A bill in the California legislature to increase scrutiny of private equity investments in health care is receiving enthusiastic support from consumer advocates, labor unions and the California Medical Association. But it is facing fierce criticism from hospitals, which fear the loss of a potential source of funding.
The bill, sponsored by Attorney General Rob Bonta, would require private equity groups and hedge funds to notify his office of and seek approval of proposed purchases of many types of health care companies. It also reaffirms state laws that prohibit non-physicians from directly employing doctors or managing their operations, a key reason for the doctors’ association’s support.
Private equity firms raise money from institutional investors such as pension funds and typically acquire companies they believe can be run more profitably. They then try to increase earnings and sell the assets for many times the price they paid for them.
That can be good for future retirees, and sometimes for poorly managed companies that need a cash injection and a revamp. But critics say the for-profit approach is not good for health care. Private equity deals in the sector are coming under increasing scrutiny across the country as evidence mounts that they often lead to higher prices, poorer care and reduced access to basic health services.
Opponents of the bill, led by the state’s hospital association, the California Chamber of Commerce and a national private equity advocacy group, say it would stifle much-needed investment. The hospital industry has already persuaded lawmakers to exempt the sale of for-profit hospitals from the proposed law.
“We chose not to make that change,” Bonta said in an interview. “But we still have a strong bill that provides very important protections.”
The legislation would still apply to a wide range of medical entities, including clinics, physician groups, nursing homes, testing labs and outpatient facilities. Contracts with nonprofit hospitals are already subject to review by the attorney general.
A final vote on the bill could come later this month if a state Senate committee advances it.
According to a Commonwealth Fund report, private equity investors have spent $1 trillion nationwide on healthcare acquisitions over the past decade. They have been particularly attracted to physician practices, with deals increasing six-fold in a decade and often resulting in significant price increases. Other types of outpatient services and clinics have also been in their sights.
In California, the value of private equity deals in health care has increased more than 20-fold from 2005 to 2021, from less than $1 billion to $20 billion, according to the California Health Care Foundation. Private equity firms are closely watching the upcoming legislation but have so far not curbed their investments in California, according to a new report from research firm PitchBook.
Several studies, as well as a series of reports from KFF Health News, have documented some of the difficulties created by private equity in healthcare.
A study published last December in the Journal of the American Medical Association showed that private equity hospitals were more likely than others to have adverse events such as infections and falls among patients. Analysts say more research is needed to examine the impact on patient care, but the impact on costs is clear.
“We can be almost certain that after a private equity takeover, we will pay more for the same thing or for something that has become worse,” said Kristof Stremikis, director of market analysis and insights at the California Health Care Foundation.
Most private equity deals in the healthcare sector are below the $119.5 million threshold that requires reporting to federal regulators, so they often go unnoticed by the government. The Federal Trade Commission is tightening scrutiny and last year sued a private equity-backed anesthesia company in Texas for anti-competitive practices.
In several other states, including Connecticut, Minnesota and Massachusetts, lawmakers have proposed legislation that would increase transparency in private equity deals.
Not all private equity firms are bad entrepreneurs, said Rep. Jim Wood, a Democrat from Healdsburg, but scrutiny is essential: “If you’re a good company, you shouldn’t be afraid of that.”
The bill would require the Attorney General to review proposed transactions to determine their impact on the quality and accessibility of health care, as well as on regional competition and prices.
Critics point out that private equity transactions are often financed with debt that is then owed by the acquired company. In many cases, private equity groups sell properties to generate immediate profits for investors, and the new owners of the properties then demand rent from the acquired company.
That was a factor in the financial collapse of Steward Health Care, a multistate hospital system owned by private equity firm Cerberus Capital Management from 2010 to 2020, according to a report by the Private Equity Stakeholder Project, a nonprofit that supports the California bill. Steward filed for Chapter 11 bankruptcy in May. “Nearly all of the most troubled U.S. health care companies are owned by private equity firms,” another study by the group said.
Opponents of the law argue it would dampen much-needed investment in an industry with rising operating costs. “We are concerned that this will cut off funds that can improve health care,” said Ned Wigglesworth, a spokesman for Californians to Protect Community Health Care, a coalition of groups fighting the law. The prospect of having to undergo a lengthy review by the state attorney general would have “a chilling effect on private funders,” he said.
Proponents of private equity investments point to what they believe to be remarkable successes in California’s healthcare system.
Children’s Choice Dental Care, for example, said in a letter to state senators that the company sees more than 227,000 dental visits annually, most of them to children who use Medi-Cal, the health insurance program for low-income Californians. “We were able to expand to 25 locations because we received capital from a private equity firm,” the group wrote.
Ivy Fertility, which operates clinics in California and eight other states, said in a letter to state senators that the company has increased its ability to provide fertility treatments through private investment at a time when demand for them is increasing.
Researchers point out that private equity investors are not alone when it comes to profiteering in healthcare, which even affects nonprofit organizations. Sutter Health, a large nonprofit hospital chain, for example, settled a lawsuit brought by then-Attorney General Xavier Becerra for $575 million over unfair contracting and pricing.
“It’s helpful to look at ownership classes like private equity, but ultimately we should look at behavior, and anyone can do what private equity firms do,” says Christopher Cai, a physician and health policy researcher at Harvard Medical School. He added, however, that private equity investors are “more likely to engage in financially risky or purely profit-seeking behavior.”
This article was produced by KFF Health News, publisher of California Healthline, an editorially independent service of the California Health Care Foundation.
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