Things I Don't Expect from the Wall Street Journal

An article (accurately) blaming private equity for increasing medical costs.

I've been talking about the pernicious impact of PE, but I don't expect this from the WSJ.

Consolidation is as American as apple pie.

When a business gets bigger, it forces mom-and-pop players out of the market, but it can boost profits and bring down costs, too. Think about the pros and cons of Walmart and “Every Day Low Prices.” In a complex, multitrillion-dollar system like America’s healthcare market, though, that principle has turned into a harmful arms race that has helped drive prices increasingly higher without improving care.

Years of dealmaking has led to sprawling hospital systems, vertically integrated health insurance companies, and highly concentrated private equity-owned practices resulting in diminished competition and even the closure of vital health facilities. As this three-part Heard on the Street series will show, the rich rewards and lax oversight ultimately create pain for both patients and the doctors who treat them. Belatedly, state and federal regulators and lawmakers are zeroing in on consolidation, creating uncertainty for the investors who have long profited from the healthcare merger boom.

Consider the impact of massive private-equity investment in medical practices. When a patient with employer-based insurance goes under for surgery, the anesthesiologist’s fee is supposed to be determined by market forces. But what happens if one firm quietly buys out several anesthesiologists in the same city and then hikes the price of the procedure?

Such a scheme was allegedly implemented by the private-equity firm Welsh, Carson, Anderson & Stowe and the company it created in 2012, U.S. Anesthesia Partners, according to a Federal Trade Commission lawsuit filed last year. It started by buying the largest practice in Houston and then making three further acquisitions, eventually expanding into other cities throughout the state of Texas. In each location, the lawsuit alleges, USAP pursued an aggressive strategy of eliminating competitors by either acquiring them or conspiring with them to weaken competition.

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Over the past decade, private equity has spent hundreds of billions of dollars acquiring healthcare businesses from emergency care to anesthesiology to nursing homes. Where private equity has gone, studies show, prices have tended to increase.

Such so-called rent-seeking behavior is a unique feature of the American healthcare system. Nowhere else in the world do so many healthcare dollars encounter so few mechanisms to limit profiteering. The U.S. commercial market relies on negotiations between insurers and medical providers to deliver the best possible quality and price for patients. Increasingly, though, it is becoming less competitive by design.

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One particularly troublesome aspect of the private-equity marriage with healthcare is that it can put businesses that are essential to society at risk. An example is the crisis engulfing Steward Health Care System. The hospital chain was formed by the private-equity firm Cerberus Capital Management when it first bought six struggling Massachusetts hospitals in 2010. A 2016 sale-leaseback agreement with the hospital landlord Medical Properties Trust allowed Cerberus to receive hundreds of millions of dollars in dividends and helped Steward expand through acquisitions.

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Alongside major hospitals and health insurers, private-equity firms have gone on a healthcare buying binge in recent decades, claiming that their acquisitions will ultimately make healthcare more affordable. All the while, Americans’ medical bills have gone nowhere but up.

A condemnation (albeit a mild one) of monopolistic behavior, merger and acquisition activity, the PE looting, false claims, and rent seeking in the Wall Street Journal? 

I did not see that coming.