The Dilemma Posed by Private Equity in Healthcare

Some recent high-profile cases clearly demonstrate neglect, fraud, and abuse.

While not new, private equity (PE) interests are buying hospitals and skilled nursing facilities (SNFs) at an increasing pace. Many of the purchasers are physician organizations, and members of Congress are sounding a doomsday alarm about profits being prioritized ahead of patients. Some recent high-profile cases clearly demonstrate neglect, fraud, and abuse. This, however, is not a situation unique to PE ownership.

Nearly all nursing homes are already privately owned. Why the concern about PE ownership? Isn’t it all the same? Excellent question. The answer is more complex than simply one of ownership.

Businesses exist to return a profit, based on earnings from operations. Successful businesses also desire to serve the community. Like most businesses, nursing home owners are in it for the long haul. Apart from Silicon Valley, where every startup hopes to be bought out by a larger concern, with an eye on ultimately figuring out what to do with billions in cash and equities, most people start businesses for something more mundane: making a living. 

Enter PE. The expectation of PE interests is a 30-percent return on investment (ROI). With razor-thin margins, nursing homes and hospitals would appear to be suboptimal opportunities. If that 30 percent were expected to come from operational revenue, indeed, it would be a fool’s errand to invest. Or criminal activity would be involved. So, from where does this kind of ROI come? It’s not all bad.

The basic supposition is that most healthcare organizations, whether a single nursing home or an entire hospital system, are rife with inefficiency. Higher earnings can be extracted through efficiencies. It is hard to argue with that. Even not-for-profits (or maybe especially not-for-profits) have layers of ineffectiveness and inefficiencies, lacking accountability to investors. It’s hard to argue against accountability. We’ve all seen it. Absolutely gorgeous buildings with courtyards and artwork, all found at the not-for-profits. The money comes from more than the savings of operating tax-free. I’m just getting started. Increased earnings can be extracted by leadership having accountability to a real board of directors, not one person chosen by leadership. 

Ultimately, the big ROI does not come from earnings (not that earnings don’t factor heavily into the equation). It comes from either selling part or all of the now-successful business, or from add-on businesses that enhance and expand on the core business. I worked for a system that exemplified all of the above. 

Part of a “360” facility system, mine was one of the larger nursing homes, with 220 beds and a thriving sub-acute unit. “Sun,” as the corporation was nicknamed, bought nursing homes in financial difficulties, often nonprofits. Mine was acquired from a Jewish charity. Sun bought the business, building and all, and put quite a lot into rehabbing it, and it was then in turn sold to a management company controlled by – you guessed it – Sun. The facility got the tax leverage of being lessees. The management company was able to turn a nice profit without adding to the tax liability of the whole. Not only is this legal, it is also good business. Then came the add-ons.

Sun created a separate corporation offering physical, occupational, and speech therapy services to the Sun buildings. Was this legal? Yes. The therapy company provided services to many non-Sun facilities. Then came “Sun Scripts,” a pharmacy network that served Sun buildings. Now, surely this is not OK, right? It’s quite OK. Sun facilities were free to go to other pharmacies, which I did frequently with our managed care residents, for better prices. Then came SunQuest, a consulting company. It was designed to bring a level of revenue cycle expertise to facilities’ administrators, eventually taking on non-Sun clients. This new corporation did not pan out as planned, so it closed and everyone was let go. 

If I sound like a fan of PEs, let’s leave it as that I am not opposed to them. There are downsides. PEs may not have the connections to a community that home-grown businesses have. PEs are also perceived as having less of a connection to their employees. PEs live to challenge the competition. God knows I enjoyed my share of schadenfreude, as competitors struggled as we succeeded. But we, at the end of the day, had a heart for what we did; it was all we did. 

If you are looking for a downside, consider this. I took over a nursing home with an empty checking account and a business office manager who had not submitted a claim, because the lease had not been paid on the coding and billing platforms. Payroll was due in two weeks. A cash call went out to the founding investors, and payroll was met for the next month. But I needed more cash – and a lot of it. I was introduced to venture capitalist. I asked for $1.5 million. He said yes, for a 51-percent stake, and I had to agree to stay on. I knew the owner would say no, and to my slight regret, I felt the same. It would have been a fun ride, pulling things together. However, it would have put the owner, a person who had put heart and soul into this enterprise, a person with roots in the community, in a minority position. Instead, she quickly married into money, saving the business. If there’s a moral to that story, someone let me know.    


Marvin D. Mitchell, RN, BSN, MBA

Marvin D. Mitchell, RN, BSN, MBA, is the director of case management and social work at San Gorgonio Memorial Hospital, east of Los Angeles. Building programs from the ground up has been his passion in every venue where case management is practiced. Mitchell is a member of the RACmonitor editorial board and makes frequent appearances on Monitor Mondays.

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