Thread

Bill to Ban Private Equity from Owning Medical Practices

509 points · 384 comments · paimapi

NegativeK · 1789944184 · focus · HN ↗
Can someone steelman private equity, please? I'm honestly looking for the upsides (for non-investors) of when PE moves into an industry like medicine and begins buying up businesses that traditionally aren't already large chains.
I already hear the downsides frequently from someone whose work is directly affected.
1. mhh__ · 1789946857 · focus · HN ↗
  PE staff are more intelligent and more shrewd than the people running the businesses they buy. Being a good doctor doesn't make you a good businessman.
  I'm not a huge fan of PE but the point of economics to deliver cheap and quality goods to consumers not keep people in a job.
  In healthcare in US in particular I think the main thing that capital should be (if regulators allow) boutique / specialists that e.g. are the best in the biz at doing MRI scans, in some states my understanding is that it's literally illegal to start a business aiming to make one small part of the process better.
  1. cool_dude85 · 1789947081 · focus · HN ↗
    What does it mean in this context to be more intelligent and shrewd than the existing owners? Delivering better profit margins?
    SoftTalker · 1789947739 · focus · HN ↗
    I mean, losing money is not sustainable. If a doctor or physician group isn't business savvy and can't earn a profit they will eventually go under. That's not good for the patient.
    cool_dude85 · 1789947983 · focus · HN ↗
    OK, but making money, though it may be less than a PE company would, is. Where do most doctor's offices fall?
    csa · 1789953772 · focus · HN ↗
    Most doctors make good money, but most who are good doctors could make much more.
    Simple example pitch that many general practitioners might consider using (based on local laws, of course):
    “Insurance covers C, Y, and Z. I can offer these additional services for A, B, and C that are not covered by insurance.”
    Where I live, you get a lot of this via “concierge doctors”, but that system can go far beyond basic concierge service, and people are willing to pay for top quality care.
    csa · 1789953141 · focus · HN ↗
    > What does it mean in this context to be more intelligent and shrewd than the existing owners?
    Streamlining everything. Sometimes this is done in a bad faith way, but it’s often not difficult to do it in a good faith way.
    Some simple examples:
    - right-sizing staff (can be reducing, increasing, or changing roles)
    - improving marketing (e.g., simple things like customer reactivation, packaging the product/service better, or just plain, ol’ getting the word out better via stuff like before/after pics or success stories)
    - improving operations (e.g., better organization, better processes, better communication, better training, better logistics, etc.)
    > Delivering better profit margins?
    Improved profit margins are a byproduct of the things listed above.
    tavavex · 1789961651 · focus · HN ↗
    You're putting the cart in front of the horse. Their incentive and their job isn't about 'streamlining' anything, let alone in a good-faith way, and that just so happens to deliver some extra cash on the side in a pleasant surprise. Their sole purpose is the profit, and they will try absolutely anything to get it. Sometimes it may accidentally produce good outcomes, but in general there's no rule or incentive to ensure that happens. They can do anything, and if there's anything to go off of, every entity I see desperately chase profit over all turns utterly evil. Being evil just deepens your toolbox for getting the only thing that matters in the world - money - so of course they tend to win out over anyone who still actually cares about the underlying business or customers.
    BrenBarn · 1789965008 · focus · HN ↗
    In theory this is true, but in practice I am skeptical that it's generally possible to do this with generic "business" intelligence that is not accompanied by specific understanding of and genuine care for the actual substance of what the business does. That is, no matter how good you are at "business", you're not going to have a good hamburger stand unless you care about making good hamburgers. It's true that the importance of this varies from one business to another, but I don't see any particular tendency for PE to gravitate towards industries where it matters less. (Medicine is an example of an area where it would matter most.)
    ChickeNES · 1789972915 · focus · HN ↗
    There's more than one form of intelligence, and being good at fixing people doesn't necessarily correlate with managing a business. As silly as it sounds, watching Shark Tank will really demonstrate that someone can have a legitimately great idea, but if they aren't business minded, it wont matter.
  2. throwaway20222 · 1789947524 · focus · HN ↗
    What shows that they are more intelligent? They might be better at extracting value from enterprise, but is that generally “more intelligent?”
    mhh__ · 1789947622 · focus · HN ↗
    Well they're considerably better paid and in a business that allows economies of scale.
    It's a steelman argument to be clear I'm not entirely convinced by it.
    gruez · 1789948067 · focus · HN ↗
    >but is that generally “more intelligent?”
    Contrary to popular belief, being intelligent in one thing does correlate with being intelligent at other things[1]. For doctors, the comparison with private equity (MBAs?) might be close, but it's not hard to imagine the targets of other PE rollups have owners that are more average in intelligence, think plumbing or roofing.
    [1] <a href="https://en.wikipedia.org/wiki/G_factor_(psychometrics)" rel="nofollow">https://en.wikipedia.org/wiki/G_factor_(psychometrics)
    tbrownaw · 1789949382 · focus · HN ↗
    DISREGARD THIS, I CAN'T READ TODAY
    > Contrary to popular belief, being intelligent in one thing does correlate with being intelligent at other things[1].
    > [1] <a href="https://en.wikipedia.org/wiki/G_factor_(psychometrics)" rel="nofollow">https://en.wikipedia.org/wiki/G_factor_(psychometrics)
    Which section of that very long article are you claiming supports your assertion?
    Here's a bit from the start of the "Concept" section:
    >> In a famous research paper published in 1904,[8] English psychologist Charles Spearman observed that children's performance measures across seemingly unrelated school subjects were positively correlated. The consistent finding of universally positive correlation matrices of mental test results (or the "positive manifold"), despite large differences in tests' contents, has been described as "arguably the most replicated result in all psychology".[9]
    That explicitly contradicts your assertion.
    gruez · 1789949928 · focus · HN ↗
    >being intelligent in one thing does correlate with being intelligent at other things
    vs
    >The consistent finding of universally positive correlation matrices of mental test results (or the "positive manifold"), despite large differences in tests' contents, has been described as "arguably the most replicated result in all psychology".[9]
    How are they contradictory? Did the first part of my comment make you think there was a negation?
    tbrownaw · 1789950435 · focus · HN ↗
    d'oh, yep
  3. jknoepfler · 1789947858 · focus · HN ↗
    Hard disagree about "more intelligent". They are playing a financial game using a combination of leverage and reptilian ruthlessness to EBITDA hack.
    They buy one (or more) companies, often with only the slimmest understanding of what those companies do, slash opex by gutting the company with layoffs (yay EBITDA), maybe staple a few such companies together with leveraged buy-outs, then resell the whole bundle for more than they paid.
    From experience, they don't give a single crap whether the resulting mess still functions. They care about selling the company for more than they bought it for. That prospect is only tenuously and at best accidentally related to whether the company still functions.
    The private equity companies I've had to deal with were full of braindead MBA spreadsheet monkeys and used car salesmen. Their chief differentiator was that they worked 80 hours a week and were enthusiastic about laying people off without much deliberation.
    Thinking private equity is "more intelligent" than business owners is like thinking house flippers are "more intelligent" than home owners. No. They know how to rip out carpet and replace it with laminate on the cheap. They know how to cut corners and hide it. They know buyers will over value a fresh veneer of paint. They don't give a shit about the long-term health or value of the house. They are not better stewards of houses. They specialize in short-term profit maximization and that is literally it.
  4. sailfast · 1789948595 · focus · HN ↗
    Remove “more intelligent” here and I’ll give you some benefit.
    The problem with healthcare “economics” is that providing high quality care is likely not as profitable as middling care, or sub-standard care.
    You say that economics is meant to deliver cheap quality goods, but in reality here economics for PE is value extraction and has nothing to do with consumer good at all - unless of course there’s more profit there. Most of the time, there isn’t.
    mhh__ · 1789949365 · focus · HN ↗
    Is Apple Inc run for consumer good or value extraction?
    macintux · 1789951180 · focus · HN ↗
    Apple has, for most of its existence, been a distant second choice, because IBM and Microsoft captured the enterprise, which trickled down into consumer buying habits.
    It survived, then thrived, by making its products so appealing that customers would buy them anyway.
    So, effectively, both.
    sailfast · 1790007364 · focus · HN ↗
    Apple is not a PE firm. They are a public consumer goods company with a ton of different business lines. Their duty is shareholder value and making good products that sell is one way to do that.
    Value extraction is a short term play. It’s usable by most companies in a pinch, but normally only happens before their death or slow decay into zombie-dom. At least, that’s what my anecdata tells me.
    nradov · 1789961505 · focus · HN ↗
    That's really not true. Studies have shown that there's little correlation between care quality and profitability. In some cases non-profit health systems charge high prices and deliver terrible care quality. The reality is that most provider organizations are run by incompetent managers. People used to working in modern tech companies would be shocked to see the waste, inefficiency, and missed opportunities. PE acquisitions may cause some problems but the new managers do at least bring a basic level of discipline and operational competence that was often missing before.
    sailfast · 1790007749 · focus · HN ↗
    Modern tech companies are not managed well at all in my experience! They’re rife with waste.
    Management often makes terribly unprofitable decisions and often work to protect their slices of the pie rather than the org.
    Tech companies are saved by their margins, their aura, and low interest rates.
    Better examples might be grocery stores or other low margin businesses that require some fairly ruthless prioritization (at least that is what I’m to understand)
    To your care / profitability argument: that is good news! However, I do believe that concern for profitability will always outweigh a care quality argument so there is a misalignment of incentives in that case. I would look to insurers to demonstrate this, generally, but can imagine a PE-owned hospital system might attempt similar measures.
    Ideal outcome is a great manager that also cares and ends up paying doctors more and providing excellent care while driving down costs using better processes and negotiating with suppliers. But, uh… not sure how often the benevolent PE firm actually shows up historically.
  5. scythe · 1789949155 · focus · HN ↗
    We know how to make MRI cheaper. Put it in a can. MRI suites are built with copper shielding in the walls, and the machines are really heavy, which creates huge capital costs. (Capex is a big problem for medicine.) There's an easy solution: you can just put an MRI machine in a standard tractor-trailer container and bring the patients in. Nothing has to be constructed or installed.
    None of the private equity chains with the sans-serif fonts, simplified logos and trisyllabic names are doing this, though. It's bad marketing. Patients don't want to walk outside to an MRI machine in the parking lot. It feels sketchy. Never mind that they score just as well on the ACR image quality tests as the in-room machines. Who the hell knows what that is?
    In reality, it's the county hospitals and big universities that use them! Places that have in-house physicists who can argue for what really makes sense in practice. A major problem with healthcare as a business is that the customer does not usually understand the product, but they still need to buy it, and there are time constraints.
    toast0 · 1789952805 · focus · HN ↗
    > Patients don't want to walk outside to an MRI machine in the parking lot. It feels sketchy.
    Seems like you could build a hallway around the trailer; if you do it right, nobody knows it's a trailer in the middle of the building. If you do it really well, you can still pull the trailer out.

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