Dr. Eileen Appelbaum is the co-director of the Center for Economic and Policy Research, Washington, DC; a fellow at the Rutgers University Center for Women and Work; and a visiting lecturer at the University of Leicester. Her research focuses on the effects of organizational restructuring on firms and workers, private equity and financialization, and work family policies. Her book, Private Equity at Work: When Wall Street Manages Main Street, coauthored with Rosemary Batt, was named a finalist for the 2016 George R. Terry Award and one of the four best books of 2014 and 2015 by the Academy of Management. Dr. Appelbaum has published numerous articles in magazines and peer review journals, including The American Prospect and The Review of Radical Political Economics.
Elijah Dahunsi: For our readers who may not be familiar with finance or economics, what exactly is private equity (PE)?
Eileen Appelbaum: A PE firm is a type of Wall Street investment firm that sponsors investment vehicles known as funds. One of the partners of a private equity firm is the general partner. The general partner makes all the decisions for the fund, in addition to recruiting potential investors. These other investors are called limited partners.
The biggest source of investment equity for PE firms is trade unions. Additionally, public sector unions account for about 35 percent of all the money in all the private equity funds. You have to be a super wealthy individual to invest in PE firms. Usually, the minimum investment for investors is around $10 million. For pension funds, that value can be up to $100 million.
The general partner representing the private equity firm puts in one to two cents for every dollar that the limited partners put in. It’s important to note that once investors invest in the fund, they have no say over what is done with the money. Rather, the general partner and the employees of the fund go looking for prospective companies to buy. PE funds finance these purchases with a combination of debt and the money invested in the fund. Sometimes these companies survive, and sometimes they don’t.
Private equity can be a positive force. Yet on the other hand, there are bad examples—primarily from the 30 largest PE firms—where companies are loaded with debt. In some instances this debt can amount to 60 percent to 80 percent of a company’s purchase price. What’s more, the company is responsible for this debt, not the PE firm. Essentially, they own you, but you have to pay back the debt.
It’s like buying your neighbor’s house and placing a down payment. After financing the rest of the house’s costs with debt, you own the house, but your neighbor has to pay the mortgage.
When I talk to people about private equity, they often ask whether or not all of this is even legal. But this is how it works.
ED: What specific motivations draw PE firms to the healthcare industry?
EA: PE firms have, relatively speaking, only recently gotten into healthcare, choosing to initially buy hospitals. A main motivation for these purchases was the passage of ObamaCare. Though many political observers harbored doubts about the bill’s ability to pass, executives in private equity were confident that the bill would pass and be fully implemented. Acting on this confidence, many PE firms purchased hospitals with the intention of capitalizing on cash flows from Medicare, Medicaid, and the VA system—government agencies that make up 50 percent of all healthcare costs. So PE involvement in healthcare is essentially tax payer, finance capitalism.
Some prominent PE firms involved in this hospital investment scheme were Cerberus and Leonard Green. Both firms owned substantial hospital chains. Yet, despite owning so many hospitals, these firms did not make a considerable amount of money running hospitals. Instead, they made most of their money by stripping the hospitals of their real estate, selling this real estate, taking the cash, and leaving hospitals to pay rent to a Real Estate Investment Trust (REIT). These REITs owned the properties and buildings that purchased hospitals had previously owned. PE firms made money from these REITs through dividend recapitalizations.
Here is how dividend recapitalizations work: First, a private equity firm places a large degree of debt on a company they purchase. Because acquiring this debt is not an arm’s length transaction, they persuade the company and its CEO to go into the junk bond market and sell junk bonds. The company will, of course, have to pay high rates of interest on these bonds. Further, the company is forced to use the cash gained from these bonds to pay a dividend to the PE firm. This results in an even larger debt burden for the company.
In the case of purchased hospitals, this increased debt limited profitability. What’s more, many of the hospitals purchased by PE firms were in small towns, rural areas, or even safety net hospitals. When these hospitals began to, predictably, struggle, vulnerable communities were negatively affected. These include white communities in rural areas and Black communities in inner cities. It was just unconscionable.
Eventually, the instability of Medicare and Medicaid rates disincentivized PE firms from buying hospitals. To accrue more stable revenue streams, PE firms instead turned to purchasing physician practices. These practices, unlike Medicare and Medicaid, allowed PE firms to make money through fixed contracts with hospitals.
PE firms focused their purchasing efforts on medical practices associated with medical specialities where patients had a higher degree of fully complying with treatment. These specialities include emergency medicine, radiology, and anesthesiology. To make sense of this strategy, consider this scenario: You need to have a surgery, and you get to the hospital at 5:30 in the morning. Your anesthesiologist says, “Everything is going to be alright, and I’m going to take good care of you.” After they tell you this, they hand you a bunch of papers to sign. You don’t really have a choice about whether you’ll sign the papers, and private equity essentially has full control over the process.
To cement this control, prominent PE firms like Blackstone and KKR have sponsored large companies, TeamHealth and Envision respectively, composed of physician practices. Usually these companies target the practices of senior doctors who wish to retire. Once they purchase these practices, the junior doctors who do not retire are essentially employees of the PE firm, and the firm takes full control over patient billing. Because PE firms are outside insurance networks, this billing is usually not covered by a patient’s insurance. As a result, patients have often had to pay thousands of dollars in surprise medical bills.
I’ve talked to numerous medical practices about their experiences dealing with this private equity based billing and acquisition model. One of these practices I’ve talked with, a specialty practice dealing with retinal and eye health, detailed how they declined an offer from a PE firm in order to retain control over their patient billing. This was very important for the practice because they do not charge patients who are in critical condition and lack insurance. They’ve told me that if they were under the control of private equity, they would not have full control on decisions like these regarding the waiving of medical fees. Instead, every aspect of the practice would be under the control of the PE firm’s management team.
This control has significant impacts on patient care. Though we have laws against the corporate practice of medicine, practices controlled by PE firms operate in a very corporate manner. The amount of patients a physician sees, the time spent with each patient, and the money generated from each patient visit is tightly managed by PE management. As a result, some doctors in PE-owned practices are forced to call for unnecessary treatments or x-rays in order to raise the returns for the PE firm. Further, these doctors often face the risk of unemployment for speaking out about lapses in medical care. Throughout the pandemic for instance, there were doctors who were fired for speaking out about unsafe conditions in their hospitals. When communities were enraged at their hospitals about these layoffs, hospitals responded by stating that these fired doctors were not their employees.
These physician experiences show how private equity firms have negatively shifted the incentives in healthcare. What’s more, private equity is quickly moving into a diverse array of medical specialities like dermatology, orthopedics, ophthalmology, reproductive health, behavioral health, home health, and hospice care, just to name a few. Particularly in the case of hospice, PE firms are hoping to take advantage of a bill introduced by President Biden that aims to spend $400 billion on home and community health services. PE firms have already reduced visit frequencies in hospice care and neglected the needs of vulnerable patients and families.
We should put our stakes in the ground here and regulate the impacts of PE firms.
ED: So how do you best regulate against the growing influence of private equity? Is it mainly through medical or governmental means?
EA: In healthcare, we have many levers. Healthcare is highly regulated already. Medicare and Medicaid set conditions for accreditation, and they can set conditions for staffing or the amount of debt placed on PE-owned firms. So in healthcare, you have regulatory agencies that can do something.
There’s a legislative remedy that controls surprise medical bills which passed in a bipartisan manner in both the House and the Senate in December of 2020. This mainly helps those under private insurance because Medicare and Medicaid already control surprise medical bills. Another legislative proposal made by Elizabeth Warren would reform the WARN Act. The WARN Act states that workers must be given 60 days notice or 60 days pay if a facility is in the process of closing. Usually, companies bypass this commitment by filing for bankruptcy. This means that workers’ compensation takes a lower priority. The Warren Stop Wall Street Looting Act would make workers’ pay the foremost priority in cases of bankruptcy.
There are also regulatory opportunities at the state level. Many hospitals in this country are nonprofit hospitals that do not pay taxes. If these hospitals are bought by for-profit companies, state attorney generals can find ways to make these hospitals give back to the community. This happened in Rhode Island. As a result, the two hospitals in Rhode Island have a good chance of surviving. Other, more rural, hospitals may not be so lucky due to their weak financial shape. In California, they almost passed a law that would have given the Attorney General additional powers with respect to private equity ownership of healthcare providers in the state. So this is another avenue that could be taken. Statutes that limit the debt put on companies may be more difficult as regulators would have to create a unique standard.
Further, I would implore the people who read this interview to really think about the influence of private equity in their lives and their communities. I think any college student interested in finance should read The Myth of Private Equity by Jeff Hooke as they consider a potential career in private equity. While there are clear monetary motivations to work in private equity, students that work in private equity should think about what they’re doing. Every private equity employee has the choice to be a good civic citizen or to maximize shareholder value at the expense of communities.
We should also be careful about labeling all of private equity as irresponsible. Not all private equity firms use leveraged buyouts. Indeed, there are many small private equity firms that actually improve the ways that companies function. So I’m not trying to get rid of private equity as an asset class. I just want to reign in the bad behavior.
ED: Are you optimistic that we will eventually reign in the excesses of private equity and get to a place where communities have more say in the way hospitals are run?
EA: While people are getting organized around the issue of private equity, organizing efforts have been much slower in healthcare. In other industries like housing, communities have seen a great deal of organizing activity which makes me optimistic. Further, climate activists, especially on college campuses, are really reigning in the effects of private equity in energy.
I think we have to do more around surprise medical bills, and I’m hoping the work I am going to do on hospice and behavioral health will motivate people to think more about private equity and healthcare. We do see a movement developing around limiting PE in healthcare, but this movement has, for now, been contained to the people in Congress who understand the issues. But Congress can’t get anything done unless there is a groundswell. What’s more, nobody spends more money on lobbying than private equity. For instance, Blackstone and KKR, the owners of TeamHealth and Envision, put up money for a huge effort they called the patient doctor unity. It was just a front group that produced ads about “evil” insurance companies in order to distract from their own roles in perpetrating surprise medical bills.
So communities have to organize, and people have to pay attention to who they’re electing. In my home state of Pennsylvania, one of private equity’s own is trying to run for the open seat in the Senate. Hopefully he doesn’t win. But in the state of Virginia, one of their guys was elected as governor. I hope he does a good job, but people have to be on their toes. Communities have to organize. Elections are important. Your vote matters. Rose and I will do our best to reveal what’s going on, but we need people to rise up and condemn these actions.
ED: Finally, for our readers who want to engage more deeply with the topic of private equity, what books and media should they engage with?
EA: There’s a pretty small community of people who are really writing about this. The Myth of Private Equity is really geared for undergraduate finance majors. The book is very accessible and allows finance majors to understand that private equity is not necessarily the best thing since sliced bread.
Our book, Private Equity at Work, is really written for people who have an interest in how private equity is affecting workplaces and workers. One of the things we did is tell many stories. So you can look at the book as a reference book. You don’t have to read it from cover to cover, but the stories illustrate several of the main points. You might want to read the sections on what private equity is doing with pension plans and unions. We also have a free 100-page report called “Private Equity in Health Care: Who Wins and Who Loses?” This report covers topics like the private equity model, hospitals, physician practices, urgent care centers, and bill collecting.
There’s a brand new book out by a political scientist at Lehigh University, Laura Olson. It is a very readable book published by the Princeton University Press. She is really angry about the moral and ethical dimensions of what private equity is doing. She focuses on patient mistreatment in various dermatology, OBGYN, and fertility clinics.
There will be articles in the press. Rose and I are publishing stuff all the time. You can also follow me on Twitter @EileenApplebaum. You can visit the Center for Economic and Policy Research (CEPR) website. We have jobs available on our website, and we would love to see graduates apply.
*This interview has been edited for length and clarity.