<Table Of Contents

Private Equity in Healthcare: An Ethical Perspective

by Daniel Y. Johnson, 2024 Medical Fellow

Introduction

Private equity firms are companies that use funds from investors to buy non-public companies with the intention of selling them for a profit within a short timeframe, usually three to seven years. Since these firms are not publicly traded, they are not subject to the same regulations and scrutiny from federal agencies as public companies. Private equity firms have recently undertaken massive investments in physician practices and hospitals, These numbers have skyrocketed, rising from $41.5 billion in 2010 to $200 billion in 2021, amounting to $1 trillion in total in the past decade.1,2

While private equity firms have long had a minor stake in the healthcare industry, this exponential growth in investment has raised concerns because of the limited knowledge of relevant fields among private equity firm managers. In a similar vein, some worry about the use of healthcare facilities and other related property as collateral for loans that private equity firms take out to pay back investors.3 The federal government has taken notice, and this year the U.S. Senate and the Federal Trade Commission held hearings and workshops to discuss such investments.4,5

Recent research has revealed that after private equity firms acquire physician practices, they push these practices to see more patients and charge more per claim to maximize the return on their investments.6 Research shows little to no improvement in the outcomes of patients treated for common acute medical conditions,7 but there has been a concerning drop in positive patient experiences and a rise in adverse events at hospitals acquired by private equity.8,9 Furthermore, the use of physician practices and hospitals as collateral has led to the bankruptcy of these facilities and the selling of their land. Notable examples include safety-net hospitals like Hahnemann Hospital in Philadelphia and rural health systems such as Little River Healthcare in Texas. These closures have left vulnerable communities with fewer healthcare options.10,11 While these research studies and reports have drawn attention to the concerning outcomes after private equity acquisitions, there is limited analysis of the issue from an ethical perspective.

In this paper, I set out to answer three key questions. First, how do the aims of private equity firms align and conflict with the ethical obligations of physicians? Second, how can physicians in private equity-acquired healthcare facilities fulfill their obligations to their patients? Third, how should private equity firms be regulated in the healthcare sector?

Moral Conflicts between Private Equity and Physicians

The United States spends more per capita on healthcare than any other country, though it has similar or worse health outcomes compared to other high-income countries.12 Organizational inefficiencies and misaligned incentives that maximize spending instead of outcomes contribute to this problem. In the past two decades, there has been a movement in health policy and the industry more broadly towards value-based care, which seeks to incentivize healthcare systems and providers to maximize health outcomes per unit of cost.13 In line with this movement, private equity firms have gained traction in healthcare by promising to improve efficiency in these settings while cutting costs.14 Private equity firms offer an uncommon opportunity to leverage capital and managerial knowledge to restructure healthcare systems to be more efficient. There are promising examples of private equity firms driving innovation in this sector, such as the privately funded organization CareMore’s improvements in care for high-risk elderly individuals.15 In this way, private equity could promote value-based care and further beneficence and justice through the efficient allocation of healthcare resources toward treatments that will maximize health outcomes.

While private equity firms have the potential to steer healthcare systems toward value-based care, these efforts often take time and significant investment without immediate returns. Private equity firms are incentivized to maximize profit within a short timeframe for shareholders. Instead of improving organizational efficiency, they can cut costs by laying off staff, raising prices and patient volumes, and focusing on high-margin services.16 Recent empirical evidence has shown that private equity acquisitions are associated with increased costs to patients or payers with mixed effects or worsening quality of care, including higher rates of adverse events, such as falls and surgical-site infections.8,17,18 These poor outcomes after private equity acquisitions conflict with healthcare providers’ ethical obligation to non-maleficence, and the increased costs to patients and the healthcare system are at odds with the principle of justice. Therefore, while private equity firms’ efforts could potentially align with the principles of beneficence and justice, their practices, namely maximizing profits in a short period of time, stand in opposition to the principles of non-maleficence and justice.

A Framework for Physicians Practicing Under Private Equity

Physicians in a practice or hospital acquired by a private equity firm may be faced with an ethical conflict between meeting the aims set by the new owners and their obligations to their patients. In a recent survey of physicians, respondents were skeptical of private equity investments in healthcare, with particular concerns about the effects of private equity ownership on physician and patient well-being.19 Furthermore, physicians employed by private equity-owned practices and hospitals were less likely to report professional satisfaction and high levels of autonomy. They were also less likely to remain with their employer.19 While many organizational changes resulting from private equity acquisitions may contribute to these sentiments, restrictions on physician autonomy and evidence of worsening patient outcomes may contribute to a sense of moral distress among physicians at private equity-owned practices. This possibility raises a fundamental question: how should physicians operate within a system that conflicts with their ethical obligations towards patients?

When physicians practice in a setting that pressures them to violate the principles of medical ethics, they can experience moral injury. The phrase “moral injury” was coined to describe the responses of soldiers to their actions in war, specifically those acts that violated their moral beliefs. In recent years, moral injury has been used in the context of healthcare to describe the ethical challenges of physicians when they encounter tension between the Hippocratic Oath and the pressures of a healthcare system that profits from people at their sickest and most vulnerable.20,21 Moral injury can contribute to physician burnout, which is reported by nearly 50% of practicing physicians.22 Private equity acquisitions may exacerbate moral injury by pressuring physicians to violate their moral beliefs by overtreating and overbilling patients.

When private equity acquisitions lead to organizational changes that threaten the health and safety of patients, physicians should listen to their fear of moral injury and seek to fulfill their obligations to patients. As a profession, physicians are largely responsible for upholding their moral principles themselves.23 There is no universal solution to the multifarious situations that may arise from the actions of private equity firms in different healthcare settings. Therefore, physicians should seek to align their actions with the principles of medical ethics: beneficence, non-maleficence, justice, and autonomy.24

To adhere to beneficence and non-maleficence, if physicians encounter organizational changes that worsen clinical outcomes or increase financial harm to patients, physicians should clearly document instances when patient care is compromised or costs to patients are excessive. Then they should bring their concerns up through channels within the hospital or practice, particularly with hospital or practice leadership. They might also bring their concerns outside of the hospital or practice through specialty, state, or national medical societies or the press. To adhere to justice, if physicians identify evidence of inequitable care or organizational changes that prioritize profits over patient needs, then the physician should advocate for hospital policies that push back against these problems. Lastly, to adhere to patient autonomy, physicians should engage in shared decision-making with patients that prioritizes the clinical risks and benefits to the patients but also incorporates cost-consciousness, particularly if there are financial pressures from leadership to steer patients towards more expensive treatments.25 While private equity acquisitions may present physicians with a multitude of ethical challenges, the principles of medical ethics can guide their decision-making to fulfill their obligations to patients.

A Framework for Regulating Private Equity in Healthcare

On a broader scale, stricter policies and regulations may be necessary to curb the business practices of private equity firms that put patients at risk. Private equity acquisitions have proliferated in healthcare in part because of less regulatory oversight, since they are not publicly traded. Compounding the issue, 90% of private equity acquisitions are not subject to federal regulatory review because they are below the threshold of $100 million.26 Additionally, private equity firms have an income tax capped at 20%, which is lower than the ordinary income tax.27 Cai and Song propose a number of policy measures that could improve oversight of private equity firms in healthcare.27 In particular, policymakers could limit the debt allowed in leveraged buyouts and prevent asset stripping, such as private equity firms selling the real estate of hospitals. In turn, this would place more of the risk associated with a private equity acquisition on the firm itself rather than the purchased companies.

Additionally, policymakers could mandate that private equity-acquired hospitals and practices report patient experience or clinical outcomes.27 Efforts to increase quality transparency may be the most politically feasible and potentially effective, as evidence has shown that increased quality transparency promotes competition in the healthcare market and improves quality of care.28

Regulations and policies will take time to develop and take effect, but in the meantime, healthcare executives and physicians in leadership positions can regulate themselves when approached by private equity firms. Private equity buyouts are attractive because of upfront payments, promises to reduce inefficiencies, and increased consolidation and competition in the healthcare market.29 Given the growing body of evidence of overutilization, increased costs to patients and payers, and worsening patient safety associated in the cases of private equity acquisitions,18 healthcare executives and physicians leaders should be wary of such firms. These outcomes indicate that the incentives and actions of private equity firms may not align with the goals of medicine to optimize the health of patients. If possible, healthcare executives and physician leaders should attempt to avoid private equity acquisitions until stricter regulations are in place. If private equity acquires a hospital or practice, then healthcare executives and physician leaders should work closely with the private equity firm to ensure that patient health and safety are prioritized.

Conclusion

The role of private equity in healthcare has grown significantly over the past decade, and recent evidence about the effects of private equity acquisitions on patients and payers has raised concerns about the ethical conflicts between their business model and the aims of healthcare providers. Private equity acquisitions exemplify the financialization of healthcare in the U.S. Through this process, healthcare entities find themselves transformed into assets that the financial sector can acquire and sell.30 In turn, the financial sector profits from healthcare while the costs are largely borne by U.S. households and the government.30,31 Confronting the growing role of private capital in healthcare will require physicians, executives, and policymakers to adhere even more closely to the core principles of medical ethics. This will take individual and policy changes and further research to document the effects of private equity on healthcare. By countering the influence of private equity with the principles of medical ethics, the healthcare system can prioritize the health and safety of patients over profits.

Daniel Y. Johnson was a 2024 FASPE Medical Fellow. He is a medical student at the University of Chicago Pritzker School of Medicine and a Sarnoff Cardiovascular Research Fellow at Beth Israel Deaconess Medical Center.

Notes

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