You Can Thank Private Equity for That Enormous Doctor's Bill

Private-equity investors have poured billions into healthcare but often game the system, hurting both doctors and patients. From a report: 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. As one insurance executive put it in the FTC lawsuit, USAP and Welsh Carson used acquisitions to "take the highest rate of all ... and then peanut butter spread that across the entire state of Texas." In May, U.S. District Judge Kenneth Hoyt dismissed the FTC's unusual step of charging the private-equity investor, Welsh Carson, but allowed the case against USAP to proceed.

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