Here’s what happens when a for-profit company takes over your local ER | Clayton Dalton

‘Private equity-backed CMGs now operate a quarter of all ERs in the US.’ Photograph: Guillermo Arias/AFP/Getty Images

‘Private equity-backed CMGs now operate a quarter of all ERs in the US.’ Photograph: Guillermo Arias/AFP/Getty Images

Here’s what happens when a for-profit company takes over your local ER

Clayton Dalton

Costs are slashed, entire departments of doctors are laid off, and patients’ bills go up. I would know

Earlier this year, I stood outside the hospital in New Mexico where I worked as an emergency physician. I was, for the first time, picketing. The next day I would be fired, another first. At least I wasn’t the only one – all of my colleagues would also be terminated.

Why would a hospital fire an entire department of doctors?

The hospital, it turns out, had decided to outsource us.

The emergency room at the hospital, Presbyterian Santa Fe medical center, would be taken over by a company called Sound Physicians. Sound is a contract management group, or CMG. It’s a for-profit corporation, owned in part by a private equity firm.

Private equity-backed CMGs now operate a quarter of all ERs in the US. The rise of the CMG reflects growing private equity investment in healthcare generally, up more than 20-fold since 2000.

The pitch is that CMGs can bring business savvy and financial resources to a struggling clinic or department. They argue that this is exactly what American healthcare needs: seasoned investors bringing an infusion of capital and business acumen.

Last fall, a local newspaper published a story about Presbyterian’s plan. An administrator stated that Sound was brought in to “consistently provide physician coverage” so that the “community has access to care when they need it most”.

“I literally laughed when I read that,” John Wagner told me. Wagner has worked in private equity and investment banking for over 20 years. I reached out to him after he published a letter in the Santa Fe New Mexican criticizing the privatization.

Private equity investors often expect a several hundred per cent return on their investment, Wagner explained in his letter. “Where do you think those earnings come from, tip jars?” he wrote. “Nope. They’re extracted from overextended doctors, underpaid nurses, and from our community … Sound Physicians is here for profit, nothing more or less.”

“I’m glad you contacted me,” Wagner said when we spoke, “because I know what private equity does when they get involved in a company.” The first thing investors look at is operating expenses, called Opex. “They know that every dollar they take off of operating expenses becomes earnings.”

Let’s say you run a lemonade stand, he explained, and you sell lemonade for a dollar. If Opex is 60 cents per glass, your profit is 40 cents. “If you can find cheaper lemons, and you sell that lemonade with Opex of 55 cents,” he said, “your earnings go up by that nickel.”

“So we’re the lemons?” I asked.

“Yes, you are!” Wagner said.

Research suggests he’s right: a recent paper found high physician turnover after private equity takeovers, with that turnover offset by physician assistants and nurse practitioners, who are less expensive but have less training. This could affect quality of care, as some studies have found that these changes may increase patient costs, with worse health outcomes. Kaiser Health News uncovered a document from one CMG that specifically promoted this tactic to cut costs.

“Everything is about saving money for the company, even when it compromises patient care,” one physician employed by a CMG wrote online. “Physicians treated just like business expenses and numbers,” wrote another.

If return on investment is your goal, the arithmetic is simple – slash payroll, drive down Opex, make more money.

Opex is only one part of the profit equation. The other part is revenue, which in healthcare is extracted, ultimately, from patients. With aggressive private equity investors, this might be expected to produce higher or even fraudulent bills. In 2020, economists found that charges roughly doubled when a CMG took over. One study of private equity-owned hospitals found that revenue increased by over $2,000,000, mostly from higher patient bills.

During a lawsuit alleging fraudulent billing practices by TeamHealth, one of the largest CMGs, an executive admitted that the actual cost of care did not factor into TeamHealth’s prices, ProPublica has reported. At “some locations”, ProPublica added, “TeamHealth’s prices were higher than those of 95% of other providers and eight or nine times more than what Medicare would pay, according to [the] deposition.” (TeamHealth eventually won the suit.)

Some signs suggest that the tide is turning on private equity’s involvement in healthcare. This year, several large CMGs declared bankruptcy. Economists suspect it’s due to a new federal law, the No Surprises Act, which outlaws predatory billing. According to Eileen Appelbaum, a healthcare economist, their “secret sauce was to pile medical debt on people with emergencies”.

These developments might seem like victory, but they’re really just new problems. When private equity firms leave a company belly-up, in healthcare as in any other industry, employees and customers suffer most. The employment of tens of thousands of physicians is now in jeopardy, as is the care of their patients. The exit of private equity firms from the healthcare market seems to cause just as much damage as their entry.

Two-thirds of all personal bankruptcies in the US are related to medical expenses. That’s more than half a million people every year. I’m worried that corporate takeovers in healthcare will make this problem worse, while also compromising quality of care, and contributing to the burnout that healthcare providers already endure.

I wouldn’t send friends or family to my old hospital, because I know that the ER is now run by a for-profit corporation, rather than by the local hospital system whose name is still on the front door.

But how would anyone else ever know?

That’s why I was standing on the sidewalk, alone with my sign, spreading the word.

  • Clayton Dalton is a writer in New Mexico, where he works as an emergency physician

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