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How private equity is changing American health care

November 07, 2023

By Stefano Kotsonis and Meghna Chakrabarti

Editor's note: The transcript of this episode has been changed from the audio to correct the description of TeamHealth as a private equity firm. TeamHealth is a physician-led provider network owned by private equity company, Blackstone.

Private equity and your doctor's office.

A private equity firm in Texas has been buying up anesthesiology businesses, promising greater efficiencies and lower costs.

Now, the FTC is suing the firm for monopolistic practices that it says harm patients' health and their pocketbooks.

Today, On Point: How private equity is changing American health care.


Gretchen Morgenson, Pulitzer Prize-winning senior financial reporter for the NBC News Investigative Unit. Author of "These Are the Plunderers: How Private Equity Runs―and Wrecks―America."

Brendan Ballou, federal prosecutor and former special counsel for private equity at the Department of Justice. Author of "Plunder: Private Equity’s Plan to Pillage America."

Also Featured

Julian Gill, medical reporter for the Houston Chronicle.

Dr. Marco Fernandez, president, Midwest Anesthesia Partners in the greater Chicago area. President, Association for Independent Medicine.


Part I

MEGHNA CHAKRABARTI: When you're flat on your back, headed in for surgery, and about to go under the knife, the last thing you want to have to think about before losing consciousness is, "Oh, I wonder if my anesthesiologist practice is owned by a private equity company that's now functioning as a virtual monopoly that might significantly inflate the cost of the care I'm about to receive."

Am I right? Like you really don't want to have to worry about that, but if you live in Texas, I wouldn't blame you if you did.

JULIAN GILL: There's a company called U.S. Anesthesia Partners. They are the largest anesthesia provider in Texas and Welsh Carson is the private equity firm that started USAP.

CHAKRABARTI: Julian Gill is a medical reporter for the Houston Chronicle, and he's telling us the story of Welsh, Carson, Anderson & Stowe, a New York based private equity firm. Founded in 1979, the firm has raised $31 billion in capital so far. Welsh Carson says, quote, "We build market leading companies in health care and technology." End quote.

They've invested in more than 100 health care companies saying they can add value "to the system by reducing costs and improving the quality of care." End quote. They created U.S. Anesthesia Partners in 2012 and have had a major impact on anesthesia care in Texas.

GILL: There are major players in Texas involved in U.S. Anesthesia Partners, namely the president of the Texas Medical Board, a state representative, and formerly involved with USAP is the vice chancellor for health affairs at a major university system here, who is also a former lawmaker. And they were recently sued by the Federal Trade Commission for using aggressive business strategies to monopolize the market.

CHAKRABARTI: U.S. Anesthesia Partners has acquired more than a dozen smaller anesthesia practices in Texas. When it filed suit last year, the Federal Trade Commission claimed that no other rival comes close to matching USAP's size. In 2021, the company was four times bigger than the second largest anesthesia group in Texas, six times bigger than the second largest anesthesia group in Dallas, and seven times larger than the second largest group in the entire state.

FTC Chair Lina Khan told Fox 26 Houston that USAP's mere monopoly in the state is harming patients.

LINA KHAN: And what this firm decided to do was pursue a roll up scheme where they bought up a whole set of anesthesiology practices across Texas, in Houston, Dallas, San Antonio, Austin, Amarillo, and ultimately used that consolidated power to jack up prices.

GILL: Part of this market consolidation scheme basically allowed USAP to bill to and charge insurers on behalf of smaller independent practices. Another aspect of it was engaging in other agreements with other competitors, saying neither side would interfere in each other's market.

CHAKRABARTI: Now, back in 1953, the president of General Motors told Congress that what was good for GM was good for the country.

And as the Houston Chronicle's Julian Gill reports, that's essentially USAP's and Welsh Carson's response to the FTC. What's good for their business is good for patients.

GILL: Anesthesia Partners said the claims the lawsuit are misleading, that no anesthesia provider has quote-unquote power over cost of health plans.

It's saying its commercial prices have been flat once adjusted for inflation. And then Welsh Carson is actually accusing the FTC of pursuing a broader, radical policy theory. FTC chair Lina Khan has come out and has stepped down in front of this and said they're going to scrutinize these types of serial acquisitions more critically.

Welsh Carson is saying that it disagrees with the FTC's logic, obviously, and says that, ultimately, their investments help patients.

CHAKRABARTI: But that claim is not dissuading FTC Chair Lina Khan from pursuing this novel lawsuit.

KHAN: We'd like the court to find liability and ultimately provide relief. And that relief would entail restoring competition to all of these Texas markets.

And ultimately, that competition could mean lower prices and better service for Texans.

CHAKRABARTI: This is On Point. I'm Meghna Chakrabarti. Now, it's not just anesthesia practices in Texas. Private equity investments are all over American health care. Forbes Magazine reports that 25% to 40% of emergency rooms in this country are staffed by private equity companies.

So what changes are they bringing to health care? Are they bringing the efficiencies that PE often promises? Or not. Joining us now is Gretchen Morgenson. She's the Pulitzer Prize winning senior financial reporter for the NBC News Investigative Unit and author of "These Are the Plunderers: How Private Equity Runs―and Wrecks―America."

Gretchen, welcome back to On Point.

GRETCHEN MORGENSON: Thank you, Meghna, for having me. Great to be here. Okay, so first of all, give us a broader sense about private equity specifically in U.S. health care. Is there a part of health care that it's not in?

MORGENSON: Oh, that's a great question. The problem with trying to understand and plumb this problem is that private equity is very secretive, private, right?

These are private companies and so they don't advertise their ownership. They don't advertise that they're running the emergency department. You don't see in your hospital, in the emergency department, the KKR run emergency department. So it's been a stealth takeover, is how I describe it, of the health care industry.

There are certain areas where it's more penetrated than others. As you mentioned, emergency departments, 40% of the nation's emergency departments are run by private equity-owned staffing companies. There is an estimate of 11% of nursing homes are owned by private equity. That is probably a low number because nursing home ownership records are extremely obscure and hard to fathom.

You can't really see who the ultimate owner is. I will tell you that this idea of how private equity is rolling up. Physician practices, as Lina Khan described in the FTCs case in Texas, 65% of physician practice buyouts in recent years have been done by private equity. So you're talking about big numbers, but not numbers that you would see on the front page of the newspaper.

CHAKRABARTI: Okay, so these are smallish physician practices being rolled up, bought up. We now consider about 9% of the nation's anesthesiologists are owned by private equity. And so you don't know this is happening. And it actually is a problem when you are at your most vulnerable point, which is what you led with the show today.

When you go to the emergency department, do you want to have to worry about who is running it? Are they running it for profits or are they running it for patients?

CHAKRABARTI: Okay. So I want to note Gretchen, though, that this isn't happening in a vacuum as far as I can tell, that let's say over the past decade or so, the rapid acceleration of private equity buyouts of mid to smaller size health care firms is coming in part because those firms and the doctors and health care workers in them are feeling completely burned out and completely exhausted underneath the growing mountain of administrative tasks, of insurance based requirements that they have to fulfill. And we've heard over and over again that it's from doctors, that it's taking time away and their ability away from giving the quality of care their patients deserve to receive.

Now, Administrivia, dealing with bureaucracy, creating efficiencies in those areas. Those are strengths of ostensibly a private equity institution. So when a PE company comes to a doctor's firm and says, "Hey, we can take all of this off your plate. We're going to buy you, but we're going to take all of this administration off your plate." And make that part of your life much easier, with the efficiencies we can introduce.

It's a hard offer to turn away from?

MORGENSON: Yes, that's true, Meghna, but what they find out after these purchases take place is that yes, while the administrative tasks may have been removed, these private equity firms are not just sitting back and letting doctors take care of their patients and spend more time with them.

Okay. So if they were spending 10 minutes with the administrative duties, now those 10 minutes go to somebody else. The private equity firm does not say, "Go spend that 10 minutes more with your patients." They say, "You've got to see more patients. You need to spend less time with each patient. You need to see more patients."

And this anesthesiology issue is very big, and it is nationwide. A recent study published in the Journal of the American Medical Association Internal Medicine found it analyzed more than 2 million anesthesia claims from 2012 through 2017. And it found that in private equity owned practices, costs for patients rose 26% after they were acquired.

So you're talking about doctors that are going to be required to spend less time with their patients and patients that are going to be required to pay more for the services that they're receiving. Keep in mind, health care is a focus of private equity because The United States of America spends 18% of its gross domestic product on health care.

That is a huge money pot. So that's what this is about. So I want to dig a little bit more into why those changes happen as you've reported, after private equity buys a medical firm, because yeah, you're right. It's not just, "We're going to take the administration." When the physicians sell their practice they're relinquishing a lot of control over their practice, right?

MORGENSON: That's right. And they are now going to be told what to do.


MORGENSON: They're going to be told how much time to spend with a patient. They're going to be told what kinds of practices they should be doing, what kinds of treatments they should be doing, tests. They're going to be probably provided lower quality instruments.

I have spoken with dermatology providers who, dermatologists who have been purchased by private equity. And they tell me that the quality of the instruments that they use decline. It's all about increasing profits, Meghna, and that is what is so pernicious about private equity in health care and for-profit health care.

That is, you cannot have those two things. They are in conflict. Are you going to try to increase profits or are you going to try to increase the care you're providing? They're not compatible.

Part II

CHAKRABARTI: Now, Gretchen, I actually want to just go back in time a little bit. To what has made private equity so successful, and then we'll circle back to health care here. Because look, what, I'd say 40, 50 years ago, the growth of private equity was meant to help distressed businesses, right?

And in fact, they did quite frequently.

MORGENSON: Yeah, where this started and where it ended up are two very different things. Okay, so private equity really began in the '70s, but exploded onto the scene in the '80s with the buyout, leveraged buyout gang culminating in the RJR Nabisco deal, which was the biggest. And attracted congressional hearings.

There were concerns about job losses, et cetera. So back then in the '80s, certainly in the '70s, there was a genuine difference between the value of a company in the public market, its stock trading on the public market, that value, and what the intrinsic value of the operation really was. Okay, we had a terrible stock market in the '70s.

We had stagflation. Oil prices were spiking, remember it was an awful period, and the stock market was very much in the doldrums. It really didn't start to take off until 1982, and so through that period, even through the end of the '80s, you had a disconnect between what the stock, what these companies were trading at on the stock market, and what they were really valued at.

Now these leveraged buyout kings, they saw that, they identified that, and they said, "Look, I'm going to profit from that differential. I'll buy the company, and then I'll wait for the market to recognize that it is really more valuable than they used to think it was." So that's what we call arbitrage in our business, but it really is just capitalizing on a misperception, I would say, about the value of a company.

That was one. The second one was what you alluded to, Meghna, which is the distressed idea that you're going to focus on a distressed company, you're going to put it into ship shape, and then in five years, you're going to sell it at a profit because you have improved its operations.

And that was another traditional element of the private equity playbook or the leveraged buyout playbook. But nowadays, this has been going on for so many decades now. These companies have been traded, flipped, passed around, sold, bought. The transactions are so furious that there are very few efficiencies left to ring out of these companies.

CHAKRABARTI: Even in health care?

MORGENSON: In many cases. In many cases. And in health care, the thing that these private equity firms see in health care are big payment systems, Medicare, Medicaid, enormous payers, okay? And that's a spigot, a money spigot that they can capitalize on. So it's been this kind of migration from what I would call, an undervalued market or distressed company play into a sort of, horse trading, transactions-oriented where you're really not adding much value over time, but you have to show more profits.

And so what ends up happening is you end up cutting back on quality. You end up slashing staff. You end up adding costs, because these are all done with very heavy amounts of debt. And oftentimes, these companies actually go bankrupt.

CHAKRABARTI: Right. So that's the using the company as a credit card pattern that we see in private equity.

Now, Gretchen, I want to check something with you. Because I've seen some numbers that practically make my heart stop when it comes to expected returns. I've seen that it's not unusual for PE investors to hope for returns exceeding 20% per year from the companies they buy. Is that reasonable?

Is that an accurate number?

MORGENSON: Okay. Accuracy is important. These companies, when they talk about what their returns are, they have a lot of leeway. They have a lot of leeway to how they value these companies. And so what their actual returns are something of a mystery.

It's all very secret. It's all very private. It's very difficult for outsiders to see into the black box. But I will tell you this definitively, Meghna, that these funds and private equity operations used to generate real returns that were excess of the stock market or the bond market. And this is why private equity became such a focus of pension funds, endowments, et cetera, because they needed those extra returns.

We're not talking about 20%, 20 percentage points more than they would get in the market, by no means is that accurate. But they were seeing higher returns in private equity. And so they were buying into it because they need those returns. They have those obligations for their former workers and for the endowments of the colleges they need to meet, okay?

But now, returns of private equity have reverted to the mean, meaning that they are just pretty much on a par with a Standard & Poor's 500 Index Fund.


MORGENSON: The actual returns have fallen, have diminished, are now on par with what you get when you go to Vanguard and buy their S&P 500 Fund.

CHAKRABARTI: I can imagine.

You made two really important points there, Gretchen. I want to go back to one of them, which is, it's easy to caricature who might be an investor in a private equity firm, right? A billionaire with a monocle. But you said pension funds and things like that. So the money going into these private equity investments comes from more diverse set of places than we might imagine.

MORGENSON: It comes from endowments and public pensions. Those are the two big contributors. They provide the oxygen for this business model. They provide the oxygen that these private equity dealmakers need to continue spinning the merry go round. And that is really an interesting piece of the puzzle.

Because public pensions have, as their beneficiaries, retired workers, retired bus drivers, retired teachers, firefighters, et cetera, and yet they're buying into a business model, the private equity business model that ends up slashing jobs. That ends up slashing jobs, that ends up bankrupting companies and reducing town tax bases when the corporation fails.

Okay, so Toys "R" Us is an example. When that company went bankrupt after private equity got involved, the town where it was headquartered lost one of its biggest tax base contributors.


MORGENSON: So you're talking about a big circle of pain associated with private equity that enriches a tiny slice of the population.

CHAKRABARTI: I see. So the second thing that you mentioned is that previously, until recent times, there was a pretty large delta between an index fund return and what the private equity companies were returning from their investments. So if that delta has shrunk in the health care space, what are the PE companies doing that have bought up anesthesiology practices in Texas or emergency rooms across the country? They still have to have some kind of motivation to increase their profits. That would ostensibly mean cutting their costs, Gretchen? How does that work in health care?

MORGENSON: Okay. It works a couple of ways. And yes, you're dead right that the goal here is to raise revenues, raise profits because they intend to sell these things in five to seven years. That's another piece of the business model, Meghna, that I consider to be unsustainable, right? We look for people with long term visions, of how they want the economy to run or businesses to run.

These people are very short term oriented. Quick flips, okay? So hurry up, make those profits grow so that I can sell this company to somebody else. How do you do that in health care? You raise the costs to the patients. You increase the number of tests that you run. Also increasing patient costs.

You reduce the amount of time that the doctor spends with the patient. You hire physician extenders who are less expensive, labor, to see patients. These are all things that really patients are not probably interested in having done, but that is the playbook and those are the ways that you increase profits in health care.

CHAKRABARTI: Of course, for patients, in addition to the cost question, the real important question is this compromising the quality of care they're receiving, Gretchen.

MORGENSON: That's right. And that's why the study of private equity on nursing homes is so just beyond damning. And important. This was a study that was done, I believe, in 2021.

It was UPenn, academics at UPenn, NYU, and University of Chicago, and what they found was over a long period of time, nursing home residents at facilities owned by private equity experienced mortality rates that were 10% higher than at non-private equity owned nursing homes. Okay? 10% higher death rates.

That translated to more than 22,000 deaths at these nursing homes. And I spoke with one of the academics who had conducted the study, and she said what we found was that they were cutting costs, cutting nursing. Cutting care, cutting the quality of the supplies. That was how they were making their profits.

And that was what contributed to the higher death rates.

CHAKRABARTI: And of course, nursing home residents are a particularly, acutely vulnerable group of Americans, right?


CHAKRABARTI: So small changes to their care can result in the kind of catastrophic outcomes that you just outlined. Go ahead.

MORGENSON: Yeah. And they don't have, they don't have a voice. Okay.


MORGENSON: If you go into a nursing home, you're a family member and you try to get better care for your member or family member who's in the nursing home, you will be drummed out of there.

CHAKRABARTI: I'm seeing also just to get a sense as to the broader spectrum of potential outcomes here.

There was a somewhat recent study, I think out this year, from a group at Johns Hopkins, Harvard Medical School and Oregon Health Sciences University. They found exactly what you were saying regarding the cost increase. That hey found they had a control group of medical firms and a private equity acquired group of medical firms, and they found that in the PE group, the average charge per claim increased 20%.

And they looked at dermatology, gastroenterology, and ophthalmology practices, about 570 practices. So dramatic rise in charges to Medicare and insurance companies, as you described. However, in those practices, they found no statistically significant changes in patient risk scores. Could it be that just the particular vulnerability of nursing home patients gave us that terrible outcome of the increase in deaths?

MORGENSON: Yeah, it's really a good question that I don't know the answer to. The thing that I just keep coming back to is private equity in health care. It would be one thing if you were a firm that was buying companies who make widgets and making those widgets more efficiently, and cutting the costs associated with manufacturing those widgets.

But we're talking about people's lives, right? We're talking about their skin, their eyes, their anesthesia in surgery. We are talking about life and death. And so the efficiencies, quote-unquote, that private equity claims to make can have genuine impact on patients. And that is the key.

CHAKRABARTI: Yeah. And in America's for-profit health care system, I'm seeing some estimates that perhaps more than 70% of doctors across this country work for some kind of private firm, whether it's a corporation or a private, privately owned hospital or a private equity firm, set more than 70%.

So let's actually return to the anesthesiology story that we started with here because we spoke with Marco Fernandez. He's an anesthesiologist and president of Midwest Anesthesia Partners in the greater Chicago area. He had a contract with Advocate Sherman Hospital in Elgin, Illinois, until one day.

The hospital told him a provider network called TeamHealth, owned by private equity company Blackstone, was taking over their contract.

MARCO FERNANDEZ: They just basically told us one day, "We're going in a different direction. You're going to be replaced by this new organization." And there was a gap in coverage. So our contract ended in August and then the takeover was in October.

So for that month of September, there was no anesthesia coverage. So the operating room shut down. That was a huge impact to the community. The community was in an uproar. They lost, actually lost their trauma designation temporarily and to this day, they're not fully staffed. This is two years later. So all those patients have to wait for their surgeries, or they have to get them done elsewhere.

CHAKRABARTI: And last year, Dr. Marco Fernandez and other independent physician owned groups together formed the Association for Independent Medicine to push back against this private equity acquisition trend we're seeing. Gretchen, that brings me to the FTC's lawsuit regarding, in Texas. Is it the first of its kind and how novel is it?

MORGENSON: It's not the first time that the private equity firm has been targeted. This is very unusual, however. I think it might be the second time that the FTC has targeted, in addition to the company that is acting as a monopoly enterprise, they will also, in this case, they went after the owner, the private equity owner.

That's unusual. That's what makes this case very standout to me. Okay? Generally speaking, when you've had antitrust cases, and we did have a period, of course, under Donald Trump when antitrust was moribund. They really weren't concerned with pursuing anti-monopoly activity. Now it has resurged under the Biden administration and Lina Khan, who runs FTC.

And what's interesting, there are a couple things interesting about the U.S. Anesthesia Partners case.

CHAKRABARTI: Gretchen, I'm going to ask you to hold that thought just because we have to take a quick break and I'll allow you to take us through what you think is interesting right on the other side of that break.

Part III

CHAKRABARTI: Gretchen, you were going to tell us the interesting things about the FTC's case in Texas.

MORGENSON: There are a couple things. One is that traditionally the FTC when it tries to go after anti-monopolistic behavior or monopolistic behavior, is it goes for the big transactions.

It looks at companies, transactions and mergers that are 100 million dollars or more. So it's going after these small physician practice "roll-ups" is new. However, they did make the case, I felt, in their lawsuit, that no matter that these were small numbers. They still had the same impact, the same monopolistic impact on the market.

And so this is a kind of a new realm for the FTC to look at the collecting of small entities into a big and powerful entity. That's one.

CHAKRABARTI: Gretchen, can I just jump in here on that one? So being a monopoly is not enough to have crossed the line of federal regulation, but it's also behaving as a monopoly.

And the FTC is claiming that U. S. Anesthesia Partners has done that, right? In terms of, I don't know, price fixing?

MORGENSON: Yes. Yeah. They raised the price of the services, right? And because patients did not have a choice. In the area, that is a monopolistic practice. Okay. And so that's the first thing.

The small nature of these acquisitions makes this an unusual case. And the other one is, again, going up the ladder from the company itself to the owner of the company, in this case, Welsh, Carson, Anderson & Stowe, which is the private equity firm. That is highly unusual. The FTC and the DOJ, for that matter, rarely go up the ladder to an owner when they pursue companies for example antitrust or Medicare fraud.

It, generally speaking, is left to the company itself to defend, pay a fine, and move along. So going after the owner is a crucial difference here.

CHAKRABARTI: Okay. So Gretchen, hang on for a second, because I want to bring Brendan Ballou into the conversation. He happens to be a former special counsel for private equity at the DOJ.

He's a federal prosecutor now, and he's author of "Plunder: Private Equity’s Plan to Pillage America." Brendan, welcome to the show.

BRENDAN BALLOU: It's great to be here and it's great to be with Gretchen.

CHAKRABARTI: So start off by answering, my question that emerges from Gretchen's observation, that it's very rare for the DOJ to climb up the ladder all the way to a PE firm when filing a suit here.

Why is it? First of all, why is that rare?

BALLOU: It's a great question. And I should of course say at the outset that I'm speaking here purely in a personal capacity and not on behalf of my employer. So it's often hard to hold private equity firms responsible for their actions, really in any area of the law.

Antitrust is one of them, but you can look across at tax, at ordinary fraud, wrongful death and so forth. Just to give you a very quick example here, and I think Gretchen and I have both written about this, is the case of Carlisle's acquisition of the nursing home chain, ManorCare, right? So Carlisle buys up ManorCare, executes a lot of sort of standard tactics within the private equity industry, cut staffing, ultimately health code complaints rise, and a resident of the facility dies in an understaffed facility.

She has to go to the bathroom by herself, hits her head on a bathroom fixture, dies of subdural hematoma. When her family sues for wrongful death, Carlisle was able to get the case against it dismissed by saying, "We are not the technical owners of ManorCare." Rather, we merely advise a series of funds whose limited partners through several shell companies ultimately own the assets of ManorCare.

And that was enough to confuse the judge, confuse the plaintiff's attorney, to get the case against it dismissed. And ultimately, Carlisle was never held responsible in that case. And so that's an example of how private equity firms are often able to wiggle out of responsibility for actions that they have effective control over.

CHAKRABARTI: I see. So in terms of describing the nature of their relationship with the sub company that's doing the direct management of the health care, I got it. Okay. But, overall, though, with these sorts of more exotic and wealthy portions of our financial system, the companies are operating as far as they can within the bounds of the law, right?

Until somebody at the DOJ or the FTC says, "Now you may have crossed the line." But with health care, isn't it a little bit different? Because there are so many additional regulations designed for patient safety at the state and federal level, that shouldn't we be seeing greater scrutiny of private equity and its investments and practices already, Brendan?

BALLOU: It's a good point. So two things, one is across areas of law, whether you're talking about antitrust or tax or bankruptcy and whether you're talking about the health care industry or more broadly, our laws not only allow private equity actions like the ones that we've been talking about for the hour. They actively encourage it. And we can get into the details if you want to, but our laws over the past two generations have really been shaped to really incentivize private equity behaviors. So that's one of the challenges that we've got.

The other one is really a challenge. You had a great word there. Exotic. And I think that's exactly right. I've talked with plaintiff side lawyers about the challenges of suing private equity firms, especially in the health care industry. When a nursing home chain is responsible for somebody getting needless bed sores, or needlessly sick or needlessly dying.

The challenges that they've got is private equity firms make their organization structures so complicated that the average person can really understand it. And when I include average people, I'm talking about lawyers and judges, too. So it can often be very hard to figure out who's responsible.

And even if you hold somebody responsible, to get any sort of money from them. Just to give one final example here, I talked with somebody that was looking at private equity investments in the insurance industry. And he was saying to me that just the chart of showing what the organization was, of the corporate structure for this acquisition, just the chart, was 32 pages long.

So if you've got a structure like that, it's going to be really hard to hold anybody responsible for their actions.

CHAKRABARTI: But that sounds like deliberate obfuscation, right? The less information, or the less transparent the information, the harder it is to regulate, de facto, right?

BALLOU: Exactly. That's exactly the goal. In fact, there was great reporting in the nursing home industry in the New York Times talking about how there would be presentations at industry conferences saying, "Here's how you can structure your nursing home portfolio company, specifically to avoid liability" because of that complexity.

CHAKRABARTI: So Gretchen, Brendan mentioned that laws have been shaped to the advantage of private equity firms.

Who's doing the shaping, Gretchen?

MORGENSON: Probably the lawyers for the private equity firms. I don't know because I'm not in the room when these laws are made, but these are very powerful companies, very prosperous companies. They have a lot of money to spend on lobbying. Anytime anyone tries to close the tax loophole that allows these titans, these billionaires to pay far lower taxes than a teacher or bus driver would.

The money spigots flow, and somehow the law doesn't get changed. I wish I could answer that question, but I am generally not allowed in those rooms. Now, I will say, Meghna, that there are laws in many states that could pursue what is called the corporate practice of medicine, and these laws are on the books, have been on the books for decades, over a century, but they are not pursued.

The attorney generals in these states do not go after entities that are breaking the laws, that are on their books barring the corporate practice of medicine. And what that means is not only do you have these people shaping the laws, but you have these supposed watchdogs looking the other way.

CHAKRABARTI: But why aren't they going after it, if the law is a century old and ready to be used?

MORGENSON: You keep asking me these questions I can't answer.

CHAKRABARTI: (LAUGHS) It's because AGs and private equity firms do not answer our calls.

MORGENSON: Exactly. Yes. Why don't they? That is an excellent question. One of the most recent cases was New York State in the AG era of Snyderman brought a case against a dental practices firm, and it was a slap on the wrist. It was ridiculous what the penalty was. It was not even a cost of doing business for the company. So I do not know why state attorneys general have let these laws just go absolutely unenforced, but that would be a huge change if that came about.

CHAKRABARTI: Now, Brendan, I can completely understand why private equity firms and lawmakers wouldn't just open the door to Gretchen Morgenson and say, "Let's let this Pulitzer Prize winning financial journalist come on in while we're shaping laws for the financial sector." But do you have an answer to that very point you raised about who is shaping the laws?

BALLOU: Yeah, I can't claim to be any closer to the room than Gretchen is, but I will say, there are really interesting stories about the effectiveness of private equity firms in shaping the laws that really matter to them. Gretchen alluded to the carried interest loophole just a moment ago, I'd add to that, the story about surprise medical billing, which is the practice of going to an emergency room.

You think it's in your network. You're treated by a doctor, then it turns out you're not. You're billed tens of thousands of dollars or more. This was an industry, was a practice that was extremely profitable to the private equity industry. And they worked hard to keep that in place. In fact, there was a really interesting consensus forming about fixing the surprise medical billing problem in Congress that was bipartisan.

Republicans and Democrats agreeing on this in the middle of the Trump administration, and there was about to be a legislative solution, but an extremely well timed $31,000 donation to a member of Congress who was helping to lead those negotiations helped to blow that up. Now, ultimately, legislation was passed to solve the problem in part, but what's really interesting is, I think it goes to show how effective the private equity industry is in its work, really more effective than just about any other industry in the country.

Then got 150 members of Congress to sign a letter to the executive branch saying, "Okay, here's what we actually meant when we passed that law, and obviously it was in a pro private equity slant." So I hate to say it's as blase as having a lot of money, but boy, they've got a lot of money, but put to really effective use.

CHAKRABARTI: Yeah, so as I look over the financial history of this country over the past 40 or 50 years, another thing stands out to me and that is companies will do what they're allowed to do, right? So that's why laws, they advocate for laws to get changed, etc. But in terms of exercising the executive's right to sue a company when they've crossed lines especially in health care, Brendan, shouldn't we also put some responsibility on the DOJ, on the FTC to have cared more about the growth of private equity in health care?

BALLOU: (LAUGHS) I don't want to get in trouble with my bosses. So I'll say that I think part of the challenge that we've had is private equity has made itself seem incredibly not just complicated, but incredibly boring as well.

You talk to these folks and I'm sure some of your listeners, their eyes are glazing over thinking about the carried interest loophole and private equity in general. I have to say, having talked with a lot of private equity folks, they've made their work seem really normal, really unexceptional, and I talked to folks in private equity, and I have to say they come off as very normal people.

They take their kids to soccer practice and so forth. And yet I think what they've been doing has been less about being a different kind of person. You alluded to the idea of these being monopoly men earlier.


BALLOU: Less being different kind of people, more, greedy or anything like that.

But just better at identifying the legal loopholes in all these different areas and exploiting them in a way that I think very few industries have been able to do.

CHAKRABARTI: Right. And look, we can't, I can't blame a person for being really good at what they do and identify ways to make more money.

I can't, I will not, I can't blame them, but I do in that case, we, as the polity of the United States need to do more to close those loopholes, for example. But Gretchen, we've only got about a minute left here. And on that point, I'm wondering, short of a form of national health, which I'm sure listeners will email me about, that's the ultimate solution here. But short of that, what can be done to rein in, both of you use the word plunder in your book titles, to rein in the plundering of health care here.

MORGENSON: It's already starting, honestly. I think the FTC case is a harbinger. I think that those kinds of cases, you don't need many of those cases to get people's attention. I think if you started to have state attorneys general going after the corporate practice of medicine, you would get people's attention.

So I think those are two areas that really are going to change. We're at a pivotal moment. We also are at a pivotal moment in the financial kind of horizon. We are. Higher interest rates are causing immense problem for private equity firms. Because they rely so much on heavy debt loads. Then, many of these companies are going bankrupt.

Envision, which was a very large provider of emergency department physicians filed for bankruptcy earlier this year. So the costs of this business model are becoming much harder to sustain. And so we have a combination of ways that might change it, but it is starting to happen.

This program aired on November 7, 2023.


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