Empowering Patients in an Era of Private Equity Acquisitions

Physicians would be wise to view recent federal economic regulatory changes within the context of potential opportunities and threats within our industry.

One requirement is that hospitals publish their charge-masters.  This is a largely symbolic first step towards Secretary Verma’s goal of “empowering patients”. It is symbolic because in practice very few patients will be able to use the transparency to calculate their costs under their high deductible health plans.  It will be interesting to see if hospitals see this change as an opportunity to provide common sense pricing to undercut their rivals who chose to hold on to the opaque status quo.

Another change comes from a bipartisan effort to eliminate surprise medical billing.  The issue of surprise billing is another effort to empower patients economically in their medical care.  While hospitals tend not to directly engage in surprise billing, out-of-network independent physician contractors do.

It should not be surprising that Envision, a private equity physician group owned by KKR, is the antagonist of the surprise-billing story.  The attractiveness of physician groups to private and publicly traded corporations is likely due to the perception of their powerful ability to set prices as a result of a the steep demand curve for healthcare, and corporate consolidation occurring in the marketplace limiting competition.

Private equity companies are notorious for the financial leverage they place on their acquisitions.  They often take on too much debt in order to leverage their return on equity and earnings. For example, as in the case of Toys-R-Us which was owned by KKR.  In this example the debt payments overwhelmed declining revenues and the company was left bankrupt. 

KKR’s recent acquisition of Envision ended public disclosure of their financial statements so we have little insight into whether KKR is employing Toys-R-Us type leverage tactics with Envision.  However, MEDNAX’s interest expense is up 3.8x between 2015-2018 while net income is down $112,020,000 over the same time period.  If Envision is experiencing similar market forces as MEDNAX, both companies may be facing challenging operating environments in the future; particularly if patients become increasingly financially empowered and our federal government is able to shift pricing power away from these organizations.

It is important to remember that physician salaries are the largest expense for these companies, but in an era of physician and radiologist shortages the labor market is likely to be another threat to their solvency.  If these companies cannot offer attractive salaries, they will be unable to service the contracts they own.  These companies may become squeezed between declining or flat revenue, and interest and labor costs.

While drawing parallels between the toy and medical industries may seem obtuse, we need to keep in mind that fundamental economic forces are ubiquitous.  If companies lose the ability to price physician services above their debt and labor costs, they may quickly become insolvent. In an era of increasing physician employer consolidation into private shareholder companies, we need to be aware of potential fallout for patients.  Many of these organizations do not hold the physician-patient relationship as a core value, but they are experts in finance.

An earlier version of this blog appeared in the Pennsylvania Radiological Society Spring 2019 newsletter.

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