Preserving Patient Care and Physician Independence in the Age of Private Equity-Owned Healthcare

Cohen Milstein on Medium

August 8, 2023

Private equity continues to expand its holdings in healthcare, having invested almost $1 trillion in hospitals and specialized practices over the last decade. And patient care and government healthcare plans such as Medicare and Medicaid are feeling the impact as evidence mounts that private equity may be crossing the line between managing the business operations of a healthcare provider and exercising control over patient care decisions.

A 2021 study published by the Becker Friedman Institute for Economics concluded that private equity ownership increases the short-term mortality of nursing home residents by 10%. That represents more than 20,000 lives lost during a 12-year period, likely due to lowered nursing-staff-to-resident ratios and the diversion of patient care funding to private equity owners. An investigation by USA Today and Newsday found that when private equity firms acquire an interest in dental practices treating Medicaid patients, those practices tend to incentivize dentists to increase the volume of procedures, regardless of medical necessity. Surprise billing, where patients receive outsized bills for out of network services provided on an emergency basis, or for supplemental services rendered by an out of network provider working within an in-network facility, are correlated to private equity ownership and outsourcing tactics.

If a private equity firm seeks to, or has acquired, your healthcare organization, there are few things you should know.

1. Purpose: The sole purpose of a private equity firm is to provide its investors with profits. In the healthcare context they do this through the strategic acquisition of various types of health care providers, some of which may be large companies like hospital systems, and others which may be smaller, such as physicians group practices. The acquisition targets are providers from which the firm believes it can generate value for itself and its investors. Typically, a private equity firm acquires a portfolio company for five to seven years, during which it cuts costs, sells off assets, and/or enhances efficiencies (sometimes by “rolling up” individual physician practices providing the same services) to improve financial results. Then it sells off the portfolio company.

2. Organizational Structure: Many private equity firms with portfolio companies in the healthcare sector have adopted the “Friendly PC” organizational model, which when used properly, can help to separate patient care (and the medical judgments which lie at the heart of patient care), from the private equity firm thereby avoiding accusations that it is unlawfully practicing medicine. Under this model, the professional corporation is owned by physicians and employs the physician providers as well. The professional corporation then enters into an agreement with a management services organization (“MSO”) which is controlled by the private equity firm. The MSO manages the day-to-day business operations of the medical practice and employs the non-clinical employees.

3. Operational Anomalies: Private equity firms and/or their MSOs may contract out critical care services, such as emergency, radiology, and anesthesiology, as well as administrative departments, such as accounting. This gives them greater leverage in pushing costs down but can result in the elimination of healthcare provider services and jobs, and the implementation of new billing and/or service tactics. Issues that can arise from private equity ownership are many — from surprise billing, to acquiring excess debt (just weeks ago, private equity-owned Envision Healthcare, discussed below, declared bankruptcy), to making decisions about patient care.

Unfortunately, private equity acquisitions in the healthcare sector may create an inherent conflict of interest between patients and their government healthcare plans on one hand, and private equity firms and their investors on the other.

Medical professionals and administrators are sometimes caught in the middle as patient care suffers.

In these situations, medical staff have legal resources to seek recourse and accountability. Many states have longstanding laws that prohibit non-licensed medical professionals, including private equity limited partnerships, from engaging in the practice of medicine. Additionally, the federal False Claims Act (FCA) and its state law counterparts have long been used to remedy and deter all manner of health care fraud directed at government payers.

The corporate practice of medicine (“CPOM”) doctrine prohibits corporations from practicing medicine or employing a physician to provide professional medical services. The doctrine exists, in part, to ensure that physicians are free to exercise their medical judgment independent of a corporation’s obligations to its shareholders.

More than thirty states have CPOM statutes, and while every state allows for the creation of professional corporations, most restrict shareholders, owners, or board directors to persons licensed to render the same professional service as the professional corporation. Other states allow non-physician owners or shareholders but limit such ownership to a minority percent. The aim of these statutes is to preserve a physician’s independence in exercising his or her medical judgment for the benefit of the patient.

Two recent court decisions in which state CPOM statutes were applied are particularly noteworthy:

  • In a unanimous 2017 decision in Allstate Ins. Co. v. Northfield Med., the New Jersey Supreme Court reinstated a nearly $4 million dollar verdict that Allstate Insurance received against a chiropractor and his lawyer, based on violations of New Jersey’s CPOM statute. In this case, the chiropractor, rather than the affiliated medical doctor, was extracting the profits from and maintaining control over a multidisciplinary healthcare provider.
  • In 2019, in Andrew Carothers, M.D., P.C. v. Progressive Insurance, the New York Court of Appeals affirmed the jury’s determination that a medical professional corporation had given nonphysicians too much operational and financial control over its activities and thus violated New York’s CPOM statute requiring that medical professional corporations be owned and controlled solely by licensed professionals. 

There are at least two recent examples of healthcare providers holding private equity firms accountable for crossing the line between managing the non-clinical aspects of a health care provider and unlawfully making decisions about patient care. Both involve Kohlberg Kravis Roberts Envision Healthcare:

  • In 2019, the American Academy of Emergency Medicine Physician Group sued Envision, alleging that the private equity firm violated California CPOM statutes when it assumed responsibility for managing the emergency department at Placentia-Linda Hospital in 2018. Specifically, through its own employees, officers and agents, Envision assumed control of the medical professional corporation which was ostensibly created to prevent Envision from making medical treatment decisions. AAEMPG alleges that Envision engaged in this unlawful strategy nationwide.
  • In 2022, an emergency room doctor who had complained about deliberate staffing shortages at a Kansas hospital and was terminated in response, was awarded $26 million by a jury in compensatory and punitive damages. The physician claimed that Emcare, a division of Envision, had staffing policies that caused persistent staffing shortfalls and endangered patient safety.

Could a court find that a violation of CPOM gives rise to parallel violations of the FCA when the private equity firm causes Medicare or Medicaid claims to be submitted for reimbursement?

No court has yet been presented with this question. However, the U.S. Supreme Court has held that the submission of claims for services provided by unlicensed professionals can violate the FCA. This legal backdrop is immensely instructive when considering strategies for policing the activities of private equity firms that exercise control over the operations of healthcare providers and prevent independent medical decision-making — especially when their activities are shortchanging patients and government payers, all in the name of profits.

The potential for private equity to insidiously undermine the doctor-patient relationship and usurp the ability to make treatment decisions from physicians is growing at an alarming rate. Such activity may also lead to the submission of illegal false claims to Medicare and Medicaid.

It is vital that healthcare professionals at health facilities owned and operated by private equity firms have in place effective enforcement strategies to ensure physician autonomy and quality patient care are not sacrificed. Barring that, medical professionals and administrators should be wary of the potential for private equity, in its quest to extract value out of a healthcare provider, to unlawfully exercise control over patient treatment decisions. If private equity is intervening in medical care or patient outcomes are worsening, pursuing legal action can be vital to winning accountability. CPOM statutes, the FCA, and state false claims statutes offer a powerful means of preserving patient care and physician independence to exercise effective patient care.