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Sick Profit: Investigating Private Equity’s Stealthy Takeover of Health Care Across Cities and Specialties

Kaiser Health News

November 14, 2022

Two-year-old Zion Gastelum died just days after dentists performed root canals and put crowns on six baby teeth at a clinic affiliated with a private equity firm.

His parents sued the Kool Smiles dental clinic in Yuma, Arizona, and its private equity investor, FFL Partners. They argued the procedures were done needlessly, in keeping with a corporate strategy to maximize profits by overtreating kids from lower-income families enrolled in Medicaid. Zion died after being diagnosed with “brain damage caused by a lack of oxygen,” according to the lawsuit.

Kool Smiles “overtreats, underperforms and overbills,” the family alleged in the suit, which was settled last year under confidential terms. FFL Partners and Kool Smiles had no comment but denied liability in court filings.

Private equity is rapidly moving to reshape health care in America, coming off a banner year in 2021, when the deep-pocketed firms plowed $206 billion into more than 1,400 health care acquisitions, according to industry tracker PitchBook.

Seeking quick returns, these investors are buying into eye care clinics, dental management chains, physician practices, hospices, pet care providers, and thousands of other companies that render medical care nearly from cradle to grave. Private equity-backed groups have even set up special “obstetric emergency departments” at some hospitals, which can charge expectant mothers hundreds of dollars extra for routine perinatal care.

As private equity extends its reach into health care, evidence is mounting that the penetration has led to higher prices and diminished quality of care, a KHN investigation has found. KHN found that companies owned or managed by private equity firms have agreed to pay fines of more than $500 million since 2014 to settle at least 34 lawsuits filed under the False Claims Act, a federal law that punishes false billing submissions to the federal government with fines. Most of the time, the private equity owners have avoided liability.

New research by the University of California-Berkeley has identified “hot spots” where private equity firms have quietly moved from having a small foothold to controlling more than two-thirds of the market for physician services such as anesthesiology and gastroenterology in 2021. And KHN found that in San Antonio, more than two dozen gastroenterology offices are controlled by a private equity-backed group that billed a patient $1,100 for her share of a colonoscopy charge — about three times what she paid in another state.

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‘Revenue Maximization’

Private equity firms often bring a “hands-on” approach to management, taking steps such as placing their representatives on a company’s board of directors and influencing the hiring and firing of key staffers.

“Private equity exercises immense control over the operations of health care companies it buys an interest in,” said Jeanne Markey, a Philadelphia whistleblower attorney.

Markey represented physician assistant Michelle O’Connor in a 2015 whistleblower lawsuit filed against National Spine and Pain Centers and its private equity owner, Sentinel Capital Partners.

In just a year under private equity guidance, National Spine’s patient load quadrupled as it grew into one of the nation’s largest pain management chains, treating more than 160,000 people in about 40 offices across five East Coast states, according to the suit.

O’Connor, who worked at two National Spine clinics in Virginia, said the mega-growth strategy sprang from a “corporate culture in which money trumps the provision of appropriate patient care,” according to the suit.

She cited a “revenue maximization” policy that mandated medical staffers see at least 25 patients a day, up from 16 to 18 before the takeover.

The pain clinics also overcharged Medicare by billing up to $1,100 for “unnecessary and often worthless” back braces and charging up to $1,800 each for urine drug tests that were “medically unnecessary and often worthless,” according to the suit.

In April 2019, National Spine paid the Justice Department $3.3 million to settle the whistleblower’s civil case without admitting wrongdoing.

Sentinel Capital Partners, which by that time had sold the pain management chain to another private equity firm, paid no part of National Spine’s settlement, court records show. Sentinel Capital Partners had no comment.

Read Sick Profit: Investigating Private Equity’s Stealthy Takeover of Health Care Across Cities and Specialties.