A bill under consideration in the California Assembly to increase oversight of private equity investments in health care has received enthusiastic support from consumer advocates, labor unions and the California Medical Association but has drawn fierce criticism from hospitals that worry they will lose a potential source of funding.
The bill, sponsored by Attorney General Rob Bonta, would require private equity groups and hedge funds to notify the attorney general and get his consent for any proposed acquisitions of many types of health care businesses. It would also strengthen state laws that prohibit non-physicians from directly employing or directing physicians’ activities, a key reason the medical association supports the bill.
Private equity firms raise capital from institutional investors such as pension funds and then buy companies they believe can be run more profitably, usually by selling the assets at many times their purchase price in an attempt to boost earnings.
That may be good for future retirees, and it’s good for struggling companies that need a capital infusion and new direction. But critics say the profit-first approach is bad for health care. Private equity deals in the health care sector have come under increased scrutiny around the country amid growing evidence that they often lead to higher prices, lower quality care and less access to core health services.
Opponents of the bill, led by the State Hospital Association, the California Chamber of Commerce and a national private equity advocacy group, say the bill would stifle badly needed investment. The hospital industry has already persuaded lawmakers to exclude for-profit hospital sales from the bill.
“We chose not to introduce that amendment,” Bonta said in an interview, “but we still have a strong bill that provides very important protections.”
The bill would still apply to a wide range of health care businesses, including clinics, physician groups, nursing homes, testing labs and outpatient facilities. Nonprofit hospital transactions are already subject to attorney general review.
If a state Senate committee advances the bill, a final vote could come as soon as this month.
Private equity gains a foothold
Nationally, private equity investors have spent $1 trillion buying health care companies over the past decade, according to a report from the Commonwealth Fund. Physician offices are especially attractive to them, with deals increasing sixfold in the decade and often resulting in steep price hikes. Other types of outpatient services and clinics are also being targeted.
In California, the value of private equity health care deals increased more than 20-fold from less than $1 billion to $20 billion between 2005 and 2021, according to the California Health Care Foundation. Private equity firms are closely tracking the pending bill, but so far it hasn’t slowed down their investments in California, according to a new report from research firm PitchBook.
Multiple studies and a series of reports from KFF Health News have documented some of the challenges created by private equity in health care.
A study published in the Journal of the American Medical Association in December found that private-equity hospitals were more likely to have adverse events such as patient infections and falls than other hospitals. Analysts say more study is needed to determine how that affects patient care, but the impact on costs is clear.
“After a private equity buyout, you’re almost certain to end up paying more for the same thing, or even worse,” said Christoph Stremikis, director of market analysis and insights at the California Health Care Foundation.
Most private equity deals in health care often escape government scrutiny because they fall below the $119.5 million threshold that would trigger notification requirements to federal regulators. The Federal Trade Commission has stepped up its scrutiny, last year suing a private-equity-backed anesthesia group in Texas for anticompetitive practices.
Lawmakers in several other states, including Connecticut, Minnesota and Massachusetts, have proposed bills to increase transparency in private equity transactions.
Trading results
Rep. Jim Wood, a Democrat from Healdsburg, said not all private equity firms are badly run, but vetting is essential. “If you’re a good company, you shouldn’t be afraid of this.”
The bill would require the Attorney General to review proposed transactions to determine their impact on quality and access to care, as well as local competition and pricing.
Critics point out that private equity deals are often financed with debt owed by the acquired company, and often the private equity group sells the property to generate an immediate profit for the investor, while the property’s new owner charges rent to the acquired company.
California Attorney General Rob Bonta speaks at a press conference.
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Justin Sullivan
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Getty Images
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That contributed to the financial collapse of Steward Healthcare, a multistate hospital system owned by private equity firm Cerberus Capital Management from 2010 to 2020, according to a report by the Private Equity Stakeholder Project, a nonprofit that supports the California bill. Steward filed for Chapter 11 bankruptcy protection in May.
Another study by the group found that “nearly all of the most distressed U.S. health care companies are owned by private equity firms.”
Notable successes
Opponents of the bill argue it would reduce badly needed investment in an industry that is expensive to operate. “Our concern is that this bill will cut off funding that could improve health care,” said Ned Wigglesworth, spokesman for the Californians for Community Health Protection, a coalition of groups that oppose the bill. The possibility of having to subject themselves to a lengthy review by the attorney general would create a “chilling effect on private funders,” he said.
Proponents of private equity investment point to California’s notable success in health care.
Children’s Choice Dental Care, for example, said in a letter to state senators that it records more than 227,000 dental visits a year, most of them to children enrolled in Medi-Cal, a health insurance program for low-income Californians. “Our access to capital from private equity firms has enabled us to expand to 25 locations,” the group wrote.
Ivy Fertility, which has clinics in California and eight other states, said in a letter to state senators that private investment has expanded its capacity to provide fertility treatments as demand for them grows.
Researchers point out that private equity investors aren’t the only ones involved in profiteering in the health care industry. It also extends to nonprofits. For example, Sutter Health, a large nonprofit hospital chain, settled a lawsuit brought by then-Attorney General Xavier Becerra over unfair contracting and pricing practices for $575 million.
“It’s useful to look at ownership classes like private equity, but at the end of the day you have to look at the behavior. Anyone can do what private equity firms do,” said Christopher Cai, a physician and health policy researcher at Harvard Medical School. But he added that private equity investors “are more likely to engage in financially risky or purely profit-driven behavior.”
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