The number of headlines and scientific journal articles attacking private equity as a central reason for many of the issues facing U.S. health care delivery appears to grow by the day.
A recent study in the Journal of the American Medical Association, or JAMA, analyzing Medicare Part A claims found private equity acquisition was associated with increased hospital-acquired adverse events, decreased treatment of elderly and poorer patients, and increased hospital transfers. This is just one of many recent peer-reviewed studies and opinion pieces being widely disseminated among the health care professional, policymaker, and lay person audience spotlighting the potential negative impact of private equity. These findings, alongside the ongoing escalation in health care costs (especially those related to out-of-pocket expenses for patients), continue to be a major concern for the American public. Thus, it comes as no surprise that the U.S. Senate has launched a bipartisan probe into private equity’s role in U.S. health care.
But is private equity the real problem or simply a scapegoat given its public perception and portrayal in the media? And is it diverting attention from the root cause - the perpetuation of misaligned incentives in American health care? In our health care delivery system, financial rewards remain anchored in the quantity of services delivered and goods sold, rather than quality – and specifically health outcomes benefiting patients relative to cost. Strategies that fundamentally address these perverse incentives are designed to create a health care delivery system that is focused on – and financially rewarded for – creating health and delivering health care that optimizes clinical outcomes most important to patients, increasing joy at work for clinical teams through reducing unnecessary documentation, administrative burden and burnout, and ensuring equitable access to high value, evidence-based care - private equity may actually be a benefit to the system.
In short, successful private equity firms thrive at buying companies that they believe to be underperforming, making adjustments to drive improved performance, and then selling them for profit. This process, however, revolves around the current incentive structure and the associated financial upsides and downsides. Thus, in an era of lacking true value-based health care transformation, competing on health causes financial distress. This must change.
In today’s health care delivery system, the volume of services and goods delivered for the “right” patients (a question of appropriateness) at the “right” time matters most. For example, in many settings, increasing the number of generally healthy, commercially insured patients who undergo elective surgical interventions can lead to a substantial financial windfall, while treating uninsured or underinsured medically complex patients can be financially damaging based on how models are traditionally structured. This can lead to “cherry picking” (risking overutilization) or “lemon dropping” and negatively impacting patients who may need care the most.
It is also true that changes to billing and the amount charged can legally be adjusted to increase revenue. Notably, incentive structures focused solely on volume and efficiency (e.g., number of procedures) sacrifice resources aimed at avoidance of death and negative hospital events, such as falls or infection, because there is no reward structure (or substantial financial penalty structure) built around these more patient-centered outcomes. The result? Private equity firms, who are eager to financially turn around underperforming health care delivery firms, focus on what optimizes profit, not what loses them minimal dollars and the patient-centered outcomes we expect become second tier.
In today’s health care setting, private equity firms may standardize procedures and goods available to physicians and others to deliver care in an effort to reduce variation and decrease cost. This commoditization and corporatization of health care delivery in the setting of a financial incentive system that pushes for ever more patients to be seen leads to physicians feeling alienated from their work and burnt out as they lose agency. However, if they want to continue to practice medicine, they have no choice – physicians must work within the system at hand, no matter how broken. But a system truly redesigned around patient’s health and well-being with financial means that reflect this shift would reduce the mental exhaustion physicians face in today’s system.
There is a perception that private equity may be hurting health care delivery today. But this is unlikely and blaming it for the woes we face is likely shortsighted. Private equity in health care – and the current outcomes of it outlined above – is a side effect, and if the underlying incentive structures are not changed, it will not matter whether private equity is allowed to invest in health care today or tomorrow. Indeed, even non-private equity-owned or operated hospitals and health systems are financially struggling today.
If we truly shift towards a health care delivery system that rewards health and enhances value – or the outcomes most important to patients achieved for the dollars spent across a full care cycle – for patients, the issues of private equity involvement in health care will be minimized, if present at all. Physicians will be free to treat patients as they see fit as long as patient value remains optimized, and bureaucratic hurdles, including unnecessary paperwork, will likely be reduced. In such a scenario, helping people and making money – which are commonly thought or assumed to be mutually exclusive in health care – will be aligned for all parties involved. Thus, private equity will enhance health, as they work hard to optimize profit, which will – in turn – optimize patient health and well-being.
With nearly 2 out of every 10 dollars in the U.S. economy spent on health, we must get to the root cause of why the current system is failing. While its expedient to blame private equity, it fails to address the underlying flaws in the current health care incentive structure. Through a collaboration of relevant stakeholders, including government, health systems, private equity (and other capital) firms, and patients, transforming our health care delivery system must be done to realign incentives around the main goal – to get people healthy and stay healthy.
The views and opinions expressed in this commentary are those of the authors only and not necessarily those of any institution or organization with which they are affiliated.
David N. Bernstein, MD, PhD, MBA, MEI is a resident physician in the Harvard Combined Orthopaedic Residency Program at Massachusetts General Hospital, Brigham and Women’s Hospital, Beth Israel Deaconess Medical Center, and Boston Children’s Hospital and a Senior Researcher in health care transformation at Harvard Business School.
Prakash Jayakumar, MD, PhD is an Assistant Professor and Director of Value-Based Health Care and Outcome Measurement Innovations in the Department of Surgery and Perioperative Care at Dell Medical School at the University of Texas at Austin.