Research found found no evidence that an ambulatory surgical center’s ownership by a private equity firm affects physician approaches to treatment.
BLOOMINGTON, Ind. – The role of private equity investment in medical facilities has raised concerns about costs passed on to patients as well as decisions by physicians, but research from the Indiana University Kelley School of Business found little evidence that it affects approaches to treatment.
Haizhen Lin, professor and associate chairperson of business economics and public policy and the Jack R. Wentworth Professor at the Kelley School, acknowledges concerns about a potential misalignment between private equity’s financial motivations and physician preferences on behalf of patients.
But a study of records involving ambulatory surgery centers in Florida with private equity ownership between 2004 and 2019 did not find that to be the case.
Haizhen Lin
“When examining private equity investment and divestment actions, we find that the clinical conduct of affected ambulatory surgery centers is virtually unfazed by the presence of private equity ownership,” Haizhen and her co-authors wrote. “These firms neither increase their procedural output nor alter the mix of procedures performed. Physicians’ medical decision-making discretion and agency on behalf of patients appear largely preserved.”
But once a private equity firm had an ownership stake, it was followed by gradual but consistent increases average list prices – as much as 50% over a four- to five-year period.
“While charges do not represent the negotiated price paid by private insurers or the administrative price paid by public insurers, they do influence price negotiations — which commonly include ‘percent of charges’ price agreements — and are therefore a strategic lever that can financially impact these firms,” she and her colleagues wrote.
“These strategies are not necessarily harmful to consumers, so long as patients are not a captive market and thereby forced to accept higher provider charges – and presumably higher transaction prices for the same services.”
The post-private equity investment change in charges per case was evident in all payer groups, including those privately paying, those with traditional Medicare, a Medicare Advantage plan and with other circumstances. The data did not allow for the researchers to study exactly how much patients paid.
By comparison, other studies of private equity stakes in physician practices, found a 20% increase in practices’ charges and an 11% increase in actual reimbursements paid by insurers.
Lin and her coauthors base their findings on all-payer data in Florida over a 15-year period, combined with detailed ambulatory surgery center ownership information they obtained through Freedom of Information Act request to the Centers for Medicare and Medicaid Services and other information to identify private equity owners among ASC investors. They then examined financial events linked to private equity involvement in the industry.
Private equity firms’ dealmaking in U.S. healthcare totaled nearly $800 billion over the last decade, and industry estimates suggest that their returns on investment have outperformed those made in other sectors of the economy. A rapidly growing number of medical services are being done on an outpatient basis, and ambulatory surgical centers account for at least 60% of all outpatient procedural care.
Rather than affect the quality of patient care, Lin and the others found evidence of private equity owners engaging in strategic “financial engineering” to enhance the ambulatory surgery center’s market value – and the value of investors’ financial stakes at the time of liquidation. This accounts for the increases in list prices.
“They need to show to the market that this ASC is running very well, that it is creating value to the shareholders and it’s going to be profitable,” Lin said. “How else can they create this profit and increase revenue? One easy thing for them to do is to raise prices.”
The article, “Private equity and healthcare firm behavior: Evidence from ambulatory surgery centers,” appeared in the September 2023 issue of the Journal of Health Economics. Other authors included Elizabeth Munnich, associate professor of economics at the University of Louisville; Michael Richards, a professor in the Jeb E. Brooks School of Public Policy at Cornell University; Christopher Whaley, associate professor of health services, policy and practice at Brown University; and Xiaoxi Zhao, associate economist at RAND Corporation.
The article was nominated for a research award by the National Institute for Health Care Management Foundation is a 2024 Research Award finalist.