Other states’ experiences with private equity are a warning for South Dakota health care

The relatively recent movement of private equity firms into both ownership and management of health care organizations has prompted increasing attention and, in many cases, concern from health care professionals. 

For-profit health care has been around for decades. However, activity has accelerated in recent years. From 2010 to 2020, the number of private equity acquisitions in health care tripled.

What is the attraction for health care providers to partner with or sell to private equity firms? Health care has become progressively more complex clinically and especially administratively. Increasing administrative demands have been particularly burdensome for providers, especially physicians. Compounding this problem is the fact that as clinical care has become more complex, so has the demand for new and updated facilities and technology. 

Enter private equity. These firms have brought access to capital to support new technology and upgraded facilities. They also have offered management experience and expertise, which providers may well have lacked.

What have we learned? Suffice it to say many problems have evolved. The central issue is the fact that there is a basic conflict in goals and orientation between private equity firms and health care providers. For private equity firms the single focus is profit. For health care providers the goal is ensuring that their patients have access to care and receive quality care when they need it. Sometimes such care is profitable and sometimes it is not.

The most common approach organizations use when trying to increase   profits is to reduce operating costs. In health care, the biggest single cost is almost always the cost of personnel. That is where private equity firms typically have focused their efforts. The problem of course is that the quality care delivered, be it acute care in a hospital or long-term care in a nursing home, is heavily dependent on the easy and prompt access  to well-trained staff.

Experience has shown that private equity takeover often results in a decrease in staffing levels and a trend toward deployment of staff with lower levels of training. Declines in staffing levels have been associated with increases in medical care errors, increases in post-operative complications, lower levels of patient satisfaction, etc.

Such developments clearly impact the practice satisfaction of physicians. Their ability to provide the level of care desired has been impaired with the net effect that physician turnover in such facilities has increased.

Another approach frequently utilized by private equity managers, especially with regard to hospital care, is to alter the mix of services offered by the facility. Some services such as invasive cardiac procedures are routinely profitable while other services such as obstetrics frequently are not. If profit is the dominant motive, the hospital may well shift the mix of services offered in ways that are not consistent with the needs of the community. 

What about private equity in South Dakota? At this point, it has not played a large role in our state. The national experience, however, provides a warning. As health care facilities are faced with financial stress, communities and boards of directors need to proceed cautiously if they are approached by private equity firms.

What to do? Clearly access to capital and management expertise are important  issues. There is nothing illegal about the strategies that private equity firms have pursued. It would be possible to prohibit for-profit organizations from owning or operating health care facilities.  However, as financial pressures have increased, traditional not-for-profit organizations have followed many of the same strategies as their for-profit competitors.

A more basic and far more complex challenge is embedded in the open market structure on which U.S. health care financing is based. In such a structure, some degree of profit is essential if an organization is to survive. Around the world numerous advanced countries, many with lower costs and better health outcomes than the U.S., have rejected open market structures for health care even if they do have competitive markets for consumer goods, etc.

We face serious and intimidating challenges in financing the cost of health care services. There is no quick fix, but I believe it is time we looked seriously at the basic underlying structure and asked, “is there a better way?”