Public Pension Funds Criticized for Profiting From Private Equity’s “Surprise Billing” Abuse

We’ve described how private equity is behind the stunningly widespread abuse known as “surprise billing” or “balance billing”. This occurs when Americans with health insurance get hit with “out of network” charges for ambulances, emergency room services, or even with scheduled surgeries when they did what they could to make sure that only medical professionals in their networks were part of their operating room team.

This scam has become so widespread that a 2019 survey by the Kauffman Foundation found that 40% of American families had been hit with an unexpected medical bill, and half of those were for out of network charges. Other studies found that over one in four emergency room visits resulted in a surprise bill, as did over four in ten ambulance rides. No wonder there have been more and more efforts at the state and local level to prohibit or severely limit this practice.

Eileen Appelbaum, co-head of CEPR, has identified the hidden hand behind this abuse: private equity. In turn, consumer and patient advocates have wised up and are starting to pressure the public pension funds that profit from investing in the private equity funds that have been leading this abuse, KKR and Blackstone. This is the key section of a must-read post by Appelbaum:

The problem of surprise billing has grown substantially in recent years because hospitals have been under financial pressure to reduce overall costs and have turned to outsourcing expensive and critical services to third-party providers as a cost-reduction strategy. Outsourcing is not new, as hospitals began outsourcing non-medical ancillary services such as facilities management and food services in the 1980s… 

Recent outsourcing, however, has expanded to critical care areas – emergency rooms, radiology, anesthesiology, surgical care, and specialized units for burn, trauma, or neo-natal care. Now hospitals contract with specialty physician practices or professional physician staffing firms to provide these services – even if the patient receives treatment at a hospital or at an outpatient center that is in the patients’ insurance network. According to one study, surprise billing is concentrated in those hospitals that have outsourced their emergency rooms.[vii]A recent report found that almost 65 percent of U.S. hospitals now have emergency rooms that are staffed by outside companies.[viii]… 

Private equity firms have played a critical role in consolidating physicians’ practices into large national staffing firms with substantial bargaining power vis-à-vis hospitals and insurance companies. They have also bought up other emergency providers, such as ambulance and medical transport services. They grow by buying up many small specialty practices and ‘rolling them up’ into umbrella organizations that serve healthcare systems across the United States. Mergers of large physician staffing firms to create national powerhouses have also occurred. As these companies grow in scale and scope and become the major providers of outsourced services, they have gained greater market power in their negotiations with both hospitals and insurance companies: hospitals with whom they contract to provide services and insurance companies who are responsible for paying the doctors’ bills. 

Hospitals have consolidated in order to gain market share and negotiate higher insurance payments for procedures. Healthcare costs have been driven up further by the dynamics associated with payments for out-of-network services. As physicians’ practices merge or are bought out and rolled up by private equity firms, their ability to raise prices that patients or their insurance companies pay for these doctors’ services increases. The larger the share of the market these physician staffing firms control, the greater their ability to charge high out-of-network fees. The likelihood of surprise medical bills goes up, and this is especially true when Insurance companies find few doctors with these specialties in a given region with whom they can negotiate reasonable charges for their services. 

The design of the private equity business model is geared to driving up the costs of patient care. Private equity funds rely on the classic leveraged buyout model (LBO) in which they use substantial debt to buyout companies (in this case specialty physician practices as well as ambulance services) because debt multiplies returns if the investment is successful. They target companies that have a steady and high cash flow so they can manage the cash in order to service the debt and make high enough returns to pay their investors ‘outsized returns’ that exceed the stock market.[xi] Emergency medical practices are a perfect buyout target because demand is inelastic, that is, it does not decline when prices go up. Moreover, demand for these services is large – almost 50 percent of medical care comes from emergency room visits, according to a 2017 national study by the University of Maryland School of Medicine, and demand has steadily increased.[xii] PE firms believe they face little or no downside market risk in these buyouts.

Appelbaum has carefully documented the history of the two biggest players in this patient-muscling operation: Envision Healthcare, a rollup of emergency ambulance and specialty physicians’ practices now owned by KKR funds, and TeamHealth, a healthcare staffing company that provides hospitals with ER professoinals, anesthesiologists, hospitalists, and hospital specialists such as OB/GYN, orthopedics, general surgery, pediatric services as well as post-acute care, now owned by Blackstone funds. And she shows that private equity ownership has led to extortionate billing practices: (...)

We also pointed out how the sudden death of a promising and pretty comprehensive California bill to end surprise billing, where no one even deigned to explain what happened, had all the hallmarks of heavyweight donors putting the kibosh on it. The revelation of private equity as the big moving force behind surprise bills makes it all make sense.

by Yves Smith, Naked Capitalism |  Read more:
[ed. See also: Elizabeth Warren’s Plan Is a Massive Win for the Medicare for All Movement (The Intercept).]