs in the context of PE strategy is a perverse form of efficiency saving. No commensurate fall occurs in costs to patients, since all available funds are directed away from the portfolio company either to service debt or to create returns to LPs and GPs. All too often efficiency and quality of patient care start to diverge, management comes under financial pressure, and employees suffer. The consequences are predictable. Either through perverse incentives or desperation, numerous problematic, and in some cases egregious, practices follow: reduction in staffing numbers and qualification levels of staff, reduced investment, under-stocking of facilities with life-saving equipment, focus on high-margin treatments even if they are of little clinical value, neglect of effective low margin or difficult treatments (long-term counseling eschewed in favor of medications, etc.), unnecessary treatments, increased charges, deliberate overcharging, negligence, abuse and fraud (directed at insurers as well as Medicare and Medicaid), and, of course, the most high-profile practice in recent years, “surprise billing,” which exploits out-of-network insurance criteria.
Each chapter after Chapter 3 is essentially a variation on this general argument and how it affects general practitioner physicians, dentistry, and specialisms ranging from dermatology to dialysis facilities, but also how it affects the full range of health care services in which commercial entities have gained a foothold: home care agencies, hospices, rehabilitation centers for drug and alcohol dependencies and eating disorders, as well as autism spectrum disorder treatment centers, and finally in Chapter 9, ground and air emergency medical transport services. Olson’s point is simple. PE goes where the money is, and in health care PE is everywhere. Moreover, many of the brakes one might expect—from financing or regulators—are not working, as PE flies under the radar and controls its narrative. When banks might become reluctant to lend, or retail investors less keen to support IPOs, PE turns to other PE firms to provide below investment grade financing and to other PE for secondary buyouts. The direction of travel, unless action is taken, is all too foreseeable: PE is tending toward local, regional, and potentially national financially precarious monopolies. Not only can the failure of these providers ultimately deny vital services to communities and the vulnerable, in the meantime providers lose the sense that such service provision is their purpose—which is a further step down the track of treating patients as customers and health care as no different in principle from any other business in a caveat emptor world. It is with this in mind that Olson’s ultimate framing of her work is ethical. Financialized PE may be problematic in any circumstance, but its hyper financial incentive structure is particularly at odds with provision of care in all of its forms.
The book then is a timely exposé in the spirit of Eileen Appelbaum and Rose Batt’s Private Equity at Work and is perhaps best read in conjunction with that. Its greatest strength is also likely its main weakness. As noted, it has a sector-by-sector and case-by-case approach, and though this establishes the problem of PE is structural and systematic rather than “a few bad apples,” the book is somewhat episodic and wearisome to read in long sittings. I would suggest dipping in and out. More traditional business school academics are likely also to object to its evocative language (e.g., devour, insatiable, snatch, clutches, fleecing) and its fragmentary approach to evidence. However, if the practices described in the context of health care do not warrant such language then nothing does. Moreover, the very need to piece together an argument from fragments gives you some sense of the problem PE represents: an ability to reject transparency and suppress criticism, which Olson struggled with in putting together data and material from interviews, hampered by nondisclosure agreements at every turn. Read in this light she has done a service to scholars and students. As a final note, I read Ethically Challenged as a citizen of the United Kingdom, another country where PE has made great inroads, but one where most health care is still considered a basic human right available free to all at the point of need, albeit this is under slow and corrosive attack. Looking from the outside, Olson’s book is even more poignant.
Jamie Morgan
Professor
School of Economics, Analytics and International Business
Leeds Beckett University Business School
j.a.morgan@leedsbeckett.ac.uk
- Featured review, Kirkus Reviews Magazine, V. VXC, No. 17, September 1, 2022, p. 208. https://d1fd687oe6a92y.cloudfront.net/files/Kirkus_Reviews_090122_Online_Edition.pdf
- “Ethically Challenged Captures Private Equity Intrusion,” Dr. Michael W. Davis, DrBicus.com, August 17, 2022. https://www.drbicuspid.com/index.aspx?sec=log&URL=https%3a%2f%2fwww.drbicuspid.com%2findex.aspx%3fsec%3dsup%26sub%3dpmt%26pag%3ddis%26ItemID%3d331987
- Kirkus Reviews, July 28, 2022. kirkusreviews.com/book-reviews/laura-katz-olson/ethically-challenged.
Full Review Below
Private equity firms are weakening America’s medical industry and hurting patients with their callous drive for profits, according to this sobering exposé.
Lehigh University political science professor Olson, who previously wrote about the industry in The Politics of Medicaid (2010), probes the takeover of much of the health care sector by private equity firms that buy companies with borrowed money and saddle them with enormous debt obligations; the PE owners then service these debts and wring profits out of their new companies by slashing costs, raising prices, and laying off workers, with an eye toward quickly selling the company again (often to another PE firm). Olson patiently unravels the labyrinthine dealmaking by which PE firms have bought hospitals, medical specialty practices, dialysis clinics, rehab centers, nursing homes, hospices, dental offices, and ambulance services, sometimes assembling them into giant health care monopolies. The results, she contends, have been dire. The pressures of debt and profit-seeking incentivize PE managers to cut budgets; shift care from highly trained doctors to lower-skilled, underpaid, and overworked nurses and physician assistants; skimp on supplies; lower standards while also performing unnecessary procedures; engage in upcoding; raise prices; and hound patients who can’t pay the resulting inflated bills. She uncovers many horror stories at PE–run facilities; for example, dermatology practices that misdiagnosed cancer as eczema, inadequately anesthetized kids strapped down for agonizing root canals on their baby teeth, autistic teens beaten and sexually assaulted, epidemics of billing fraud, and car-crash victims who get $60,000 bills for a flight of a few miles in a medevac chopper. Olson draws on press reports, regulatory filings, and her own interviews with health care workers to flesh out a detailed and troubling picture of private equity depredations. Her research is far-ranging and meticulous; she names names, crunches the numbers, and shows her receipts, conveying her findings in lucid prose lit with flashes of passion. Hers is a finely honed critique not just of malpractice and financial hubris, but of a dispiriting moral shabbiness that’s poisoned a field that should be idealistic and humane. Many readers will feel similarly outraged at the avarice she unearths here.
A disturbing, timely report on the deep corruption of health care by capitalism run amok.
- Review by Online Book Club, Antonela Maria, April 29, 2022. https://forums.onlinebookclub.org/viewtopic.php?f=24&t=232293 (full review below)
Ethically Challenged: Private Equity Storms US Health Care by Laura Katz Olson is an informative nonfiction book. As the title says, this book is mainly focused on private equity and its influence on our everyday lives, with a special focus on health care. Private equity (PE) is an investment form where funds from private investors are used to buy public companies or invest directly in private companies. In short, professional investors, pension funds, insurance companies, successful companies, or wealthy individuals put money into a venture capital fund managed by a specialized company. As per the author’s warning, it is an expanding sector of the economy that is slowly taking over the most important parts of our lives.
It is especially scary to know that a financial firm is taking control of health services. If PE’s first goal is to make more money, where does that leave us? And by “us,” I mean regular people using these services. The author places a strong emphasis on PE involvement with drug rehabilitation, autism and eating disorder centers, dentists, dermatologists, and homecare facilities. She supports her claims with research and interviews with people directly involved with PE.
My main takeaway from reading this book is the number of facts and information I learned while reading it. Furthermore, reading this book was shocking but also a wake-up call to be more involved in learning about health care and the direction it is headed. This is a teachable, informative, and compelling book. Moreover, I like how current this book is. The author addresses COVID-19 and the pandemic’s influence on PE’s tactics.
I didn’t find anything negative to say about this book. Sure, it is a USA-centered narrative, but it is so important and valuable no matter who the reader is. I also think that it can be a useful read for economic beginners and, in the same way, for professionals.
There is only one spacing issue I noticed in the whole book. It is safe to say this is a professionally edited book. Besides that, it is a book that is easy to follow with an appendix, glossary, abbreviations, notes, bibliography, and index. You will not get lost while reading this book. For all those and the previously mentioned reasons, I can’t rate this book with anything less than a perfect score of 4 out of 4 stars.
I would recommend this book to all Americans, or if you live in the United States, just read this book. Knowledge is power, and you all need to be informed about the state of your health system, economics, government decisions, and its intersection with all parts of your life. If you are a curious reader like me and want to learn more about topics you don’t know much about, then this is a book for you too.
- Reviewed in “The Pain Profiteers,” Rhoda Feng, The American Prospect Magazine, June 3, 2022. https://prospect.org/culture/books/pain-profiteers-mariner-olson-reviews/ (full review below)
Private equity is largely responsible for the phenomenon of balance (or surprise) billing, which can ensnare patients who have health insurance but are treated by an out-of-network medical professional, like a physician in an emergency room who works for a third-party physician staffing company. Putting Americans in debt from surprise medical bills is nearly universally despised, yet, as Laura Katz Olson shows in her important and revealing new book Ethically Challenged: Private Equity Storms US Health Care, it’s a practice that became increasingly common after PE firms started taking over medical companies.
At the molten core of the private equity business model is the practice of accruing massive piles of debt to make investments, and requiring the companies they buy to pay it off. Drawing largely from state and local pension funds and endowments, private equity “is neoliberalism on steroids,” writes Olson. “Supersized earnings for PE and its shareholders are front and center, with no pretense otherwise.” The fact that it is accountable to no one other than its investors means that a great deal of its financial transactions are fogged in mystery.
Private equity has begun to consolidate segments of U.S. health care, at the expense of patients and workers.
Constantly selling off assets of a current buyout to finance future conquests, PE firms are a bit like the mythical ship of Theseus, forever being reconfigured with new parts—if Theseus were a plutocrat with a passion for dividend recapitalizations. Adding to the atmosphere of omertà, erstwhile founder-owners who saw their practices acquired by PE and who were willing to be interviewed for Olson’s book could only disclose so much without running afoul of nondisclosure agreements. Still, there’s enough data for Olson to make a convincing case that PE has infiltrated almost all imaginable recesses of our lives, from the way we communicate to where we shop for groceries to how we charge our electronic widgets to—most worrying of all—where we get treated for medical emergencies or drug addiction.
Specialized establishments like home care and hospice centers, diagnostic labs and imaging centers, pharmaceutical companies, medical device businesses, dialysis facilities, fertility clinics, urgent care centers, and dermatologist offices have all been swallowed up by PE. Since 2011, reports Olson, the trend in many of these health sectors has been add-ons and mergers, with PE houses bundling acquisitions to “achieve scale” and “expand geographic reach” rather than selling off parts. According to Axios, in 2018 alone, there were nearly 800 private equity health care deals, nearly 15 percent of all PE acquisitions, yielding a total value of more than $100 billion.
It’s not uncommon for PE-held hospitals to pressure physicians to maximize “patient volume,” or to restrict the time they can spend with each patient, bilking people of proper care and attention. After Hospital Corporation of America was purchased by Bain Capital, KKR, and Merrill Lynch Global Private Equity in 2006, for instance, HCA engaged in a number of shady practices, including manipulating ER billing codes and turning away patients who failed to pay in advance. Physicians in other PE-owned firms have been found to “hard-sell products and treatments (some of which may be unnecessary), and be parsimonious with medical and other supplies,” writes Olson. Managing directors are “not particularly concerned” about their acquisition’s long-term viability or performance; what interests them most is the quickest route to windfall profits.
PE-owned firms frequently put up a facade of catering to patients’ consumer preferences, through accoutrements like telemedicine and remote patient monitoring. Yet they often skimp on less tangible aspects of care, such as substituting lesser-trained practitioners for more expensive physicians. As both Abramson and Olson point out, the very notion of “choice” in the context of health care is misleading: Patients rarely have a full picture of fees and are not positioned to “shop around” for services in an emergency as if choosing shoes. It would be more accurate to say that patients are not so much granted unfettered access to health care options as they are themselves instrumentalized, their health subordinated to profit motives.
PE has begun to consolidate segments of U.S. health care that lack clinical standardization and government oversight, such as eating disorder centers and autism treatment facilities. This allows owners to impose all sorts of cost-cutting and so-called “efficiency” standards at the expense of patients. Workers at such enterprises also suffer under PE’s ruthless calculus: They often experience crushing workloads, earn lower wages than at comparable non-PE outfits, and have fewer benefits as PE focuses on retrenching operating expenses. Olson cites a study that shows that PE-controlled shops were responsible for over 1.3 million job losses since 2009. When bankruptcies hit companies, workers bear the brunt of the impact, while general partners sail off with golden parachutes.
Upton Sinclair once wrote, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” As recently as 2019, the leadership of the House Ways and Means Committee, chair Rep. Richard Neal (D-MA) and ranking member Rep. Kevin Brady (R-TX), were intent on not understanding the need to protect unsuspecting patients from surprise medical bills. This was no surprise: Neal and Brady were bankrolled by the Blackstone Group and Welsh, Carson, Anderson & Stowe (WCAS), respectively, two private equity firms that own health care staffing companies. Though Olson declines to provide precise figures in her book, a report from Public Citizen reveals that in 2019 alone—when congressional leaders started cottoning on to the outsized earnings flowing into PE coffers—employees or political action committees connected to Blackstone and WCAS contributed $63,600 to Brady and $32,700 to Neal. Private equity–backed groups like Doctor Patient Unity also spent millions of dollars on fear-mongering ad campaigns painting a dystopian future if providers are restricted to charging market rates for their services.
The good news is that Congress did pass legislation, which then-President Trump signed into law, protecting patients from being socked with surprise bills from out-of-network staffing companies and emergency air transit. The bad news—for everyone but PE’s financial puppeteers—is that the bill does not apply to public payers, and ground ambulances are also exempt, meaning sick and vulnerable people can still pay punitively high fees for out-of-network transport.
Private equity buyouts have been facing increasing scrutiny on Capitol Hill since the bankruptcy of stores like Toys ‘R’ Us and the outcry over surprise billing. As PE scoops up more and more physician practices, with a perennial aim of double-digit returns, their pecuniary incentives will increasingly collide with the only thing that should matter: the health needs of patients. Call it the “Hypocritic Oath”: Their commitment is to making money hand over fist.
To rein in PE’s pernicious influence on health care, Olson calls for the removal of tax havens that enable its revenue-seeking behaviors and investing more in social services. Like Abramson, she thinks we currently spend too much on downstream health care costs and not enough on upstream non-medical-care determinants of health. There is too much at stake to stand idly by as PE titans amalgamate even more health and medical services—the lives of disabled, sick, elderly, and other vulnerable people depend on putting an end to the rapaciousness of corporate medicine.
- Review, “Private Equity Takes Aim at Primary Care,” Don McCanne, David Himmelstein et. al, Physicians for a National Health Program, Health Justice Monitor, June 1, 2022. https://pnhp.org/news/private-equity-takes-aim-at-primary-care/ (full review below)
The advent of the neoliberal order and its restructuring of the US political economy coincided with the emergence of private equity in its shadow. Financialization took root and surged during the 1980s, and PE has been riding on that wave ever since. Buttressed through eased regulations and preferential tax treatment, the financiers have steadily advanced their tentacles into ever more market sectors, from manufacturing and retail to business and monetary products, energy, and information technology. Eventually, they gravitated toward human services, such as health care, where in some cases they created markets that had not previously existed.
Private equity’s business model can be characterized as a later stage of neoliberalism, one that takes its rationale to greater extremes; it is neoliberalism on steroids. Supersized earnings for PE and its shareholders are front and center, with no pretense otherwise. Nothing else matters. The profit motive guides everything in both word and deed. At a PE conference I (Laura Olson) attended in 2019 hosted by the Wharton School, the entrepreneurs discussed their buyout priorities, value-enhancing strategies, return on investment, and other metrics; not once did anyone mention the impact of their playbook on individuals or society, at least not at the sessions I joined.
The PE industry – capitalism in overdrive – weighs down its health companies with enormous debt while pushing for extra large earnings. Faceless PE shops take an oversized bite into US health dollars, transferring substantial public and private money for medical needs into the pockets of financiers who do not provide any health services per se.
PE firms are on a roll, pushing full steam ahead in the physician practice, urgent care, and medical staffing domains. What will be the next niche? It seems that the indispensable but long-neglected primary care doctors are on their radar, as are other relatively unclaimed health care spaces. If the trend continues – and I’m sure that it will – medical decisions will be less and less between you and your doctor.
Comment:
By Don McCanne, M.D.; David Himmelstein, M.D.; Steffie Woolhandler, M.D., M.P.H.; Jim Kahn, M.D., M.P.H.
We have been worried about the injustices of our current health care financing using a fragmented, inequitable system of health insurance, but, behind the scenes, private equity has been taking over the health care system, using various economic tools to divert massive amounts of health care dollars to its own industry. In her book, “Ethically Challenged,” Laura Katz Olson explains the surprising degree to which this has already occurred and how we are losing control of our health care system as a result.
Examples of some of the tools used by private equity include leveraged buyout using other people’s funds, dismissing expensive personnel and using less qualified individuals, establishing creative management fees and newly structured real estate payments for nominally owned facilities, “improving productivity” by slashing benefits for labor, raising prices and reducing product quality, extracting all funds available from the captured entities, pre-planned use of Chapter 11 to dismiss negotiated debts, early selloff of captured enterprises drained of assets in order to achieve maximum return on investment, etc., etc.
Many health care niches have already been occupied by behind-the-scenes private equity entities, and much damage has been done, as Laura Olson explains. If you don’t already know how this is happening, you should read her book or a similar source to understand. Then the reason for the following statement will be clear.
URGENT WARNING: Primary care, the basic infrastructure of health care in America, is about to be taken over by private equity. Although the appearance of having your own health care professionals will continue, your health care will actually be under the control of invisible (to the public) private equity entities whose sole interest in you is to generate more wealth for themselves with absolutely no regard for your personal health, except to avoid blemishes to the market value of your primary care facility.
Again, read “Ethically Challenged” to learn how trillions of dollars are going to be milked out of our compromised health care system, and we will be unable to do much about it once the changes are in place. Single payer Medicare for All won’t be able to help us then. We urgently need to educate ourselves on what is transpiring, and then we urgently need to elect a Congress that understands and will take the appropriate measures.