Private Equity’s Expanded Role in the U.S. Health Care System

WM Oversight: Examining Private Equity’s Expanded Role in the U.S. Health Care System, March 25, 2021

The problem of private equity did not come from nowhere. The public sector has a huge role in how it arose, both through tax policy and the failure to adequately fund public medicine. The District of Columbia is a case in point. D.C. General was closed, not because it was substandard, but because Congress wanted to close it. It also refused funds to open a new public hospital.

I was on the Mayor’s staff when we asked for more money for mental healthcare, including funding for St. Elizabeth’s, which started as a federal facility designed to serve the entire geographic region. When we asked, Congress did nothing, even though mental healthcare is traditionally a state function.

The District of Columbia is in no way unique. The decision to close public hospitals after not providing adequate funding was endemic in the late 20th and early 21st Centuries. We are now forced to live with these decisions.

How did private equity get the money to usurp public hospitals, which coincidentally, they were on the record as opposing, with the money to back it up? The extreme cuts to capital gains rates under Presidents Clinton and Bush. These provided the seed money to then borrow from the Federal Reserve to engage in epic land grabs in both medicine and housing. While it is fashionable to blame one party and not the other, the damage to our economy was bipartisan. I will not bother to name the guilty. It is a long list.

Private equity is an example of vulture capitalism. It takes advantage of funding shortfalls in state and local government or in religiously owned systems who must sell their property to provide for their retirees. That last bit was entirely the result of public policy, which refused to provide for retired religious on the grounds that they hold property. Even when they continue to hold hospitals, the lack of vocations has led to lay management used to corporate perks and cost cutting. Call it virtual private equity.

This type of expert capitalism closed down our mental health system in the 1970s and then called out pension funds who did not meet unrealistic capital requirements, thus allowing the industry to market inferior products to workers who expected better in their retirement.

This is one case where corporations are not solely to blame. Private equity is a small business affair as well as a corporate one. One of the great over-generalizations in economic discussion is to assume that all large firms are corporations or that one form of ownership is bad, while others are good, Capitalism can occur in large and small firms, in corporations, partnerships and sole proprietorships. Use of the term “corporations” is a way not to be seen as a Marxist and a Russian sympathizer. What we used to call big businesses are now referred to as corporations.

The rise of Putin shows that capitalist authoritarianism can take many forms, from state capitalism to oligarchs. In the United States, the old Soviet Union and modern (?) Russia, the form of organization of a firm has no bearing on its true nature. The only difference in recent times is that a modern Republican President brought sympathy with Russian authoritarianism, and its methods, to the White House.

The term capitalism is widely misused. Many conflate it with free markets. They are not the same thing. The key feature of capitalism is the exploitation of workers, consumers, suppliers and (in corporations) shareholders. The key feature of that exploitation is not size, it is the withholding of information. Entrepreneurs, whether they are in the C Suite, Trump Tower or the back office is the ability to monopolize information.

Nowhere is this more true than in private equity. Information is as private as ownership. These operations do not file annual reports, while pass-through arrangements means they take profits as if they were corporate. This practice is not untoward on its face, but have no illusions that these “small businesses” are not big business. This fact is often lost in the rhetoric. Firms go to great expense at election time to make sure it says lost.

There are two options here. One is to simply adequately fund public hospitals and provide decent remediation of what can be considered predatory student loan policies. These policies prevent doctors from handing out their own shingles, requiring them to get jobs in large practices. Allowing private malpractice insurance (and even some public ones) to seek excessive profits contributes to the decline of individual or small group practices.

Adequate funding can include single payer insurance, from a public option to Medicare for All to an entirely public system. See the first attachment regarding the inevitability of single-payer systems. Even without single payer, public hospitals can be reestablished and Catholic hospitals shored up by including sisters and nuns in the public retirement system.

These are big changes. Too big to rely simply on taxes on the wealthy. Ideally, such taxes would be high enough to discourage the payment of large salaries. Such salaries were simply not paid when the marginal tax rate was 91%. Tax reform could bring us back there, not in a direct assault but in the multi-tiered attack laid out in our proposed plan.

The other option is to encourage employee-ownership of both medical practices and hospitals through Employee Stock Ownership Programs. Potentially, such firms may also make agreements with similarly owned firms or join with them, depending on the size of either entity or group of entities.

This can start small, through expanding the ESOP exemption from capital gains taxes to all ownership sales, from stocks to private equity partnerships. Marking inherited shares to market (rather than maintaining estate taxes) would encourage any heirs who do not wish to join the family business to sell their interests tax free. As such firms under more democratic management become common rather than being just a retirement option under ERISA, more aggressive funding options will evolve, as detailed in the second attachment.

Cooperative firms are the opposite of capitalist firms. They thrive on open information. They are the antidote to private equity capitalism. Cooperative firms with their own medical staffs align cost cutting with financial responsibility. Third party insurance is not required, nor is malpractice insurance, when doctors, nurses, medical assistants and managers are all fellow employees. The care is better too.

In short, the options are public social democracy or private voluntary socialism. Either or both options are better than what we now experience. All that is lacking is the will to go forward.

As an aside, a recent paper by the National Bureau of Economic Research asking “Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes” is essential in addressing this issue. I commend it to your attention. You can find it online at https://www.nber.org/papers/w28474

Attachment: Single Payer

Attachment: Employee-Ownership