Practicing Medicine In The Era Of Private Equity, Venture Capital And Public Markets
Source: Forbes, Sachin H. Jain
Photo: Healthcare delivery firms are increasingly owned by private equity, venture capital, and public markets. Ethical operations of these firms will require new guardrails. (CORBIS VIA GETTY IMAGES)
In the last decade, there has been a remarkable shift in ownership of healthcare delivery. Previously independent, physician-owned medical practices have been acquired by private equity firms and publicly traded corporations. The rationale for these acquisitions is typically two-fold. First, the acquiring entity can streamline cost structures and implement management practices to lower the overall cost of delivering care. Second, these firms can use their consolidated position in the marketplace to extract more favorable rates from third-party payers. In addition to private equity and publicly traded companies, venture capital firms have invested heavily in healthcare hoping to reap rewards from new models of care delivery.
Contrary to others observers of these trends, I believe this change in ownership of healthcare is not intrinsically good or bad. There are countless examples of not-for-profit healthcare organizations behaving in predatory ways, just as there are examples of for-profit healthcare organizations operating altruistically. In addition, private capital does create opportunities to transform care delivery at scale—in meaningful ways that otherwise might not otherwise receive investment.
This change in ownership does, however, create a new operating reality where the previous central tenet of healthcare delivery—doing what is best for the patient—now has a competing imperative: doing what is best for shareholders and investors. The code of professionalism taught in medical schools butts up against the fiduciary responsibility taught in business schools. I believe that publicly traded healthcare firms and their private equity counterparts must must proactively build ethical frameworks that ensure that these two imperatives conflict do not conflict.
In the past several months, I have observed several cases where these competing priorities were handled poorly. A hiring freeze was implemented in a clinical care company because of potential earnings shortfalls by its publicly-traded parent—despite clear patient need for clinical services. In the midst of the COVID-19 pandemic, a private equity owned home-based assessments company continued to perform non-clinical coding visits to capture more Medicare Advantage revenue. Entering a new funding cycle, a venture-backed healthcare company pushed its physicians for schedule follow-up visits earlier than needed to improve revenue and enhance the company’s valuation. In each of these cases, a business imperative trumped a clinical one—in each case introducing potential harm to patients for the benefit of shareholders and investors.
I believe that shareholders and investors have a longer-term interest in preserving the clinical ethics of the healthcare organizations in which they invest. There is growing momentum to limit the influence of private capital in healthcare. In California, for example, lawmakers introduced legislation requiring the State to approve any transaction in which a healthcare provider organization is being acquired by private equity. To be sure, this is a reaction to to the belief that private enterprise can not be trusted to do what is in the public interest—in the way the medical profession historically has been trusted. The need for investor-backed healthcare to adopt a clear and defensible ethical framework has never been greater. I believe this framework has four parts: 1) board obligations and composition; 2) organizational structure; 3) clinical decision-making governance; and 4) compensation design.
Boards of private equity and public traded firms owning healthcare delivery assets must commit to a dual obligation to investors and shareholders and patients; and commit to the idea that when these interests are in conflict, the obligation to patients trumps others interests. Many decisions are made in organizations without adequate consideration of clinical impact because boards are not expected or empowered to consider these impacts. The monocular focus on creating shareholder value or long-term returns frees them from considering deleterious clinical impact. Enlightened boards and board members will often implicitly consider patient impact—but this is by no means an industry standard. Companies operating in healthcare must visibly and meaningfully acknowledge at the highest level that when human interests and financial interests collide, human interests will supersede financial interest in decision-making. This is a controversial notion to some who believe corporations need a single organizing objective. However, the only way investor-back healthcare will sustainably earn and maintain the public trust is to embrace this dual obligation and hierarchy.
To enable this dual obligation, companies should adopt an organizational structure in which the the chief clinical executive (often the chief medical officer) has dual reporting to the chief executive and the board. I have observed a deleterious trend where chief clinical executives are not reporting directly to the chief executives, sometimes reporting to chief operating officers or chief financial officers. I believe the enhanced primacy of clinical decision-making in these organizations demands a seat at two tables—the organizational executive committee, leveling the chief medical officer equivalent to other corporate officers, but also a direct line to the board of directors. This structure is similar to the dual reporting many publicly traded companies adopt with other high priority areas such as compliance. The board must have direct visibility into clinical care operations in order to take responsibility for its ethical administration. This structure is not to absolve chief executive officers of their responsibility—but to create a necessary counterbalance to the profit motive.
To further enhance the clinical sophistication of boards, organizations should consider a dedicated board position of an “independent clinical director,” a full-time practicing clinician or patient whose job it is to enhance the clinical perspective and decision-making of the board—and constantly ask the question “how will the affect the patient.” Too often, the physician voices (if any) on boards are physicians whose days in full-time clinical practice are far in the past and whose perspectives are more dominated by business considerations than clinical ones. Boards must be vigilant and thoughtful about installing a thoughtful “clinical conscience” in the form of a practicing physician or patient.
Clinical organizations must further adopt a governance norm that any decision that is clearly clinical in nature will ultimately be made by clinicians. To be sure, operations and finance leaders can and should provide input into clinical decisions. However, I have too often observed non-clinicians providing input into clinical decisions without adequate consideration of the consequences. The staffing example provided earlier is emblematic. Clinical decisions should ultimately be made by people expert in clinical care who are ultimately most capable of balancing trade-offs between business and clinical imperatives..
Finally, there must be vigilance around the design of incentives to ensure that clinical incentives payments of any kind are not tied to any potential source of harm to patients—overuse, under-use, or misuse of clinical services—or any imperative to enhance billing documentation (I.e. HCC coding). This may be the trickiest to implement, as companies typically use a combination of incentive payments and stock to reward performance—each of which may be tied indirectly to decisions made by clinicians on a daily basis. Where possible, incentives must be tied most closely to clinical outcomes.
The incursion of private equity and publicly traded firms into healthcare delivery has grown increasingly controversial—especially as these firms grow in number and an increasing share of US healthcare is being delivered by entities whose stated primary obligation is to investors, not patients and communities. Private equity and public markets are not incompatible with ethical medical practice, but they do require enhanced ethical safeguards; the same might be said for large integrated delivery systems whose behaviors and business practices increasingly resemble for-profit companies more than community-based non-profits.. The time is now for all types of organizations to proactively adopt frameworks to ensure that in the rush to create “value” our care and concern for the patient is not lost—and that the ethical mores underlying the practice of medicine are not permanently compromised.