TITLE: Wall Street Is Making House Calls
https://www.levernews.com/wall-street-is-making-house-calls/
EXCERPT: Care delivered in the home includes both medical care and meeting the needs of daily life that seniors and people with disabilities can’t provide for themselves. In-home health care includes medically necessary treatments like skilled nursing, physical and occupational therapy, and infusion treatments, which are covered by Medicare. In-home personal care includes services like mobility assistance, bathing, and household chores. These services are reimbursed by Medicaid or charged to the patient as out-of-pocket expenses.
Most people who qualify for nursing home care would prefer to remain at home. And it’s usually a better deal for those who foot the bill.
The government is encouraging the shift because in-home care costs about 40 percent less than the cost of care in a nursing home, which can cost as much as $100,000 a year. The Centers for Medicare and Medicaid Services has incentivized more people to choose in-home care by allowing states to provide a wide range of home and community-based services to Medicaid beneficiaries who would otherwise require institutional care.
Now the same giant health insurers that dominate the Medicare Advantage market are gobbling up the large national chains that provide in-home medical services. When a senior joins a Medicare Advantage plan, the insurer receives a capped annual payment from the federal government equal to the cost of the average amount of health care that seniors with similar health conditions consume each year. Medicare Advantage insurers earn profits by holding those expenditures below that average amount.
People qualifying for in-home health care are especially juicy targets for Medicare Advantage insurers. These beneficiaries usually have three or more chronic conditions and are prone to brief but expensive hospitalizations. Since the Centers for Medicare and Medicaid Services, which oversees Medicare Advantage, pays the highest annual rates for these beneficiaries, owning the firms that deliver in-home care allows Medicare Advantage plans to control both the cash flow and profits that once flowed to hospitals or independent in-home providers.
The scheme also provides the biggest insurance industry holding companies, which in recent years have been buying up physician practices and pharmacy benefit managers, a way to hide their profits from regulators.
The government requires privatized Medicare plans to spend at least 85 percent of their revenue on actual health care, not overhead and profits (a requirement known in the industry as a medical-loss ratio). Insurers can get around that rule through internal transfer pricing — charging their closely held home health companies higher prices than they would charge independent home health providers in the private market. Their home health profits then show up as costs on the reports they send to the government.
“Parent companies that own both health plans and related health care businesses can evade the medical-loss ratio regime by altering transfer prices, the prices that [Medicare Advantage] plans pay to related health care businesses owned by the same parent,” wrote Richard G. Frank, head of health care policy at the Brookings Institution, in a recent paper. “By charging higher transfer prices, a vertically integrated [Medicare Advantage] plan can move profits from the… plan to the related business.”
Insurers can also use prior authorization and care denials to limit payments for services that are covered by traditional fee-for-service Medicare covers.
“Traditional Medicare rarely requires so-called prior authorization for services,” the New York Times reported. “But virtually all Medicare Advantage plans invoke it before agreeing to cover certain services, particularly those carrying high price tags, such as chemotherapy, hospital stays, nursing home care, and home health.”
Big insurers are moving quickly to take advantage of these arrangements.
TITLE: A Hospital Bankruptcy Offers a Cautionary Tale on Private Equity
https://www.bloomberg.com/opinion/articles/2024-06-04/private-equity-in-health-care-needs-more-transparency
EXCERPT: Steward Health Care System LLC was once thought to be the future. Its chief executive officer, Ralph de la Torre, was named “health care’s new maverick” by Fortune in 2012. With the help of private equity giant Cerberus Capital Management LP, de la Torre turned six Boston-area facilities into one of the nation’s largest for-profit hospital chains.
Now Steward is on the brink of financial ruin. The company owes millions in rent and has been sued by several vendors for unpaid supplies and services. Last month, Steward filed for Chapter 11 protection, making it one of the biggest hospital bankruptcies in decades. Tens of thousands of patients and workers are in turmoil.
Exactly what caused this unraveling is hard to say — and that’s part of the problem. As private equity investment in health care has surged to almost $1 trillion over the past decade — funding new technologies, clinical trials and more — a lack of transparency has made it hard to assess whether the industry is also putting patients at risk. In that regard and others, Steward’s failure should be a cautionary tale.
When de la Torre became CEO of the Caritas Christi Health Care hospital group in 2008, its facilities were in decay. Caritas faced an underfunded pension obligation for 13,000 workers. The $895 million rescue de la Torre orchestrated made him a local hero.
At first, conditions improved. The newly named Steward Health Care upgraded its technology and electronic records systems. Emergency rooms got much-needed renovations. The pensions were saved. But Steward also borrowed heavily to fund its expansion. Repayment deadlines loomed and the company needed cash. In 2016, Steward sold its only asset — land — for $1.25 billion. The deal required Steward to pay millions in rent on the property it once owned. It also allowed equity owners, including de la Torre, to extract a $484 million dividend.
For Steward, the deal was a fatal blow. Most hospitals make money from expensive procedures and commercially insured patients with their generous reimbursement rates. Steward, with mostly low-income patients, had neither. Its rent payments slipped. Other bills piled up and vendors shied away. Last fall, a woman reportedly died after giving birth because a device that would’ve stopped her bleeding had been repossessed.
Such financial problems aren’t uncommon. Medicaid and Medicare pay for more than half of inpatient days at 96% of hospitals nationwide. For many struggling hospitals, private equity offers a lifeline: a way to streamline operations, upgrade facilities and outsource administrative burdens. Yet the industry’s business model — loading up acquired entities with debt, stripping down assets and leasing them back, and making a quick and profitable exit — can be a poor fit with the messy reality of American hospitals.
In health care, “efficiencies” are typically achieved by reducing staff, slashing labor costs and eliminating hospital units, all of which are dangerous for patients. One study found that hospital-acquired complications rose 25% after a facility had been bought by a private equity firm; falls increased 27%; and central-line infections were 38% higher. And while aggregate findings on health outcomes are mixed, many measures of quality, including patient satisfaction, are negative.
TITLE: Private Equity Puts Brakes on Healthcare Roll-Ups After Government Scrutiny
https://www.wsj.com/articles/private-equity-puts-brakes-on-healthcare-roll-ups-after-government-scrutiny-6fc64f5a
EXCERPT: Roll-ups are perhaps the most fundamental strategy in the private-equity playbook. Add-on transactions made up 76% of total U.S. buyouts as of the end of 2022, up from 60% a decade earlier, according to law firm Goodwin Procter.
The business logic for these deals is simple. Creating one big company from many small ones can improve profit margins through economies of scale. And larger companies typically command higher prices in the merger market, so buyout firms have an easy arbitrage opportunity when they combine several small companies into a big one, and then sell it.
For many years roll-ups were not a big priority for antitrust regulators, say attorneys who work with buyout firms. The government focused on large transactions, not ones for relatively small businesses like individual physician practices or medical labs.
But under Lina Khan, who has chaired the FTC since 2021, the agency has become concerned about the cumulative effect of these series of acquisitions even if the individual companies being bought are small.
“By consolidating power gradually and incrementally, through a series of smaller deals, firms have sometimes sidestepped antitrust review,” Khan said in March. “In the aggregate, these roll-up plays can eliminate meaningful competition and allow new owners to jack up prices, degrade quality and neutralize rivals without competitive checks.”
Last September, the FTC sued private-equity firm Welsh, Carson, Anderson, & Stowe and an anesthesiology business it backs for allegedly trying to monopolize the Texas market and raise prices. A federal judge last month dismissed the charges against Welsh Carson, but let the case against the anesthesiology provider continue.
In December, antitrust authorities changed merger guidelines to let them review more small roll-up transactions that would have skated through in the past. In March, the FTC and Justice Department announced a federal probe into private-equity conduct in the medical sector, including the effect of roll-ups.
The private-equity industry and its lobbyists have pushed back against antitrust enforcers’ efforts to slow roll-ups, also called “buy-and-build” strategies.
“The ongoing attacks against buy-and-build will make it harder for entrepreneurs across our country to achieve the American dream, create jobs, and provide opportunities in their communities for workers and families,” said Drew Maloney, president and chief executive of private-equity trade group the American Investment Council, in response to the probe started in May by the Justice Department and FTC.
Some people who work on these deals say regulatory pressure has so far had little effect. Healthcare roll-ups have declined, but so have all buyout deals. Private-equity dealmaking last year was 41% lower by total value than in the peak year of 2021, according to PitchBook data, largely because of higher interest rates and reduced asset values.
Nathan Ray, head of healthcare mergers and acquisitions at consulting firm West Monroe, thinks the decline in deal volume is entirely due to macroeconomic factors such as high rates, and not government scrutiny.
Private-equity firms “are paying for more advisers to do more market analysis, but I don’t believe that anyone has failed to consummate a [private-equity healthcare transaction] because of this scrutiny,” Ray said.