Bitter medicine: private equity moves into hospital ERs

Katie Porter did not go to the nearest hospital when, in the middle of her 2018 campaign for election to Congress, she began suffering debilitating pain in her abdomen.

“I knew enough to choose to go to an in-network emergency room when my appendix burst,” said Porter. In agony, she insisted on being taken to a hospital that was covered by her health insurance, even though it was further away.

“But my surgeon was out of network,” Porter added. Soon afterwards, she received a demand from the doctor for about $3,000.

Porter had learnt the hard way that her hospital, like many others in the US, did not employ the doctors who work on its wards.

It is a feature of America’s fragmented healthcare system that the private equity industry has seized upon. Over the past five years, some of the country’s biggest buyout firms have snapped up the companies that employ emergency room doctors, capturing some of the 18 per cent of gross domestic product that the US spends on medical care.

Critics have said the result was an increasingly concentrated market in which a handful of Wall Street-backed companies have the power to control how emergency medicine is practised and paid for. The buyout firms and some within the healthcare industry dismiss this fear, saying scale is necessary for doctors to hold their own in daily negotiations on bills with powerful insurers.

Texas provides a striking example of the inroads private equity has made. Three companies employ physicians that staff about one-quarter of the state’s 384 emergency rooms, a Financial Times review of job postings and regulatory records has found. This pattern is repeated across the country. A single company, TeamHealth, reported in 2017 that it provided emergency staffing to 17 per cent of the hospitals in its target market.

TeamHealth was sold to Blackstone for $6.1bn in 2017, at about the same time that its smaller rival American Physician Partners (APP) was taken over by Brown Brothers Harriman. The biggest physician staffing company, Envision, was acquired by KKR for $9.9bn the following year.

Trustbusters

Now, as the Biden administration toughens up competition policy after years of leniency, antitrust enforcers are increasingly receptive to arguments that private equity money is distorting the provision of healthcare.

The Federal Trade Commission, whose chair Lina Khan has vowed to take a “muscular” approach to policing private equity deals that have “life-and-death” consequences, hosted a listening session to probe the consequences of healthcare mergers earlier this year.

A series of lawsuits filed in the past two years by employees, doctors’ groups and insurance companies sketch a picture of those consequences, alleging that some of the biggest firms have tampered with clinical standards to cut costs or raise bills, or in some cases engaged in systematic fraud.

Such financial disputes, together with a potential regulatory crackdown, threaten not only private equity’s profits but the financial stability of a life-saving industry that is saddled with billions of dollars of debt following the buyout deals.

“I call it a monopolisation,” said a Texas doctor who has worked for two of the three biggest private equity-backed staffing companies and laments the decision of some medics to sell the businesses they have built. “It’s like our colleagues are selling the future generation of medicine.”

Turning doctors into executives

Even before private equity got involved, hospitals had compelling reasons to outsource the staffing of their emergency rooms, often relying on small companies owned by the doctors themselves.

Some hospitals did not want the administrative overhead of organising rotas or negotiating with insurers. Others operate in states where for-profit hospitals are barred from employing doctors to practise medicine, a measure that is intended to prevent the profit motive from intruding on treatment decisions.

Those incentives created an inherent tension between doctors both running companies and providing care — and opened the door for private equity.

Chris Newton had only just finished his medical residency in Michigan when in 2002 he joined Emergency Physicians Medical Group (EPMG), which ran the emergency room at St Joseph’s Hospital in Ann Arbor. “I really didn’t know what EPMG did,” said Newton.

Twelve years later, he was chief executive of a business employing 500 doctors across 35 emergency departments, just as the conflict between medical providers and insurance companies was coming to a head. In response, he hired an investment banker to figure out whether they should sell to a bigger rival or to a private equity firm.

“We’d grown, we’d built our infrastructure, but we needed to be bigger,” said Newton. Many executives believe that emergency medics have become particularly vulnerable to insurers trying to squeeze payouts because they are required by law to treat all-comers.

In 2016, Newton sold the doctor’s group he had joined as a young medic to Envision, the biggest provider of staffing for hospital emergency rooms. Two years later, KKR bought the enlarged group, making Newton one of the most senior executives at a company that hoped, under private equity ownership, it would have the financial heft to stand up to the biggest insurers.

Insurers versus private equity

For a private equity industry that has made billions of dollars and created empires by assembling car washes, dentists’ offices and local businesses of every conceivable kind into efficiently run national chains, a “roll up” of hospital emergency rooms seemed like a sound plan.

But private equity firms had not reckoned on a legislative backlash that made it harder to collect payment for medical care that they are required by law to provide.

Two years after her election, Porter, who is a Democrat, joined a bipartisan majority in Congress that passed the No Surprises Act, which bans medical providers from billing patients for charges that have been rejected by their insurance companies.

Envision and Blackstone-owned TeamHealth both campaigned against an early version of the law, which they argued would have enabled big insurance companies to set rates unilaterally. TeamHealth said it had long eschewed so-called surprise billing as a matter of policy and Envision ended the practice after a new chief executive, Jim Rechtin, joined in 2020.

With patients now safe from surprise bills, Rechtin said, insurers were free to press the negotiating advantage created by a 1986 law that requires hospitals to treat emergency cases regardless of ability to pay. “A subset of health plans began to say, in effect, ‘Hey, if you have to see my patients, regardless of whether I pay you, why should I pay you?’”

However, insurers claim that doctors’ groups exploit the absence of an upfront negotiation to charge unreasonable prices for emergency care.

The stand-off has spawned an expanding legal battle that casts an unflattering light on insurance companies and physician staffing groups alike.

America’s biggest health insurer, UnitedHealthcare, has filed lawsuits against Envision and TeamHealth, alleging that both companies drastically overcharged for routine encounters by submitting bills indicating that patients would have risked death or permanent impairment unless they had received immediate, complex care.

In one case cited in a lawsuit filed in Tennessee last year, TeamHealth allegedly demanded $1,712 for treating a 23-year-old man who walked into a hospital at midnight complaining of epigastric pain after eating a chilli dog. Court documents state that the patient was given an antacid and sent home.

UnitedHealthcare alleges fraud in about 60 per cent of the highest-cost medical bills submitted by the two private equity-owned companies, with the insurer saying it has made $100mn in overpayments to TeamHealth alone.

Similar allegations have appeared in testimony from doctors who have worked in private equity-run emergency rooms. Caleb Hernandez, a physician who worked at various hospitals in Colorado, claimed in a lawsuit that he had been required to falsify records to show that he had participated in the care of patients who were actually treated by less-qualified staff, so that TeamHealth could claim reimbursement at a higher rate. The case was settled; terms have not been disclosed.

But TeamHealth and Envision argue that they are the real victims of a long-running campaign by UnitedHealthcare to avoid paying legitimate medical bills. Their arguments have met with some success. Last year, a Nevada jury ordered UnitedHealthcare to pay a TeamHealth subsidiary $60mn in compensation and punitive damages connected to one such claim.

TeamHealth said such episodes demonstrated that it “has the resources and scale to fight back against giant insurance companies that are exploiting their huge size to slash payments to doctors”. UnitedHealthcare said crucial evidence was withheld from the jury and is appealing.

“I don’t think anybody’s a saint here,” said Mark Miller, who advocates for healthcare reform at Arnold Ventures, a philanthropic fund set up by billionaire energy trader John Arnold.

“It’s true that the insurers engage in claims denial, basic hassle and all kinds of other activities that from a physician’s point of view could be very unfair,” said Miller. “But consolidation is inherent to the private equity business model and one huge outcome of consolidation is prices go up.”

The battle in Texas

The doctors at Texoma Medical Center in Denison, Texas did not understand how private equity was going to change the way they worked until six months after the takeover.

“They came in saying that nothing would change,” said one Texas doctor at an emergency department that was acquired by APP. “They didn’t do anything for six months and then they put the model to work.”

That model is spelt out in a presentation given by APP executives as they sought a cash infusion of $580mn, a copy of which has been seen by the FT.

“Any potential negative impact resulting from the No Surprises Act” would be repaired — the presentation assured potential lenders — by cutting doctor wages, linking earnings to “productivity”, replacing doctors with less qualified personnel and reducing staffing.

APP staffs at least a dozen emergency rooms in the Houston area, according to job advertisements published on the company’s website. Medics in the city are suing to extricate themselves from non-compete agreements similar to the one presented to doctors at Texoma, contending that APP’s efforts to cut costs and boost profits ended up blighting the emergency rooms with infighting and mismanagement.

One Houston doctor is accused of diverting performance payments that were due to his colleagues by billing insurance companies for more hours than he actually worked, according to a complaint filed in Harris County against several APP subsidiaries.

Another doctor allegedly told colleagues to work while unwell, appearing to circumvent Covid-19 protocols by communicating “his ‘four Ms’: Motrin [ibuprofen], mask, man up, must not test”, the complaint added.

The APP subsidiaries named in the lawsuit have denied the allegations. APP and Brown Brothers Harriman declined to comment.

The escalating fights over doctor pay and working conditions may partly reflect an industry hit by rising costs, tougher reimbursement negotiations and a shortage of patients, as the risk of infection made many people wary of setting foot inside a hospital.

APP’s effort to raise new debt ultimately failed, forcing the company to negotiate a restructuring.

Meanwhile, after a lengthy negotiation, Envision this year used a complicated legal manoeuvre to present its creditors with a choice between accepting a haircut on its debt or being pushed to the bottom of the priority queue for repayment. And in October, a downgrade from rating agency Moody’s pushed TeamHealth deeper into junk territory.

Back at Texoma, the medics plotted a rebellion. Unwilling to embrace corporate management that they felt worsened patient care, yet reluctant to risk a costly lawsuit, they wrote a letter late last year to the hospital’s chief executive, asking him to help them take back control of their emergency room.

“The acquisition felt more like a hostile takeover and had a devastating impact not only on our morale but in patient care and quality metrics as well,” said the letter, signed by five doctors last December and seen by the FT.

The rebellion bore fruit. Texoma said in a statement that it “no longer contracted with APP for ER physician services”. APP’s removal paved the way for the doctors to set up their own staffing company at the hospital.

But such outcomes are rare. According to APP’s presentation to lenders, issued in November 2021, only one contract termination had occurred in the company’s history.

“We were able to pull it off,” said one of the Texoma doctors. “The spirit is back. It’s not about how much money they can take from you, it’s about taking care of patients.”