Private equity is buying up health care, but the real problem is why doctors are selling

Who owns your doctor’s office? More and more often nowadays, the answer is a private equity firm — a type of investment fund that buys, restructures, and resells companies.

Over the last decade, private equity firms have spent nearly $1 trillion on close to 8,000 health care deals, snapping up practices that provide care from cradle to grave: fertility clinics, neonatal care, primary care, cardiology, hospices, and everything in between.

We should all be concerned about how private equity is reshaping American health care. Although research remains mixed on how it affects quality of care, there is clear evidence that private equity ownership increases prices. These firms aim to secure high returns on their investments — upwards of 20 percent in just three to five years — which can conflict with the goal of delivering affordable, accessible, high-value health care.

But amid warnings that private equity is taking over health care and portrayals of financiers as greedy villains, we’re ignoring the reality that no one is coercing individual physicians to sell. Many doctors are eager to hand off their practices, and for not just for the payday. Running a private practice has become increasingly unsustainable, and alternative employment options, such as working for hospitals, are often unappealing. That leaves private equity as an attractive third path.

There are plenty of short-term steps that regulators should take to keep private equity firms in check. But the bigger problem we must address is why so many doctors feel the need to sell. The real solution to private equity in health care is to boost competition and address the pressures physicians are facing.

Consolidation in health care isn’t new. For decades, physician practices have been swallowed up by hospital systems. According to a study by the Physicians Advocacy Institute, nearly 75 percent of physicians now work for a hospital or corporate owner. While hospitals continue to drive consolidation, private equity is ramping up its spending and market share. One recent report found that private equity now owns more than 30 percent of practices in nearly one-third of metropolitan areas.

Years of study suggest that consolidation drives up health care costs without improving quality of care, and our research shows that private equity is no different. To deliver a high return to investors, private equity firms inflate charges and cut costs. One of our studies found that a few years after private equity invested in a practice, charges per patient were 50% higher than before. Practices also experience high turnover of physicians and increased hiring of non-physician staff.

How we got here has more to do with broader problems in health care than with private equity itself.

The American Medical Association found that the top reason physicians sell their practices (to any entity) is that they need higher reimbursement rates to remain financially viable. On their own, they find that they cannot negotiate those rates effectively with insurers. Physicians also need access to capital to keep up with the high costs of doing business, from legal compliance to technological investments, such as complex electronic health records.

Anecdotally, we’ve heard that private equity firms often pitch physicians that they’ll increase the value of the stake the physicians retain in their practices, making an eventual exit more lucrative. And many physicians appear to prefer private equity employment to grueling hospital hours and schedules because they’re able to preserve more autonomy and achieve a better work-life balance.

To fix consolidation in health care will require us to address the system that leads physicians to see profit-driven private equity as their best path to staying afloat, even if they initially entered medicine to help people.

A simple first step is to require better information on consolidation activity. Private equity companies are mostly exempt from ownership disclosure requirements because they are privately held, making it almost impossible for a patient to figure out who owns their doctor’s office, or for physicians to know who is behind the firms trying to buy their practices.

Boosting ownership transparency and going after monopolistic behavior — steps the Biden Administration endorsed last week and that the Federal Trade Commission and Department of Justice have also recently started to pursue more aggressively — will help keep private equity’s impact in check. We can decrease the attraction of private equity just by making physicians more aware of whom they’re selling to and what other practices those firms own.

Ultimately, however, we need to address the pressures that lead physicians to sell in the first place. The most important thing we can do is ease the financial burden of running an independent practice. Earlier this year, Indiana passed a tax credit for independent physician practices. Other states should consider following its lead.

At the federal level, Medicare has long undervalued primary care, partly because rates are influenced by a committee full of specialists. Medicare also frequently relies on a fee-for-service approach that rewards quantity of services delivered, incentivizing physicians to see as many patients as possible as many times as possible.

Congress can reform Medicare to boost payments to primary care practices, which are more financially vulnerable than specialist practices. One group of researchers estimates we need an increase of anywhere from 30 to 50 percent to account for current undercompensation.

We can also move toward value-based-care, which rewards quality and outcomes, and pay practices a set amount per patient every month, providing them with a steady and predictable source of revenue. Since private insurers often base their rates on Medicare, these steps would likely trickle down and boost the financial stability of practices that treat non-Medicare patients.

The best place to stop an avalanche is not at the bottom of the hill, but at the top, and while the future torrent remains only a snowball. We must address the underlying problems making it so hard for physicians to maintain independent practices, so that they are no longer at a disadvantage compared to private equity giants.  

Yashaswini Singh is an assistant professor, and Christopher Whaley an associate professor, of Health Services, Policy and Practice at the Brown University School of Public Health.