Gretchen Morgenson and Role of Private Equity in Healthcare

Gretchen Morgenson is the senior financial reporter for the NBC News Investigative Unit. A former stockbroker, she won the Pulitzer Prize in 2002 for her “trenchant and incisive” reporting on Wall Street. Previously at The New York Times and The Wall Street Journal, she and coauthor Joshua Rosner have written a new book, These Are the Plunderers: How Private Equity Runs—and Wrecks—America .

In the 1902 State of the Union Address, Theodore Roosevelt said, “Our aim is not to do away with corporations; on the contrary, these big aggregations are an inevitable development of modern industrialism. We are not hostile to them; we are merely determined that they shall be so handled as to subserve the public good.” What would President Roosevelt have to say about private equity’s recent interaction with healthcare?

As private equity firms invest in everything from dermatology practices to emergency room staffing companies, the impacts are not always obvious. Gretchen Morgenson’s new book, excellently researched and compiled, examines private equity influence in America. You will be surprised by the findings.

This transcript of the discussion has been edited for clarity and length.

Mike Sacopulos: My guest today is Gretchen Morgenson. Ms. Morgenson is a Pulitzer Prize winning journalist. She has written for both The New York Times and The Wall Street Journal. She is the coauthor of the recently published book These Are the Plunderers: How Private Equity Runs—and Wrecks—America . Gretchen Morgenson, welcome to SoundPractice.

Gretchen Morgenson: Thank you for having me. Really love to be here.

Sacopulos: Oh, well, we are excited to have you. Let us start out. What is a private equity firm and what does it do?

Morgenson: Private equity really is kind of a new refreshed, sort of genteel description of what we used to call leveraged buyouts. So, the most famous leveraged buyout, the one that put them all on the map, was the RJR Nabisco buyout of the late 1980s. That was a mesmerizing moment because it was a hostile takeover, and it was a lot of back and forth between a lot of wealthy people and it was fun to watch. But in fact, what happened was it really started a sort of decades-long practice of takeovers that really has had a pernicious effect on a wide range of participants.

And so, you have these firms that used to be called the LBO firms, leveraged buyout firms, like Kohlberg Kravis Roberts was the big one in RJR, Blackstone, very prestigious firm now, Apollo, Carlyle Group, you have these firms that have amassed really hundreds of billions of dollars in assets and use them to take over companies, supposedly make them more efficient and then sell them within five to seven years, hopefully at a profit for the firms and their partners. So that is what private equity does in theory. It is all about how this efficiency process that they claim really harms the wide array of stakeholders in these companies that I am interested in.

Sacopulos: Well, let us talk a little bit about that. Have private equity firms reduced the cost of healthcare for consumers if they are more efficient, then that Chicago School of Economic Thought, Milton Friedman and the crowd would say that the prices should have come down.

Morgenson: That is right. And so, what you have was you had that theory for a long time that this was going to make businesses more efficient, whether it was healthcare, whether it was retail, whether it was widgets. But now we have enough long-term data, academic studies that are not biased, that are not written and conducted by people who are paid for by the private equity industry. These independent studies show that what happens is prices go up, numbers of tests go up and care and quality of care goes down. So, the efficiencies that they promise seem to go into the pockets of the firms themselves, not into the pockets of the end users, of the consumers, of the patients. It really is a transfer of wealth, and that is why we wanted to write These Are the Plunderers, to really expose that for what it is.

Sacopulos: So, you just mentioned that outcomes go down, and it seems to me that when we can talk about efficiency or benefits, we could talk about cost or we could talk about outcome, and it sounds as though we get neither. Could you talk a little bit about healthcare results or outcomes for patients that are seen by private equity owned practices?

Morgenson: Well, the most stunning study, the really most arresting study was one that came out in 2021, I believe, from academics from NYU, University of Chicago, which you mentioned a bit ago, who found that a longitudinal look at nursing homes that are owned by private equity companies, they found that mortality rates were 10% higher in nursing homes owned by private equity than in nursing homes owned by other entities, which even included other for-profit entities. And so, this was a really a damning study because it looked at the most important outcome of all, the life and death outcome, and it found that mortality rates were higher. Some 20,000 lives were lost at private equity owned nursing homes; the study found.

That is, I think the headline study that we have seen, but we have also seen studies about outcomes at dermatology practices, outcomes at healthcare as healthcare costs go up. A big part of the story also is the consolidation that occurs when these takeovers really roll up physician practices. They roll up small operators and make them into more of a monopolistic operation. And so that also contributes to the negative outcomes because we all know what happens when a monopoly is in effect, consumers are hurt, and the monopolists take all the profits.

Sacopulos: Studies show that your zip code is more important than your genetic code when it comes to health. I am interested if private equity firms select targets by sociodemographic areas.

Morgenson: I am not familiar with that. That would be an interesting exercise. The initial way to look at anything that private equity is interested in is, is there a lot of money associated with the practice? Is there a lot of, say, reimbursement potential associated with the practice? Is Medicare a big participant in the business? They really are after the biggest pools of money that they can. That is the way you sort of hunt down where their areas of interest are. For instance, autism services. Once autism services began to be reimbursed in all 50 states, which of course the parents of autistic children were agitating for and rightfully so, once those reimbursements were guaranteed both by states, both by private payers and Medicaid, private equity firms went all in on autism services. It is estimated that there are over 125 private equity backed companies in that space. You look for those kinds of before and after situations and you see where private equity really focuses its efforts.

Sacopulos: This may be an unusual question, but I am interested, do you know if any private equity firms that invest in healthcare have a chief medical officer on staff?

Morgenson: The private equity firm probably does not. I do not know the answer up and down, straight up, but I would say that the private equity firm would probably say to you, Blackstone for instance, which owns TeamHealth. Blackstone would say, "Well, we don't have a chief medical officer at Blackstone, but TeamHealth certainly would have a chief medical officer." The question is an interesting one because one of the things that these firms are careful to do is to isolate themselves from the activities of their portfolio companies.

So, if there is a Medicare fraud case, for example, of a company that is owned by a private equity firm, the private equity firm may have been the entity that was pressuring the portfolio company to increase its efficiency and increase its performance. We don't know this, but it may have actually created the incentives for a bad practice. But the private equity firm is never hardly, whether I think one case where the DOJ or the FTC has sued a private equity company for the activities of the portfolio company. They have isolated themselves and kept themselves off to the side, which is an interesting problem because if you are not going to be able to hold them accountable for a business model that creates the incentives for bad behavior or questionable behavior, then it is just going to continue. And as you know, many of these fines are just the cost of doing business.

Sacopulos: Do boards of medicine which set and enforce ethical and professional standards for the practice of medicine fail to protect patients and the profession of medicine?

Morgenson: You are talking about state medical boards?

Sacopulos: Right. It seems to me that the private equity firms need to have physicians to accomplish their goals and the boards of medicine control the ethical and professional standards of those physicians. Have they become involved at all in responding to private equity investment in healthcare?

Morgenson: I have not seen a robust response from state medical boards to the incursion by private equity in the practice of medicine. Now, this gets into two important issues. One is the one you raised, which is, where are the state medical boards? And that has been proven to be a problem. In a particular case that I write about in These Are the Plunderers, it involves a doctor in Texas who works with Envision, then known as EmCare, who allows his name to be used as the LLC supposed owner/operator of, at one point in time, 300 different medical operations, 300 different physician practices. Now, this allowed Envision to maintain that the doctor was running these operations, that the corporation was not, which is of course against laws in many states, the corporate practice of medicine.

So here we had a circumstance, and this is how they circumvent these laws where one physician was having his name used so that Envision could operate these different physician practices. That physician, there were complaints lodged with the Texas State Medical Board about that physician and nothing was ever done about it. And so that is a perfect case in point, and I did try to reach out to them. The Texas board was not willing to comment on it or have a conversation. I spoke briefly with the doctor himself. He was not interested in having a conversation. But you have that problem of the corporate practice of medicine, which no one seems to be enforcing.

And I would say if it were the state medical boards are the first line of defense, but then where are the attorneys general in the states where this is going on? Are they unwilling to enforce the laws barring corporations practicing medicine in their states? And if so, why? These laws have been on the books for over a hundred years, and you just do not see many cases being brought that are trying to enforce this very sound legal concept that a corporation should not be allowed to practice medicine.

Sacopulos: Do you believe that when physicians sell their practice to private equity firm that they are forsaking their younger colleagues?

Morgenson: I think the physicians, most of them that sell to private equity firms, do not really know what is coming for their younger colleagues. I think that they have put in many, many years of very hard work. They believe that they have earned a reward for that hard work, and I certainly would not question that. But what comes next after the private equity takeover of a physician practice is something that the doctors who are selling their practices either have not become aware of or have not done the investigation or just do not know and are perhaps in the dark about it.

So, if we want to give them the benefit of the doubt, let us just say they really may not know what is coming for their younger colleagues after the private equity takeover. I have spoken to many people who have sold their practices, and they talk about it. There is about a yearlong sort of honeymoon period where the physician or the founder is still in place so that you can make the transition with the customers, the patients. They are not alarmed by a new person coming in, but then it starts to disintegrate after a year. You often see cases where the founders of a company bought by private equity later are sorry that they wound up selling to the entity.

Sacopulos: Where are the third-party payers in this, the insurance companies? Because it seems to me that they would react to the influx of private equity and healthcare. Am I wrong?

Morgenson: Well, I think the insurance companies are watching this space. I have not done as much work on what they are doing. I mean, to some degree we have insurance companies that are vertically integrating and buying practices themselves. And so, it is a different business model, but the question is, will it have the same kinds of outcomes? I think that the biggest case in point where the insurance companies were absolutely up in arms was the surprise billing that occurred in emergency departments that were constructed by private equity firms to circumvent the in-network capacity of the physician's practices in the emergency departments.

And so, you had a situation where Envision, again was the company, and now bankrupt, that sort of devised this scheme to take the emergency department physicians out of network and then bill massively larger bills to the clients who were patients who were completely unaware. Walking into an ER, you are at a very vulnerable point in your life. You need immediate assistance, urgent help, and you are not going to sort of ask, "Hey, is this in network? You think your hospital is in network?" And so, you would automatically assume. Now, I think that case really brought attention to some of the tactics, and I think the insurance companies were extremely aware of that.

Sacopulos: Can you speak to the transparency of private equity firms? It sounds like it was difficult to research your book These Are the Plunderers.

Morgenson: Well, these are private companies that they take over. The firms themselves are public now. KKR has publicly traded stock. Blackstone, Apollo, Carlyle, they are all publicly traded. Even so, their financial statements are difficult to plumb. But what is really tough is the particular portfolio companies themselves. And so, these are private entities, very difficult to get any financial statements on them. If they have issued debt, you can sometimes find financial reporting on those companies, but it is difficult to get at them.

And that is one of the, I think, areas that could use a lot of help and sunshine if regulators started to require these companies to be more public, A: that they own these entities. I think Blackstone, Apollo, Carlyle, KKR, they should have their names on these entities, so people understand what they are dealing with. It is I think quite interesting that they do not really advertise their ownership of all of the companies that they own. They prefer to stay in the background. And I think that could really change things. But it is difficult to get the information you need. They are not helpful. I had my interactions with the firms ahead of the publication of the book. I was particularly interested in Blackstone's response to me.

As you know, Blackstone owns TeamHealth, and I had said, I had told them my thesis, that these firms were eviscerating the American economy, we are hurting workers, pensioners, customers, et cetera. And they of course rejected that thesis, but also told me that the thesis of, for instance, job creation. They maintained that they had over 15 years created 200,000 net new jobs among the portfolio companies that they own. And so, I said, "Well, fantastic. I would love to know more about this. Can you supply the data that backs that up?" And they were unwilling to. So even when you get to having a conversation with them, they are not willing to give you the information that you need to sort of verify what they are saying.

Sacopulos: Do you approach healthcare for yourself and your family differently after writing These Are the Plunderers?

Morgenson: I sure do. I sure do. I mean, it is difficult to be a healthcare consumer. You cannot pick and choose. You cannot shop wisely. I mean, this is all a part of the reason that our healthcare system is so fractured. We have so much difficulty understanding who owns what and where the money is going. So yes, I mean, I am very now aware and have a heightened awareness of, "Okay, who owns that urgent care center that I am going to? Who owns that dental practice?" I asked my dentist, "Are you owned by private equity?" My dermatologist, "Are you owned by private equity?" Because I really think that it is something that patients need to be aware of and that patients can be hurt by.

Sacopulos: As our time together comes to an end, what do you see in the future for private equity in healthcare?

Morgenson: Well, I do not see much in the way of hurdles or objections as we discussed earlier from state medical boards, from state attorneys general. I think that the FTC and the DOJ may be getting a little bit more backbone on this issue and trying to analyze and even stop some of the roll-ups and some of the acquisitions. We have been in a period where there are rules about acquisitions to try to prevent monopolistic practices and they have this sort of threshold for deals that have to be a certain size before they have any government scrutiny of them whatsoever. These small physician practice roll-ups do not come anywhere near meeting that threshold. And so, they have been allowed to proliferate and go on and on and on. I think those days may be over.

But I think the thing that is really hurting these firms now and causing a real reality check is the rising interest rates and what that is doing to their business model. You saw in the Envision situation they had recently filed for bankruptcy. And so, their business model is not sustainable because of the heavy debt that these firms load onto the portfolio companies. And they load on floating rate debt. It is not fixed rate debt. So, when interest rates rise, their costs go up. And so, I think you are starting to see a reckoning that the market, that interest rates, the economic environment, is causing the reckoning. It is really not regulators who are causing the reckoning, but it is a more powerful force perhaps. And I think we are going to see a lot more bankruptcies, especially in the healthcare arena as people understand what private equity is doing in healthcare and as interest rates continue at these high, high levels.

Sacopulos: My guest has been Gretchen Morgenson. Her new book is These Are the Plunderers: How Private Equity Runs—and Wrecks—America . Gretchen Morgenson, thank you so much for being on SoundPractice.

Morgenson: Well, thank you. Have a great day.

Sacopulos: My thanks to Gretchen Morgenson.

Listen to this episode of SoundPractice.