Private Equity Impacts On Health Care: Federal and State Legislative and Regulatory Actions, Will It Matter?

The role of private equity in health care has attracted growing attention in the media, among health policy experts, and more recently, among policymakers as well. This interest reflects concern about the rapid growth of this form of investment and control of health care providers,¹ and the evidence that private equity-controlled facilities and practices charge more,² cost more, and may compromise the quality of care. A critical question now is whether policy interventions at the federal and state levels can (or should) moderate the growth and behavior of private equity-owned health care organizations. We review here recent policy developments that bear on private equity in health care, and their potential impacts on this growing form of commercial activity in health care markets.

The Private Equity Phenomenon

Over the last decade, private equity firms have purchased 6,000 physician practices.³ This has led to one-third of metropolitan areas in the United States having a private equity firm with greater than 30% market share in at least one specialty and price increases⁴ on the order of 10 – 20% with mixed to harmful impacts on quality.

Private equity firms also have been purchasing other health care assets. At present, 460 US hospitals are controlled by private equity, and studies suggest that this results in higher prices with worse quality.⁵ An estimated 5% of nursing homes are now owned by private equity with serious negative impacts in some instances, including higher mortality rates.⁶ Private equity acquisitions also can lead to reduced access to services as debt-laden acquisitions buckle under the increased costs of servicing loans. Most recently, the pending bankruptcy of the Steward Health Care System in Massachusetts has highlighted the threat to the availability of health care services in local communities such as Boston.

Federal Responses

At the federal level, both Congressional and executive branch actors have shown increasing interest and concern with private equity in health care, though concrete action has been limited to date.

Senators Sheldon Whitehouse (D-RI) and Charles Grassley (R-IA), chair and ranking member of the Senate Budget Committee, respectively, have launched an inquiry into the role of private equity in health care. Senator Ron Wyden (D-OR), chair of the powerful Senate Finance Committee, also has expressed alarm over the private equity phenomenon.

Senator Edward Markey (D-MA), reacting to the collapse of the Steward Health Care System, has introduced the Health Over Wealth Act, by far the most comprehensive proposed national effort to regulate private, investor-owned activities in health care. It would require extensive annual reporting to the US Department of Health and Human Services (HHS) by all for-profit, private health care organizations on diverse matters, including levels of debt, fees collected by a private equity firm, sales and leaseback arrangements, staffing levels, and much more. It would also require private equity firms to acquire a license from HHS in order to engage in health care transactions. Licenses could be revoked if firms do not comply with other aspects of the law.

The most concrete intervention to date has consisted of antitrust action by the Federal Trade Commission (FTC). In a recent public workshop, FTC chair Lina Khan expressed concern “that growing financialization in the health care industry can force medical professionals to subordinate their medical judgment to corporate decision-makers, profit motives at the expense of patient health.” In a precedent setting action, the FTC sued United States Anesthesia Partners (USAP) and its private equity owner, Welsh Carlson, for allegedly violating antitrust statutes by “rolling up” anesthesia practices in selected Texas communities. The FTC accuses USAP of using the resulting market power to increase prices unlawfully for anesthesia services in those markets. One novel aspect of this suit is that it targets not just the USAP, but also its private equity investors, who typically have not been singled out in such antitrust actions.

As a further indication of the executive branch’s growing interest in private equity, the FTC, the Department of Justice (DOJ), and HHS have announced a joint inquiry into health care private equity.

State Responses

Over a dozen states have passed laws that require private equity to notify the state about a planned transaction, with some requiring state approval. We focus on three states that illustrate the general response that states have been taking. We feel that these responses may be the most impactful.

In February 2024, New York enacted Article 45-A, which improves transparency by requiring public notification by any health care entity increasing its total gross in-state revenues by $25 million or more within a 12-month rolling period for mergers, acquisitions, affiliations, joint ventures, or partnerships. The NY Department of Health is mandated to publish these proposed transactions on its website for public comment. The lack of notification can lead to civil penalties. Though the law encompasses transactions beyond those of private equity firms, it would dramatically increase transparency and scrutiny of private equity purchases in health care.

Oregon’s HB 4130, sponsored by Rep. Ben Bowman (D-OR), is set to be reintroduced in the 2025 legislative session. It would strengthen the law on the corporate practice of medicine by prohibiting individuals in leadership positions within medical corporations from simultaneously being involved in the management services organizations that are contracted by the medical corporation. The bill specifies numerous activities that would constitute impermissible control by a lay-owned management service organization, including ultimate authority over physician employment terms and decisions, time spent with patients, clinical standards and policies, diagnostic coding decisions, as well as billing practices. Moreover, it prevents these individuals from influencing the hiring, firing, or terms of employment for the medical professionals within the corporation. Key provisions include banning stock transfer restriction agreements, and non-compete agreements that keep physicians unable to leave contracts with these entities. It would also void nondisclosure agreements if physicians or medical corporations believe corporate entities are violating these provisions and speak out to that effect.  If passed it could act as a model for other states and moderate many of the adverse impacts of the private ownership of medical practices.

California’s AB 3129, introduced by Attorney General Rob Bonta (D-CA) and Speaker Pro Tempore Jim Wood (D-CA), is by far the most extensive proposed legislation at the state level. It focuses on health care consolidation emphasizing transactions that involve private equity or hedge funds with health care facilities or provider groups. Simply stated, it mandates that the Attorney General approve in writing transactions involving changes in control. This includes instances in which a private equity group or hedge fund seeks to impact health care organizations in a substantial way. The Attorney General will provide guidelines for waivers based on the transaction’s impacts on competition or health care access. Importantly, it prohibits private equity firms or hedge funds from controlling or directing physician or psychiatrist practices. The bill is currently moving through the legislative process.

Colorado is the first example of a specific state action to address the market power of private equity firms. Attorney General Phil Weiser settled with US Anesthesia Partners of Colorado Inc. (USAP) (the same group sued by the FTC) to resolve an investigation of alleged anti-competitive practices that raised prices for surgical anesthesia services. The USAP is required to pay $200,000 in monetary relief and to release and modify non-compete agreements with providers.

Implications of Current Policy Developments

The question, of course, is whether the current ferment at federal and state levels will result in any changes in the prevalence or behavior of private equity investors in the health care sector. At least in the short term, federal action is likely to be limited to the more aggressive application of existing statutes to private equity-owned providers. This will likely involve close scrutiny by the FTC and DOJ of these entities for antitrust violations and by HHS for violation of fraud and abuse statutes. In the case of nursing homes, recent regulations from the Centers for Medicaid and Medicare Services regarding minimum staffing requirements could mitigate aggressive cost-cutting by private equity-owned facilities, or deter them from investing.

Given the polarization and dysfunction affecting Congress, new legislation seems unlikely prior to the 2024 elections. If, as some observers expect, Republicans remain in control of at least one house of Congress in 2025, new constraints on the health care industry would seem unlikely, given Republicans’ general aversion to regulating private industry in health or other fields. As for the executive branch, its current activism on private equity in health care depends on White House support, which might not survive a change in the Oval Office occupant.

For these reasons, significant efforts to regulate private equity are as likely to emerge at the state level as at the federal level. Blue states especially seem likely to experiment with efforts to contain documented abuses. The standards for state regulation of private equity remain to be clearly elaborated across the states contemplating regulation.

The pace of private equity growth in health care may slow by its own accord because of higher interest rates and the harvesting of the most attractive opportunities. Thus, it may be some time before governmental action plays a significant role in modifying or containing the private equity phenomenon in health care.

Acknowledgements:

We would like to thank Preethi Subbiah (Nicholas C. Petris Center) for her research and editorial assistance and Daniel Arnold (Nicholas C. Petris Center) for providing the data.

References:

1. Scheffler, R. M., Alexander, L. M., & Godwin, J. R. (2023). Soaring private equity investment in the healthcare sector: Consolidation Accelerated, competition undermined, and patients at risk. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3860353
2. Gliadkovskaya, A. (2022, September 13). Private equity deals drive up healthcare use, costs among physician practices, Jama Study finds. Fierce Healthcare. https://www.fiercehealthcare.com/finance/private-equity-associated-greater-spending-utilization-jama-study-finds
3. Abdelhadi, O., Fulton, B. D., Alexander, L., & Scheffler, R. M. (2024). Private equity–acquired physician practices and market penetration increased substantially, 2012–21. Health Affairs, 43(3), 354–362. https://doi.org/10.1377/hlthaff.2023.00152
4. Scheffler, R. M., Alexander, L. M., Fulton, B. D., Arnold, D. R. & Abdelhadi, O. A. (July 10, 2023). Monetizing Medicine: Private Equity and Competition in Physician Practice Markets. American Antitrust Institute
5. Kannan, S., Bruch, J. D., & Song, Z. (2023). Changes in hospital adverse events and patient outcomes associated with private equity acquisition. JAMA, 330(24), 2365. https://doi.org/10.1001/jama.2023.23147
6. Scheffler, R. M., & Abdelhadi, O. (2023). Private equity and your doctor: Profits before patients.The Gerontological Society of America, 33(2), 59–62. https://doi.org/10.1093/ppar/prad005

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