QUESTION:
Why the concerns with private equity groups acquiring and/or managing physician practices?
OUR ANSWER FROM HORTYSPRINGER ATTORNEY HENRY CASALE:
Concerns have been voiced by many observers about private equity acquisition of physician groups and other health care providers. A number of studies have concluded that private equity acquisitions lead to: decreased quality of patient care and increased patient safety risk, higher costs for patients, taxpayers, and payers;understaffing and high employment turnover in hospitals, as well as anti‑competitive practices and possible fraud and abuse. Additionally, according to one recent study private equity accounted for about one-fifth of the bankruptcies of healthcare companies that were filed in 2023 (a trend that is projected to continue).
One particular area of concern is anti-competitive practices involving hospital-based physicians. Hospitals have historically entered into exclusive contracts with hospital-based physician groups to provide anesthesia, radiology, pathology and emergency medicine services. Both the FTC and the courts have long recognized that exclusive contracts with hospital-based physicians can be pro-competitive. See, e.g., Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984); In re Burnham Hospital, 101 F.T.C. 991 (1983). In almost every case where exclusive physician contracts with hospitals have been challenged, they have been upheld.
Recently, private equity groups have been acquiring hospital-based physician groups with the express purpose of obtaining market dominance and leverage in payer negotiations. Some have been so bold as to boast about this business model to investors and capital sources, saying that their objective is to gain critical mass in markets to gain negotiating leverage with hospitals and payers. National physician management companies first acquire hospital-based physician groups that have exclusive contracts with a number of hospitals in a given market. They then bind the physicians and other providers in the group to non-compete covenants. This locks the physicians into their current positions since leaving the employ of the group would require them to relocate. This in turn tends to suppress wages for the physicians due to their lack of alternative employers and leads to staffing shortages due to the suppressed wages. This business model also leaves the hospitals with little alternative but to stay with the private-equity owned group, since the group’s restrictive covenants with providers would prevent the hospital from hiring the providers after the contract with the group expires. This further adversely affects competition since the hospital would be barred from directly contracting with the providers employed by the exclusive group, as would other physician groups that might be interested in bidding for a new exclusive contract when the existing one expires.
Private equity owned groups have also used the threat of litigation to get their way in states where non-compete covenants with physicians have been banned or restricted by statute or court decisions. Whether they rely on creative interpretations of the law or the shear in terrorem effect of litigation on individual physicians, this tactic is likely to continue notwithstanding the FTC’s recent final rule on noncompete agreements absent specific enforcement actions targeting these practices.
Other areas of concern include improperly directed referrals, abuse of the Stark in-office ancillary services exception, and management services agreements. These are just a few examples of practices by private equity firms that have led to decreased competition and increased costs in the healthcare industry. As the HHS Office of Inspector General recently stated:
The growing prominence of private equity and other forms of private investment in health care raises concerns about the impact of ownership incentives (e.g., return on investment) on the delivery of high quality, efficient health care. Health care entities, including their investors and governing bodies, should carefully scrutinize their operations and incentive structures to ensure compliance with the Federal fraud and abuse laws and that they are delivering high quality, safe care for patients. An understanding of the laws applicable to the health care industry and the role of an effective compliance program is particularly important for investors that provide management services or a significant amount of operational oversight for and control in a health care entity.[1]
Federal agencies are being urged to look more closely at these abusive practices and bring enforcement actions where appropriate.
If you have a quick question about this, e-mail Henry Casale at hcasale@hortyspringer.com.
If you want to learn more about the OIG, the Anti-Kickback Statute, the Stark Law, the False Claims Act, exclusive agreements, the recent FTC regulations on noncompete agreements, and much more, check out our latest episode of the Kickback Chronicles podcast and also join us at the Hospital-Physician Contracts and Compliance Clinic Seminar in Las Vegas from November 14-16, 2024!
[1] General Compliance Program Guidance, U.S. Department of Health and Human Services Office of Inspector General at pages 79-80 (Nov. 6, 2023) https://oig.hhs.gov/documents/compliance-guidance/1135/HHS-OIG-GCPG-2023.pdf.