Once a month, National Public Radio highlights medical horror stories for its series, Bill of the Month. The series is crowdsourced by patients who have been gouged by the medical industry, and they have swamped NPR with testimonies. Taken together, their accounts are a devastating indictment of the monopolization of the American medical industry.
A recent story highlighted Dr Naveen Khan, a 35-year-old radiologist from Southlake, Texas, who had his arm crushed by an all-terrain vehicle. An air ambulance took him to Fort Worth, Texas. The company promptly called him while he was in the hospital to let him know that the brief flight cost a total of $56,603. His insurer paid $11,972, which is about what the flight actually costs, while the air ambulance company billed Dr. Khan for the remaining $44,631, which he would have to pay out of pocket.
Dr. Khan’s bill is one among thousands of extortionate charges from air ambulances. Nationally, the average helicopter bill has now reached $40,000, according to a report by the Government Accountability Office. That is more than double what it was only nine years ago. It would be tempting to conclude that higher prices are due to a shortage of helicopters or pilots to ferry wounded patients. In fact, the U.S. air-ambulance fleet has doubled in size over the past 15 years.
The laws of economics dictate that when demand is flat and supply increases substantially, prices should go down not up. What is preventing the laws of supply and demand from operating here?
The reason is the emergence of a national oligopoly. After a series of mergers, the air ambulance industry is highly concentrated and controlled by private equity groups. Two thirds of medical helicopters operating in 2015 belonged to three for-profit providers, according to the GAO.
Private equity have been active consolidating the industry, as they have so many other industries. In fact, researchers have argued that keeping hidden monopolies private is part of the attraction of private equity. The helicopter company that transported Dr. Khan was Air Medical Group Holdings, which is owned by the private equity group Kohlberg Kravis and Roberts (KKR). Other private equity groups are also active. American Securities LLC bought Air Methods for $2.5 billion in March 2017.
“It’s the same people who have bought out all the emergency room practices, who’ve bought out all the anesthesiology practices,” said James Gelfand, senior vice president of health policy for the ERISA Industry Committee. He added, “They have a business strategy of finding medical providers who have all the leverage, taking them out of network, and essentially putting a gun to the patient’s head.”
Gouging consumers with surprise bills is how private equity groups operate. According to an article in the Harvard Business Review, “Private equity firms have been buying and growing the specialties that generate a disproportionate share of surprise bills: emergency room physicians, hospitalists, anesthesiologists, and radiologists.”
A study by Stanford University shows that surprise billing has been rapidly rising from about a third of visits in 2010 to almost 43 percent in 2016. Much of this is driven by private equity groups, which are rolling up large parts of the medical industry. (...)
Private equity groups have been busy buying free-standing emergency rooms, where prices can reach up to 22 times higher than at a physician’s office. They have been very active with mergers, buying orthopedic, ophthalmology, and gastroenterology practices. As humans treat pets like family members, private equity are even buying veterinary hospitals. Federal Trade Commissioner Rohit Chopra has called out roll-up transactions as an area of potential concern. (...)
The term private equity is highly misleading. There is very little equity involved in most deals, and companies are generally loaded with debt. In the 1980s, the industry was more appropriately called the Leveraged Buyout (LBO) industry, due to the high degree of debt (leverage) involved in deals. When a wave of LBOs went bankrupt in the late 1980s and early 1990s, the industry rebranded and became known as “private equity.”
Pirate equity is more appropriate. It is an extractive industry that takes as much as possible from the companies it buys through endless fees and special dividends. Acquired companies are loaded with debt, which they can only pay down by hiking prices on customers and cutting costs. There is no new equity added in almost all acquired companies. Every time the term private equity is used, it obscures the true nature of the beast.
Unlike venture capital, which injects equity into companies and funds new ventures, or initial public offerings, which raise actual equity, private equity is purely extractive. Studies have shown that private equity leads to higher defaults, its claims to increase productivity are a sham, and it causes higher rates of job losses and firings in target companies as well as lower wages. (Unsurprisingly, industry-funded studies are much more sanguine.) But perhaps the most damning indictment of the private equity model is that their returns are overstated and their performance simply not as good as they lead investors to believe.
You do not need an MBA from Wharton to know that loading up companies with debt will lead to bankruptcy. Research shows that private equity funds acquire healthy firms and increase their probability of default by a factor of 10. They are the antithesis of conservative management.
Private equity groups have been behind most of the recent bankruptcies in local newspapers, retail, and grocery stores. In fact, analysis by FTI Consulting found that two thirds of the retailers that filed for Chapter 11 in 2016 and 2017 were leveraged buyouts. The pirate equity groups load debt onto the companies and dividend out the cash to themselves, which often leads to bankruptcy and a trail of job losses and underfunded pensions. Heads they win, tails the company, employees, and suppliers lose.
by Jonathan Tepper, The American Conservative | Read more:
Image: Ledomstock//Shutterstock
