Private Equity Is Sucking Up More and More Medicare Cash

The old Dollar Tree around the corner from me in Brooklyn gave up the ghost earlier this year, and efficient construction crews swooped in to renovate the large space on Knickerbocker Avenue, a sign that the next occupant would be a well-capitalized corporation.

A good bet is that rapid new construction in a city comes from the for-profit health care industry, and the space quickly threw open its doors as a clinic called Oak Street Health, founded in Chicago in 2012, that exclusively accepts adults on Medicare with complex conditions, with what it describes as a focus on preventative care.

The gleaming new facility, from a company backed by private equity, will bring in revenue from the vast rivers of cash that spring from mandatory federal spending, the pool that accounts for two-thirds of the annual U.S. budget.

The amount of public funding going into healthcare is enormous and growing rapidly, on top of private insurance expenses and out-of-pocket costs paid by patients. Last year, U.S. governments put in $2.145 trillion to Medicare, Medicaid, and state programs, according to data from the federal agency Centers for Medicare and Medicaid Services (CMS), making up over half of national health expenditures. A few years ago, CMS projected health spending to grow by 5.5% per year, which could mean at least $6 trillion in healthcare spending by 2030 out of $32 trillion in projected GDP — almost 19% of the economy and fully twice as much as the average OECD country.

The fiscal year 2022 White House budget request accounted for $767 billion for Medicare and $518 billion for Medicaid, along with nearly $1.3 trillion in mandatory programs other than Social Security, making Medicare & Medicaid together over a fifth of the entire federal budget.

Not surprisingly, trillions of dollars in government-guaranteed funding makes an attractive target for private equity investors. A May white paper from UC Berkeley and the American Antitrust Institute (AAI) found soaring investment by private equity in healthcare, growing to nearly $750 billion in the last decade, which ends up reducing competition and could negatively impact patient outcomes due to misalignment of sought-after profit margins with patients’ needs. Meanwhile, private equity firms have loaded up healthcare companies with debt in order to pull out cash for dividends to their owners. The Berkley-AAI study cites another February 2021 study that ​​found that private equity ownership of nursing homes increases 90-day mortality for admitted Medicare beneficiaries by about 10%, which would mean an estimated 20,000 deaths.

Other firms have been found by Yale University researchers to have racked up profits through surprise medical billing practices, though that practice should begin to decline under legislation signed in the final days of the Trump administration. A top Democratic recipient of PE backing, Ways and Means Chairman Richard Neal, won some concessions for the industry in the legislation that may allow PE-owned firms to soak health insurance companies, who will almost certainly pass on costs to their customers.

Oak Street Health’s four private equity investors, according to Crunchbase, took the company public last August with a $328 million initial public offering. The company said in May it would reach a base of 112,000 at-risk patients by the end of the year. Under the legislative proposal for a multi-year shift to a single-payer system (“Medicare for All”) that was cosponsored last year by a majority of House Democrats, medical care would still be privately delivered by private providers much like Oak Street, who would be reimbursed from Medicare and could see a far wider variety of patients, including those under 65 years of age.

The kind of community outreach and technology-forward preventative care that the clinic advertises could still be received in my neighborhood, just not as part of a healthcare system where for-profit insurance companies act as middlemen throughout, driving up costs of procedures. The company’s ​​chief clinical officer Dr. David Buchanan put it as stepping up the “dosage of primary care” received by under-served communities. Such an urgent and worthy goal could also be achieved without the pressure of PE-level returns on investment.