To me it seems like PE has simply discovered a loophole in the system. We want a system where creating value for people is rewarded, but PE has found a way to legally get the rewards without improving society. Normally this is called a scam or a fraud, and there are laws for standard stuff like taking people's money without giving them what you promised.
For PE however, they've found a way around it, using the machinery available in the economy. For instance, once you are able to pay out a dividend that covers your cost of purchase, whatever comes next doesn't matter a whole lot from an investment point of view. You may have saddled the target with a huge debt, but that's a heads-I-win-tails-you-lose situation. If the firm does ok, PE actually win more. If it goes bankrupt, oh well. PE firm is still doing fine.
The risk is entirely on all the other interested parties: employees and customers.
But because we only have one side of the "created value" balance, all we can really see is some PE guys get paid. We don't see the other side, which is pretty hard to untangle. You can make an argument that everyone is better off with society organized this way, but you can't really ignore that many people seem to think they're worse off in this world.
I think it should be illuminating to balance narratives like this with simple questions along classical economic lines:
1. Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new.
2. When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
I don't necessarily think the conventional prestige media narrative around PE is wrong, but it never seems to get around to asking these basic economic questions. It can't be as simple as some metaphor where bandits are roaming the economic countryside pillaging innocent victims. Voluntary transactions are occurring and we need to understand why to address any underlying issues.
"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action. Whatever underlying issues are making healthcare an attractive PE target will probably persist, and maybe get worse, if all we do is pass some kind of "PE bad, stop PE" law.
My current working theory. Happy to hear from any of the actual PE people who are reading this.
1. As you can imagine, not everyone has the wherewithal to launch a PE firm. Only people who are well connected in the financial world will get access to the funds. People who have friends in the investment sector for instance. There's plenty of stories about how VC (which isn't the same thing) investment is hard to get a meeting for if you don't know someone in the firm. PE works in a similar way, certain people know the players and get the deals together. Of course a lot of it is a promise of future business.
2. When a firm is acquired, the M&A advisors that did the deal get paid. When a firm is restructured (from bankruptcy), the same happens. Lawyers as well. These people all get paid to make the deals happen. Part of what happens is the M&A people will talk someone in the lending department into doing the deal. And remember it isn't just one bank or one lawyer or one lender on each deal. The lenders will all take a piece of the debt, which can be sold on (eg packaged in various tranched products) to investors (pension funds etc). If you smooth out the poop enough it doesn't smell so bad.
That's what I can glean from my far corner of the financial world, while I do work in finance I'm pretty removed from PE.
1.) PE is enabled by easy money. If you look at the PE industry, the entire sector was enabled initially through the rise of junk bonds in the 80s, bonds so "worthless" but cheap issued by high risk companies (everyone was issuing bonds back then) with high reward for the winners - kinda like VC as an investment. In recent history, it was the ZIRP and of late money-printing. Easy money with high returns always pulls out money from more conservative investments like government bonds or blue chip stocks, and into more risk-tolerant sectors like PE and VC.
2.) Underwriting banks issue the debt for the PEs. They get paid handily, both from the constant debt payments PE firms take out of cash flow and from repeat underwriting business as investment bankers for future deals. Banks have their own ways of disposing junk debt that fails, but usually PE debt doesn't fail - the only ones being shafted are the company employees and the company itself. The management of the company, the owners and shareholders of the company, and the PE firm itself all make out of it like bandits.
Nowadays, the traditional bread and butter of PE, such as leveraged buyouts, are mostly gone, with most of the returns coming from other avenues such as Real Estate (like buying up homes in Western cities), Emerging Markets and more passive investments in family/practitioner-owned businesses, like the Healthcare space.
Full disclosure, I don't work in finance, so I may be getting a bunch of this wrong.
> Why is private equity ending up with all these resources?
Because they have cash, mostly from pension funds and insurance companies.
> Who is selling to them and why?
The doctors running the practices, more generally they're rolling up companies in relatively dispersed industries where they believe they can make money.
In the best case, this is because replicating administration across many SMEs is much less efficient than centralising it. In the worst case, it's a way to buy them companies with the cash flows of the company themselves, and pay out fat dividends while gutting the actual business.
Why didn't this happen before?
Really low interest rates super-charged the amount of money that PE could borrow , and helped them raise money because insurance and persion funds needed to get above premium returns which were hard to find because of said really low interest rates.
Additionally, banks became much less likely to lend money since the 2008 crash (because of requirements around capital buffers) so PE was basically the only game in town.
Honestly though, I think the good times are over for PE, as most of the industry (and finance in general) has been cushioned by a low interest rate world, and as debt starts to cost real money we're gonna see a _lot_ of these bets unwind.
> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions.
Banks. Again, these loans are assets, and assuming that the business continues as normal and interest rates don't rise, these were OK(ish) risks. More importantly they built a bunch of relationships with the PE people, so it wasn't about any one individual loan, but rather the constant amount of deal flow.
This is where discussions break down because there's broad disagreements on what is and is not considered "voluntary" - there are ethical/moral traditions that claim nothing is voluntary, while others that claim everything is.
We can gain clarity by defining the opposite then: Involuntary
So, what set of circumstances would be required to declare that someone is doing labor "Involuntarily?" and thus there is no "free market" for labor.
For example, would you say that the person who is manually sorting trash out of recycling for <$40,000/yr [1] is doing so voluntarily?
Maybe someone really loves that and wants to do it and would do it for free. That's possible but unlikely. Maybe someone made decisions such that this is the only job that they can get without moving or some other major life decision. Is that still voluntary simply because they are in that position? Assuming they aren't disabled, they can always put their things in a bag and walk to some place with more options. What of people that are disabled then? How much of what they do is voluntary? You get the point
The challenge then is asking, given that there is no OBJECTIVE answer to the question of what is voluntary (Extreme example: You should be constantly trying to break out of prison, otherwise you doing what the guards tell you to is "voluntary") then "voluntary" shouldn't be a discriminator on whether society has something to say about a transaction between people.
Extreme (unreasonably IMO) freemarketeers view individuals as atomic complete units and that's the end of the story. So irrespective of starting or current positions EVERYTHING is voluntary and the world is all-v-all pvp no hold barred competition. That's who is in PE and finance, so that's what you're up against.
> ... someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
I listened to a podcast interview with a financial professional who advises public pension fund boards. What he said in all but words was that, yes, the political appointees who actually vote on decisions are perpetual suckers.
1 - why didnt this happen before? Thwre was never this much of money created in the system, and Capital was never this cheap.
2 - its usually employees, and sometimes even customers, who are non equity shareholders but long term beneficiaries of the health of the company. Workers usually are not organized well enough to repel a a saavy PE firm. But careful, in some cases, PE may be liberating a firm being sucked dry from low-productivity workers or richly paid pensioners. Its hard to know which is which unless you are diving into the details.
PE is not wrong, just like unions are not wrong, but what matters is what is their management style. Parasite, or builder?
> Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new.
PE as an investment strategy was pioneered by KKR in the 60's, beginning with the acquisition of family-owned businesses facing succession issues. The strategy exists because there's really poor liquidity for private companies. If you're a founder who wants to sell your stake, you either:
1. Sell to a strategic buyer
2. Sell to an individual
3. IPO
4. Sell to PE
The first three options may not be always viable at a given point in time (aka illiquidity). Strategic buyers aren't always looking to buy, an individual may not have enough capital, and IPOs place a huge amount of reporting burden on a company. PE is the only reasonable exit option for a huge swath of private companies. Take a hypothetical family-owned supermarket chain with 10 locations across 3 cities in the midwest. All the kids are terrible successors. Who's going to buy it?
1. A strategic buyer, such as Walmart, may not be interested right now.
2. An individual probably doesn't have enough enough money to buy the whole thing
3. An IPO saddles the business with reporting requirements that simply don't make sense for a supermarket with only 10 locations
People sell to PE because it's often the only way to exit. Almost all bootstrapped companies belong in this category. At the end of the day, PE funds are simply groups of professional investors that specialize in buying out companies. If they are poor investors or poor operators, they will tank the company. If they are good investors and good operators, they will sell the firm for a profit in the future.
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> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
Many people offer debt, from private credit funds such as Golub Capital to bank syndicates. The best lenders are not suckers and the best PE funds almost never default. Oftentimes, the PE fund itself is collateral. PE funds that regularly default will have a difficult time finding a lender.
People also misunderstand the purpose of debt. It's simple math:
You want to buy a company for $100M. You can buy the entire thing with cash and sell it again after it doubles in 5 years, netting yourself $100M, giving you a 1x return.
Alternatively, you can pay $20M down and borrow $80M at a 10% interest rate (simple interest for ease of calculation). When you sell it for $200M in 5 years, you net $200M - $20M - $80M * 1.5 = $60M, giving you a 3x return.
Obviously, you've also increased the risk - your business must be capable of paying off an extra $8M a year in interest.
Ready for a fun conspiracy theory? Guess where most PE guys start (i.e., where their base professional network is developed, where their expertise is, etc.). If you correctly guessed "Ivy League undergrad and business schools" and "investment banking", you can probably tell where I'm going with this. The gameplan is simple: lend your buddy the money to buy the business. Now you have a line to the person who has the most access to data about, if not control over, the direction of the business. Wherever it happens to go, you can be ahead of the market. Long if it's going to survive and grow; short if it's doomed. He's happy because the decision to be lenient or aggressive about repayment lies with his own contact - you.
How do you get businesses to agree to your terms? Well, they hired consultants at some point. Oh, those guys are your buddies, too. You have acquaintances on the BoD, too.
Why go through all the trouble? Besides the fact that you're becoming filthy rich, you also have the opportunity to remove rivals and consolidate markets under an n-opoly. More money. More control.
>"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action.
How about fraud and insider trading?
I realize that this is a simplistic and somewhat paranoid take on the matter, but in a society with a broad and continuous history (distant and recent) of corruption at elite levels, maybe securities violations and revolving door employment aren't just for our politicians. I wonder if we're dealing with Occam's Razor: how are PE firms achieving phenomenal profits while the businesses they use to do so die? Easy: they're cheating.
The victims never consent to the sale. They have no say in the transactions that victimize them. You're looking at two parties making a transaction and assume that those are the only two parties that are part of the transaction.
> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
In at least some of the cases, the answer is absolute corruption with PE paying the other party “on the side” to sign off on a deal only a sucker would agree to.
See for example this piece of investigative journalism into Medical Properties Trust and just how many red flags and obvious bribes were involved (not to mention potential murder to cover up their misdeeds!!): https://prospect.org/health/2023-05-23-quackonomics-medical-...
> Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new.
Exploiting financial loopholes is like hacking. We see more hacking these days because more people depend on these systems, and more exploits are found.
Note: "hacking" can be defined as using a system in a way it was not intended to be used. Hacking is also punishable by law. PE firms and the like should not get away simply because they are following the law, as they are abusing the law in the same way as hackers abuse computer systems.
>1. Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new.
Centrally planned benchmark interest rates below market equilibrium took capital away from activities that produced value today and handed it to people who promised unrealistically optimistic future growth. Central planning doesn't work.
People have gone from criticising the FOMC to openly mocking it. Google 'transitory meme'.
2) Older doctors, stomatologists etc... Running an individual practice is a challenge, requires constant investment and learning and at some point in life there is an incentive of larger cash out.
And why? Because as West deindustrialized potenial for profit lays in high-value services. Instead of an aluminium smelter you purchase 100 of orthodontist practices. After purchase you cut on costs, raise prices and the investment pays out rather quickly....
> someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
The lenders in a PE buyout are securing that loan on the assets of the purchased company. Real estate, brand names, IP, capital equipment. Their worst case scenario is that stuff all gets sold off and they get paid back from the firesale proceeds.
For #2 - I'm not a PE insider, but I'm pretty aware of a lot of corporate dynamics in big tech, which increasingly seems like it's indistinguishable from any other corporate sector. I think we have a habit of thinking of companies/firms as individual actors deciding what's in their best interest, when in reality it's basically an oligarchy of either C-suite execs or boards of directors determining what's going to happen to the rest of the company. If these people want to get rich quick, and I'm guessing they do, since this is probably the end game for 99% of them, then private equity is their answer. They likely don't really care about the employees or the future of the company as an end in itself, just a means to enrich themselves, and so if PE presents this opportunity without those strings attached (i.e. by splitting the dividend recapitalization or the real estate leasebacks with the execs in the form of 'bonuses') the execs/boards will likely take it.
TL;DR - PE can't exist in its current form without extreme power/ownership imbalances within the firms they take over and run into the ground. This has probably been increasing over time, hence why PE has been getting worse over time.
> To me it seems like PE has simply discovered a loophole in the system.
The fundamental loophole is that "the free market" is practically a religion in the United States (the so-called Invisible Hand taking the role of a god doling out rewards and punishments), and a significant portion of the population is vehemently opposed to any regulation of capital. You can even see this attitude in some of the comments here, where commenters are claiming that the problem is too much regulation rather than too little.
Moreover, political campaigns are financed by private "donations" (i.e., legal bribes), so the lawmakers themselves are practically indebted to wealthy interests who don't want to be regulated.
In the US, the problem is too much regulation but that regulation comes from different levels like insurance companies, medicare, medicaid, etc.
I know somebody who owns a therapy business. Medicaid rates have not increased in 15 years and increasingly make it harder and harder to do your job. The level of stress and pressure it creates is intense.
What do you think is going to happen when private equity comes around and offers an exit?
I can't speak for the pressures on doctors as confidently, but I can assume there are similar issues.
So what you end up with is regulatory pressure that is forcing the market to a certain position, which makes private equity seem like the only realistic escape. In a true free market, this wouldn't happen or it would be significantly more expensive for the PE firms to make acquisitions. The businesses would either fail quickly or become successful enough to increase their rates and thus the compensation for their employees and owners, which removes incentives to sell.
I was at a sporting event earlier this year where I overheard an exec from an insurance company (I was a guest of somebody with pricey tickets). He was complaining about how a hospital was forcing them to increase rates after being willing to drop them as an insurance provider, because the insurance company would lose all business in the area of the hospital wasn't on board. It's a microcosm of the stuff happening behind the scenes.
I want a political cartoon that shows "The Free Market Ideal" with a bustling market full of wooden stands with fruit and produce, handmade goods, handmade signs, lots of people making choices and talking with the merchants one-on-one, haggling over prices, etc.
The next cartoon pane shows "The Free Market Reality", and it's a bunch of tired looking people standing in line for one of two automated computer terminals.
The truths portrayed would be: Those selling in the market have automated processes, there is no talking with the merchant, no haggling over prices, and there are not dozens of carts to choose from, in many markets there's 2 or maybe 3, or sometimes only 1.
For me and my friends free market is not a religion, it is thoroughly thought out concept that proved it self over and over again.
I this your count misrepresent the reality.
In my mind, people who oppose free market capitalism usually don't understand how it works.
The good thing is that reality is what settles the debate. What happens is that people vote with their feet --- and millions of ambisious people from countries where there is less free market economy are desperately trying to come to US to realize their full potential, but not the other way around.
People often see the United States as the ultimate free market, but compared to other countries it can be seen as pretty heavily regulated.
According to the Heritage Foundation's Economic Freedom ranking, it ranks 25th, well below "socialist" states like Denmark (in 9th place) and Sweden (in 10th place).
If you believe this, you should find it pretty easy to indemnify me for the hospital I am starting where I will operate and practice medicine. Be aware that I have no degree in medicine and have majored in Mathematics. Since the free market is a true religion, there must be no regulation preventing this. My hospital is able to compete on pure outcomes.
Of course, I don't actually think you believe this bit about the free market. I think you've been trained to rant here because this community rewards views like that.
More like running many kinds of businesses has become more hassle than its worth.
Medical malpractice premiums are very high, insurance payouts are stingier, and medicine has become more capital intensive than ever as newer medicines and diagnostics increasingly dominate, along with an aging population that needs more intensive care.
Doctors report being more burnt out than ever. It's an attractive proposition to outsource the hard and messy stuff to a firm that knows the business angle well so that they can keep their sanity and focus on what got them interested in medicine in the first place while still getting a great salary.
I don't love the situation, but let's not pretend it happened in a vacuum.
> Doctors report being more burnt out than ever. It's an attractive proposition to outsource the hard and messy stuff to a firm that knows the business angle well so that they can keep their sanity and focus on what got them interested in medicine in the first place while still getting a great salary.
The corporatization of medicine is one of the major causes of burnout, not an escape from it. I am not aware of any physician who enjoys things like things like "all hands" meetings with the CEO and CMO to talk about the "new vision" for the group. Or doing several different annual/biannual compliance trainings for meaningless BS. Or having to go through several layers of internal bureacracy if they want to buy a new piece of equipment. Or having zero say in the hiring process for the ancillary staff that they work with. Or having very little say in how many patients they see during the day, or during which hours, or which types of diagnoses, or how the clinic staff does intake and rooming.
The docs who are selling their practices to PE are doing so to cash out right as they go into retirement, not to outsource their admin work. Admin work is already outsourced in the private practice model. The practice hires ancillary staff for clerical work and contracts an accounting firm for help with the financials.
No, you've completely misdiagnosed why PE is involved.
It is involved because there is slack on the system in the form of downtime, and it figured out that if it just buys up all the doctor's offices, makes the doctors rush through the cases, and keeps them busy seeing patients every working minute, the practice and it's owners will make way more money.
Quality of care will decline, but unless the doctor is actively doing surgery, or something else risky, whatever money they lose due to the decline in quality will be more than offset by grinding through patients quicker.
It's almost impossible to sue a doctor for malpractice in Texas, yet the exact same problem with PE is happening there, too.
Vets are another example where this is happening - and again, it's not because of frequent $XYZ,000 malpractice settlements. Anything that's not billable hours seeing patients is considered to be damage by the system, and capitalism tries to route around it.
This would be a good argument if it were only medical practices where PE was active and having a malign effect. But that's most definitely not the case.
Regarding burnout I know individuals in the medical field who wish they could control their schedules by reducing the number of clients per day, but they simply are not allowed to because leadership expects them to turn certain levels of profit.
Very well put. And this has been going on for a while. A decade ago the NYT had a great article on how private equity destroyed Simmons Mattress: https://archive.is/uGYrT
And you're right that the effects are obscured. I happened to be talking with an optometrist earlier this year. He and his partners sold their practice to a PE firm on the promise of making everything better. But he had started to moonlight at somebody else's non-PE practice because the PE overlords kept making things both worse and more expensive for the patients, and less and less satisfying for the doctors. And all of this was explained in a hush-hush tone, presumably because there were NDAs involved.
> You may have saddled the target with a huge debt
I’m not sure that’s the model PE is using in healthcare. My impression is that they’re buying hospitals and medical practices, then obscuring the cost of actually providing care, so they can charge insurance companies not something reasonable like cost+20% but rather the maximum amount they think they can get out of the insurance company. Their financial modelers figure out after each procedure the max they can charge based on the procedure, the insurance company and plan, patient’s finances, etc.
The net effect is to drive up medical insurance costs across the country, impoverishing and bankrupting many people while a small number of PE folks get rich. It’s an entirely extractive business model, not wealth-creating or innovation-producing.
Laws that simply require total transparency in medical care pricing and pre-publication of prices for all procedures and drugs would probably go a long way toward fixing this, and in a capitalism-compatible way. We require transparency among publicly traded companies, SEC has extensive rules about that, but less so for private ones like hospitals and medical practices. That’s the loophole PE is exploiting.
You are actually right, I focused too much on the financial angle and not the operational.
I myself was "affected" if buying a shitty burger qualifies as a form of victimization. Ed's Easy Diner here in the UK totally changed their burger after getting acquired, to something inedible.
This PE-driven enshittification is actually the more important thing about it: every damn thing in society is made a little bit worse for the consumer (and the employees) due to people buying up the businesses and quite directly making everything about the service worse.
Many arguments for sketchy business moves like ticket scalping or PE / market making is that they "create liquidity"
Who is to say that a business should be liquid? Why? What is the value in making it easy to bail on your responsibilities, and why should we encourage people to quickly build a complicated and powerful system and make it easy for them to recuse themselves of that duty?
I see your point, but otherwise you'd be punishing people for pursuing essential lines of work. A software engineer at a FAANG gets to enjoy liquidity without scrutiny even if they're just facilitating the sale of ads. Why shouldn't a doctor who saves lives get to do the same?
You really nailed the problem with the financialization of everything.
I’m busy figuring out how we got here, and how to get out of it but you’ve perfectly described how the incentives are flipped.
I’d further add that regulatory capture means that financialization is a ratchet process, so undoing it is multiples more difficult than putting it into place.
I live in Canada, where we have socialized medicine. Our survival rates for major cancers are on par the US and our infant mortality rate is lower, though we spend far less. We certainly have problems related to physician pay and cost of living crisis, but we are dealing with them. A lot of the problems we have here are the same as in the US: not enough nurses due to burnout, retiring physicians, etc.
I have never once in my life thought "I sure wish there was somebody in the middle extracting value from this whole situation." Contributes absolutely nothing. Doctors are plenty efficient (pathologically so) and no MBA is going to speed things up. Long term outcomes are ideologically opposed to short-term capitalism. You cannot relate a reduction in type 2 diabetes or stroke cases 20 years later to a quarterly report. It's insanity to have them involved at all.
> I live in Canada, where we have socialized medicine. Our survival rates for major cancers are on par the US
That's not really true. Cancer is one area that has been extensively studied over multiple rounds of years-long comparative studies, and while Canada is not as far behind the US in survival rates for cancers as other developed countries are, it's still decisively behind the US.
You're correct that the middlemen here serve no purpose and are effectively leeches upon the system (with patients paying the price in the end, with both their wallets and their health). However, cancer is not the example that proves this point - it's one are where the US system does quite well, by the numbers.
I think its more of a systematized rentiership rather than fraud. There's no difference between local ownership and private equity except for the level of systematization.
With that said, I do agree that we've rewarded this form of rentiership and also enhanced the barriers to entry for other forms of private ownership (like a partner owned firm). This is in place of value created as a source of wealth, which the tax system has entirely devalued
The whole practice of a LBO does seem like a fraud almost. I dont understand how a buyer can "lend" to the purchased firm without bearing actual risk perhaps I don't understand the mechanics there fully
On top of this, most of it is leveraged capital at a fraction of the actual cost, so the risk is almost vacant for the firms. Corrupt banking leads to infinite leverage for the super-wealthy to buy up / control it all. They do not need to care because they risk little and still profit even if it crashes because the tangible assets have shifted to their side of the gap.
Is it leveraged? Or is it often times money from underfunded government employee pension funds and whatnot, seeking higher returns to make up for the underfunding from previous decades?
Think the economic reality is that the days of a doctor hiring a couple employees and hanging their shingle are over. The capital requirements are too high and the counter parties too big for individuals to thrive anymore. PE is one of the ways to consolidate and get some economies of scale. Plus I think most doctors prefer doctoring to running a business.
But there's nothing to stop all the doctors in an area from forming a cooperative. That would also be private equity, but not in the sense described in the article.
The PE in the article is firms with other values than what traditional medical professionals have, and those values are conflicting.
It seems that way if you only look at the PE part of the transaction. When a firm takes on debt, someone is backing that debt and loses out if the firm fails. If it's a the same PE firm or a bank making the loan, they would lose in the case of a bankruptcy.
In theory, there's nothing wrong with companies trying new things and sometimes failing. The only problem is when barriers are too high and it is difficult to replace failed companies.
> The risk is entirely on all the other interested parties: employees and customers.
How is PE increasing their risk in any way?
Maybe you are right that PE are getting more wealth than they create value but unless you want PE to be banned because of jealousy, you haven't pointed on any negative consequence due to them.
There is a lot of survivorship bias in reporting. Buying companies and trying to make money at it is an incredibly competitive game to be in. Yeah, the winners make billions, but so does Lebron.
> To me it seems like PE has simply discovered a loophole in the system
Serving private equity literally is the focus of the system in capitalism; it hasn’t found a loophole, it is the thing around which the system is engineered.
> For PE however, they've found a way around it, using the machinery available in the economy.
No, the effect you describe is literally what several centuries were spent engineering the machinery of the economy to create, its not an unintended pathway recently discovered that that machinery can be bent toward.
Its what “capitalism” was named, by its critics, for.
Reminds me of "Does Private Equity Investment in Healthcare Benefit Patients?" [1].
> Our estimates show that PE ownership increases the short-term mortality of Medicare patients by 10%, implying 20,150 lives lost due to PE ownership over our twelve-year sample period. This is accompanied by declines in other measures of patient well-being, such as lower mobility, while taxpayer spending per patient episode increases by 11%. We observe operational changes that help to explain these effects, including declines in nursing staff and compliance with standards.
Another good article in this space is the New Yorker's report on Hahneman Hospital [1], which was acquired by a private equity firm and dissolved a few years later.
> As they acknowledge, this factor is extremely difficult to isolate from demographics, geography, religion, etc.
No? They used "a within-facility differences-in-differences design to address nonrandom targeting of facilities" so they're measuring the change in outcomes at the same facility before & after takeover.
But it is not difficult to isolate from common sense. No one should profit from denying someone healthcare. All systems have ration care but it is immoral for someone to profit by denying care. Profit motive does not make for a good healthcare system.
When possible, I prefer people who work for me to have incentives that are aligned with mine. PE-owned medical practices and even many private practices throw that out the window, with financial incentives to do procedures or run tests.
I was talking to my wife’s obstetrician about this last week and he also feels strongly about it. He’s paid a flat salary and gets no financial benefit for a c-section vs. an induction vs. a conventional delivery. I’d like to keep it that way.
That seems infinitely better than the status quo. Having unnecessary procedures is much worse. With the former you can go to another doctor, with the latter they'll just run up your bill until you're broke or dead unless you're one of the exceedingly rare few who gets medical advice from multiple doctors (most can't afford that or do not have alternative in-network doctors).
Financializers and engineers so often miss the human factor, or try to design around it. At some point in this process involving care for humans, you have to rely on people simply choosing to do the right thing, even if it's hard. This has been medicine's tradition for a long time. The fewer layers between doctor and patient the easier it is to do this. You also have to provide enough resources for them and some kind of work/life/pay balance.
In Canada we have fee for service, with incentives to care for specific populations (remote or chronic conditions etc.) Doctors (or their clerk) do their own billing direct to provincial health services. It works. We rely on individual morality and they generally do the right thing. Our outcomes are good.
Doesn't this apply to all jobs? You're sort of suggesting that salaried employment can't work, because employees will be incentivized to do the easiest or least work. Clearly it does work in practice though, despite this alleged fundamental flaw.
I think there’s more nuance than that. I’m guessing you work in a job like tech where incentivizes are typically more carrot-based.
IMO the effectiveness of carrot (variable bonuses/pay, a many-tiered level structure with promos between as “carrots”, being disciplined or fired as “sticks”) incentive structures depends on how easy it is to evaluate good vs bad work at a job. In tech it can be hard to distinguish mediocre vs bad work which is why we don’t have a lot of stick incentivizes; good work is a lot easier to recognize so instead we have carrot incentives.
While for some medical jobs like being a surgeon good work is easier to recognize vs mediocre work, it’s a lot easier to identify bad work: bad medical outcomes, low patient satisfaction, less patients seen per hour. So as a result you don’t need as many carrot incentivizes as in tech and can probably get by with more stick incentives. Fwiw I think carrot incentives often have a lot of drawbacks as people optimize for the carrot directly rather than “doing a good job”. With sticks you optimize against sticks, but when you have signals like patient satisfaction to account for, you have a very strong stick signal.
Traditional American fee-for-service medicine has been absolutely shown to (a) drive practitioners to do unnecessarily risky and expensive things and (b) fail to produce better outcomes than salaried physician facilities.
Am I a Pollyanna for believing all other things being equal, doctors want to do the ethical thing and that direct financial incentive to do otherwise is an obstacle they have to overcome.
A bonus based on risk-adjusted outcomes would put pay in alignment with patient care. This would require much better outcome analysis and reporting though (also a good thing).
I agree that incentives are frequently and perhaps typically exploited, especially when crafted carelessly or not iterated upon, as most incentives seem to be.
I would be eager to contemplate a clinical outcome based incentive scheme.
Physicians are absolutely reimbursed per procedure, per surgery, per test, etc. OB specifically has a higher concentration of employed doctors, but the hospitals are still reimbursed the same way, and these numbers are 100% taken into account when determining things like bonuses and promotions. But other specialties (like family med) are still dominated by private practices where physicians directly earn more by doing more.
The balancing act of this is that oversight is (typically) by qualified medical professionals who can judge whether a given procedure, test, surgery, etc. was medically indicated or not.
> 100% taken into account when determining things like bonuses and promotions
Eh, there's some truth to what you said but it's a bit of a stretch.
For bonuses, it depends on specialty and practice. In my current job I have zero incentive structure, period. If by some miracle, zero patients showed up on my shifts over the course of an entire year, I would make exactly the same as if I averaged 20 patients per day. I also don't get any reimbursed for any of the procedures I do -- 100% of that goes to the hospital. This is an increasingly common compensation model in pretty much every nonsurgical speciality and even in a small number of surgical ones (Ob/Gyn, as you mentioned).
As for promotions, I don't
think that's true at all. First, physicians tend to have a very flat hierarchy outside of academics. (At many hospitals, you're either CMO, a department chief, or just some guy.) What this means, in my personal experience, is that promotion is such a remote possibility that it's something that 80 to 85% of physicians don't spend any time thinking about. Second, productivity is not a principle criterion for promotion. When a hospital or clinic promotes a physician, they take a large chunk of that physician's clinical time and replace it with administrative work. If you're trying to maximize revenue, your most clinically productive person is precisely the last person you want to do that with.
> But other specialties (like family med) are still dominated by private practices
Family medicine is definitely not dominated by private practices, at least for new grads. Private practice is quickly going extinct everywhere except for those specialties that have a high proportion of out-of-pocket payors (plastic surgery, dermatology, orthopedics) or those specialties where the demand is high but the supply is so thin that hospitals can find themselves battling with each other to sign contracts with the one of the few practices in their area (neurosurgery, otolaryngology, CT surgery in some parts of the country).
I don't think that's typical anywhere. The incentives they face are less concrete. It may be more inconvenient or uncomfortable for the doctor. If something goes wrong and there is a legal risk, it's difficult to retroactively justify not immediately changing strategies.
In the US, C-sections reimburse higher than vaginal deliveries across the board. What's changed over the years is who gets the extra money from the C-section. It used to be the physician, but nowadays it is increasingly the hospital. The incentive to do C-sections over vaginal deliveries is still there, but it's transforming into a population level incentive (i.e. is the hospital structuring staffing and workflow in a way that favors C-sections) rather than an individual one (i.e. is a particular physician very trigger happy with C-sections).
> PE-owned medical practices and even many private practices throw that out the window, with financial incentives to do procedures or run tests.
Quite the opposite. They tend to be under capitated contracts with insurers, which means they are responsible for the costs of services they provide, but receive a flat amount for reimbursements. This explicitly encourages underutilization of care.
This is the kind of economic distortion that should be expected when onerous government-imposed regulation of practitioners, medication, and medical devices creates barriers to entry that reduce competition.
While such regulation may have been imposed to try to increase safety, quality, and consistency, for example, it also ends up interfering with the incentives of the participants.
The lack of real competition, combined with the introduction of significant unnecessary costs and other overhead, encourage and enable the participants to act in ways that may not be beneficial to the patients.
The truly unfortunate part is that such regulation often takes options and choices away from the patients, preventing them from accessing alternatives that may help mitigate or avoid the perverse incentives introduced by regulation.
Alternatively, this is the kind of economic distortion that occurs when excessive de-regulation removes the floor of a market, allows local monopolies to flourish, and allows a system in which the most profitable action is to let people die.
While such deregulation may have been imposed to increase competition, it also interferes with the incentives of the participants.
The lack of real oversight, combined with the introduction of unnecessary profit margins and shareholder returns, encourage and enable the participants to act in ways that are harmful to patients.
The truly unfortunate part is that deregulation often takes options and choices away from patients, as an unregulated market’s tendency toward monopoly prevents them from accessing alternatives that may help mitigate or avoid the perverse incentives introduced by quarterly performance targets.
Strongly disagree with this comment. The most powerful monopoly one can hold is one entrenched by the will of the government. Every time the people have asked the government to step in and regulate healthcare, corporate lobbyists have crafted the laws in such a way to weigh down any potential competitors.
In the US, the more regulated a market is, the more likely people are to demand further regulation, because they incorrectly blame the free market when the market is anything but free.
The unnecessary deaths in US healthcare are largely attributable to waste and incentive mis-alignment; the person paying for healthcare isn't the one receiving it, so it is no wonder patients receive poor care.
The problem is regulatory capture. Regulating an industry that can easily kill people is probably smart government. The problem is this creates a system that allows companies like Pfizer and Moderna, or Siemens, or GE or capture many or all of a given market sector.
I would actually argue regulatory capture is a worse outcome than de-regulation in almost any industry. It's a delicate balance. In our industry we can see this with last mile internet. We can see this with taxes in America where regulatory capture has permitted Intuit to have a license to print money. No different than providers, insurance companies, and medical device manufacturers.
Here's one example. If we took some regulation away from health insurance providers, allowing them to make bigger risk pools through cross-state service, the patients would by and large see better and more consistent outcomes. In fact, this is so scary there are untold billions being pumped into congress to stop it. Instead, we got the abortion of a solution known as the ACA. Sometimes properly applied deregulation creates the environment needed to make an industry better by removing regulatory capture. Competition is a good thing at all levels. Any effort to completely stamp out the competitive nature of human beings always results in worse outcomes for everyone. Imagine if doctors had to compete for patients! The life of a doctor right now couldnt be easier. Make friend with insurance and the wallets-with-pulses are sent directly to you!
Patient options and choices such as "go to the doctor" vs "go into crippling debt while trying to navigate a labyrinthine billing nightmare"?
Just as an alternative point of view - you describe these regulations as "government-imposed". Would it not be equally (if not more) likely that these regulations are being created and supported by the industry players themselves?
This lack of real competition that you mention sounds like a dream if you have few scruples and a captive market. And telling someone that they'll die unless they pay for your services seems to be about as captive of a market as you can get.
I think choices was meant to mean things like being able to choose between competing healthcare providers.
Created and supported by big industry players that get them turned into law (and thus "government-imposed" - classic regulatory capture.
On the Mexican side of the border there are clusters of doctors, dentists, etc., offering lower cost treatment. I imagine that a large part of the decreased cost is due to reduced regulations that make it easier for small, independent providers to offer their services, which in turn results in substantial competition between the many providers to offer the lowest cost for the standard of treatment that patients want.
I’m the furthest thing from having any knowledge here, but it feels like it should kind of be like how law firms can only have lawyers be owners with the idea that owners need to be aligned with codes of professional conduct/ethical obligations to clients etc
The business lobbies freaked out when that was proposed, in spite of it being fairly moderate. It was one of the reasons for the character assassination extravaganza (anti semitism, "terrorist friends", etc).
The veterinarian world is doomed. Increasingly PE is taking over entire neighborhoods when it come to vet hospitals. This is led to increased wait times, lower standards of care, higher cost to consumers and higher pet mortality rates. That can very well translate to human healthcare.
That model works well for professional services (eg. lawyers, accountants, consultants) because require very little capital. Everything from the office they work in, to the computers they type on can be leased. The same can't be said for hospitals, which cost hundreds of millions to build and equip. How are you going to raise all that capital from only the doctors? They're rich, but not that rich. Moreover, the payback on said investment is on the order of decades. A doctor late in their career has the most to invest, but they're also nearing retirement. What are you going to do with their shares? Sell them to newly graduated doctors who are hundreds of thousands in debt? Let them keep them, at which point they turn into quasi-investors?
There were a number of physician owned hospitals. Here's one compiled list [0] circa 2013. ACA seems to have limited growth of these hospitals [1]. My view with a local flavor of this in Indianapolis (St.V Heart Center) was pretty positive and matches with the WSJ articles assertion. When doctors feel in control and view the hospital as a reflection of their own community - holistically the entire operation embodies and reflects that from the doctors to the nurses to the staff themselves. Similar to how a small-town practice reflects the values of the doctor who runs it and depends on its reputation. Some of these hospitals have been sold off and I've heard nurses and doctors lament of the better times when they felt more autonomy when the doctors made the decisions based on shaping a hospital that they'd like to be admitted to rather than the vision from an MBA.
"Specialty physician-owned hospitals focused on cardiology and cardiac surgery were found to deliver higher-quality care than nonprofit hospitals, with lower rates of hospital readmission or mortality for high-risk surgery. Physician-owned specialty hospitals for orthopedic procedures, such as hip and knee replacements, offered lower costs and higher quality than nonprofit counterparts."
That’s not true. There was a doctor owned clinic in Seattle (The Polyclinic) with multiple locations across the city. A few years ago it was purchased by Optum (United Healthcare), and the standard of care has fallen through the floor.
1) There is a big difference between a hospital and medical practice, 2) this is a solved problem as it relates to other professional service firm (law firms, investment banks (back in the day)).
america, unsatisfied with spending vastly more privately on healthcare than the rest of the world, while also spending more publicly on healthcare than the rest of the world, continues to find ways to make healthcare yet more expensive and ruinous for its citizens.
That is more a function of the size of the US medical system than its overall quality. The average American is going to whatever hospital is closest when they have an emergency, but if you’re healthy and wealthy enough to go anywhere then you can pick and choose extreme outliers. Large countries simply have more extreme outliers in both directions.
More US citizens seek treatment outside the US than foreign nationals seek treatment inside the US. But, people have specific diseases and sometimes the best treatment is inside the US, though more often it isn’t.
I don't think it's true. In fact, I'm pretty sure each year 14 millions Americans are going to Canada for medical treatment, and richer American are going to Singapore/Uk.
Metabolic health is responsible for at least 3/5 of healthcare costs. 4/5 of SNAP recipients have at least one underlying metabolic health issue. Big food wins. Big medicine wins. Big pharma wins.
"Costs attributable to overweight and obesity in Canada were $6.0 billion in 2006, with 66% attributable to obesity. This corresponds to 4.1% of the total health expenditures in Canada in 2006. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-789X....
This is a notoriously difficult thing to estimate, and highly influenced by exact definitions of any given study, so some variance is to be expected. But going from around 6% to >60% seems like quite a jump.
PE bought your hospital? More like, "some guys" bought your hospital.
Ask why "some guys" bought it instead of using their money in the market, or why your hospital sold in the first place. As anyone who's company has been purchased by private equity knows, it's probably because your hospital wasn't doing so hot to begin with and "some guys" were willing to gamble that they could turn it around and make some money before it blew up. This will mean turning the screws on the customers and employees and creating a sucky environment. But this is just accelerating what was likely already an inevitable decline.
As with any risky investment, there's a solid chance the PE firm will lose money on the gamble.
Hospitals, in many cases, are not good businesses. Especially in places where doctors, nurses, and other staff can demand a premium based on their local market's dearth of professionals. PE firms in my opinion are part of the slow death of these failing businesses - the last attempts of "some guys" desperate for returns trying to squeeze blood from a rock that everyone else was avoiding.
See, what I fundamentally disagree with is the notion that hospitals should be "good business." Why are "some guys" allowed to try to make a profit here at the expense of patient care? Healthcare (or government) should not be run like a business, and instead be provided as a service using the taxes we already pay for, much like how roads are built. The health of the public is our most vital infrastructure, and public infrastructure requires investment that you really can't make money on without defeating the whole purpose of public service.
By this argument why does anything cost money? I need shelter if I am to contribute to society. It should be free!
My own healthcare is extremely valuable to me and I should be allowed to spend money on that. Someone else may decide they'd rather have a new pair of sneakers. Who am I to say they're wrong, that they are not permitted to allocate their capital in this way?
> PE can be replaced with "Some guys". PE bought your hospital? More like, "some guys" bought your hospital.
The article is about how PE funds are large, and can thus buy enough businesses to reduce competition. Your "some guys" analogy doesn't hold here, right?
Readit News
For PE however, they've found a way around it, using the machinery available in the economy. For instance, once you are able to pay out a dividend that covers your cost of purchase, whatever comes next doesn't matter a whole lot from an investment point of view. You may have saddled the target with a huge debt, but that's a heads-I-win-tails-you-lose situation. If the firm does ok, PE actually win more. If it goes bankrupt, oh well. PE firm is still doing fine.
The risk is entirely on all the other interested parties: employees and customers.
But because we only have one side of the "created value" balance, all we can really see is some PE guys get paid. We don't see the other side, which is pretty hard to untangle. You can make an argument that everyone is better off with society organized this way, but you can't really ignore that many people seem to think they're worse off in this world.
1. Why is private equity ending up with all these resources? Who is selling to them and why? Why didn't this happen before? It's not like PE is new.
2. When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
I don't necessarily think the conventional prestige media narrative around PE is wrong, but it never seems to get around to asking these basic economic questions. It can't be as simple as some metaphor where bandits are roaming the economic countryside pillaging innocent victims. Voluntary transactions are occurring and we need to understand why to address any underlying issues.
"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action. Whatever underlying issues are making healthcare an attractive PE target will probably persist, and maybe get worse, if all we do is pass some kind of "PE bad, stop PE" law.
1. As you can imagine, not everyone has the wherewithal to launch a PE firm. Only people who are well connected in the financial world will get access to the funds. People who have friends in the investment sector for instance. There's plenty of stories about how VC (which isn't the same thing) investment is hard to get a meeting for if you don't know someone in the firm. PE works in a similar way, certain people know the players and get the deals together. Of course a lot of it is a promise of future business.
2. When a firm is acquired, the M&A advisors that did the deal get paid. When a firm is restructured (from bankruptcy), the same happens. Lawyers as well. These people all get paid to make the deals happen. Part of what happens is the M&A people will talk someone in the lending department into doing the deal. And remember it isn't just one bank or one lawyer or one lender on each deal. The lenders will all take a piece of the debt, which can be sold on (eg packaged in various tranched products) to investors (pension funds etc). If you smooth out the poop enough it doesn't smell so bad.
That's what I can glean from my far corner of the financial world, while I do work in finance I'm pretty removed from PE.
2.) Underwriting banks issue the debt for the PEs. They get paid handily, both from the constant debt payments PE firms take out of cash flow and from repeat underwriting business as investment bankers for future deals. Banks have their own ways of disposing junk debt that fails, but usually PE debt doesn't fail - the only ones being shafted are the company employees and the company itself. The management of the company, the owners and shareholders of the company, and the PE firm itself all make out of it like bandits.
Nowadays, the traditional bread and butter of PE, such as leveraged buyouts, are mostly gone, with most of the returns coming from other avenues such as Real Estate (like buying up homes in Western cities), Emerging Markets and more passive investments in family/practitioner-owned businesses, like the Healthcare space.
> Why is private equity ending up with all these resources?
Because they have cash, mostly from pension funds and insurance companies.
> Who is selling to them and why?
The doctors running the practices, more generally they're rolling up companies in relatively dispersed industries where they believe they can make money.
In the best case, this is because replicating administration across many SMEs is much less efficient than centralising it. In the worst case, it's a way to buy them companies with the cash flows of the company themselves, and pay out fat dividends while gutting the actual business.
Why didn't this happen before?
Really low interest rates super-charged the amount of money that PE could borrow , and helped them raise money because insurance and persion funds needed to get above premium returns which were hard to find because of said really low interest rates.
Additionally, banks became much less likely to lend money since the 2008 crash (because of requirements around capital buffers) so PE was basically the only game in town.
Honestly though, I think the good times are over for PE, as most of the industry (and finance in general) has been cushioned by a low interest rate world, and as debt starts to cost real money we're gonna see a _lot_ of these bets unwind.
> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions.
Banks. Again, these loans are assets, and assuming that the business continues as normal and interest rates don't rise, these were OK(ish) risks. More importantly they built a bunch of relationships with the PE people, so it wasn't about any one individual loan, but rather the constant amount of deal flow.
This is where discussions break down because there's broad disagreements on what is and is not considered "voluntary" - there are ethical/moral traditions that claim nothing is voluntary, while others that claim everything is.
We can gain clarity by defining the opposite then: Involuntary
So, what set of circumstances would be required to declare that someone is doing labor "Involuntarily?" and thus there is no "free market" for labor.
For example, would you say that the person who is manually sorting trash out of recycling for <$40,000/yr [1] is doing so voluntarily?
Maybe someone really loves that and wants to do it and would do it for free. That's possible but unlikely. Maybe someone made decisions such that this is the only job that they can get without moving or some other major life decision. Is that still voluntary simply because they are in that position? Assuming they aren't disabled, they can always put their things in a bag and walk to some place with more options. What of people that are disabled then? How much of what they do is voluntary? You get the point
The challenge then is asking, given that there is no OBJECTIVE answer to the question of what is voluntary (Extreme example: You should be constantly trying to break out of prison, otherwise you doing what the guards tell you to is "voluntary") then "voluntary" shouldn't be a discriminator on whether society has something to say about a transaction between people.
Extreme (unreasonably IMO) freemarketeers view individuals as atomic complete units and that's the end of the story. So irrespective of starting or current positions EVERYTHING is voluntary and the world is all-v-all pvp no hold barred competition. That's who is in PE and finance, so that's what you're up against.
[1] https://www.talent.com/view?id=685b4384e8d6
I listened to a podcast interview with a financial professional who advises public pension fund boards. What he said in all but words was that, yes, the political appointees who actually vote on decisions are perpetual suckers.
2 - its usually employees, and sometimes even customers, who are non equity shareholders but long term beneficiaries of the health of the company. Workers usually are not organized well enough to repel a a saavy PE firm. But careful, in some cases, PE may be liberating a firm being sucked dry from low-productivity workers or richly paid pensioners. Its hard to know which is which unless you are diving into the details.
PE is not wrong, just like unions are not wrong, but what matters is what is their management style. Parasite, or builder?
PE as an investment strategy was pioneered by KKR in the 60's, beginning with the acquisition of family-owned businesses facing succession issues. The strategy exists because there's really poor liquidity for private companies. If you're a founder who wants to sell your stake, you either:
The first three options may not be always viable at a given point in time (aka illiquidity). Strategic buyers aren't always looking to buy, an individual may not have enough capital, and IPOs place a huge amount of reporting burden on a company. PE is the only reasonable exit option for a huge swath of private companies. Take a hypothetical family-owned supermarket chain with 10 locations across 3 cities in the midwest. All the kids are terrible successors. Who's going to buy it? People sell to PE because it's often the only way to exit. Almost all bootstrapped companies belong in this category. At the end of the day, PE funds are simply groups of professional investors that specialize in buying out companies. If they are poor investors or poor operators, they will tank the company. If they are good investors and good operators, they will sell the firm for a profit in the future.--------
> When PE loads up a firm with supposedly unsustainable billions of debt, someone is on the other side of that transaction, lending the billions. Who does that and why? Are they perpetual suckers, unaware of the decades of experience we have doing this?
Many people offer debt, from private credit funds such as Golub Capital to bank syndicates. The best lenders are not suckers and the best PE funds almost never default. Oftentimes, the PE fund itself is collateral. PE funds that regularly default will have a difficult time finding a lender.
People also misunderstand the purpose of debt. It's simple math:
You want to buy a company for $100M. You can buy the entire thing with cash and sell it again after it doubles in 5 years, netting yourself $100M, giving you a 1x return.
Alternatively, you can pay $20M down and borrow $80M at a 10% interest rate (simple interest for ease of calculation). When you sell it for $200M in 5 years, you net $200M - $20M - $80M * 1.5 = $60M, giving you a 3x return.
Obviously, you've also increased the risk - your business must be capable of paying off an extra $8M a year in interest.
How do you get businesses to agree to your terms? Well, they hired consultants at some point. Oh, those guys are your buddies, too. You have acquaintances on the BoD, too.
Why go through all the trouble? Besides the fact that you're becoming filthy rich, you also have the opportunity to remove rivals and consolidate markets under an n-opoly. More money. More control.
>"Unpleasant things are happening, we need some sort of regulation" doesn't seem like a sufficient basis for socially beneficial action.
How about fraud and insider trading?
I realize that this is a simplistic and somewhat paranoid take on the matter, but in a society with a broad and continuous history (distant and recent) of corruption at elite levels, maybe securities violations and revolving door employment aren't just for our politicians. I wonder if we're dealing with Occam's Razor: how are PE firms achieving phenomenal profits while the businesses they use to do so die? Easy: they're cheating.
In at least some of the cases, the answer is absolute corruption with PE paying the other party “on the side” to sign off on a deal only a sucker would agree to.
See for example this piece of investigative journalism into Medical Properties Trust and just how many red flags and obvious bribes were involved (not to mention potential murder to cover up their misdeeds!!): https://prospect.org/health/2023-05-23-quackonomics-medical-...
Exploiting financial loopholes is like hacking. We see more hacking these days because more people depend on these systems, and more exploits are found.
Note: "hacking" can be defined as using a system in a way it was not intended to be used. Hacking is also punishable by law. PE firms and the like should not get away simply because they are following the law, as they are abusing the law in the same way as hackers abuse computer systems.
Centrally planned benchmark interest rates below market equilibrium took capital away from activities that produced value today and handed it to people who promised unrealistically optimistic future growth. Central planning doesn't work.
People have gone from criticising the FOMC to openly mocking it. Google 'transitory meme'.
2) Older doctors, stomatologists etc... Running an individual practice is a challenge, requires constant investment and learning and at some point in life there is an incentive of larger cash out.
And why? Because as West deindustrialized potenial for profit lays in high-value services. Instead of an aluminium smelter you purchase 100 of orthodontist practices. After purchase you cut on costs, raise prices and the investment pays out rather quickly....
The lenders in a PE buyout are securing that loan on the assets of the purchased company. Real estate, brand names, IP, capital equipment. Their worst case scenario is that stuff all gets sold off and they get paid back from the firesale proceeds.
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TL;DR - PE can't exist in its current form without extreme power/ownership imbalances within the firms they take over and run into the ground. This has probably been increasing over time, hence why PE has been getting worse over time.
The fundamental loophole is that "the free market" is practically a religion in the United States (the so-called Invisible Hand taking the role of a god doling out rewards and punishments), and a significant portion of the population is vehemently opposed to any regulation of capital. You can even see this attitude in some of the comments here, where commenters are claiming that the problem is too much regulation rather than too little.
Moreover, political campaigns are financed by private "donations" (i.e., legal bribes), so the lawmakers themselves are practically indebted to wealthy interests who don't want to be regulated.
I know somebody who owns a therapy business. Medicaid rates have not increased in 15 years and increasingly make it harder and harder to do your job. The level of stress and pressure it creates is intense.
What do you think is going to happen when private equity comes around and offers an exit?
I can't speak for the pressures on doctors as confidently, but I can assume there are similar issues.
So what you end up with is regulatory pressure that is forcing the market to a certain position, which makes private equity seem like the only realistic escape. In a true free market, this wouldn't happen or it would be significantly more expensive for the PE firms to make acquisitions. The businesses would either fail quickly or become successful enough to increase their rates and thus the compensation for their employees and owners, which removes incentives to sell.
I was at a sporting event earlier this year where I overheard an exec from an insurance company (I was a guest of somebody with pricey tickets). He was complaining about how a hospital was forcing them to increase rates after being willing to drop them as an insurance provider, because the insurance company would lose all business in the area of the hospital wasn't on board. It's a microcosm of the stuff happening behind the scenes.
The next cartoon pane shows "The Free Market Reality", and it's a bunch of tired looking people standing in line for one of two automated computer terminals.
The truths portrayed would be: Those selling in the market have automated processes, there is no talking with the merchant, no haggling over prices, and there are not dozens of carts to choose from, in many markets there's 2 or maybe 3, or sometimes only 1.
I this your count misrepresent the reality.
In my mind, people who oppose free market capitalism usually don't understand how it works.
The good thing is that reality is what settles the debate. What happens is that people vote with their feet --- and millions of ambisious people from countries where there is less free market economy are desperately trying to come to US to realize their full potential, but not the other way around.
Blaming something for being practically a religion is about as empty a piece of reasoning as it's possible to make.
Why not actually suggest a solution rather than just throwing your hand up at the whole thing?
At least in the US we (try) and make donations public. The places where it’s “banned” are black holes.
According to the Heritage Foundation's Economic Freedom ranking, it ranks 25th, well below "socialist" states like Denmark (in 9th place) and Sweden (in 10th place).
https://www.heritage.org/index/ranking
Of course, I don't actually think you believe this bit about the free market. I think you've been trained to rant here because this community rewards views like that.
Medical malpractice premiums are very high, insurance payouts are stingier, and medicine has become more capital intensive than ever as newer medicines and diagnostics increasingly dominate, along with an aging population that needs more intensive care.
Doctors report being more burnt out than ever. It's an attractive proposition to outsource the hard and messy stuff to a firm that knows the business angle well so that they can keep their sanity and focus on what got them interested in medicine in the first place while still getting a great salary.
I don't love the situation, but let's not pretend it happened in a vacuum.
The corporatization of medicine is one of the major causes of burnout, not an escape from it. I am not aware of any physician who enjoys things like things like "all hands" meetings with the CEO and CMO to talk about the "new vision" for the group. Or doing several different annual/biannual compliance trainings for meaningless BS. Or having to go through several layers of internal bureacracy if they want to buy a new piece of equipment. Or having zero say in the hiring process for the ancillary staff that they work with. Or having very little say in how many patients they see during the day, or during which hours, or which types of diagnoses, or how the clinic staff does intake and rooming.
The docs who are selling their practices to PE are doing so to cash out right as they go into retirement, not to outsource their admin work. Admin work is already outsourced in the private practice model. The practice hires ancillary staff for clerical work and contracts an accounting firm for help with the financials.
It is involved because there is slack on the system in the form of downtime, and it figured out that if it just buys up all the doctor's offices, makes the doctors rush through the cases, and keeps them busy seeing patients every working minute, the practice and it's owners will make way more money.
Quality of care will decline, but unless the doctor is actively doing surgery, or something else risky, whatever money they lose due to the decline in quality will be more than offset by grinding through patients quicker.
It's almost impossible to sue a doctor for malpractice in Texas, yet the exact same problem with PE is happening there, too.
Vets are another example where this is happening - and again, it's not because of frequent $XYZ,000 malpractice settlements. Anything that's not billable hours seeing patients is considered to be damage by the system, and capitalism tries to route around it.
And you're right that the effects are obscured. I happened to be talking with an optometrist earlier this year. He and his partners sold their practice to a PE firm on the promise of making everything better. But he had started to moonlight at somebody else's non-PE practice because the PE overlords kept making things both worse and more expensive for the patients, and less and less satisfying for the doctors. And all of this was explained in a hush-hush tone, presumably because there were NDAs involved.
I’m not sure that’s the model PE is using in healthcare. My impression is that they’re buying hospitals and medical practices, then obscuring the cost of actually providing care, so they can charge insurance companies not something reasonable like cost+20% but rather the maximum amount they think they can get out of the insurance company. Their financial modelers figure out after each procedure the max they can charge based on the procedure, the insurance company and plan, patient’s finances, etc.
The net effect is to drive up medical insurance costs across the country, impoverishing and bankrupting many people while a small number of PE folks get rich. It’s an entirely extractive business model, not wealth-creating or innovation-producing.
Laws that simply require total transparency in medical care pricing and pre-publication of prices for all procedures and drugs would probably go a long way toward fixing this, and in a capitalism-compatible way. We require transparency among publicly traded companies, SEC has extensive rules about that, but less so for private ones like hospitals and medical practices. That’s the loophole PE is exploiting.
I myself was "affected" if buying a shitty burger qualifies as a form of victimization. Ed's Easy Diner here in the UK totally changed their burger after getting acquired, to something inedible.
This PE-driven enshittification is actually the more important thing about it: every damn thing in society is made a little bit worse for the consumer (and the employees) due to people buying up the businesses and quite directly making everything about the service worse.
Who is to say that a business should be liquid? Why? What is the value in making it easy to bail on your responsibilities, and why should we encourage people to quickly build a complicated and powerful system and make it easy for them to recuse themselves of that duty?
I’m busy figuring out how we got here, and how to get out of it but you’ve perfectly described how the incentives are flipped.
I’d further add that regulatory capture means that financialization is a ratchet process, so undoing it is multiples more difficult than putting it into place.
I have never once in my life thought "I sure wish there was somebody in the middle extracting value from this whole situation." Contributes absolutely nothing. Doctors are plenty efficient (pathologically so) and no MBA is going to speed things up. Long term outcomes are ideologically opposed to short-term capitalism. You cannot relate a reduction in type 2 diabetes or stroke cases 20 years later to a quarterly report. It's insanity to have them involved at all.
That's not really true. Cancer is one area that has been extensively studied over multiple rounds of years-long comparative studies, and while Canada is not as far behind the US in survival rates for cancers as other developed countries are, it's still decisively behind the US.
You're correct that the middlemen here serve no purpose and are effectively leeches upon the system (with patients paying the price in the end, with both their wallets and their health). However, cancer is not the example that proves this point - it's one are where the US system does quite well, by the numbers.
With that said, I do agree that we've rewarded this form of rentiership and also enhanced the barriers to entry for other forms of private ownership (like a partner owned firm). This is in place of value created as a source of wealth, which the tax system has entirely devalued
The whole practice of a LBO does seem like a fraud almost. I dont understand how a buyer can "lend" to the purchased firm without bearing actual risk perhaps I don't understand the mechanics there fully
The PE in the article is firms with other values than what traditional medical professionals have, and those values are conflicting.
So why not call it a scam or a fraud? I know there's likely a solid legal argument for not classifying it as such, but laws can be changed.
This is its own thing that operates on another level.
The only thing they have in common is that people aren't getting the value they thought.
In theory, there's nothing wrong with companies trying new things and sometimes failing. The only problem is when barriers are too high and it is difficult to replace failed companies.
How is PE increasing their risk in any way?
Maybe you are right that PE are getting more wealth than they create value but unless you want PE to be banned because of jealousy, you haven't pointed on any negative consequence due to them.
Serving private equity literally is the focus of the system in capitalism; it hasn’t found a loophole, it is the thing around which the system is engineered.
> For PE however, they've found a way around it, using the machinery available in the economy.
No, the effect you describe is literally what several centuries were spent engineering the machinery of the economy to create, its not an unintended pathway recently discovered that that machinery can be bent toward.
Its what “capitalism” was named, by its critics, for.
> Our estimates show that PE ownership increases the short-term mortality of Medicare patients by 10%, implying 20,150 lives lost due to PE ownership over our twelve-year sample period. This is accompanied by declines in other measures of patient well-being, such as lower mobility, while taxpayer spending per patient episode increases by 11%. We observe operational changes that help to explain these effects, including declines in nursing staff and compliance with standards.
[1] https://www.nber.org/system/files/working_papers/w28474/w284...
[1] https://www.newyorker.com/magazine/2021/06/07/the-death-of-h...
I am sure they are already working on increasing this from only 11% to much more.
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No? They used "a within-facility differences-in-differences design to address nonrandom targeting of facilities" so they're measuring the change in outcomes at the same facility before & after takeover.
I was talking to my wife’s obstetrician about this last week and he also feels strongly about it. He’s paid a flat salary and gets no financial benefit for a c-section vs. an induction vs. a conventional delivery. I’d like to keep it that way.
One nasty way that can manifest is to under test because if you don’t find anything you don’t have to do anything.
In Canada we have fee for service, with incentives to care for specific populations (remote or chronic conditions etc.) Doctors (or their clerk) do their own billing direct to provincial health services. It works. We rely on individual morality and they generally do the right thing. Our outcomes are good.
Healthcare in America is a prime example. So is higher education, in which the lenders and universities collude to raise prices as much as possible.
IMO the effectiveness of carrot (variable bonuses/pay, a many-tiered level structure with promos between as “carrots”, being disciplined or fired as “sticks”) incentive structures depends on how easy it is to evaluate good vs bad work at a job. In tech it can be hard to distinguish mediocre vs bad work which is why we don’t have a lot of stick incentivizes; good work is a lot easier to recognize so instead we have carrot incentives.
While for some medical jobs like being a surgeon good work is easier to recognize vs mediocre work, it’s a lot easier to identify bad work: bad medical outcomes, low patient satisfaction, less patients seen per hour. So as a result you don’t need as many carrot incentivizes as in tech and can probably get by with more stick incentives. Fwiw I think carrot incentives often have a lot of drawbacks as people optimize for the carrot directly rather than “doing a good job”. With sticks you optimize against sticks, but when you have signals like patient satisfaction to account for, you have a very strong stick signal.
We're already selecting a highly motivated subset of the population with the med school process.
Traditional American fee-for-service medicine has been absolutely shown to (a) drive practitioners to do unnecessarily risky and expensive things and (b) fail to produce better outcomes than salaried physician facilities.
I agree that incentives are frequently and perhaps typically exploited, especially when crafted carelessly or not iterated upon, as most incentives seem to be.
I would be eager to contemplate a clinical outcome based incentive scheme.
The balancing act of this is that oversight is (typically) by qualified medical professionals who can judge whether a given procedure, test, surgery, etc. was medically indicated or not.
Eh, there's some truth to what you said but it's a bit of a stretch.
For bonuses, it depends on specialty and practice. In my current job I have zero incentive structure, period. If by some miracle, zero patients showed up on my shifts over the course of an entire year, I would make exactly the same as if I averaged 20 patients per day. I also don't get any reimbursed for any of the procedures I do -- 100% of that goes to the hospital. This is an increasingly common compensation model in pretty much every nonsurgical speciality and even in a small number of surgical ones (Ob/Gyn, as you mentioned).
As for promotions, I don't think that's true at all. First, physicians tend to have a very flat hierarchy outside of academics. (At many hospitals, you're either CMO, a department chief, or just some guy.) What this means, in my personal experience, is that promotion is such a remote possibility that it's something that 80 to 85% of physicians don't spend any time thinking about. Second, productivity is not a principle criterion for promotion. When a hospital or clinic promotes a physician, they take a large chunk of that physician's clinical time and replace it with administrative work. If you're trying to maximize revenue, your most clinically productive person is precisely the last person you want to do that with.
> But other specialties (like family med) are still dominated by private practices
Family medicine is definitely not dominated by private practices, at least for new grads. Private practice is quickly going extinct everywhere except for those specialties that have a high proportion of out-of-pocket payors (plastic surgery, dermatology, orthopedics) or those specialties where the demand is high but the supply is so thin that hospitals can find themselves battling with each other to sign contracts with the one of the few practices in their area (neurosurgery, otolaryngology, CT surgery in some parts of the country).
I don't think that's typical anywhere. The incentives they face are less concrete. It may be more inconvenient or uncomfortable for the doctor. If something goes wrong and there is a legal risk, it's difficult to retroactively justify not immediately changing strategies.
Quite the opposite. They tend to be under capitated contracts with insurers, which means they are responsible for the costs of services they provide, but receive a flat amount for reimbursements. This explicitly encourages underutilization of care.
https://news.ycombinator.com/item?id=32597326 ( When private equity takes over a nursing home)
The Portopiccolo Group got sued, but the lawsuit did not go anywhere. https://www.mcknights.com/news/shuttered-nursing-home-avoids...
they are shady to say the least - https://medicareadvocacy.org/private-equity-and-nursing-faci...
Also see - https://news.ycombinator.com/item?id=36108182 ( Private Equity Is Now Dominating the US Hospice System)
While such regulation may have been imposed to try to increase safety, quality, and consistency, for example, it also ends up interfering with the incentives of the participants.
The lack of real competition, combined with the introduction of significant unnecessary costs and other overhead, encourage and enable the participants to act in ways that may not be beneficial to the patients.
The truly unfortunate part is that such regulation often takes options and choices away from the patients, preventing them from accessing alternatives that may help mitigate or avoid the perverse incentives introduced by regulation.
While such deregulation may have been imposed to increase competition, it also interferes with the incentives of the participants.
The lack of real oversight, combined with the introduction of unnecessary profit margins and shareholder returns, encourage and enable the participants to act in ways that are harmful to patients.
The truly unfortunate part is that deregulation often takes options and choices away from patients, as an unregulated market’s tendency toward monopoly prevents them from accessing alternatives that may help mitigate or avoid the perverse incentives introduced by quarterly performance targets.
In the US, the more regulated a market is, the more likely people are to demand further regulation, because they incorrectly blame the free market when the market is anything but free.
The unnecessary deaths in US healthcare are largely attributable to waste and incentive mis-alignment; the person paying for healthcare isn't the one receiving it, so it is no wonder patients receive poor care.
The problem is regulatory capture. Regulating an industry that can easily kill people is probably smart government. The problem is this creates a system that allows companies like Pfizer and Moderna, or Siemens, or GE or capture many or all of a given market sector.
I would actually argue regulatory capture is a worse outcome than de-regulation in almost any industry. It's a delicate balance. In our industry we can see this with last mile internet. We can see this with taxes in America where regulatory capture has permitted Intuit to have a license to print money. No different than providers, insurance companies, and medical device manufacturers.
Here's one example. If we took some regulation away from health insurance providers, allowing them to make bigger risk pools through cross-state service, the patients would by and large see better and more consistent outcomes. In fact, this is so scary there are untold billions being pumped into congress to stop it. Instead, we got the abortion of a solution known as the ACA. Sometimes properly applied deregulation creates the environment needed to make an industry better by removing regulatory capture. Competition is a good thing at all levels. Any effort to completely stamp out the competitive nature of human beings always results in worse outcomes for everyone. Imagine if doctors had to compete for patients! The life of a doctor right now couldnt be easier. Make friend with insurance and the wallets-with-pulses are sent directly to you!
Just as an alternative point of view - you describe these regulations as "government-imposed". Would it not be equally (if not more) likely that these regulations are being created and supported by the industry players themselves?
This lack of real competition that you mention sounds like a dream if you have few scruples and a captive market. And telling someone that they'll die unless they pay for your services seems to be about as captive of a market as you can get.
Created and supported by big industry players that get them turned into law (and thus "government-imposed" - classic regulatory capture.
On the Mexican side of the border there are clusters of doctors, dentists, etc., offering lower cost treatment. I imagine that a large part of the decreased cost is due to reduced regulations that make it easier for small, independent providers to offer their services, which in turn results in substantial competition between the many providers to offer the lowest cost for the standard of treatment that patients want.
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https://www.reuters.com/article/us-britain-politics-labour-b...
The business lobbies freaked out when that was proposed, in spite of it being fairly moderate. It was one of the reasons for the character assassination extravaganza (anti semitism, "terrorist friends", etc).
The result is that a veterinarian owns the business on paper, but the PE fund can take over or replace them as needed.
"Specialty physician-owned hospitals focused on cardiology and cardiac surgery were found to deliver higher-quality care than nonprofit hospitals, with lower rates of hospital readmission or mortality for high-risk surgery. Physician-owned specialty hospitals for orthopedic procedures, such as hip and knee replacements, offered lower costs and higher quality than nonprofit counterparts."
[0] https://www.beckersspine.com/lists/14578-56-physician-owned-...
[1] https://www.wsj.com/articles/end-obamacares-ban-on-physician...
I’ve seen similar in Federal contracting, hire a tick-the-box preference point partner with a make-work role to get contracts.
More US citizens seek treatment outside the US than foreign nationals seek treatment inside the US. But, people have specific diseases and sometimes the best treatment is inside the US, though more often it isn’t.
- you forgot that part there
I would love to see a source for that, as it is strongly at odds with all data that I've ever seen. For example:
"Medical cost of overweight and obesity combined is approximately 5.0% to 10% of US healthcare spending." https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-789X....
"Costs attributable to overweight and obesity in Canada were $6.0 billion in 2006, with 66% attributable to obesity. This corresponds to 4.1% of the total health expenditures in Canada in 2006. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-789X....
"Costs attributable to obesity totaled US$ 269.6 million (1.86% of all expenditures on medium- and high-complexity health care)." https://journals.plos.org/plosone/article?id=10.1371/journal...
This is a notoriously difficult thing to estimate, and highly influenced by exact definitions of any given study, so some variance is to be expected. But going from around 6% to >60% seems like quite a jump.
PE bought your hospital? More like, "some guys" bought your hospital.
Ask why "some guys" bought it instead of using their money in the market, or why your hospital sold in the first place. As anyone who's company has been purchased by private equity knows, it's probably because your hospital wasn't doing so hot to begin with and "some guys" were willing to gamble that they could turn it around and make some money before it blew up. This will mean turning the screws on the customers and employees and creating a sucky environment. But this is just accelerating what was likely already an inevitable decline.
As with any risky investment, there's a solid chance the PE firm will lose money on the gamble.
See this recent hacker news submission: https://news.ycombinator.com/item?id=36048464, 30% of rural hospitals are closing due to costs growing faster than revenues.
Hospitals, in many cases, are not good businesses. Especially in places where doctors, nurses, and other staff can demand a premium based on their local market's dearth of professionals. PE firms in my opinion are part of the slow death of these failing businesses - the last attempts of "some guys" desperate for returns trying to squeeze blood from a rock that everyone else was avoiding.
My own healthcare is extremely valuable to me and I should be allowed to spend money on that. Someone else may decide they'd rather have a new pair of sneakers. Who am I to say they're wrong, that they are not permitted to allocate their capital in this way?
The article is about how PE funds are large, and can thus buy enough businesses to reduce competition. Your "some guys" analogy doesn't hold here, right?