Private Equity and the Corporatization of Health Care

527

Stanford Law Review

Volume 76 March 2024

ARTICLE

Private Equity and the

Corporatization of Health Care

Erin C. Fuse Brown & Mark A. Hall*

Abstract. Private equity has rapidly enlarged its presence in the health care sector,

expanding its investment targets from hospitals and nursing facilities to physician

practices. The incursion of private equity is the latest manifestation of a long trend toward

the corporatization and financialization of medicine. Private equity pools investments

from large private investors to buy controlling stakes in companies through leveraged

buyouts or similar arrangements that use the companies’ own assets to finance debt. These

investors seek to earn handsome profits by rapidly increasing revenues before selling off

the investment.

Private equity’s incursion into health care is especially concerning. The drive for quick

revenue generation threatens to increase costs, lower health care quality, and contribute to

physician burnout and moral distress. These harms stem from market consolidation,

overutilization and upcoding, constraints on physicians’ clinical autonomy, and

compromises in patient care. Policymakers attempting to counter these threats can barely

keep up. Like a cloud of locusts, private equity moves so quickly that by the time

lawmakers become aware of the problem and researchers study the effects, private equity

has moved on to other investment targets.

While it remains unclear whether private equity investment is fundamentally more

threatening to health policy than other forms of acquisition and financial investment—

* Erin C. Fuse Brown, J.D., M.P.H., is the Catherine C. Henson Professor of Law and

Director of the Center for Law, Health, & Society at Georgia State University College of

Law. Mark A. Hall, J.D., is the Fred and Elizabeth Turnage Professor of Law and Public

Health at Wake Forest University. Professors Fuse Brown and Hall acknowledge the

contributions of collaborators from the USC-Brookings Schaeffer Initiative for Health

Policy on a related publication: Loren Adler, Erin Duffy, Paul Ginsburg, and Samuel

Valdez. The authors would like to thank Zack Buck, I. Glenn Cohen, Jacob Elberg,

Deborah Farringer, Brendan Maher, Michelle Mello, Ángel Oquendo, Govind Persad,

Jessica Roberts, Christopher Robertson, Gabriel Scheffler, and Lindsay Wiley for their

helpful comments and insights, as well as participants in workshops at UCLA, Harvard

University, University of Connecticut, University of Miami, Georgia State University,

University of Chicago, University of Michigan, University of Texas, and Case Western

Reserve University. The authors extend special appreciation to Jake Summerlin, Greg

Mercer, James Sherrill, and Grace Gluck for the stellar analytic contributions and

excellent research assistance.

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528

whether by publicly traded companies, conglomerate health systems, or health insurers—

private equity presents a heightened threat of commercialization. Even if private equity is

not uniquely harmful, it is extremely adept at identifying and exploiting market failures

and payment loopholes. The emphasis on short-term returns and exit, the heavy reliance

on debt, and the insulation from professional and ethical norms make private equity

investors more avid to exploit revenue opportunities than institutional repeat players.

Thus, this Article’s central claim is that the influx of private equity into health care poses

sufficient risks to warrant an immediate legal and policy response. Public policy should

primarily target market failures and payment loopholes and only secondarily curb private

equity investment per se.

The good news is that we already have many tools under federal and state law with the

potential to address the harms of commercialization. These can be used or sharpened to

address the particular concerns raised by private equity’s incursion into physician markets.

Key tools include antitrust oversight, fraud and abuse enforcement, and state laws

regulating the corporate practice of medicine and the terms of physician employment. In

some instances, legislative or regulatory action may be needed to adapt existing laws. In

other instances, new laws may be needed to close payment loopholes or correct market

distortions. A leading example is the recent No Surprises Act, which curtails surprise out-

of-network medical billing.

While the Article lays out a roadmap for additional legal and policy actions to protect the

health system from the acute risks of private equity, these are patches rather than systemic

solutions. If these patches fail to stave off the incessant march toward commercialization

of health care, we may see renewed calls to fundamentally rethink the market orientation

of the U.S. health system.

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529

Table of Contents

Introduction ............................................................................................................................................................ 530

I. The Problem of Private Equity in Health Care ......................................................................... 536

A. The Private Equity Model ........................................................................................................... 537

B. The History and Trends of Private Equity Investment in Health Care ............ 539

C. The Risks of Private Equity Investment in Health Care ........................................... 543

II. Regulating Private Equity in Health Care: Current Legal Tools .................................... 547

A. Antitrust Law ..................................................................................................................................... 547

B. Fraud and Abuse Enforcement ................................................................................................. 552

1. Applying the False Claims Act to private equity owners ............................... 553

2. Applying the Stark Law to private equity owners ............................................. 558

C. Corporate Practice of Medicine and State Fee-Splitting Laws ............................... 562

1. The history and current application of

the corporate practice of medicine doctrine .......................................................... 563

2. Applying the corporate practice prohibition to private equity .................. 566

a. The MSO model ........................................................................................................... 566

b. Litigation over PE investment models ........................................................... 568

3. State fee-splitting laws ........................................................................................................ 571

D. Physician Employment Laws.................................................................................................... 573

III. Toward Better Regulation of Private Equity in Health Care ............................................ 578

A. Improving and Better Using Existing Laws ..................................................................... 580

1. Sharpening antitrust enforcement tools .................................................................. 580

2. Sharpening the corporate practice of medicine prohibition......................... 582

B. Where We Need New Laws ...................................................................................................... 584

1. Closing payment loopholes ............................................................................................. 584

2. Transparency in ownership ............................................................................................ 588

3. Tax treatment of private equity .................................................................................... 590

C. The Past, Present, and Future of Corporatization

and Financialization of Health Care ...................................................................................... 591

Conclusion ................................................................................................................................................................ 593

Appendix: Policies to Address Private Equity Investment in Health Care .......................... 595

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Introduction

Policymakers and policy advocates are growing increasingly alarmed by

private equity’s (PE) investment influx into various sectors of the economy,

especially health care. The alarm bells started ringing two decades ago when

private equity companies began purchasing and selling hospitals and skilled

nursing facilities. As PE has moved into physician practices, concerns have

intensified about PE’s effects on the quality and availability of patient care,

physicians’ clinical decisions, and rising health care costs.

Private equity differs from other forms of health services investment in

three critical ways. First, the investment comes from lay entities or

individuals, meaning that investors lack professional and institutional

obligations to promote the higher ethical goals of medical care.

Second, PE

investment is heavily debt-financed. For example, a typical leveraged buyout

(LBO) uses the assets of the underlying business to secure much of its purchase

price.

Third, traditional PE investors aim to reap their profit rewards over a

much shorter term than do conventional corporate investors or venture

1. For scholarly assessment of the risks posed by private equity’s entry into health care

markets, see, for example, Eileen Appelbaum & Rosemary Batt, Private Equity Buyouts

in Healthcare: Who Wins, Who Loses?, at 5 (Ctr. for Econ. & Pol’y Rsch., Working Paper

No. 118, 2020), https://perma.cc/Y66A-A8KS; John E. McDonough, Termites in the

House of Health Care, M

ILBANK Q. OP., Nov. 2022, https://perma.cc/TL9V-YMZ9;

ICHARD M. SCHEFFLER, LAURA ALEXANDER, BRENT D. FULTON, DANIEL R. ARNOLD &

OLA A. ABDELHADI, MONETIZING MEDICINE: PRIVATE EQUITY AND COMPETITION IN

PHYSICIAN PRACTICE MARKETS 9, 30 (2023), https://perma.cc/UFY8-XXZG; Jane M.

Zhu & Daniel Polsky, Private Equity and Physician Medical Practices—Navigating a

Changing Ecosystem, 384 N

EW ENG. J. MED. 981, 982-83 (2021), https://perma.cc/S4DG-

Y6YP.

For journalistic coverage and opinion pieces expressing concerns over private equity

investment in health care, see, for example, Reed Abelson & Margot Sanger-Katz, Who

Employs Your Doctor? Increasingly, a Private Equity Firm: A New Study Finds that Private

Equity Firms Own More Than Half of All Specialists in Certain U.S. Markets, N.Y. T

IMES

(July 10, 2023), https://perma.cc/NT3C-2PEL; Brendan Ballou, Opinion, Private Equity

Is Gutting America—And Getting Away with It, N.Y.

TIMES (Apr. 28, 2023),

https://perma.cc/2F5Z-VDF3; Robert Pearl, Private Equity and the Monopolization of

Medical Care, F

ORBES (Feb. 20, 2023, 4:00 AM EST), https://perma.cc/J3E3-BZS4;

Yasmin Rafiei, When Private Equity Takes Over a Nursing Home, N

EW YORKER (Aug. 25,

2022), https://perma.cc/2TEC-98Q8; Wendi C. Thomas, Maya Miller, Beena

Raghavendran & Doris Burke, This Doctors Group Is Owned by a Private Equity Firm and

Repeatedly Sued the Poor Until We Called Them, P

ROPUBLICA (Nov. 27, 2019, 1:00 PM

EST), https://perma.cc/QER7-9TLX; Fred Schulte, Sick Profit: Investigating Private

Equity’s Stealthy Takeover of Health Care Across Cities and Specialties, KFF H

EALTH NEWS

(Nov. 14, 2022), https://perma.cc/5WAS-UMRA; Jeanne A. Markey & Raymond M.

Sarola, Opinion, Private Equity, Health Care, and Profits: It’s Time to Protect Patients, STAT

(Mar. 24, 2022), https://perma.cc/SA27-PL9F.

2. Appelbaum & Batt, supra note 1, at 5, 7-8.

3. Id. at 6.

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capital (VC) firms.

Accordingly, PE investors seek to generate substantial

increases in the enterprise’s operating profitability in just a few years before

exiting the investment.

PE’s push for rapid revenue growth and quick exits generally means that

PE is not adding value to patient care. Instead, PE seeks to strip the target’s

assets, load up the target with debt, slash costs (usually through staffing cuts),

aggregate market power, and exploit payment loopholes to rapidly achieve

investment returns without attendant quality improvements for patients. In

this way, PE financializes health care, using health care entities as a means to

extract wealth for investors, thereby prioritizing quick profits at the expense

of patient care.

PE investors in health services often find and exploit market

vulnerabilities in a manner that raises significant public policy concerns.

Public policy analysts can use PE firms’ investment activities as a sentinel to

identify dysfunctional markets that are being mined for profit. After initially

targeting institutional entities such as hospitals and nursing homes about a

decade ago, PE investors began to move into hospital-based physician-specialty

markets such as emergency medicine and anesthesiology. PE investors found

they could exploit the ability of these specialties to engage in surprise out-of-

network billing to rapidly increase revenues.

More recently, PE has moved

beyond the hospital-based specialties that can use surprise billing as a revenue

strategy to procedural specialties (like gastroenterology, dermatology,

ophthalmology, and orthopedics) that offer lucrative in-office procedures and

ancillary services.

Private equity has also begun to invest in primary care

4. Id. at 7-8; Umar Ikram, Khin-Kyemon Aung & Zirui Song, Commentary, Private Equity

and Primary Care: Lessons from the Field, NEJM

CATALYST 2-3 (2021), https://perma.cc/

3ZSC-9AZN; Atul Gupta, Sabrina T. Howell, Constantine Yannelis & Abhinav Gupta,

Owner Incentives and Performance in Healthcare: Private Equity Investment in Nursing

Homes 9-10 (Nat’l Bureau of Econ. Rsch., Working Paper No. 28474, 2023),

https://perma.cc/K2M9-5V3F.

5. Appelbaum & Batt, supra note 1, at 7.

6. See Eileen Appelbaum & Rosemary Batt, Financialization in Health Care: The

Transformation of US Hospital Systems 69 (Ctr. for Econ. & Pol’y Rsch., Working Paper),

https://perma.cc/UT5S-Q8RZ; Benjamin M. Hunter & Susan F. Murray, Deconstructing

the Financialization of Healthcare, 50 D

EV. & CHANGE 1263, 1270-72, 1279 (2019); Colleen

M. Grogan & Miriam Laugesen, Financialization of Health Politics (unpublished

manuscript at 2) (on file with authors).

7. For a description of surprise medical billing and the role of private equity investment,

see Zack Cooper, Fiona Scott Morton & Nathan Shekita, Surprise! Out-of-Network

Billing for Emergency Care in the United States, 128

J. POL. ECON. 3626, 3634 (2020); Erin C.

Fuse Brown, Stalled Federal Efforts to End Surprise Billing—The Role of Private Equity, 382

EW ENG. J. MED. 1189, 1189-90 (2020). See also infra Part I.B.

8. ERIN FUSE BROWN ET AL., USC-BROOKINGS SCHAEFFER INITIATIVE FOR HEALTH POL’Y,

PRIVATE EQUITY INVESTMENT AS A DIVINING ROD FOR MARKET FAILURE: POLICY

RESPONSES TO HARMFUL PHYSICIAN PRACTICE ACQUISITIONS 12-14 (2021),

footnote continued on next page

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practices that can aggressively upcode

patient diagnoses to profit from

Medicare’s value-based and risk-adjusted payment policies.

And recent

reports have noted PE’s growing interest in other health care targets, including

hospices

and behavioral health.

While the revenue playbook for each health care market segment may

differ, every playbook taps into one or more of a core set of public policy

concerns: consolidation and attendant price increases; overutilization,

improper billing,

and upcoding; the shirking of unprofitable services or

patients; interference with physicians’ clinical decisions and independence; and

compromised quality of patient care. In human terms, these harms manifest as

https://perma.cc/SE4F-QWXN. Such ancillary services could include, for example,

physician-administered drugs, diagnostic imaging, lab services, cosmetic dermatology,

or rehabilitation services. Id. at 13.

9. “Upcoding” is a form of improper billing, where providers code higher levels of patient

acuity than is justified or higher levels of service than were provided. It includes

aggressively coding patient diagnoses or comorbidities to make an insured appear

sicker to increase risk-adjusted payments from Medicare and other payers. It is also a

form of fraud and abuse. See Michael Geruso & Timothy Layton, Upcoding: Evidence

from Medicare on Squishy Risk Adjustment, 128

J. POL. ECON. 984, 985, 1021-24 (2020).

10. Id. at 14-15; see also Soleil Shah, Hayden Rooke-Ley & Erin C. Fuse Brown, Corporate

Investors in Primary Care—Profits, Progress, and Pitfalls, 388 N

EW ENG. J. MED. 99, 100

(2023); Reed Abelson, Corporate Giants Buy Up Primary Care Practices at Rapid Pace, N.Y.

TIMES (updated May 12, 2023), https://perma.cc/ZR7B-5B2T (describing how investors

are targeting primary care practices to capture and profit from Medicare Advantage

patients by gaming the risk-adjusted and value-based payment formulas under these

private Medicare plans).

11. See, e.g., Joan M. Teno, Hospice Acquisitions by Profit-Driven Private Equity Firms, JAMA

HEALTH F. e213745, at 1-2 (2021), https://perma.cc/U2LX-28CC (highlighting the

potential repercussions of the recent influx of PE into hospice); Markian Hawryluk,

Hospices Have Become Big Business for Private Equity Firms, Raising Concerns About End-of-

Life Care, KFF

HEALTH NEWS (July 29, 2022), https://perma.cc/VD45-TQZW

(identifying and addressing the hindrances that PE has placed on hospice patients and

the Medicare program).

12. See, e.g., Benjamin Brown, Eloise O’Donnell & Lawrence P. Casalino, Private Equity

Investment in Behavioral Health Treatment Centers, 77 JAMA P

SYCHIATRY 229, 229 (2020)

(providing data on and identifying the rationale behind PE’s increasing presence in the

behavioral health sector).

13. “Overutilization,” or overuse, encompasses excess volume or intensity of health care

and inappropriate health care. It is considered to be a major contributor to high and

rising health care costs in the United States. See Ezekiel J. Emanuel & Victor R. Fuchs,

The Perfect Storm of Overutilization, 299 JAMA 2789, 2789-90 (2008).

14. “Improper billing” is the act of billing a payer, such as Medicare or an insurer, for

services not provided or more than is justified by the services provided. Improper

billing is a form of health care fraud and abuse. See Paul E. Kalb, Health Care Fraud and

Abuse, 282 JAMA 1163, 1165 (1999); C

TRS. FOR MEDICARE & MEDICAID SERVS., U.S. DEP’T

OF HEALTH & HUM. SERVS., NO. MLN4649244, MEDICARE FRAUD & ABUSE: PREVENT,

DETECT, REPORT 11-13 (2021), https://perma.cc/NPE9-ANEV.

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unmanageable medical bills and harsh collection practices,

clinicians

experiencing moral distress and burnout under pressure to put profits over

patients,

and—in extreme cases—declines in the quality of patient care.

Increasing corporatization—or what others have termed

“financialization”

—in health care is not a new phenomenon. Various aspects

of corporatization in health care have drawn extensive scholarly attention for

decades.

Recent private equity investment, however, takes these trends to a

new extreme by targeting the heart of medical practice—physicians treating

patients in their professional offices and clinics. Here, we offer an extended

analysis of the heightened public policy challenges presented and a thorough

review of the legal and regulatory tools needed and available to address the

elevated concerns.

Health services research that systematically quantifies the effects of PE

investment in health care is only beginning to emerge. A real question remains

as to whether PE poses unique risks or whether such risks occur whenever a

corporate investor controls a health care entity.

At bottom, all corporate

investors—whether PE, retailers, conglomerate health systems, or health

insurers—seek to maximize profits. Even if the risks of the corporatization of

health care are not unique to PE, PE investment appears to heighten those risks

by more adeptly or ruthlessly identifying profit opportunities and

15. See, e.g., Appelbaum & Batt, supra note 1, at 76 (describing private equity’s entry into

“revenue cycle management”—medical billing and collection); Thomas et al., supra note

1 (describing 4,800 lawsuits by TeamHealth, a PE-backed physician-staffing firm).

16. See, e.g., Ryan Crowley, Omar Atiq & David Hilden, Financial Profit in Medicine: A

Position Paper from the American College of Physicians, 174 A

NNALS INTERNAL MED. 1447,

1448-49 (2021) (describing how private equity and other forms of corporate ownership

might compromise physicians’ clinical decisions); Gretchen Morgenson, ‘Get That

Money!’ Dermatologist Says Patient Care Suffered After Private Equity-Backed Firm Bought

Her Practice, NBC N

EWS (updated Dec. 20, 2021, 5:55 AM PST), https://perma.cc/L6NG-

AX6F (describing how PE’s pursuit of profits can harm patient care quality); Tara

Bannow, Parents and Clinicians Say Private Equity’s Profit Fixation Is Short-Changing Kids

with Autism, S

TAT (Aug. 15, 2022), https://perma.cc/V595-L8QM (documenting the

negative effects of PE’s management strategies in behavioral health on quality of and

access to patient care); Eyal Press, The Moral Crisis of America’s Doctors, N.Y.

TIMES MAG.

(updated July 14, 2023), https://perma.cc/4HBE-JZA3 (describing how the

corporatization of health care is causing moral injury and burnout among physicians).

17. See Rafiei, supra note 1 (describing abject conditions, minimal staffing, and deaths of

residents at St. Joseph’s Home for the Aged after it was acquired by a private equity

firm); Gupta et al., supra note 4,

at 18, 45 (finding that patients at private equity-owned

nursing facilities suffered an 11% increase in 90-day mortality compared with

control patients).

18. Appelbaum & Batt, supra note 6, at 4, 6, 17.

19. See, e.g., JAMES C. ROBINSON, THE CORPORATE PRACTICE OF MEDICINE: COMPETITION AND

INNOVATION IN HEALTH CARE (1999).

20. See FUSE BROWN ET AL., supra note 8, at 1.

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534

consolidating previously fragmented providers. PE’s short-term pursuit of

revenue growth and use of debt financing means it may lack the reputational

concerns and risk aversion of longer-term institutional players.

But if

policymakers wait for more definitive answers from studies, it will be too late;

PE investors will have entered, altered, and exited their health care

investments. In its wake, PE will likely leave behind a health care system that is

costlier, more concentrated, and less accessible. Thus, policymakers urgently

need solutions to address PE’s rapid incursion into health care. Because it is

unclear if PE is uniquely harmful or just poses a heightened version of

corporatization writ large, however, the current policy response has been to go

after the market dysfunctions being exploited by PE and other corporate

buyers rather than directly targeting PE.

The good news is that several legal and policy interventions already exist

to address the risks posed by PE investment in health care. These include

antitrust enforcement to address consolidation, fraud and abuse laws to go

after improper billing and self-referrals, and the old state-law doctrine

prohibiting the corporate practice of medicine. In some cases, such as fraud and

abuse enforcement, the existing tools are already capable of policing the risks

of PE investment and simply need to be trained on this current target.

In other cases, these existing legal tools should be sharpened and

strengthened to better address PE investment. A leading example is antitrust

authorities’ failure to review many PE health care acquisitions that occur

incrementally and thus are too small to trigger reporting under the Hart-Scott-

Rodino (HSR) Act.

Some of this honing of legal tools can be done at the state

level, which may be fertile ground for policy innovation.

For example, state

21. See Christopher Cai & Zirui Song, A Policy Framework for the Growing Influence of Private

Equity in Health Care Delivery, 329 JAMA 1545, 1545-46 (2023).

22. See infra Part III.A.1.

23. Volumes have been written about federalism in health care and health policy. See, e.g.,

Erin C. Fuse Brown & Elizabeth Y. McCuskey, Federalism, ERISA, and State Single-Payer

Health Care, 168 U.

PA. L. REV. 389, 446-48 (2020) (describing the federalism dynamics at

play in state-based single-payer innovations); Abbe R. Gluck & Nicole Huberfeld, What

Is Federalism in Healthcare for?, 70 S

TAN. L. REV. 1689, 1693 (2018) (describing federalism

in health care); Kristin Madison, Building a Better Laboratory: The Federal Role in

Promoting Health System Experimentation, 41 P

EPP. L. REV. 765, 766 (2014) (same); Jerry L.

Mashaw & Theodore R. Marmor, The Case for Federalism and Health Care Reform, 28

ONN. L. REV. 115, 116 (1995) (same); Richard P. Nathan, Federalism and Health Policy, 24

EALTH AFFS. 1458, 1458-59 (2005) (same); Wendy E. Parmet, Regulation and Federalism:

Legal Impediments to State Health Care Reform, 19 A

M. J.L. & MED. 121, 121 (1993) (same);

Lindsay F. Wiley, Elizabeth Y. McCuskey, Matthew B. Lawrence & Erin C. Fuse

Brown, Health Reform Reconstruction, 55 U.C. D

AVIS L. REV. 657, 703 (2021) (describing

the federalism split between national and state spheres of regulation in health care);

Patricia J. Zettler, Pharmaceutical Federalism, 92 I

ND. L.J. 845, 851 (2017) (describing

federalism in pharmaceutical regulation).

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76 STAN. L. REV. 527 (2024)

535

laws prohibiting the corporate practice of medicine can be used to require that

licensed physicians, rather than corporate investors or managers, retain

control over the clinical and financial operations of the practice.

Other legal

tools would require new federal legislation—for example, changing the federal

tax treatment of PE investment income or closing Medicare payment

loopholes being exploited to increase profits. The need for federal legislation

makes enacting reforms more difficult but not impossible. A case in point is the

passage of the No Surprises Act, which limits the market failure exploited by

PE in the form of aggressive out-of-network billing.

This Article’s central claim is that the influx of PE into health care

warrants an immediate legal and policy response—one that primarily targets

the payment loopholes and market failures so adroitly leveraged by PE

investors. This Article also argues that state policymakers have a vital role to

play. Many of the available tools are creatures of state law (such as the

corporate practice of medicine doctrine) or can be deployed by state enforcers

(such as antitrust or fraud and abuse laws). State law innovations can inform

the slower, more cumbersome federal policy response.

PE’s incursion into health care continues a decades-long trend toward

corporatization, financialization, and commercialization, which all prioritize

profit maximization and financial returns for owners and investors of health

care entities.

Concerns over the adverse effects of corporate financial

incentives on patient care, professionalism in medical practice, and health care

costs are as old as the U.S. health system.

Therefore, the legal tools previously

developed to address these concerns, though archaic, remain useful today. Even

so, existing tools have thus far failed to mitigate the steady march toward

commercialization. Moreover, regulators and enforcement authorities may

only be learning about the risks of PE’s incursion into health care and therefore

may be unaware of how to use the existing legal tools to address the problem.

Thus, PE challenges policymakers to dust off existing legal tools to correct

exploitable market dysfunctions. The PE incursion is also a signal that the U.S.

health care system may be approaching an end stage of capitalism, requiring a

more foundational renovation.

This Article describes the risks posed by PE investment in health care and

then analyzes legal and policy interventions to mitigate these risks. Part I

recounts the history of PE investment in health care and describes the problem

24. See infra Part III.A.2.

25. Sarah Kliff & Margot Sanger-Katz, Surprise Medical Bills Cost Americans Millions.

Congress Finally Banned Most of Them, N.Y.

TIMES (updated Sept. 30, 2021),

https://perma.cc/LZR9-ZEQ5.

26. Appelbaum & Batt, supra note 1, at 4.

27. See infra Part II.C.1.

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76 STAN. L. REV. 527 (2024)

536

posed by PE’s recent focus on physician practice acquisitions. Part II highlights

the existing legal tools that could be used to address the adverse effects of PE

investment in health care and assesses their strengths and limitations. Included

are antitrust enforcement, fraud and abuse laws, the state corporate practice of

medicine doctrine, and employment laws applicable to physicians. Part III

identifies how existing tools may be sharpened and where additional policy

reforms are needed.

The conclusion draws some lessons for the broader effort

to counter the corporatization of medicine.

I. The Problem of Private Equity in Health Care

Robbers rob banks because, as the saying goes, that is where the money

is.

For that same reason, PE investment has surged in the health care

industry, which, at more than $4 trillion in annual spending, represents nearly

a fifth of the U.S. economy.

According to one estimate, PE investment in

health care grew from less than $5 billion annually in 2000 to $100 billion in

2018.

Other sources estimate that PE investment in health care ranged from

$750 billion to about $1 trillion over the past decade.

After slowing somewhat

during the first year of the Covid-19 pandemic, PE investment accelerated

again, reaching $77.5 billion and 733 deals in 2021.

In the past decade, PE

investors have rapidly acquired physician practices, completing 39 such deals

in 2010 and 221 deals in 2019, totaling 1,116 deals over that decade.

Private equity investment in health care is the most acute manifestation of

a larger trend toward the financialization of health care, in which financial

investors and intermediaries (including PE) view health care organizations as

28. The legal and policy tools for addressing PE investment in health care and how they

can be sharpened are depicted in the Appendix below.

29. See Willie Sutton, FBI, https://perma.cc/TA2K-SQMF (archived Jan. 19, 2024)

(attributing the quote to famed bank robber Willie Sutton).

30. Ctrs. for Medicare & Medicaid Servs., National Health Expenditures 2021 Highlights 1

(n.d.), https://perma.cc/CZT6-YP7L; see also Appelbaum & Batt, supra note 1, at 14.

31. Appelbaum & Batt, supra note 1, at 14.

32. Schulte, supra note 1; RICHARD M. SCHEFFLER, LAURA M. ALEXANDER, & JAMES R.

GODWIN, SOARING PRIVATE EQUITY INVESTMENT IN THE HEALTHCARE SECTOR:

CONSOLIDATION ACCELERATED, COMPETITION UNDERMINED, AND PATIENTS AT RISK 39-

42 (2021), https://perma.cc/G4LM-88YT.

33. PITCHBOOK, 2021 ANNUAL US PE BREAKDOWN 10 (2022), https://perma.cc/T963-XZ99.

34. FUSE BROWN et al., supra note 8, at 5 tbl.1.

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537

sources for extracting wealth.

In a financialized market, profit making is the

primary end, and the quality of the product—patient care—is secondary.

This Article focuses on PE investment in physician practices, though some

of the proposed regulatory channels and lessons apply to PE investment in

hospitals, nursing homes, hospices, behavioral health, and other types of health

care entities.

This Part describes the PE model, its history, and the risks posed

by PE investment in health care.

A. The Private Equity Model

Private equity leverages private funds to purchase target companies from a

wide array of industries. The target businesses are usually established and

mature, and the PE investor seeks to substantially improve profitability

through active management.

Private equity funds aim to sell the company for

a large profit in a relatively short time, typically between three and seven

years.

PE firms tend to use a LBO or similar model that finances the bulk of

the purchase price with loans for which the business itself serves as security.

For the portion financed by equity, PE firms contribute only a small

percentage as a general partner, yet retain a controlling interest in the target

company.

Although a PE firm typically contributes only about 2% of the

funds for a given deal, it reaps approximately 20% of the profits, known as

carried interest.

The general partner of the PE fund only earns its 20% carried

interest after clearing the hurdle rate (typically an 8% rate of return), which

may further incentivize risk-taking to quickly maximize returns.

Private

equity suffers from moral hazard because it bears comparatively little financial

risk but earns outsized returns for rapid financial engineering tactics.

35. See LAURA KATZ OLSON, ETHICALLY CHALLENGED: PRIVATE EQUITY STORMS US HEALTH

CARE 2-3 (2022); Appelbaum & Batt, supra note 6, at 8; Hunter & Murray, supra note 6,

at 1268-72; Grogan & Laugesen, supra note 6, at 1-2.

36. OLSON, supra note 35, at 3; Appelbaum & Batt, supra note 6, at 6.

37. For an in-depth legal and policy analysis of PE investment in nursing homes, see

Robert I. Field, Barry Furrow, David R. Hoffman, Kevin Lownds & Hilary Pearsall,

Private Equity in Health Care: Barbarians at the Gate?, 15 D

REXEL L. REV. 821 (2023).

38. See Ikram et al., supra note 4, at 2-3.

39. See id.; Chris Morran & Daniel Petty, What Private Equity Firms Are and How They

Operate, P

ROPUBLICA (Aug. 3, 2022, 5:00 AM EDT), https://perma.cc/TJ5W-R8U9.

40. Appelbaum & Batt, supra note 1, at 6.

41. Id.

42. MEDICARE PAYMENT ADVISORY COMM’N, REPORT TO THE CONGRESS: MEDICARE AND THE

HEALTH CARE DELIVERY SYSTEM 80 (2021), https://perma.cc/XS92-QBQD.

43. See OLSON, supra note 35, at 21, 316.

44. Cai & Song, supra note 21, at 1545-46.

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538

The PE firm typically restructures the target company to increase its

profitability or to liquidate its most valuable assets (e.g., surplus real estate).

The PE investor also actively manages portfolio companies to rapidly grow

revenues.

In health care, this financial engineering can involve using

payment arbitrage, cutting staffing costs, consolidating market power, spiking

prices, and pushing high-volume services.

The PE investment fund earns the

bulk of its returns when it sells the company, so it typically looks to exit the

investment in a short period of time rather than continue to hold or manage

the acquired company.

Thus, PE investments are highly leveraged, actively

managed, and short-term.

PE investments in physician practices, in particular, often employ what is

known as a “platform and add-on” or “roll-up” approach in which investors

first purchase a large established practice (the “platform practice”) and then

acquire smaller “add-ons” to build market share and economies of scale and

scope.

The PE firm then typically contracts out management of the business

aspects of the practice.

In exchange for selling their practices, physician

owners receive a sizeable buyout payment.

After the PE firm has grown the

company, it will typically sell to another investor or a corporate buyer or take

the company public.

The original physician owners, however, usually

forfeit control over selecting subsequent buyers.

While PE is not the only

type of corporate investor in health care, it poses heightened financial risks.

Publicly traded companies may invest significant capital or use debt to finance

45. See Rosemary Batt & Eileen Appelbaum, How Public Real Estate Investment Trusts Extract

Wealth from Nursing Homes and Hospitals, I

NST. FOR NEW ECON. THINKING (Aug. 1, 2022),

https://perma.cc/DDZ2-A73D; David Blumenthal, Private Equity’s Role in Health Care,

OMMONWEALTH FUND (Nov. 17, 2023), https://perma.cc/2VEY-6PEB.

46. See Appelbaum & Batt, supra note 1, at 6-7.

47. Id.

48. Appelbaum & Batt, supra note 1, at 7.

49. Anaeze C. Offodile II, Marcelo Cerullo, Mohini Bindal, Jose Alejandro Rauh-Hain &

Vivian Ho, Private Equity Investments in Health Care: An Overview of Hospital and Health

System Leveraged Buyouts, 2003-17, 40 H

EALTH AFFS. 719, 719-20 (2021).

50. See Zhu & Polsky, supra note 1, at 981-82; BRENDAN BALLOU, PLUNDER: PRIVATE

EQUITY’S PLAN TO PILLAGE AMERICA 30-32 (2023) (describing private equity’s roll-up

strategy in health care and other industries); S

CHEFFLER ET AL., supra note 32, at 29.

51. Patrick D. Souter & Andrew N. Meyercord, Private Equity Investment in the Physician

Practice: Has Its Time Finally Come or Will the Mistakes of the Past Be Repeated?, 13 J.

HEALTH & LIFE SCIS. L. (2020), https://perma.cc/3WML-FH7R.

52. Suhas Gondi & Zirui Song, Potential Implications of Private Equity Investments in Health

Care Delivery, 321 JAMA 1047, 1047 (2019).

53. See Zhu & Polsky, supra note 1, at 981-82; Sarah Hershey et al., Healthcare Exits: Corporate

Buyers Step Up, B

AIN & CO. (Mar. 15, 2022), https://perma.cc/Q75D-HWNW.

54. See OLSON, supra note 35, at 81, 90.

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539

health care acquisitions.

But public companies are subject to more regulation

and disclosure requirements in offering securities to public investors, and the

managers of publicly traded companies typically hold for longer periods of

time.

VC is a specific form of PE that typically focuses on pure equity

investments in early-stage businesses, such as technology or biosciences

companies, with an eye to establishing and growing the company to the point

where it can either go public or be sold to a larger, more mature company.

Unlike VC, PE tends to focus on more mature companies and is more heavily

debt-financed.

Both investment styles can contribute to health care

commercialization.

Yet, the combination of short-time horizons and moral

hazard from highly leveraged acquisitions leads traditional PE to be more

aggressive and risk-tolerant than other investors. This Article focuses on PE

because it introduces heightened risks of corporatization to the U.S. health

care system.

B. The History and Trends of Private Equity Investment in Health Care

Private equity investment in health care initially focused on facilities such

as nursing homes and hospitals.

In recent years, however, PE investment in

physician practices has dramatically accelerated because reduced returns from

these earlier targets pushed private equity investors to seek more specialized

providers.

By one estimate, from 2013 to 2016, PE acquired 355 physician

practices encompassing 1,426 locations and 5,714 physicians.

The rate and

volume of physician practice acquisitions have been increasing, from 75 deals

in 2012 to 484 deals in 2021, a six-fold increase.

55. Prominent examples include Amazon’s announcement that it would purchase primary

care practice One Medical for $3.9 billion and CVS’s announcement that it would

purchase home health primary care provider Signify for $8 billion. See Rebecca

Springer, Walmart, Amazon and CVS Want to Disrupt Healthcare Services. Here’s How PE

and VC Could Benefit, P

ITCHBOOK (Sept. 14, 2022), https://perma.cc/E6LS-5N6P. Also,

private equity firms may sell their health care companies to publicly traded companies

or take the companies public, such as Oak Street Health, which initially received VC

funding, then PE funding in 2018, before going public in 2020. Oak Street Health,

RUNCHBASE, https://perma.cc/75VZ-QWFH (archived Feb. 28, 2022).

56. Appelbaum & Batt, supra note 1, at 7.

57. See Ikram et al., supra note 4, at 2.

58. Id. at 3 tbl.1.

59. Shah et al., supra note 10, at 99-100.

60. Appelbaum & Batt, supra note 1, at 4.

61. Id.; FUSE BROWN ET AL., supra note 8, at 3-4.

62. Jane M. Zhu, Lynn M. Hua & Daniel Polsky, Private Equity Acquisitions of Physician

Medical Groups Across Specialties, 2013-2016, 323 JAMA 663, 663 (2020).

63. SCHEFFLER ET AL., supra note 1, at 4.

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540

Private equity first targeted hospital-based specialties, such as emergency

medicine and anesthesiology, based on their ability to use surprise medical

billing as a revenue strategy.

Surprise medical bills occur when patients

unexpectedly and involuntarily see an out-of-network provider, commonly in

emergencies and where the facility is in-network, but the physician is out-of-

network.

In all of these cases, the patient has no choice of provider due to an

emergency or reasonable (but incorrect) assumption that the physicians at an

in-network facility will also be in-network. Physician-staffing companies

owned by PE and publicly traded firms have strategically used this market

failure to increase revenues. They have intentionally stayed out-of-network to

charge higher out-of-network rates, to “balance bill” patients for the difference

between their list charges and what insurance paid, or to use the threat of

surprise billing to demand higher in-network rates from health plans.

Journalists have drawn attention to this phenomenon by documenting

stories of surprise medical bills and their financial burden on patients, not all

generated by PE-backed providers. Illustrative examples include a $108,951

surprise bill from an out-of-network hospital after a man suffered a massive

heart attack,

a $52,112 surprise bill from an out-of-network air ambulance

provider who transported an intubated 60-year-old woman suffering from

Covid-19,

and a $117,000 surprise bill from an out-of-network assistant

surgeon whom a patient did not even recall meeting.

PE’s exploitation of out-of-network surprise billing as a revenue strategy

drew bipartisan ire, catapulting the issue onto the legislative agenda.

The

effort to curb surprise medical bills generated considerable policy action—

starting with dozens of state laws and culminating in the passage of the federal

64. FUSE BROWN ET AL., supra note 8, at 4, 5 tbl. 1.

65. MARK A. HALL ET AL., USC-BROOKINGS SCHAEFFER INITIATIVE FOR HEALTH POL’Y,

OLVING SURPRISE MEDICAL BILLS 5 (2016), https://perma.cc/AR6N-Y4LE.

66. See, e.g., Cooper et al., supra note 7, at 3631, 3634; Julie Creswell, Reed Abelson &

Margot Sanger-Katz, The Company Behind Many Surprise Emergency Room Bills, N.Y.

TIMES (July 24, 2017), https://perma.cc/KSX8-PDJA.

67. Chad Terhune, Life-Threatening Heart Attack Leaves Teacher with $108,951 Bill, NPR

(Aug. 27, 2018, 4:57 AM ET), https://perma.cc/X3YE-9JL6.

68. Sarah Kliff, A $52,112 Air Ambulance Ride: Coronavirus Patients Battle Surprise Bills, N.Y.

TIMES (updated Oct. 22, 2021), https://perma.cc/WM5Q-8VJN.

69. Elisabeth Rosenthal, After Surgery, Surprise $117,000 Medical Bill from Doctor He Didn’t

Know, N.Y.

TIMES (Sept. 20, 2014), https://perma.cc/4HVQ-LDKA.

70. See Fuse Brown, supra note 7, at 1189-90; Lunna Lopes, Audrey Kearney, Liz Hamel &

Mollyann Brodie, Data Note: Public Worries About and Experience with Surprise Medical

Bills,

KFF (Feb. 28, 2020), https://perma.cc/72LH-A82F.

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76 STAN. L. REV. 527 (2024)

541

No Surprises Act at the end of 2020.

The saga continues as PE-backed

physician-staffing firms, air ambulances, and other industry groups fight the

implementation of the law or aggressively use the law’s arbitration process to

push for higher payments and preserve their profits.

Policymakers are right

to wonder what loophole PE will exploit next and how to mount a preemptive

policy response.

PE investors are attracted to the areas of physician practice that offer the

greatest profit potential due to their market structures or reimbursement

rules.

Physicians are receptive to these investors because they offer

substantial capital and relieve physicians from practice management

responsibilities.

In addition to supplying capital, PE investment can provide

economies of scale necessary for providers to successfully navigate the shift to

value-based payment, assume financial risks, and take on more responsibility

for population health management.

Because individual physician practice acquisitions are too small to be

reviewed by antitrust authorities, PE investors have stealthily amassed

significant market shares in certain markets.

A 2022 study by Yashaswini

Singh and colleagues found that in 2019, PE market penetration across six

office-based specialties reached 30% in certain geographic areas.

Another

study by Richard Scheffler and colleagues demonstrated that PE firms are

71. No Surprises Act, Pub. L. No. 116-260, 134 Stat. 2784, 2815, 2859, 2863 (2020) (codified at

26 U.S.C. § 9816); see also Kliff et al., supra note 25; Maanasa Kona, State Balance-Billing

Protections, C

OMMONWEALTH FUND (Feb. 5, 2021), https://perma.cc/66MT-PZK7.

72. Katie Keith, Latest in No Surprises Act Litigation and New Guidance, HEALTH AFFS. (June 6,

2022), https://perma.cc/44DS-JTTN; Zachary L. Baron, Latest Twists and Turns in No

Surprises Act Litigation: What It Means for Consumers and Ongoing Implementation,

O’N

EILL INST. FOR NAT’L AND GLOB. HEALTH L. (Aug. 31, 2023), https://perma.cc/

2KVW-SGPD.

73. See infra Part III.A.

74. See Appelbaum & Batt, supra note 1, at 52-53.

75. Gondi et al., supra note 52, at 1047; Appelbaum & Batt, supra note 1, at 4-5.

76. See FUSE BROWN ET AL., supra note 8, at 1; Ikram et al., supra note 4, at 7 (pointing out

that PE has provided “much-needed capital” for primary care practices to promote

value-based care models and respond to the pandemic); Eloise May O’Donnell, Gary

Joseph Lelli, Sami Bhidya & Lawrence P. Casalino, The Growth Of Private Equity

Investment in Health Care: Perspectives from Ophthalmology, 39 H

EALTH AFFS. 1026, 1027

(2020) (discussing economies of scale and scope in PE acquisitions of ophthalmology

practices).

77. See infra Part II.A; see also Scheffler et al., supra note 1, at 4, 15 (arguing that many PE

acquisitions in health care provider markets have anticompetitive effects but are too

small to draw the attention of antitrust regulators).

78. Yashaswini Singh, Jane M. Zhu, Daniel Polsky & Zirui Song, Geographic Variation in

Private Equity Penetration Across Select Office-Based Physician Specialties in the US, 3 JAMA

EALTH F. e220825, at 1-2 fig. 1 (2022), https://perma.cc/7SMA-2W6G.

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542

amassing high market shares in an increasing number of local physician

practice markets. In particular, they found that in 28% of metropolitan

statistical areas (MSAs), a single PE firm controlled more than 30% of a

physician market and that in 13% of MSAs, a single PE firm’s market share

exceeded 50%.

In a typical antitrust analysis, 30% market share is a

competitively significant threshold.

Indeed, in these highly concentrated

markets, PE-owned practices increased the cost of care by double digits.

In previous decades, private investment in health services focused mainly on

insurers or on hospitals and other health care facilities.

More recently,

however, PE investments have gone to the very core of medical professional

practice by directly targeting physicians’ care of patients.

Commercialization of

physicians’ office practices has been seen only once before, a generation ago, in

physician practice management companies (PPMCs), but that form of

investment differed in meaningful ways.

The market value of for-profit

PPMCs rose rapidly but then crashed spectacularly only a few years after they

emerged.

PPMCs were often publicly traded and thus less leveraged, with

physicians usually maintaining a majority equity stake.

Initial valuations ended

up being far off the mark, however, because PPMCs failed to achieve anticipated

cost reductions and lacked business strategies to substantially increase profit

margins.

PPMCs, hungry for revenue growth, financed further acquisitions by

diluting existing share values, ultimately leading to an implosion in the market

that observers likened to the collapse of a pyramid scheme.

PE investors have avoided this fate so far—perhaps because they have

targeted areas of physician practice ripe for substantial profit growth.

79. SCHEFFLER ET AL., supra note 1, at 6, 19, 20 fig.3.

80. See id. at 17.

81. Id. at 4; Abelson et al., supra note 1.

82. See FUSE BROWN ET AL., supra note 8, at 3-4.

83. See id.

84. See generally Lawton R. Burns, Physician Practice Management Companies, 22 HEALTH

CARE MGMT. REV. 32 (1997) (providing an overview of PPMCs); Souter et al., supra note

51 (comparing PE’s interest in the health care market to PPMCs in the 1990s).

85. Uwe E. Reinhardt, The Rise and Fall of the Physician Practice Management Industry: Can

Wall Street Efficiently Value Health Care?, 19 H

EALTH AFFS. 42, 44 (2000); see also Burns,

supra note 84, at 41-42; Bill Frack & Nurry Hong, Physician Practice Management—A New

Chapter, B

ECKER’S HOSP. REV. (Feb. 19, 2014), https://perma.cc/NKV6-MTS9; Souter et

al., supra note 51.

86. See Burns, supra note 84.

87. See Souter et al., supra note 51; see also Reinhardt, supra note 85, at 51-52 (arguing that

PPMCs failed because they took on too much debt).

88. See Reinhardt, supra note 85, at 44, 46-50.

89. See Appelbaum & Batt, supra note 1, at 94.

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543

investors have also assumed more control over business strategies by reducing

physicians’ role in management aspects to minority status.

However, it is too

soon to tell whether current PE investment models will likewise collapse once

easy revenue generation opportunities are exhausted.

C. The Risks of Private Equity Investment in Health Care

Many public policy analysts are worried that PE investment in health care

contributes to its commercialization, fuels consolidation and rising costs, and

worsens patient access, outcomes, and professional practice.

Private equity is exceptionally adept at identifying and exploiting market

failures that can be turned into profit for investors. PE investors are not the only

investors who capitalize on these market failures. However, they are more likely

to find opportunities to profit from payment loopholes or market dysfunctions

and to move aggressively into that space.

PE investors’ heightened risk

tolerance stems from their desire to generate high returns quickly, and the LBO

model effectively requires companies to significantly grow revenues or cut costs

to shoulder the debt burden.

Hence, as we have argued elsewhere, PE functions

as a divining rod for finding market failures; where PE has penetrated, there is

likely a profit opportunity ripe for exploitation.

PE investment poses three main risks to patients, medical professionals,

and the health care market overall. First, PE investment spurs health care

consolidation, which increases prices and potentially reduces quality and

access.

Second, the pressure from PE investors to increase revenue can lead to

exploitation of billing loopholes, overutilization, upcoding, aggressive risk-

coding, harming patients through unnecessary care, excessive bills, and

90. See FUSE BROWN ET AL., supra note 8, at 7; Robert Tyler Braun, Amelia M. Bond, Yuting

Qian, Manyao Zhang & Lawrence P. Casalino, Private Equity in Dermatology: Effect on

Price, Utilization, and Spending, 40 H

EALTH AFFS. 727, 728 (2021).

91. For academic commenters, see Appelbaum & Batt, supra note 1; Cai & Song, supra note

21; Field et al., supra note 37; McDonough, supra note 1; S

CHEFFLER ET AL., supra note 1.

Policymakers have also expressed these concerns. See, e.g., Press Release, S. Comm. on

Fin., Wyden Statement at Finance Committee Hearing on Corporatization and

Consolidation in Health Care (June 8, 2023), https://perma.cc/JF5U-DGDE.

92. FUSE BROWN ET AL., supra note 8, at 2, 17.

93. Cai & Song, supra note 21, at 1545.

94. See FUSE BROWN ET AL., supra note 8, at 16.

95. Claire E. O’Hanlon, Christopher M. Whaley & Deborah Freund, Medical Practice

Consolidation and Physician Shared Patient Network Size, Strength, and Stability, 57 M

ED.

CARE 680, 680 (2019); see also Jon B. Christianson, Caroline S. Carlin & Louise H.

Warrick, The Dynamics of Community Health Care Consolidation: Acquisition of Physician

Practices, 92 M

ILBANK Q. 542, 543-44 (2014) (noting the more general point that health

care consolidation can lead to higher prices for consumers).

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544

increasing overall health spending.

Third, physicians acquired by PE

companies may be subject to onerous employment terms and lose autonomy

over clinical decisions.

Although the data are still being developed, early evidence supports

several of these concerns. In the hospital context, PE acquisition has been

associated with decreases in staffing ratios and increases in charges, markups

over costs, and the proportion of privately insured patients.

The quality of

patient care also appears to suffer after a PE firm acquires a hospital, perhaps

due to reduced staffing. One study found that PE-acquired hospitals

experienced a 25.4% increase in hospital-acquired adverse events (central line

infections, falls, and surgical site infections) among Medicare beneficiaries,

compared with non-PE hospital controls.

Among nursing homes, evidence of

the impact of PE on patient outcomes is particularly troubling. Researchers

found that Medicare patients in PE-owned nursing facilities suffered a 11%

increase in ninety-day mortality between 2004 and 2016 and that this increased

risk of death may have been due to reduced staffing levels.

100

Other quality

measures also declined following acquisition, even as per-patient spending

increased.

101

Another study found that residents in PE-owned nursing homes

had higher rates of hospitalizations and emergency room visits as well as

96. Appelbaum & Batt, supra note 1, at 5; FUSE BROWN ET AL., supra note 8, at 2-3; see also

Harris Meyer, More Orthopedic Physicians Sell Out to Private Equity Firms, Raising Alarms

About Costs and Quality, KFF

(Jan. 6, 2023), https://perma.cc/QM56-79UL (describing

how PE investment in orthopedic practices has generated concerns over increased

prices and utilization, unnecessary care, and quality concerns).

97. See Sally Tan, Kira Seiger, Peter Renehan & Arash Mostaghimi, Trends in Private Equity

Acquisition of Dermatology Practices in the United States, 155 JAMA

DERMATOLOGY 1013,

1019 (2019); Zhu & Polsky, supra note 1, at 982; Jack S. Resneck Jr., Dermatology Practice

Consolidation Fueled by Private Equity Investment: Potential Consequences for the Specialty

and Patients, 154 JAMA D

ERMATOLOGY 13, 13-14 (2018); Harris Meyer, Banning

Noncompete Contracts for Medical Staff Riles Hospitals, KFF (Mar. 27, 2023),

https://perma.cc/LUM2-JJME.

98. Joseph D. Bruch, Suhas Gondi & Zirui Song, Changes in Hospital Income, Use, and Quality

Associated with Private Equity Acquisition, 180 JAMA

INTERNAL MED. 1428, 1432-33

(2020); Offodile et al., supra note 49, at 724-25.

99. Sneha Kannan, Joseph D. Bruch & Zirui Song, Changes in Hospital Adverse Events and

Patient Outcomes Associated with Private Equity Acquisition, 330 JAMA 2365, 2368, 2371

(2023).

100. Atul Gupta, Sabrina T. Howell, Constantine Yannelis & Abhinav Gupta, Owner

Incentives and Performance in Healthcare: Private Equity Investment in Nursing Homes 18

(Nat’l Bureau of Econ. Rsch., Working Paper No. 28,474, 2021), https://perma.cc/QE92-

TWRL.

101. Id. at 3, 18.

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545

higher Medicare costs compared to non-PE-owned nursing homes.

102

And a

review of studies of PE’s effect on various health care settings (hospitals,

nursing homes, physicians) across eight countries found “mixed impacts of PE

ownership on health care quality, with greater evidence that PE ownership

might degrade quality in some capacity rather than improve it.”

103

The impact of PE investment in physician practices shows similar risks of

higher prices, increased health spending (which reflects higher utilization), and

reduced staffing levels. One study documented that hospitals that contracted

with either of two large PE-backed physician-staffing companies for

emergency services experienced substantially higher prices, increased testing

and hospital admissions, and more aggressive billing practices.

104

Another

study found that PE-acquired physician practices specializing in dermatology,

gastroenterology, and ophthalmology increased health spending and

utilization.

105

A separate study of dermatology practices found that PE targeted

larger practices for acquisition (which poses consolidation concerns) and that

PE acquisition led to higher prices and patient volumes.

106

PE investment in

anesthesia practices yielded similar price increases.

107

A study across multiple

specialties found evidence that physician price increases from PE acquisitions

were driven by market consolidation, and price increases tended to be higher

in areas where a single PE firm controls more than 30% of the market.

108

In terms of staffing impacts, PE ownership of surgical dermatology

practices is associated with higher ratios of nonphysician providers to

physicians and lower staffing levels overall, particularly for non-revenue-

generating staff.

109

Compared to non-PE-acquired practices, PE-owned

102. Robert Tyler Braun, Hye-Young Jung & Lawrence P. Casalino, Association of Private

Equity Investment in US Nursing Homes with the Quality and Cost of Care for Long-Stay

Residents, 2 JAMA

HEALTH F. e213817, at 1 (2021), https://perma.cc/MVW8-UMJ2.

103. Alexander Borsa, Geronimo Bejarano, Moriah Ellen & Joseph Dov Bruch, Evaluating

Trends in Private Equity Ownership and Impacts on Health Outcomes, Costs, and Quality:

Systematic Review, 382 BMJ e075244, at 13 (2023), https://perma.cc/B8RA-YEKQ.

104. Cooper et al., supra note 7, at 3656, 3672-73.

105. Yashaswini Singh, Zirui Song, Daniel Polsky, Joseph D. Bruch & Jane M. Zhu,

Association of Private Equity Acquisition of Physician Practices with Changes in Health Care

Spending and Utilization, 3 JAMA H

EALTH F. e222886, at 1 (2022), https://perma.cc/

GR7R-RNU6.

106. Braun et al., supra note 90, at 733-34.

107. Ambar La Forgia et al., Association of Physician Management Companies and Private Equity

Investment with Commercial Health Care Prices Paid to Anesthesia Practitioners, 182 JAMA

NTERNAL MED. 396, 397, 402 (2022).

108. SCHEFFLER ET AL., supra note 1, at 30 tbl.3.

109. Alexander L. Fogel, Sara Hogan & Jeffrey Dover, Surgical Dermatology and Private

Equity: A Review of the Literature and Discussion, 48 D

ERMATOLOGIC SURGERY 339, 339

(2022).

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546

dermatology, ophthalmology, and gastroenterology practices showed higher

physician turnover and the addition of more advanced practice providers.

110

These findings suggest that physician satisfaction may be lower in PE-owned

practices and that PE-driven practice growth may rely on midlevel

practitioners rather than hiring new physicians.

To be sure, not all studies have shown clear adverse effects.

111

Physicians

may perceive certain benefits of PE ownership, such as the access to capital,

the stability of salaried employment, and the ability to offload the

administrative burden of practice management.

112

Yet no study has found

significant improvements to health care quality, efficiency, costs, or access as a

result of PE acquisition.

Taken together, the emerging evidence of PE’s adverse effects on health

care appear to outweigh evidence of its benefits. There is strong evidence that

PE acquisition appears to increase heath care prices and spending, depress

quality, and negatively alter staffing. Moreover, anecdotal and journalistic

accounts link the PE corporatization with physicians’ deep moral and mental

health crises.

113

In contrast, there is little support that PE improves efficiency

or patient care. Based on these findings and the speed of PE’s incursion,

policymakers and enforcers should urgently mount a policy response to

counter the risks to patient care, health care spending, and physicians’ clinical

autonomy posed by rampant PE investment in health care.

114

110. Joseph Dov Bruch et al., Workforce Composition in Private Equity-Acquired Versus Non-

Private Equity-Acquired Physician Practices, 42 H

EALTH AFFS. 121, 126-27 (2023).

111. See, e.g., Marcelo Cerullo et al., Association Between Hospital Private Equity Acquisition and

Outcomes of Acute Medical Conditions Among Medicare Beneficiaries, 5 JAMA N

ETWORK

OPEN e229581, at 10 (2022), https://perma.cc/3R7Y-NTVJ (reporting no increase in

hospital mortality following private equity acquisition).

112. Lawrence P. Casalino, Private Equity, Women’s Health, and the Corporate Transformation

of American Medicine, 180 JAMA I

NTERNAL MED. 1545, 1545 (2020) (summarizing

conceptual arguments for and against PE acquisition of physician practices); Gondi &

Song, supra note 52, at 1047 (describing why physicians may be attracted to private

equity buyouts); F

USE BROWN ET AL., supra note 8, at 6.

113. See Press, supra note 16 (quoting a physician who estimates that staffing in 30% of all

ERs is now overseen by PE-owned firms that, once in charge, “start squeezing the

doctors to see more patients per hour, cutting staff”); infra note 334 and

accompanying text.

114. For examples of contemporary regulatory and policy responses to PE’s entry into

health care, see Anastassia Gliadkovskaya, The FTC and DOJ Have Vowed to Scrutinize

Private Equity Deals. Here’s What It Means for Healthcare, F

IERCE HEALTHCARE (Oct. 21,

2022, 7:45 AM), https://perma.cc/CRS3-SPUK; Press Release, S. Comm. on Fin., Wyden

Statement at Finance Committee Hearing on Corporatization and Consolidation in

Health Care (June 8, 2023), https://perma.cc/JF5U-DGDE; Press Release, Rep. Pramila

Jayapal, Jayapal Introduces Bill To Improve Transparency in Health Care (Mar. 23,

2023), https://perma.cc/X324-C7S7.

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II. Regulating Private Equity in Health Care: Current Legal Tools

In their quest to maximize profits, PE investors exploit various market

dysfunctions and payment loopholes. Although similar critiques could be

leveled against other acquirers of physician practices, such as health systems,

public companies, or insurance companies, PE’s entry into a physician-

specialty market serves as a divining rod to identify regulatory gaps and

market dysfunctions that merit correction.

115

Because of its short-term pursuit

of large returns and heavy reliance on debt, PE poses heightened risks to the

health care system. While not unique to PE, the problems of consolidation,

overutilization, upcoding, corporate control over medical practice, and

anticompetitive physician employment practices are intensified.

An array of existing laws passed in response to the perennial threat of

profit-seeking in the U.S. health care system could be trained on this latest (and

most egregious) manifestation of the problem. Enforcement of existing laws

can address market vulnerabilities to some extent, but the aggressiveness of PE

makes honing and adapting these legal tools even more urgent, to address old

threats by new actors.

This Part reviews existing legal mechanisms to address the key harms

posed by PE in health care: (A) antitrust enforcement to address consolidation;

(B) fraud and abuse enforcement to address improper self-referrals, overbilling,

and upcoding; (C) state prohibitions on the corporate practice of medicine and

fee splitting to address threats to professionalism from improper lay control

over physicians’ practices; and (D) state employment laws to curb PE’s use of

restrictive covenants and gag clauses against physicians. The Appendix

summarizes these legal tools, the policy concerns they address, their source

(state or federal), and what could be done to sharpen them to address the risks

of PE investment in health care.

A. Antitrust Law

Antitrust review for PE roll-up transactions is a tool for addressing the risk

that PE investment in physician practices contributes to the horizontal market

consolidation of these physician specialties.

116

This concern is particularly

strong for PE investments that fit the “platform add-on” model, in which an

existing practice with market clout grows substantially by acquiring smaller

and less recognized groups.

117

Regional dominance allows the combined

115. FUSE BROWN ET AL., supra note 8, at 2.

116. SCHEFFLER ET AL., supra note 32, at 39-42; Zhu & Polsky, supra note 1, at 981-83; see also

Resneck Jr., supra note 97, at 13-14.

117. FUSE BROWN ET AL., supra note 8, at 18-19; SCHEFFLER ET AL., supra note 32, at 29;

Resneck Jr., supra note 97, at 13; Gondi & Song, supra note 52, at 1047; Zhu & Polsky,

supra note 1, at 981-82.

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548

practice to demand higher prices from payers.

118

Moreover, PE’s use of debt to

finance its acquisitions strongly incentivizes consolidation because one way to

quickly grow the revenues of a portfolio company is to buy other companies.

The availability of debt financing increases with the size of the company, and

there is some evidence that larger companies trade at higher EBITDA (earnings

before interest, taxes, depreciation, and amortization) multiples than smaller

companies, all other things being equal—especially important given PE firms

seek to exit their investment.

119

Consumers may be the losers: Studies find that

horizontal consolidation of physician practices results in higher prices.

120

And

horizontal physician consolidation may lead to worse patient outcomes when it

is not possible to increase prices, as under Medicare.

121

One legal solution to address PE’s use of the platform add-on model to

amass market power would be to increase antitrust scrutiny of these

incremental acquisitions. Under Section 7 of the Clayton Act, federal antitrust

authorities—the Federal Trade Commission (FTC) and the Department of

Justice (DOJ)—can sue to block mergers and acquisitions where the effect of the

transaction may be “substantially to lessen competition, or to tend to create a

monopoly.”

122

To determine whether a transaction may threaten competition,

antitrust agencies analyze whether the transaction will enhance the market

power of the transacting parties in a given geographic and product market.

123

The amassed market power allows the merging entity to increase prices to

consumers and can lead to adverse “non-price” effects such as diminished

118. SCHEFFLER et al., supra note 32, at 29, 41-42.

119. Id. at 30; Casalino et al., supra note 50, at 114 (describing how acquiring smaller

practices “provides a major arbitrage opportunity” because rolling up smaller practices

allows the PE fund to resell the larger entity at the a higher multiple without any

change in the underlying assets).

120. Laurence C. Baker, M. Kate Bundorf, Anne B. Royalty & Zachary Levin, Physician

Practice Competition and Prices Paid by Private Insurers for Office Visits, 312 JAMA 1653,

1654-61 (2014); Daniel R. Austin & Laurence C. Baker, Less Physician Practice Competition

Is Associated with Higher Prices Paid for Common Procedures, 34 H

EALTH AFFS. 1753, 1753-

59 (2015); Eric Sun & Laurence C. Baker, Concentration in Orthopedic Markets Was

Associated with a 7 Percent Increase in Physician Fees for Total Knee Replacements, 34

HEALTH AFFS. 916, 916-920 (2015); Thomas Koch & Shawn W. Ulrick, Price Effects of a

Merger: Evidence from a Physicians’ Market, 59 E

CON. INQUIRY 790, 790-91 (2021).

121. Thomas Koch, Brett Wendling & Nathan E. Wilson, Physician Market Structure, Patient

Outcomes, and Spending: An Examination of Medicare Beneficiaries, 53 H

EALTH SERVS.

RSCH. 3549, 3550-51 (2018); Christopher S. Brunt, Joshua R. Hendrickson & John R.

Bowblis, Primary Care Competition and Quality of Care: Empirical Evidence from Medicare,

29 H

EALTH ECON. 1048, 1048-49 (2020).

122. Clayton Antitrust Act of 1914, Pub. L. No. 63-212, § 7, 38 Stat. 730, 731-32 (codified as

amended at 15 U.S.C. § 18).

123. See U.S. DEP’T OF JUST. & FTC, 2023 MERGER GUIDELINES 39-40 (Dec. 18, 2023),

https://perma.cc/PTA8-NHNN (to locate, select “View the live page,” and then select

“2023 Merger Guidelines”).

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549

quality or access.

124

Typically, the FTC oversees health care acquisitions (other

than insurance).

125

This merger enforcement follows a series of steps, starting

with pre-merger notification of the authorities, then a review period during

which the transaction may not close; following review, the government may

clear the deal to move ahead, request more information, or challenge the

deal.

126

Most challenged transactions are resolved in a negotiated consent

agreement, under which the agency allows the transaction to move ahead

subject to certain conditions, such as limiting price increases, maintaining

access to key services, and divesting assets to maintain or restore competition

in the relevant market.

127

If the parties do not reach a settlement, the agency

can seek an injunction to block the transaction in federal court.

128

Although the market consolidation that results from PE acquisitions of

health care entities could be slowed by antitrust review, there are two main

barriers to effective enforcement: (1) Many acquisitions go unreported and

unreviewed because no single transaction exceeds the mandatory reporting

threshold under the HSR Act;

129

and (2) previous merger guidelines and legal

precedent do not provide models for assessing the collective market effects of

serial platform and add-on acquisitions.

130

Due to these barriers, whether

driven by PE or other causes, physician markets are characterized by so-called

“stealth consolidation.”

131

124. See id. 6-8.

125. Health Care Competition, FTC, https://perma.cc/4VW3-7CDD (archived Jan. 19, 2024);

Scott Hulver & Zachary Levinson, Understanding the Role of the FTC, DOJ, and States in

Challenging Anticompetitive Practices of Hospitals and Other Health Care Providers, KFF

(Aug. 7, 2023), https://perma.cc/2F3W-XJW7.

126. Premerger Notification and the Merger Review Process, FTC, https://perma.cc/8DQW-

ZHYM (archived Jan. 19, 2024).

127. See DOUGLAS H. GINSBURG & JOSHUA D. WRIGHT, FTC, ANTITRUST SETTLEMENTS: THE

CULTURE OF CONSENT paras. 9-11 (Feb. 28, 2013), https://perma.cc/C9Z9-3BDX;

Frequently Asked Questions About Merger Consent Order Provisions, FTC,

https://perma.cc/QLN3-PV7R (archived Jan. 19, 2024).

128. Premerger Notification and the Merger Review Process, supra note 126.

129. Hard-Scott Rodino Antitrust Improvements Act of 1976, Pub. L. No. 94-435, § 201, 90

Stat. 1383, 1390-94 (codified as amended at 15 U.S.C. § 18a). The HSR reporting

thresholds are updated annually, and in 2023, the reporting threshold was set at

transactions valued at $111.4 million or more. FTC Announces 2023 Update of Size of

Transaction Thresholds for Premerger Notification Filings and Interlocking Directorates, FTC

(Jan. 23, 2023), https://perma.cc/X7JW-RKPM.

130. Cory Capps, David Dranove & Christopher Ody, Physician Practice Consolidation Driven

by Small Acquisitions, So Antitrust Agencies Have Few Tools to Intervene, 36 H

EALTH AFFS.

1556, 1560-61 (2017).

131. Thomas G. Wollman, How to Get Away with Merger: Stealth Consolidation and Its Real

Effects on US Healthcare 2-5 (Nat’l Bureau of Econ. Rsch., Working Paper No. 27274,

2020), https://perma.cc/Q32M-3Z7H; Capps et al., supra note 130, at 1561-62.

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76 STAN. L. REV. 527 (2024)

550

Moreover, the incremental add-on approach of PE investment obscures

the extent of consolidation over time and across a larger geographic

footprint.

132

As a result, some have called for updating federal merger

guidelines to target nonhorizontal forms of consolidation beyond simple

mergers between two rivals in a single geographic area.

133

In the context of PE,

the updated merger guidelines indicate that antitrust enforcers will address

serial add-on acquisitions that accumulate market power for a platform

practice across a broader geographic area, rather than consider each

transaction individually.

134

The FTC and DOJ may be moving in this direction. In December 2023, the

federal antitrust agencies released new merger guidelines to replace the existing

horizontal and vertical merger guidelines, which provide guidance on how the

agencies identify and analyze potentially illegal mergers.

135

The 2023 merger

guidelines direct the agencies to examine the cumulative impact of smaller,

serial acquisitions for anticompetitive effects under the Clayton Act.

136

The FTC has also shown signs of more active enforcement of roll-up deals.

In September 2023, the FTC filed a complaint against U.S. Anesthesia Partners

(USAP) and its PE parent, Welsh Carson, alleging that they engaged in a

multiyear scheme both to consolidate the market for anesthesia practices in

Texas using a roll-up strategy and to drive up prices.

137

The FTC alleges (1) that

USAP and Welsh Carson monopolized the market for anesthesia services in

violation of Section 2 of the Sherman Act; (2) that the roll-up acquisitions of

anesthesia practices violated Section 7 of the Clayton Act; (3) that they engaged

in illegal agreements to set prices and allocate the market in violation of Section

1 of the Sherman Act; and (4) that their scheme to reduce competition for

anesthesia services across Texas constituted an unfair method of competition

under Section 5 of the Federal Trade Commission Act.

138

The case is significant

for three reasons: (1) It is the first antitrust action to target the roll-up strategy

132. SCHEFFLER ET AL., supra note 32, at 44.

133. Aimee Cicchiello & Lovisa Gustafsson, Federal Antitrust Tools Are Inadequate to Prevent

Anticompetitive Health Care Consolidation, C

OMMONWEALTH FUND (May 13, 2021),

https://perma.cc/88VY-2NPG; Jaime S. King & Erin C. Fuse Brown, The Anti-

Competitive Potential of Cross-Market Mergers in Health Care, 11 S

T. LOUIS U. J. HEALTH L.

& POL’Y 43, 61-67 (2017); Leemore Dafny, Kate Ho & Robin S. Lee, The Price Effects of

Cross-Market Mergers: Theory and Evidence from the Hospital Industry, 50 RAND

J. ECON.

286, 315 (2019); see also Keith Brand & Ted Rosenbaum, A Review of the Economic

Literature on Cross-Market Health Care Mergers, 82 A

NTITRUST L.J. 533, 533 (2019).

134. See SCHEFFLER ET AL., supra note 1, at 15-16.

135. See generally U.S. DEP’T OF JUST. & FTC, supra note 123, at 39-40.

136. Id. at 23.

137. Complaint for Injunctive and Other Equitable Relief at 1-5, FTC v. U.S. Anesthesia

Partners, Inc., No. 23-cv-03560 (S.D. Tex. Sept. 21, 2023), ECF No. 1.

138. Id. at 95-105.

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551

used by PE firms in health care; (2) it operationalizes the principle in draft

merger guidelines that the agency will consider the cumulative effect of serial

acquisitions; and (3) it names the PE firm as a party.

139

In another effort to address the limitations of the HSR threshold, the FTC

voted in 2021 to revive a long-abandoned remedy that requires prior notice

and approval of proposed transactions by parties to a merger consent

agreement (resulting from a challenged merger) for a period of ten years.

140

2022, the FTC applied this technique in a consent agreement with a PE-owned

veterinary services provider, requiring notification and approval of future

acquisitions that would otherwise not be reported under the HSR Act.

141

The

FTC specifically tied the notice-and-approval remedy to the agency’s concerns

that “[p]rivate equity firms increasingly engage in roll up strategies that allow

them to accrue market power off the Commission’s radar.”

142

In June 2023, the FTC and DOJ proposed a rule to expand the HSR pre-

merger notification filing form, the first major change in 45 years.

143

Among

the changes, the proposed rule would expand the information reported to the

agencies by merging entities on prior acquisitions in related business lines. The

proposed rule would also expand the period of reportable prior transactions

from five years to ten and eliminate the threshold for reportable prior

139. See Reed Abelson & Margot Sanger-Katz, F.T.C. Sues Anesthesia Group Backed by Private-

Equity Firm, N.Y.

TIMES (Sept. 21, 2023), https://perma.cc/35SX-WJCN; Bob Herman &

Tara Bannow, FTC Sues Private Equity Firm Welsh Carson, U.S. Anesthesia Partners for

Allegedly Creating a Monopoly, S

TAT NEWS (Sept. 21, 2023), https://perma.cc/M97G-

PX79.

140. Press Release, FTC, FTC Rescinds 1995 Policy Statement that Limited the Agency’s

Ability to Deter Problematic Mergers (July 21, 2021), https://perma.cc/TNW6-S6BN;

Notice and Request for Comment Regarding Statement of Policy Concerning Prior

Approval and Prior Notice Provisions in Merger Cases, 60 Fed. Reg. 39745, 39745-47

(Aug. 3, 1995).

141. JAB Consumer Partners/Ethos Veterinary Health; Analysis of Agreement Containing

Consent Orders to Aid Public Comment, 87 Fed. Reg. 48026, 48027 (Aug. 5, 2022)

(proposed consent agreement).

142. Press Release, FTC, FTC Acts To Protect Pet Owners from Private Equity Firm’s

Anticompetitive Acquisition of Veterinary Services Clinics (June 13, 2022),

https://perma.cc/H5TW-R2N4.

143. Premerger Notification; Reporting and Waiting Period Requirements, 88 Fed. Reg.

42178, 42178 (proposed June 29, 2023) (to be codified at 16 C.F.R. pts. 801, 803); see also

Lina Khan, FTC Chair Lina Khan on Proposed Amendments to Premerger Notification Form

and Hart-Scott-Rodino Rules, C

OLUM. L. SCH. BLUE SKY BLOG (June 30, 2023),

https://perma.cc/789A-S2MG; Press Release, FTC, FTC and DOJ Propose Changes to

HSR Form for More Effective, Efficient Merger Review (June 27, 2023),

https://perma.cc/Q868-M7YA.

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552

acquisitions.

144

The agency hopes to identify whether parties are engaged in

serial acquisitions that collectively may pose risks to competition, even if

individual transactions are too small to be reported.

145

The proposed rule does

not, however, reduce the HSR’s threshold for reportable transactions, so it does

not fully address the problem that most of these deals go unreported. Only if a

transaction is large enough to trigger notification will the agencies receive

information about prior acquisitions.

The antitrust agencies have taken meaningful and promising steps to

heighten antitrust scrutiny over the consolidation and competitive harms

posed by PE’s land grab among health care entities. But gaps remain. As

discussed further below, antitrust enforcement tools can be sharpened with

policy reform at the federal and state levels to better counteract PE’s threats to

health care competition.

146

B. Fraud and Abuse Enforcement

PE firms’ drive to increase the revenues of acquired portfolio practices can

result in the adoption of illegal billing practices. These questionable practices

include overutilization, inappropriate billing, medically unnecessary care, and

prohibited self-referrals for ancillary services.

147

Maximizing profitability

may also result in avoiding less profitable services (or patients) or

inappropriately using nonphysicians.

148

The federal fraud and abuse laws

generally address these threats to costs and quality, principally through the

False Claims Act (FCA), Anti-Kickback Statute (AKS), and Stark Law.

149

addition, most states have related laws, such as those that bar fee splitting and

self-referral.

150

More active enforcement of these laws could counter some of

the fraud and abuse risks that PE investment in physician practices poses.

Federal fraud and abuse laws hold the prospect for extensive liability. The

FCA triggers up to a $27,000-per-claim penalty and “treble damages” for each

improper claim for payment.

151

Thus, if PE firms direct or encourage unlawful

144. Premerger Notification; Reporting and Waiting Period Requirements, 88 Fed. Reg. at

42202-03. The proposed rule would also require reporting of prior transactions by both

the acquiring and acquired entities. Id.

145. Id.

146. See infra Part III.A.1.

147. See Gondi & Song, supra note 52, at 1047-48; Zhu & Polsky, supra note 1, at 982.

148. Resneck Jr., supra note 97, at 13-14.

149. FUSE BROWN ET AL., supra note 8, at 22.

150. See infra Part II.C.3.

151. Any person who knowingly presents a false or fraudulent claim for payment is liable

for a civil penalty plus three times the amount of damages which the government

sustains. 31 U.S.C. § 3729(a)(1). FCA penalties are adjusted for inflation. Adjustments for

footnote continued on next page

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553

conduct by portfolio practices, PE firms could face substantial financial liability

or be excluded from participating in federal programs such as Medicare.

152

Nevertheless, the government typically seeks significantly less than the

maximum penalties in settlements (closer to double damages than treble), which

may reduce the deterrent value for PE firms.

153

An outside investor seeking to

rapidly extract returns and exit may see occasional settlements as the cost of

doing business and lack the reputational incentives of long-term operators of

health care entities. While maximum damages may force hospitals or health

systems to close and diminish access, the same may not be true of PE investors.

Thus, government enforcers may want to consider the nature of the defendant

when determining damages multipliers in such cases.

Each fraud and abuse statute targets different types of conduct, but they

overlap in one key respect: The FCA, which imposes civil and criminal liability

for false or fraudulent payment claims made to the federal government,

encompasses any claims for payment that also violate the AKS or Stark Law.

154

1. Applying the False Claims Act to private equity owners

The FCA is a potent tool to police inappropriate billing practices such as

upcoding, claims for unnecessary care, or improper billing for services by mid-

level practitioners.

155

In two recent cases, PE firms were sued under the FCA

for the alleged fraudulent conduct of their respective portfolio companies.

156

In both cases, the plaintiffs alleged that the PE owners knew of or acquiesced to

Inflation to Civil Monetary Penalties, 88 Fed. Reg. 3, 4 (Jan. 3, 2023) (to be codified at 15

C.F.R. pt. 6). The 2023 FCA minimum penalty per claim is $13,508, and the maximum is

$27,108. Id.

152. See 42 U.S.C. § 1320a-7(3).

153. Jacob T. Elberg, A Path to a Data-Driven Health Care Enforcement, 2020 UTAH L. REV.

1169, 1194.

154. 31 U.S.C. §§ 3729-33 (imposing liability for violations of the FCA); 42 U.S.C. § 1320a-

7b(g) (establishing that claims for payment in violation of the AKS constitute false or

fraudulent claims for the purposes of the FCA); see also Fraud & Abuse Laws, U.S.

DEP’T

OF HEALTH & HUM. SERVS., https://perma.cc/M4N7-7NLL (archived Jan. 19, 2024) (“The

fact that a claim results from a kickback or is made in violation of the Stark law also

may render it false or fraudulent, creating liability under the civil FCA as well as the

AKS or Stark law.”).

155. See Field et al., supra note 37, at 866 (“As private equity investment in health care

continues to increase, the FCA has become the principal mechanism by which its

investors can face liability for the conduct of their portfolio companies.”).

156. United States ex rel. Martino-Fleming v. S. Bay Mental Health Ctr., Inc., No. 15-13065,

2018 WL 4539684, at *1 (D. Mass. Sept. 21, 2018); United States ex rel. Carmen Medrano

v. Diabetic Care RX, LLC, No. 15-cv-62617, 2018 WL 6978633, at *1 (S.D. Fla.

Nov. 30, 2018).

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554

billing practices that were sufficiently fraudulent to render the PE owners

liable under the FCA.

157

To prove liability under the FCA, the plaintiff must show that (1) the

defendant caused a claim to be presented to the United States for payment,

(2) such claim was false or fraudulent, and (3) the defendant had the requisite

level of scienter or knowledge of the fraudulent conduct.

158

Therefore, it

stands to reason that putative control over a medical practice may be imputed

to the PE owner where the PE owner has a high level of knowledge of the acts

underlying the fraud of its portfolio. Under the FCA, a third-party defendant—

such as a PE investor—can be liable by proving that it possessed the requisite

knowledge and control to cause the submission of false claims.

159

Defendants are liable under the FCA where they “knowingly present[], or

cause[] to be presented, to an officer, employee, or agent of the United States” “a

false or fraudulent claim for payment or approval.”

160

The FCA does not

require specific intent to defraud; rather, the scienter requirement is

established if the defendant has actual knowledge of false information, acts in

deliberate ignorance of the truth or falsity of the information, or acts in

reckless disregard of the truth or falsity of the information.

161

Closely related

to scienter is the causation element, as a defendant can be liable only for claims

that it “causes to be presented” to the government.

162

Although scienter and

causation are technically distinct elements, they often overlap, such that

proving one necessarily proves the other.

163

Scienter and causation are particularly critical to proving FCA liability of

PE owners of health care entities, who argue that they are passive third-party

investors who cannot be held liable for the actions of medical professionals.

164

Under the FCA, merely being a parent corporation is not sufficient to establish

157. Martino-Fleming, 2018 WL 4539684, at *3-6; Medrano, 2018 WL 6978633, at *4-5.

158. 31 U.S.C. § 3729(a)(1)(A).

159. Id.; see also Lee Turner Friedman, Jennifer S. Windom, Raph C. Mayrell & Jason A.

Shaffer, Investors Beware: Private Equity Firms Continue to Face Potential Liability Under the

False Claims Act for Their Portfolio Companies’ Conduct, K

RAMER LEVIN (Aug. 2, 2022),

https://perma.cc/6LBW-CW9B.

160. 31 U.S.C. § 3729(a)(1)(A).

161. Id. § 3729(b)(1)(A)-(B).

162. Id. § 3729(a)(1)(A).

163. CLAIRE M. SYLVIA, THE FALSE CLAIMS ACT: FRAUD AGAINST THE GOVERNMENT § 4:3

(West 2023) (“The person or entity ‘causing’ the submission of the claim must have

acted ‘knowingly’ within the meaning of the FCA.”).

164. United States ex rel. Carmen Medrano v. Diabetic Care RX, LLC, No. 15-cv-62617, 2018

WL 6978633, at *8-11 (S.D. Fla. Nov. 30, 2018).

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liability for the conduct of a subsidiary.

165

In United States ex rel. Hockett v.

Columbia/HCA Healthcare Corp., the court considered two possible ways to hold

a parent corporation liable under the FCA.

166

First, through traditional veil-

piercing frameworks, a parent may be liable on behalf of its subsidiary where a

“unity of interest and ownership” essentially destroys the separate personalities

of the two entities.

167

In the PE context, traditional veil piercing would likely

be difficult because of the carefully crafted relationship between the medical

practice and the outside management and investment entity.

Hockett also held that parent liability may be established where the parent

was “directly involved in submitting false claims or causing them to be

submitted to the government.”

168

The parent company in Hockett,

Columbia/HCA, was directly involved in submitting cost reports to the

government that determined the amount of reimbursement the company

received from government payers.

169

Due to the administrative control exerted

by PE over acquired medical practices, this direct-involvement theory of parent

liability seems more viable than veil piercing. PE firms are known for their high

degree of involvement in the billing practices and procedures of the medical

practice.

170

Unlike other forms of capital investment, PE firms acquire a

controlling share of their portfolio companies and direct management to take

steps to quickly increase revenues.

171

The aggressive focus on revenue by the PE

fund’s general partner and active involvement with the revenue-generation

strategies of portfolio companies could form a basis for establishing the requisite

level of knowledge and control for FCA liability to attach.

172

Private and government enforcers have begun to sketch out a counter-

playbook to bring FCA claims against PE owners of health care firms. Two

recent cases illustrate how scienter and causation can be established to hold PE

parent companies liable for FCA violations of their portfolio companies. The PE

firm in United States ex rel. Carmen Medrano v. Diabetic Care RX, LLC used a

common organizational structure: acquisition of portfolio companies through a

wholly owned management company, which owns and/or manages the

165. United States ex rel. Hockett v. Columbia/HCA Healthcare Corp., 498 F. Supp. 2d 25, 59-

60 (D.D.C. July 17, 2007) (citing United States ex rel. Tillson v. Lockheed Martin Energy

Sys., Inc., No. 00-cv-00039, 2004 WL 2403114, at *33 (W.D. Ky. Sept. 30, 2004)).

166. Id. at 60-63.

167. Id. at 60 (quoting Labadie Coal Co. v. Black, 672 F.2d 92, 96 (D.C. Cir. 1982)).

168. Id. at 62.

169. Id.

170. See Appelbaum & Batt, supra note 1, at 65.

171. Id. at 6-7.

172. Field et al., supra note 37, at 884 (“A private equity firm . . . can be shown to have

sufficient knowledge and control over the operating organization to implicate FCA

liability.”).

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acquired companies.

173

In Medrano, the PE firm acquired a controlling stake in a

portfolio pharmacy via a management contract with the firm’s wholly owned

management company.

174

The government alleged that the portfolio pharmacy

violated the Anti-Kickback Statute by engaging marketing companies to refer

beneficiaries to the pharmacy to purchase an expensive topical cream.

175

The

management company argued that it could not be held liable under the FCA

because it had no knowledge of the pharmacy’s scheme and did not cause the

claims to be submitted to the government.

176

The court disagreed.

177

First, the

court held that the PE owner had knowledge of the scheme because it approved

the pharmacy’s decision to use the marketers to generate referrals.

178

Second,

the PE owner caused the violation when it provided $2 million in commissions

to the marketers for generating referrals.

179

The PE firm in United States ex rel. Martino-Fleming v. South Bay Mental

Health Center, Inc. acquired its ownership stake in a mental health center

through a holding company.

180

The plaintiff, a private whistleblower, alleged

that the defendant mental health facility employed unlicensed staff and

provided inadequate supervision to employees providing care.

181

Submission

of claims for payment in violation of these requirements constitutes a false

claim.

182

The plaintiff alleged that the board of directors, many of whom were

partners in the PE firm, rejected her recommendation to bring the facility into

compliance.

183

The court found that the plaintiff adequately alleged causation

because “knowingly ratif[ying] the prior policy of submitting false claims by

rejecting recommendations to bring [the facility] into regulatory compliance

constitutes sufficient participation in the claims process to trigger FCA

173. United States ex rel. Carmen Medrano v. Diabetic Care RX, LLC, No. 15-cv-62617, 2018

WL 6978633, at *1 n.3 (S.D. Fla. Nov. 30, 2018).

174. Id.

175. Id. at *3.

176. Id. at *10-11.

177. Id. at *12.

178. Id. at *10.

179. Id. at *12.

180. Amended Consolidated Complaint at 8-9, United States ex. rel. Martino-Fleming v. S.

Bay Mental Health Ctr., Inc., No. 15-cv-13065, 2018 WL 4539684 (D. Mass. Sept. 21,

2018), 2019 WL 13167541. It appears that the subject transaction was not subject to the

corporate practice prohibition because the portfolio company was a Massachusetts

licensed for-profit corporation rather than a professional corporation. Id. at 5. Before

acquisition, it was wholly owned by a licensed mental health care provider. Id. at 2.

181. Martino-Fleming, 2018 WL 4539684, at *3-4, *6.

182. Id. at *4.

183. Id. at *4-5.

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557

liability.”

184

In doing so, the court expressly relied on the Hockett case in

holding that the PE firm may be liable because it was “directly involved in the

operations” of the medical practice.

185

United States ex rel. Anderson v. Curo Health Services, Inc. further supports the

proposition that PE owners can be liable for the actions of their acquired

companies under the FCA.

186

Anderson centered around a group of PE-owned

Tennessee hospice providers that were alleged to have falsely certified to

Medicare and Medicaid that patients’ illnesses had reached a terminal stage,

resulting in the submission of false claims.

187

Curo Health Services Holdings,

Inc. is a private equity-backed operator of hospice chains which purchased

smaller providers, including Avalon Hospice, which operated twenty-seven

hospice agencies in Tennessee.

188

The crux of the case involved the

government’s claim that Curo was liable for Avalon’s submission of false

claims for ineligible hospice patients.

189

The government argued Curo was

liable due to its active involvement in assessing patient eligibility, as well as its

history of pressuring Avalon to admit patients into hospice through

management practices and financial incentives.

190

The Court ruled in favor of

the government, finding that it had established the elements necessary to

establish liability on behalf of Avalon’s corporate parents—including PE-

backed Curo.

191

Medrano, Martino-Fleming, and Anderson demonstrate that the substantial

level of control PE owners exert over their acquired medical practices can

expose them to FCA liability for the actions of those practices.

192

Even where

sophisticated contracting obscures formal control enough to evade the state

corporate practice of medicine doctrine,

193

various forms of influence and

184. Id. at *5.

185. Id.

186. United States ex rel. Anderson v. Curo Health Servs., Inc., No. 13-cv-00672, 2022 WL

842937, at *4, *7 (D. Tenn. Mar. 21, 2022).

187. Id. at *1.

188. Id. at *4.

189. Id.

190. Id. at *4-6.

191. Id. at *15.

192. Id. at *1; United States ex rel. Carmen Medrano v. Diabetic Care RX, LLC, No. 15-cv-

62617, 2018 WL 6978633, at *1 n.3, *11-13 (S.D. Fla. Nov. 30, 2018); United States ex rel.

Martino-Fleming v. S. Bay Mental Health Ctr., Inc., No. 15-cv-13065, 2018 WL 4539684,

at *5 (D. Mass. Sept. 21, 2018); see also Field et al., supra note 37, at 877-78 (reviewing

Medrano, Martino-Fleming, and Anderson and concluding that taken together, the three

cases establish that private equity investors can be liable under the FCA).

193. See infra Part II.C.

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558

oversight can establish that private equity owners act with the requisite level

of scienter and causation to be liable under the FCA.

194

2. Applying the Stark Law to private equity owners

Enforcement of the Stark Law can target another revenue strategy of PE-

acquired physician practices: self-referrals for ancillary, wrap-around services

within the PE’s portfolio practices. This strategy seems to motivate PE’s

recent acquisition of office-based specialties like dermatology,

ophthalmology, and gastroenterology that provide outpatient procedures and

lucrative ancillary services such as physician-administered drugs or pathology

laboratory services.

195

The Stark Law bars Medicare payment for services generated by

prohibited referrals for “designated health services.”

196

This referral

prohibition attaches to physicians who have a financial relationship with

entities that render the service, unless the arrangement satisfies one of a series

of specific exceptions.

197

Stark is a strict liability statute, so—unlike the FCA or

AKS—the government does not have to prove the defendant’s intent to violate

the law.

198

This feature of Stark may make it easier to establish a violation by

PE investors or the PE-controlled managed company.

A portfolio practice, management company, and a group’s physicians may

enter into financial arrangements, including a physician’s ownership interest

in a PE-backed practice, revenue-sharing among the parties, the practice’s

management services agreement, and the basic employment compensation for

physicians.

199

Under the Stark Law, these financial arrangements must satisfy

a Stark exception.

200

Otherwise, the group’s physicians cannot lawfully make

194. See Medrano, 2018 WL 6978633, at *11-13; Martino-Fleming, 2018 WL 4539684, at *5.

195. FUSE BROWN ET AL., supra note 8, at 13.

196. 42 U.S.C. § 1395nn(a); 42 U.S.C. § 1395nn(h)(6) (defining “designated health services” to be

any of the following items or services: “(A) Clinical laboratory services. (B) Physical

therapy services. (C) Occupational therapy services. (D) Radiology services, including

magnetic resonance imaging, computerized axial tomography scans, and ultrasound

services. (E) Radiation therapy services and supplies. (F) Durable medical equipment and

supplies. (G) Parenteral and enteral nutrients, equipment, and supplies. (H) Prosthetics,

orthotics, and prosthetic devices and supplies. (I) Home health services. (J) Outpatient

prescription drugs. (K) Inpatient and outpatient hospital services. (L) Outpatient speech-

language pathology services.”).

197. 42 U.S.C. § 1395nn(a).

198. FUSE BROWN ET AL., supra note 8, at 23.

199. Id.

200. 42 U.S.C. § 1395nn(a)-(b).

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559

within-group referrals for ancillary services, which form a key revenue stream

targeted by PE investors.

201

The Stark Law exception for “in-office ancillary services” is critical to

many PE investors’ strategies for revenue generation.

202

This exception is

intended to facilitate rapid diagnostic or therapeutic services during a patient’s

office visit so that patients do not need to go elsewhere for services such as

imaging, laboratory, or physical therapy.

203

If satisfied, the in-office ancillary

services exception allows members of a group practice to share revenues earned

from referrals within the practice, which would otherwise be unlawful.

204

To use the in-office ancillary services exception, the practice must meet the

Stark Law’s requirements for designation as a “group practice.”

205

First, the

practice must be a single legal entity.

206

Additionally, physician members must

render substantially all of their patient services through the group practice; the

business must be unified through centralized administration, billing, and

financial reporting; and at least 75% of physician services must be provided by

physician members rather than contractors.

207

In addition, the exemption

applies intricate requirements on physician compensation and profit-sharing.

208

PE-backed portfolio practices may struggle to meet some of these

requirements. For instance, the “single legal entity” provision does not include

“separate group practices under common ownership or control through a

physician practice management company . . . or other entity or organization.”

209

Each add-on practice in a portfolio would be considered its own entity and so

could not be considered a single group practice.

210

In addition, it may be difficult

to meet the unified business and centralized decisionmaking requirements,

where a representative body has effective control over the practice’s billing and

finances; the PE-owned management company often takes over administration

201. Id. § 1395nn(b)(2); FUSE BROWN ET AL., supra note 8, at 23.

202. 42 C.F.R. § 411.355(b) (2022); 42 U.S.C. § 1395nn(b)(2); Madeline E. DeWane, Eliot

Mostow & Jane M. Grant-Kels, The Corporatization of Care in Academic Dermatology, 38

LINICS IN DERMATOLOGY 289, 290 (2020).

203. FUSE BROWN ET AL., supra note 8, at 24.

204. 42 U.S.C. § 1395nn(b)(2); 42 C.F.R. § 411.355(b).

205. 42 C.F.R. § 411.352 (2022); see also Am. Med. Ass’n, Key Considerations in Providing

Ancillary Services in Your Physician Practice (2021), https://perma.cc/3YKT-CB4S

(providing a checklist for physician groups to comply with Stark Law requirements

when considering offering ancillary services to patients).

206. 42 C.F.R. § 411.352(a).

207. Id. § 411.352(d)(1).

208. Id. § 411.352.

209. Id. § 411.352(a).

210. See id. § 411.352(a).

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560

and management for all the portfolio practices.

211

Thus, the portfolio practices

may not qualify as a single group practice necessary to share revenues and to

permit referrals across the practices.

Qualifying as a group practice is only one of the requirements of the in-

office ancillary services exception.

212

Other requirements include restrictions

on who may perform the services (only by the referring physician, another

physician in the group practice, or someone supervised by them), the location

where the services may be provided, and who may bill for the services.

213

Because Stark’s group practice definition and its requirements for the in-

office ancillary services exception are so complex, many PE investments are

likely noncompliant. Particularly for PE investments in procedural specialties

such as dermatology, gastroenterology, and ophthalmology that rely on in-

office procedures and ancillary services as a revenue strategy, deeper

investigations into the structure and revenue sharing of these practices may

uncover violations.

214

Although the Stark Law is a strict liability statute, for a

Stark violation to constitute a false claim under the FCA, the government or qui

tam relator would still need to prove the PE firm acted with the requisite intent

(i.e., that it knowingly violated the Stark Law)—which may prove difficult,

given the complicated requirements of the Stark Law.

215

Nevertheless, PE’s

hands-on management and revenue strategies for increasing billing and

referrals may create opportunities for further enforcement scrutiny.

Existing fraud and abuse laws provide ample authority to address some of

PE investors’ egregious practices. Thus, government enforcers and private

whistleblowers have begun to hold PE companies liable for upcoding, billing

for medically unnecessary care or unapproved treatments, kickback schemes,

and improper use of midlevel practitioners.

216

Expanding these targeted

211. Id. § 411.352(f); see BALLOU, supra note 50, at 109-10; OLSON, supra note 35, at 82.

212. 42 C.F.R. § 411.355(b).

213. Id. § 411.355(b)(1)-(3); see also Victoria Vaskov Sheridan, Gary W. Herschman & Joseph

E. Lynch, Recent Settlements May Indicate Increased Government Focus on the Stark Law’s

“Group Practice” Requirements and Exception for “In-Office Ancillary Services,”

EPSTEIN

BECKER GREEN (Feb. 26, 2018), https://perma.cc/CXR5-AQML (explaining how recent

settlements illustrate how the government is enforcing the Stark Law requirements

for group practices and in-office ancillary services).

214. FUSE BROWN ET AL., supra note 8, at 24.

215. See United States ex rel. Bartlett v. Ashcroft, 39 F. Supp. 3d 656, 674-75 (W.D. Pa. 2014)

(denying the qui tam relators’ motion for partial summary judgment related to their

FCA claim where the relators failed to provide sufficient evidence of the physician’s

and hospital defendants’ subjective knowledge); see also United States ex rel. Drakeford

v. Tuomey, 792 F.3d 364, 393 (4th Cir. 2015) (Wynn, J., concurring) (noting that health

care lawyers and their clients find the Stark Law complicated and counterintuitive).

216. See Press Release, U.S. Dep’t of Just., EEG Testing and Private Investment Companies

Pay $15.3 Million to Resolve Kickback and False Billing Allegations (July 21, 2001),

https://perma.cc/UAJ8-227J (explaining that PE firm Ancor Holdings LP agreed to

footnote continued on next page

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561

investigations of PE portfolio company practices could further uncover

and deter bad behavior and recoup improper payments from government

health programs.

Existing fraud and abuse laws may be further supplemented to curtail

overutilization. One approach, recommended by the Government

Accountability Office, is to add a self-referral “flag” to claims for certain in-

office referrals that are more likely to entail unnecessary services.

217

The

Medicare Payment Advisory Commission (MedPAC) has also endorsed

additional steps to limit the in-office ancillary exception or to counter the

exemption’s financial incentives for group physicians to increase the volume

of inappropriate care.

218

Recent amendments to the Stark and AKS rules,

however, have loosened rather than tightened the rules (or in the case of

Medicare accountable care organizations, waived the rules altogether), in an

effort to promote value-based payment arrangements that reduce compliance

burdens.

219

One way to address the risk of overutilization created by fee-for-

service payments would be to adopt alternative payment models, such as

capitation or bundled payments, for physician practices that self-refer

pay $1.8 million for false claims resulting from an ongoing kickback scheme

engineered by the portfolio company); Press Release, U.S. Att’y’s Off., E. Dist. of Pa.,

Former Owners of Therakos, Inc. Pay $11.5 Million to Resolve False Claims Act

Allegations of Promotion of Drug-Device System for Unapproved Uses to Pediatric

Patients (Nov. 19, 2020), https://perma.cc/V3AW-5TYY (explaining that the Gores

Group agreed to pay $1.5 million to settle a FCA lawsuit filed after their portfolio

company allegedly marketed an unapproved cancer treatment for pediatric patients,

resulting in the submission of false claims to federal programs); United States ex rel.

Carmen Medrano v. Diabetic Care RX, LLC, No. 15-cv-62617, 2018 WL 6978633, at *1

(S.D. Fla. Nov. 30, 2018) (involving an action by relators against a pharmacy for

allegedly violating the FCA); see also United States ex rel. Martino-Fleming v. S. Bay

Mental Health Ctr., Inc., No. 15-13065, 2018 WL 4539684, at *1 (D. Mass. Sept. 21,

2018) (involving an action by a relator against a mental health center); United States

ex rel. Cho v. H.I.G. Cap., LLC, No. 17-cv-00983, 2020 WL 5076712, at *1 (M.D. Fla.

Aug. 26, 2020) (involving an action by relators against a surgery center).

217. U.S. GOV’T ACCOUNTABILITY OFF., GAO-13-445, MEDICARE: ACTION NEEDED TO

ADDRESS HIGHER USE OF ANATOMIC PATHOLOGY SERVICES BY PROVIDERS WHO SELF-

EFER 24-25 (2013), https://perma.cc/BGQ7-KGPC.

218. MEDICARE PAYMENT ADVISORY COMM’N, REPORT TO THE CONGRESS: ALIGNING

INCENTIVES IN MEDICARE 219-21 (2010), https://perma.cc/W9MF-BG57 (discussing the

evidence that volume of ancillary services under the exception has increased and

questioning the appropriateness of such services); id. at 224-32 (recommending policies

to curb the overutilization of in-office ancillary services, including narrowing the

scope of the Stark exception and changing payment methodologies to blunt incentives

for overutilization of ancillary services).

219. Medicare Program; Modernizing and Clarifying the Physician Self-Referral

Regulations, 85 Fed. Reg. 77492, 77503 (Dec. 2, 2020) (codified at 42 C.F.R. pt. 411);

Medicare Program; Final Waivers in Connection with the Shared Savings Program, 76

Fed. Reg. 67992, 67994 (Nov. 2, 2011) (codified at 42 C.F.R. chs. IV, V).

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562

ancillary services.

220

However, value-based and capitated payments can drive

their own fraud, upcoding, and gaming, so they are no panacea to

overutilization and waste.

221

A further limitation of federal fraud and abuse laws is that some of the

specialties targeted by PE firms are attractive because of their extensive cash-

pay services that are not reimbursed by federal health care programs (e.g.,

cosmetic dermatology or refractive vision services).

222

Federal fraud and abuse

laws do not apply if the services are not paid for by a federal health care

program. Preventing overutilization of these services paid for by commercial

insurance or by cash would fall more naturally under state fraud enforcement

or evade regulation altogether.

C. Corporate Practice of Medicine and State Fee-Splitting Laws

The “corporate practice of medicine” prohibition has traditionally been

used to address many of the commercialization and profit-seeking concerns that

PE investment raises. This doctrine, which is a product of state professional

licensure laws, common law, and statutes, generally prohibits nonprofessionals

from owning or controlling medical practices.

223

Similarly, state anti-fee-

splitting laws sought to prevent corporations from profiting from physicians’

medical care.

224

These two historical doctrines prove useful to address the

contemporary issues raised by PE investment in physician practices.

220. Capitation is a payment method where the payer pays the provider (or group of

providers) a fixed monthly fee for each insured patient. See Capitation and Pre-payment,

TRS. FOR MEDICARE & MEDICAID SERVS., https://perma.cc/3UH5-LFVR (archived Feb.

26, 2024). Bundled payments pay a team of providers a fixed fee for all the services

involved in an episode of care—for example, a lump sum for the hospital, physician,

and post-acute care for a hip replacement. See Bundled Payments for Care Improvement

(BPCI) Initiative: General Information, C

TRS. FOR MEDICARE & MEDICAID SERVS.,

https://perma.cc/8FVL-LKWT (archived Jan. 19, 2024). These alternative payment

arrangements counter the physicians’ incentives under fee-for-service payments to

increase the volume and intensity of services by putting the providers at financial risk

for managing all the patient’s services under a fixed fee. If they provide efficient care,

they make money, and if they provide inefficient care, they lose money. See Michael E.

Porter & Robert S. Kaplan, How to Pay for Health Care, H

ARV. BUS. REV. (July-Aug. 2016),

https://perma.cc/Z3EC-PK38.

221. Paul A. Branstad & Claude R. Maechling, Explaining Corporate America’s Aggressive

Investment in Primary Care, H

EALTH AFFS. (Apr. 5, 2023), https://perma.cc/H5Q7-ENRH;

Shah et al., supra note 10, at 99-100; Reed Abelson & Margot Sanger-Katz, ‘The Cash

Monster Was Insatiable’: How Insurers Exploited Medicare for Billions, N.Y.

TIMES (Oct. 8,

2022), https://perma.cc/2NFZ-H9LM.

222. FUSE BROWN ET AL., supra note 8, at 13.

223. André Hampton, Resurrection of the Prohibition on the Corporate Practice of Medicine:

Teaching Old Dogma New Tricks, 66 U. C

IN. L. REV. 489, 497 (1998).

224. FUSE BROWN ET AL., supra note 8, at 22.

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1. The history and current application of the corporate practice of

medicine doctrine

The prohibition against the corporate practice of medicine has its roots in

ethical standards promulgated by the American Medical Association (AMA)

during the 1800s.

225

The guidelines, which prohibit corporations or lay entities

from employing physicians, set out to distinguish professionally trained

doctors from “quacks” who offered substandard or fraudulent medical care.

226

The AMA’s ban on the corporate practice of medicine reflected public

policy concerns about the safety and legitimacy of the medical practice in the

hands of for-profit or other nonprofessional entities.

227

The public policy

concern was that lay control over the medical profession would create

perverse profit motives at the expense of patients.

228

Additionally, corporate

control over medicine would remove the physician’s autonomy in

decisionmaking critical to the patient’s care.

229

Broadly, the corporate practice

prohibition responded to a concern about the commercialization of the

medical profession and the fear of conflicting interests between profit and

patient care.

230

Eventually, the AMA successfully turned these ethical guidelines into state

laws by lobbying state legislatures to adopt strict medical practice acts

incorporating much of the AMA’s framework.

231

Organized medicine

232

maintained that prohibition of corporate control over physicians is implicit in

that only natural persons, not corporations, could be licensed to practice

medicine.

233

Many newly adopted laws also prohibited fee splitting between

225. Nicole Huberfeld, Be Not Afraid of Change: Time to Eliminate the Corporate Practice of

Medicine Doctrine, 14 H

EALTH MATRIX 243, 245-47 (2004).

226. Id.

227. Mark Hall, Institutional Control of Physician Behavior: Legal Barriers to Health Care Cost

Containment, 137 U.

PA. L. REV. 431, 514 (1988); AM. MED. ASS’N, PRINCIPLES OF MEDICAL

ETHICS, ch. 3, art. 6, § 5, in AM. MED. ASS’N, AMERICAN MEDICAL DIRECTORY 15 (15th ed.

1938).

228. Hall, supra note 227, at 514; Hampton, supra note 223, at 497.

229. Hall, supra note 227, at 514; Hampton, supra note 223, at 497.

230. Hall, supra note 227, at 514.

231. Kathrine Marous, Comment, The Corporate Practice of Medicine Doctrine: An Anchor

Holding America Back in the Modern and Evolving Healthcare Marketplace, 70 D

EPAUL L.

EV. 157, 161 (2020).

232. The term “organized medicine” refers to the collection of professional associations,

including the AMA, representing the political interests of medical profession. It was a

major political and economic force, particularly in the twentieth century. P

AUL STARR,

HE SOCIAL TRANSFORMATION OF AMERICAN MEDICINE 26-28 (1982); R. Scott Jones,

Organized Medicine in the United States, 217 A

NNALS SURGERY 423, 423-25 (1993).

233. Hall, supra note 227, at 509-10; Huberfeld, supra note 225, at 249-50.

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564

medical professionals and lay entities.

234

Finally, courts affirmed that state

medical practice acts barring the unlicensed practice of medicine implicitly

prohibit corporate ownership or employment of physicians, cementing public

policy against corporate control of the medical profession.

235

From its inception, the corporate practice of medicine doctrine did not

escape criticism.

236

Some critics argued that the AMA’s guidelines were profit-

seeking attempts at stifling competition.

237

A century after the ethical code

was first passed, the FTC challenged the doctrine as anticompetitive.

238

During the 1970s and 1980s, the FTC successfully argued that the AMA’s

ethical guidelines prevented physicians from adopting “more economically

efficient business formats.”

239

An additional impetus to scale back the corporate practice prohibition

came from public policy embrace of health maintenance organizations, as

manifested in the Health Maintenance Organization (HMO) Act of 1973.

240

The

Act incentivized the creation of managed care entities where physicians could

contract directly with corporate entities.

241

Most medical practice acts,

however, were interpreted to prohibit physicians from associating with

HMOs.

242

The corporate practice of medicine doctrine therefore stood in the

way of innovation and reforms intended to control the skyrocketing price of

health care in the 1970s and 1980s.

243

234. Huberfeld, supra note 225, at 249; see infra Part II.C.3.

235. See, e.g., Neill v. Gimbel Bros., Inc., 199 A. 178, 182 (Pa. 1938) (holding that a department

store could not employ an optometrist); Bartron v. Codington County, 2 N.W.2d 337,

346 (S.D. 1942) (concluding that corporations’ engagement in the practice of medicine is

against public policy because it reduces the quality of care); see also Huberfeld, supra

note 225, at 251.

236. See Hall, supra note 227, at 510 (“The doctrine has a long history of suppressing needed

innovation in times of industry upheaval.”).

237. See id. at 515 (“When courts enforce the corporate practice doctrine, they mistakenly

suppose they are enforcing the legislature’s public protection polices when in fact they

are enforcing the profession’s economic protection policies.”); see also Marous, supra

note 231, at 161 (explaining that the AMA sought to “control the health care market”

by limiting the practice of medicine to people with formal medical training).

238. Hall, supra note 227, at 515; Huberfeld, supra note 225, at 255.

239. In re Am. Med. Ass’n, 94 F.T.C. 701, 1017-18 (1979); see Hall, supra note 227, at 515; see also

Huberfeld, supra note 225, at 255. The FTC based its conclusion in part on concerns over

the AMA’s statements that “[i]t is unprofessional for a physician to dispose of his services

under conditions . . . which interfere with reasonable competition among the physicians

of a community.” Id. at 246 n.5 (quoting A

M. MED. ASS’N, supra note 227, at 15).

240. Huberfeld, supra note 225, at 255; Hampton, supra note 223, at 501.

241. Huberfeld, supra note 225, at 255; see Hampton, supra note 223, at 501.

242. Huberfeld, supra note 225, at 255-56.

243. Hall, supra note 227, at 510-11; see Huberfeld, supra note 225, at 255.

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Following the HMO Act and the managed care revolution, the corporate

practice of medicine doctrine fell into legal disfavor.

244

Just as legislators

carved out exceptions for managed care entities, courts increasingly

recognized exceptions for other officially endorsed forms of corporate

practice such as hospitals and nonprofit clinics, which were allowed to

employ medical professionals.

245

Despite its apparent diminution, the doctrine still persists in many states,

leading some observers to challenge the doctrine’s role in the modern health

care economy.

246

These critiques broadly contend that the doctrine’s

originating concerns are out of step with current realities in three ways.

First, managed care is now an industry norm and has grown even more

important since the passage of the Affordable Care Act and the shift away from

fee-for-service reimbursement.

247

Payment reforms involving risk sharing and

value-based payment necessitate care coordination and management efforts

that entail more corporate involvement.

248

Second, physicians are motivated in part by financial concerns.

249

Therefore, managed care deploys payment methods that encourage physicians

to consider what treatment costs, which is in tension with the purity of

motivation that the corporate practice prohibition seeks.

250

Third, the rise of consumer-directed health insurance—which pairs high

deductible health plans with health savings accounts to encourage the

consumer to price shop for health services—has furthered the notion that

health care is an ordinary consumer product.

251

In these various ways, modern

health plans have created a reality in which insurance-like entities exercise

control over the delivery of care.

252

244. Marous, supra note 231, at 168-69.

245. Hall, supra note 227, at 517; Marous, supra note 231, at 168.

246. Hall, supra note 227, at 509-11, 516; see Marous, supra note 231, at 158 (arguing that

“[t]he justification behind barring corporate influence from medical practice overlooks

the realities of the current healthcare marketplace”).

247. Marous, supra note 231, at 174.

248. Huberfeld, supra note 225, at 257-58; Marous, supra note 231, at 173-74. In the context of

health care payments, risk-sharing refers to the agreements to share financial risk

between the payer and providers for the cost and quality of care provided to the health

plan’s enrollees. Value-based payments are a form of reimbursement where the payer

ties payment to the quality and efficiency of health care provided, rather than paying

based on volume. See Jacqueline LaPointe, Understanding the Value-Based Reimbursement

Model Landscape, R

ECYCLE INTEL. (Sept. 9, 2016), https://perma.cc/YDH5-YTPW.

249. Hall, supra note 227, at 515; Huberfeld, supra note 225, at 258-59.

250. Huberfeld, supra note 225, at 258-59.

251. TIMOTHY STOLTZFUS JOST, HEALTH CARE AT RISK: A CRITIQUE OF THE CONSUMER-

RIVEN MOVEMENT 17-19 (2007).

252. Marous, supra note 231, at 174-75.

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566

Accordingly, although a few states still vigorously enforce the doctrine,

others have made it easier for corporations to employ medical professionals.

253

In addition to maintaining the carved-out exceptions previously noted, such

states allow some form of corporate control over medicine as long as the

physician retains ultimate control over the delivery of care.

254

2. Applying the corporate practice prohibition to private equity

Despite its near demise and unpopularity, the prohibition against the

corporate practice of medicine persists in most states in some form.

255

States

vary in the extent of their enforcement, ranging from a nearly per se ban to

practical nonenforcement.

256

Even in states that strongly enforce the

corporate practice of medicine doctrine, PE firms have successfully

circumvented the prohibition by using investment models that grant them

significant control over medical practices, even without outright

ownership.

257

Nevertheless, because the corporate practice prohibition

remains on the books in most states, the doctrine can be revived and

redeployed to address the commercialization concerns over PE’s increasing

investment in and influence over physician practices. The following Subparts

explore several ways this might occur or is in fact occurring.

a. The MSO model

The most common attempt to outmaneuver the corporate practice

prohibition involves a management services organization (MSO) owned and

controlled by a PE firm contracting with a physician-owned professional

corporation to provide administrative and other services for a fee.

258

This

model is popular with both parties because it alleviates the physicians’ burdens

of running the business while granting financial and operational control over

the medical practice to the investor.

259

The MSO’s administrative services may

253. Stuart I. Silverman, In an Era of Healthcare Delivery Reforms, the Corporate Practice of

Medicine Is a Matter that Requires Vigilance, 9 A

M. U. HEALTH L. & POL’Y BRIEF 1, 2 (2015).

254. Id. at 8.

255. See Jane M. Zhu, Hayden Rooke-Ley & Erin Fuse Brown, A Doctrine in Name Only—

Strengthening Prohibitions Against the Corporate Practice of Medicine, 389 N

EW ENG. J.

MED. 965, 966 (2023); Matt Wilmot, Wes Scott & Ethan Rosenfeld, Corporate Practice of

Medicine Doctrine: Increased Enforcement on the Horizon?, N

ELSON MULLINS (Jan. 17, 2023),

https://perma.cc/46E2-2CCQ.

256. Marous, supra note 231, at 163-67.

257. Id. at 170-71.

258. Id.

259. Carol Lucas, Corporate Practice of Medicine on Steroids, JD SUPRA (May 11, 2021),

https://perma.cc/M48A-VYDA.

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567

include purchasing office space and equipment, billing and collections, and

hiring nonphysician staff.

260

While the MSO may provide administrative

services, the corporate practice prohibition requires that clinical decisions be

made by the physicians.

261

Even though the MSO does not technically employ the physicians, the

MSO can use various mechanisms to maintain effective control over the

medical practice.

262

For example, as part of the deal, some physician-owners of

the medical practice are required to sign stock restriction agreements

preventing them from selling their interests or exercising certain rights in the

practice without the approval of the MSO.

263

Physician-owners are also

obligated to sign tight restrictive covenants and nondisclosure agreements.

264

In California, a state with a historically strong corporate practice

prohibition, the legislature recently considered a bill that took aim at the MSO

investment model by requiring the physician-owners of the practice to

exercise ultimate control over the business aspects of the medical practice:

(a) The shareholders, directors, and officers of a medical corporation . . . shall

manage and have ultimate control over the assets and business operations of the

medical corporation and shall not be replaced, removed, or otherwise controlled

by any lay entity or individual, including, without limitation, through stock

transfer restriction agreements or other contractual agreements and

arrangements.

(b) For purposes of this section, “ultimate control” shall mean and be consistent

with the definition provided by generally accepted accounting principles.

265

The California bill did not advance to a vote, but other states, including

Oregon, have pursued similar measures to strengthen the corporate practice of

medicine doctrine.

266

Such legislation would severely curtail the ability of PE

and other lay investors to use the MSO model to avoid the corporate practice

of medicine prohibition. More than just requiring that physicians control the

260. Id.

261. Adam M. Freiman, The Abandonment of the Antiquated Corporate Practice of Medicine

Doctrine: Injecting a Dose of Efficiency into the Modern Health Care Environment, 47 E

MORY

L.J. 697, 739-40 (1998) (describing MSO arrangements and requirements that the MSO

not interfere with physicians’ medical decisions).

262. Marous, supra note 231, at 171.

263. Id.

264. FUSE BROWN ET AL., supra note 8, at 21-22.

265. S.B. 642, Cal. Leg., 2021-2022 Reg. Sess. (Cal. 2021).

266. See H.B. 4130, 82d Legis. Assemb., 2024 Reg. Sess. (Or. 2024) (proposing legislation to

strengthen the corporate practice of medicine prohibition in Oregon); see also Amelia

Templeton, Oregon Lawmakers Could Limit Corporate Ownership of Medical Practices, O

PUB. BROAD. (Feb. 22, 2024, 6:00 AM), https://perma.cc/BV7J-SBMS.

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76 STAN. L. REV. 527 (2024)

568

clinical decisionmaking, this proposal requires medical professionals to have

control over the business aspects of the practice.

267

b. Litigation over PE investment models

The “friendly PC” model is similar to the MSO model and allows PE firms

to control physician practices without running afoul of the corporate practice

prohibition.

268

A standard way physicians satisfy the corporate practice

prohibition is to incorporate their practice as a medical professional

corporation (PC), which must be owned only by one or more licensed

physicians.

269

In the friendly PC adaptation, PE firms appoint which licensed

physician will be the PC’s owner.

270

This “friendly” physician owner then hires

other physicians and enters into contracts for the delivery of care.

271

The friendly PC model is at issue in the California case, AAEMPG v.

Envision, involving one of the largest PE firms in the health care marketplace,

Kohlberg Kravis Roberts (KKR).

272

In 2017, KKR bought Envision Physician

Services, one of the largest multispecialty physician groups in the country.

273

The plaintiff is a physician management company that lost a contract with

another emergency medical group after a hospital granted an exclusive

contract with an Envision-owned emergency group.

274

The plaintiff alleges

that Envision, through a friendly PC, exercises an impermissible level of

control over the delivery of care by its affiliate in violation of California’s

corporate practice prohibition.

275

Specifically, the plaintiff alleges that the affiliate is owned by a California-

licensed physician who is either directly employed by Envision or is under its

substantial control.

276

The physician-owner must sign a stock transfer

agreement that prevents them from having actual control over the company,

including restrictions on the ability to issue dividends, create additional stock,

267. Cal. S.B. 642.

268. Marous, supra note 231, at 170-71.

269. Am. Med. Ass’n, Issue Brief: Corporate Practice of Medicine 1 (2015), https://perma.cc/

X92W-CSBU.

270. Marous, supra note 231, at 171.

271. Michael Gawley, A Friendly Reminder: Friendly PC Arrangements Are Subject to Scrutiny,

JD S

UPRA (June 20, 2022), https://perma.cc/TV6J-TPQV; Don’t Forget the “PC” in the

“Friendly PC” Model, N

OSSAMAN LLP (Feb. 15, 2022), https://perma.cc/6F9G-GZ5W.

272. Complaint at 5, Am. Acad. of Emergency Med. Physician Grp., Inc. v. Envision

Healthcare Corp., No. 22-cv-00421 (N.D. Cal. Jan. 21, 2022), ECF No. 1-1.

273. Id.

274. Id. at 7-8.

275. Id. at 6-7, 16.

276. Id. at 8.

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569

or sell the medical group.

277

Moreover, KKR-backed Envision retained control

over several key aspects of the practice: physician employment, compensation,

work schedules, and staffing levels; negotiating contracts with payers; and

setting quality and performance metrics.

278

Although the case is still pending, the federal district court rejected

Envision’s motion to send the case first to the state medical board.

279

Though

unresolved at this time, the case may affect the ability of PE firms to exercise

control over their health care investments in California.

280

Texas is another state with a strong prohibition against the corporate

practice of medicine.

281

Addressing what constitutes “control” over the medical

practice, Texas courts indicate that control over a medical practice is a fact-

intensive inquiry, requiring close review of the individual MSO agreements at

issue. In Flynn Brothers, Inc. v. First Medical Associates, two business partners

contracted with an emergency physician in Texas through various corporate

entities and management agreements.

282

Because the investors were not

licensed physicians, the emergency physician formed a professional

corporation that could contract with a hospital to provide emergency

services.

283

The management agreement between the two parties gave lay

investors the following rights: to prevent the physician from selling his

interest in the practice, to receive two-thirds of the practice’s net profit, to

encumber the practice’s assets to raise capital and other financing, to trade on

the physician’s medical license, and to decide which of the PC’s medical staff

would work at the hospital.

284

The court invalidated the agreement under the Texas Medical Practice Act

because it found that the physician was essentially under the employment of

the unlicensed investors.

285

The court reasoned that the “contractual scheme

277. Id.

278. Id. at 9-10.

279. Am. Acad. of Emergency Med. Physician Grp., Inc. v. Envision Healthcare Corp., No. 22-

cv-00421, 2022 WL 2037950, at *6, *11 (N.D. Cal. May 27, 2022).

280. See, e.g., Gawley, supra note 271 (describing the implications of AAEMPG v. Envision

for the corporate practice of medicine); Dan Weissmann, Private Equity Might Run

Your Local Emergency Room. Meet the Doctors Suing to Kick Them Out, A

N ARM & A LEG

(June 16, 2022), https://perma.cc/4YH9-BUNP (discussing the plaintiff’s legal

strategy using state corporate practice of medicine laws to challenge private equity

investment in physician practices).

281. Flynn Bros. v. First Med. Assocs., 715 S.W.2d 782, 785 (Tex. App. 1986); Xenon Health,

L.L.C. v. Baig, 662 F. App’x 270, 274 (5th Cir. 2016).

282. Flynn Bros., 715 S.W.2d at 783.

283. Id.

284. Id. at 783-85.

285. Id. at 785.

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570

was developed to do indirectly that which they freely concede they could not

do directly under the Medical Practices Act.”

286

Relevant to the PE context, the

court disallowed using a physician’s emergency practice as an investment

vehicle for those who could not practice medicine independently.

287

Additionally, there are comparisons between the pledging of the PC’s assets

noted in this case and the LBO model utilized by most PE acquisitions.

The Fifth Circuit likewise weighed in on what contractual terms would

constitute the unlicensed practice of medicine in violation of the Texas

Medical Practice Act in Xenon Health, L.L.C. v. Baig.

288

Although the entity that

violated the law was a California professional corporation and not a lay

corporation, the reasoning of the case could apply as well to a PE-backed MSO

not licensed to practice medicine in Texas. In Xenon, a joint venture agreement

between the California PC and the Texas PC gave the California PC (owned by

a physician not licensed in Texas) the exclusive authority over many aspects of

the practice in Texas, including: hiring, credentialing, and scheduling

physicians in the Texas clinic; ordering supplies and equipment; billing and

collection; monitoring regulatory compliance; financial reporting and

management; and implementing quality assurance programs.

289

Additionally,

the joint venture agreement prevented the Texas PC from “paying any

dividends or distributions, incurring any debt, or selling company assets”

without the consent of the California PC.

290

The court concluded that, as a

whole, the agreement violated the Texas Medical Practice Act because it took

“total control of” of the Texas PC.

291

Although Flynn Brothers and Xenon provide examples of impermissible

control by unlicensed entities over medical practices through the use of

management agreements, other case law in Texas finds no violation where the

management agreements stop short of converting physician owners into

virtual agents or employees.

292

Thus, whether or not a corporate investor or

management firm exerts impermissible levels of control over a medical

practice is highly fact specific—even in a state like Texas with a vigorous

corporate practice prohibition.

293

The nature of the PE investment model,

286. Id.

287. Id.

288. Xenon Health, L.L.C. v. Baig, 662 F. App’x 270, 271 (5th Cir. 2016).

289. Id. at 271, 273.

290. Id. at 273.

291. Id. at 272-73.

292. Gupta v. E. Idaho Tumor Inst., Inc., 140 S.W.3d 747, 754 (Tex. App. 2004); McCoy v.

FemPartners, Inc., 484 S.W.3d 201, 210 (Tex. App. 2015).

293. See Gupta, 140 S.W.3d at 754 (distinguishing the instant case from Flynn Bros. because

the physician retained authority over personnel and billing decisions); McCoy, 484

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571

with active management by the PE general partner, inherently pushes the

limits of allowable nonprofessional control. Because investors want maximum

control of the business, management agreements between private equity firms

and medical practices might edge toward those found to be impermissible in

the Flynn Bros. and Xenon cases.

3. State fee-splitting laws

As a corollary to the corporate practice of medicine doctrine, many states

have adopted laws prohibiting the splitting of professional fees between

medical professionals and lay entities.

294

These fee-splitting laws aim to

prevent unlicensed corporations from profiting from a physician’s

professional income and grew out of the same AMA lobbying efforts that

convinced state legislatures to limit the practice of medicine to physicians.

295

The policy concern was that fee-splitting arrangements could divide

physicians’ loyalty to their patients and would place nonprofessionals in a

position to influence medical practice for financial gain.

296

As with the corporate practice prohibition, states vary in the degree to

which they enforce fee-splitting laws.

297

Where enforced, fee-splitting laws

are used to invalidate agreements to share a percentage of professional revenue

with outside entities, such as management companies.

298

In New York, the

state fee-splitting law has been applied to invalidate management service

arrangements between medical practices and lay entities, where the lay entity

shares a percentage of the revenues generated by medical services.

299

In other states, state legislatures have watered down judicial enforcement

of fee-splitting laws.

300

For example, the Illinois Supreme Court had

previously applied the state fee-splitting law

301

to invalidate percentage-of-

S.W.3d at 212 (holding that lay persons only controlled “nonmedical functions and

services,” leaving recruitment and oversight of physicians in the hands of physicians).

294. Huberfeld, supra note 225, at 261-62.

295. Id. at 249.

296. See Ari J. Markenson & Angela Humphreys, What Is . . . the Corporate Practice of Medicine

and Fee-Splitting?: Fee-Splitting Prohbitions, A

M. BAR ASS’N. (Feb. 2021), https://perma.cc/

VU63-PJML.

297. Silverman, supra note 253, at 20-23.

298. Id. at 22.

299. Necula v. Conroy, No. 96-cv-08990, 2000 WL 877009, at *1-3, *11 (S.D.N.Y. June 30,

2000) (striking down the agreement between a radiologist and an MSO because the

physician agreed to pay the MSO a fixed percentage of the receipts for billing services),

aff’d, 13 F. App’x 24 (2d Cir. 2001).

300. Silverman, supra note 253, at 21.

301. 225 ILL. COMP. STAT. ANN. 60/22.2 (West 2023) (providing that “[a] licensee under this

Act may not directly or indirectly divide, share or split any professional fee or other

footnote continued on next page

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572

revenue agreements in Vine Street Clinic v. HealthLink, Inc.

302

At issue were two

financial arrangements between the defendant corporation and physician

groups: (1) an administrative fee equal to 5% of the physician groups’ revenue;

and (2) a flat fee based on the volume of claims submitted by the physician

groups in the preceding calendar year.

303

The court invalidated the percentage

of revenue arrangement as against the public policy expressed by the fee-

splitting prohibition but upheld the flat fee arrangement because it was not

“based or linked to [the physician’s] revenue.”

304

Following the Vine Street decision, however, the Illinois legislature

amended the fee-splitting law to allow certain types of arrangements—even

those where an unlicensed entity receives a percentage of professional fees—if

certain requirements are met.

305

The new exception permits medical providers

to pay fair market value to an unlicensed entity to perform “billing,

administrative preparation, or collection services based upon a percentage of

professional fees billed or collected,” provided that: (1) the medical practice

controls the amount of fees charged or collected; and (2) all charges collected

are deposited into an account controlled by the medical practice or are held in

trust by a licensed collection agency.

306

This exception, although it requires

medical practices to retain control over professional fees, creates room for the

“friendly PC” and MSO arrangements that PE investors use.

California’s fee-splitting law contains a similar fee-splitting exception,

which also gives significant leeway for private investment.

307

That law

provides that:

The payment or receipt of consideration for services other than the

referral of patients that is based on a percentage of gross revenue or similar

type of contractual arrangement shall not be unlawful if the consideration is

commensurate with the value of the services furnished or with the fair rental

value of any premises or equipment leased or provided by the recipient to

the payer.

308

California courts have applied this exception to uphold at least one financial

arrangement between a physician and MSO where the court concluded the

form of compensation for professional services with anyone in exchange for a referral

or otherwise . . . .” (emphasis added)).

302. Vine St. Clinic v. HealthLink, Inc., 856 N.E.2d 422, 434 (Ill. 2006).

303. Id. at 426-27; see also Silverman, supra note 253, at 21.

304. Vine St. Clinic, 856 N.E.2d at 434-35.

305. 225 ILL. COMP. STAT. ANN. 60/22.2 (West 2023); see Silverman, supra note 253, at 21.

306. 225 ILL. COMP. STAT. ANN. 60/22.2 (West 2023).

307. CAL. BUS. & PROF. CODE § 650(b) (West 2023).

308. Id.

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76 STAN. L. REV. 527 (2024)

573

management services fee was commensurate with fair market value.

309

Although not explicitly pled under the California fee-splitting statute, the

plaintiff in the pending AAEMPG v. Envision case alleges an illegal fee-splitting

scheme because Envision “earns amounts from the physician’s billings that

exceed the reasonable value of . . . administrative services Envision provides.”

310

Not all states have adopted exceptions to their fee-splitting laws.

311

New

York’s law remains relatively strong; it explicitly prohibits the type of

arrangement that California and Illinois amended their laws to allow.

312

many states, however, lay corporations wishing to invest in or operate

physician practices can avoid state fee-splitting laws with a carefully

structured agreement. In states with stronger fee-splitting laws, the aggressive

nature of the PE model might make such agreements legally vulnerable. By

exerting aggressive control over investments in the medical practice, PE firms

might be more prone to impermissible behavior, such as setting the fees billed

by physicians, controlling the practice’s revenue, or providing services to the

medical practice at nonmarket rates. If the practice was set up to avoid sharing

revenues from federally reimbursed services and entanglements under the

Stark Law,

313

the practice may still violate state fee-splitting laws, which do

not discriminate based on the source of the revenue by payer or type of service.

If indications of PE control over acquired practices are evident, state fee-

splitting laws might remain a viable oversight mechanism.

D. Physician Employment Laws

State and federal laws regulating the use of noncompete,

antidisparagement, and nondisclosure clauses in employment agreements

could offer stronger protection for physicians’ clinical and professional

autonomy from control by PE investors. After acquisition by a PE firm,

physicians typically must sign employment agreements with the PE-backed

practice.

314

These agreements generally include restrictive covenants, under

which the physician is not permitted to work within a defined geographic

309. Epic Med. Mgmt., LLC v. Paquette, 244 Cal. App. 4th 504, 516-17 (2015).

310. Complaint at 9, Am. Acad. of Emergency Med. Physician Grp., Inc. v. Envision

Healthcare Corp., No. 22-cv-00421 (N.D. Cal. Jan. 21, 2022), ECF No. 1-1.

311. See Zhu et al., supra note 255, at 961.

312. N.Y. EDUC. LAW § 6530 (McKinney 2023) (prohibiting “any arrangement or agreement

whereby the amount received in payment for furnishing space, facilities, equipment or

personnel services used by a licensee constitutes a percentage of, or is otherwise

dependent upon, the income or receipts of the licensee from such practice”).

313. See supra notes 196-201.

314. See Bonnie Darves, Physician Employment Contracts: Strategies for Avoiding Pitfalls, NEJM

CAREERCENTER (Nov. 20, 2019), https://perma.cc/97Z7-XYJ7; Abelson & Sanger-Katz,

supra note 1.

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574

radius of the employer for a certain period of time, sometimes years, after

employment.

315

Further, physician noncompetes can be anticompetitive. In its

antitrust suit against U.S. Anesthesia Partners and Welsh Carson, the FTC

alleged that USAP used noncompetes to prevent physicians from “splitting off

and forming their own groups or joining other groups looking to challenge

USAP’s market position.”

316

The use of noncompetes are common in physician

employment agreements to protect the value of the investment by retaining

the physician’s expertise, labor, and patient base.

317

Some physician contracts

with PE, however, go further to include nondisclosure and antidisparagement

clauses which may prevent physicians from expressing concerns about the

practice’s operation, including concerns over billing practices, patient safety,

or staffing.

318

Although noncompete agreements have become relatively common for

physicians, they remain controversial.

319

Regulation of noncompetes is

traditionally the realm of state law, but the FTC has recently stepped in with a

proposed rule to bar noncompete clauses in employment contracts across all

sectors, including for physicians.

320

The proposed rule would classify the use of

employee noncompete agreements as an unfair method of competition.

321

While some question the applicability of the rule to nonprofit hospitals over

which the FTC has limited jurisdiction,

322

analysts predict that the FTC’s ban

on noncompetes could cause a dramatic collapse of investment in physician

practices if investors could not prevent the core value of the investment (the

physicians) from walking away.

323

315. Derek W. Loeser, The Legal, Ethical, and Practical Implications of Noncompetition Clauses:

What Physicians Should Know Before They Sign, 31 J.L. M

ED. & ETHICS 283, 283 (2003).

316. Complaint for Injunctive and Other Equitable Relief at 83, FTC v. U.S. Anesthesia

Partners, No. 23-cv-03560 (S.D. Tex. Sept. 21, 2023), ECF No. 1.

317. FUSE BROWN ET AL., supra note 8, at 21.

318. Heather Perlberg, How Private Equity Is Ruining American Healthcare, BLOOMBERG

(updated May 20, 2020, 2:09 PM PDT), https://perma.cc/8CG8-Y9BX.

319. FUSE BROWN ET AL., supra note 8, at 21; Erik B. Smith, Ending Physician Noncompete

Agreements—Time for a National Solution, 2 JAMA H

EALTH F. e214018, at 1 (2021),

https://perma.cc/6CVN-XEJW.

320. Non-Compete Clause Rule, 88 Fed. Reg. 3482 (proposed Jan. 19, 2023) (to be codified at

16 C.F.R. pt. 910).

321. Id.

322. See, e.g., Frank Diamond, How FTC’s Noncompete Agreements Rule Could Impact Healthcare,

IERCE HEALTHCARE (Jan. 6, 2023, 5:00 PM), https://perma.cc/NB66-Z9GU; Samantha

Liss, Nonprofit Hospitals May Evade Noncompete Ban Enforcement, Experts Say,

EALTHCARE DIVE (Jan. 20, 2023), https://perma.cc/A25R-7ERY.

323. See, e.g., Samantha Liss, Doctors No Longer Bound by Noncompetes Under FTC’s Proposed

Ban, H

EALTHCARE DIVE (Jan. 11, 2023), https://perma.cc/7LCX-F7AT; Blake Madden,

What to Know About the CVS-Carbon Health Deal and What It Means for Healthcare,

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575

States that limit physician noncompete clauses via state statute or case law

do so based on policy concerns about the physician-patient relationship and the

availability of medical services.

324

With increased market consolidation,

geographic restrictions may be so broad as to force a physician to either

relocate to another region upon termination or to cease practice for a period of

years.

325

Such onerous restrictions may chill physicians’ willingness to voice

concerns about an employer’s practices or exit an employment situation they

consider ethically questionable.

Most states limit, rather than ban, physician noncompete agreements

through judicial application of general public policy considerations and a

reasonableness standard.

326

Some states extend more explicit statutory

protection to physicians.

327

Covenants not to compete are unenforceable in

New Hampshire if they restrict the right of the physician to practice in any

geographic region within the state.

328

In Connecticut, noncompetes may not

restrict a physician’s ability to practice more than fifteen miles from the

primary site where the physician practices.

329

Additionally, restrictive

covenants in Connecticut are unenforceable if the physician’s agreement is

terminated by the employer without cause.

330

In 2023, Indiana passed a law

that makes noncompetes for physicians unenforceable in most circumstances

starting July 1, 2023, and establishes a buyout process for physicians who

entered into noncompete agreements prior to July 1, 2023.

331

Other states concerned about preserving physician autonomy under PE

investment could adopt similar laws or declare physician noncompetes

presumptively unenforceable. Strengthening statutory or regulatory limits on

physician noncompete clauses would provide quicker and clearer policy

WORKWEEK (Jan. 10, 2023) (predicting that if the FTC’s ban on noncompetes is

finalized, “[p]hysician practice M&A would fall apart”), https://perma.cc/2MHV-EV24.

324. Loeser, supra note 315, at 287-88.

325. Id. at 284.

326. Id. at 287.

327. Id.

328. N.H. REV. STAT. ANN. § 329:31-a (2023).

329. CONN. GEN. STAT. § 20-14p(b)(2)(A)(ii) (West 2023).

330. Id. § 20-14p(b)(2)(B)(ii).

331. See S. Enrolled Act 7, 123rd Gen. Assemb., 1st Reg. Sess. (Ind. 2023). A noncompete for

employed physicians is unenforceable if any of the following circumstances occur:

“(1) The employer terminates the physician’s employment without cause. (2) The

physician terminates the physician’s employment for cause. (3) the physician’s

employment contract has expired, and both the physician and employer have

fulfilled their obligations under the contract.” I

ND. CODE ANN. § 25-22.5-5.5-2(b)

(West 2023). Noncompetes for primary care physicians are barred in all

circumstances. Id. § 25-22.5-5.5-2.5(b).

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76 STAN. L. REV. 527 (2024)

576

change, rather than relying on courts to scrutinize the reasonableness of

noncompete restrictions case by case.

Imposing nondisclosure or antidisparagement clauses—also known as gag

clauses—is another restrictive employment practice that inhibits physicians

from confronting troubling aspects of the PE investment.

332

These gag clauses

might, for instance, prevent physicians from speaking out publicly or to

patients about utilization practices, upcoding, reductions in staffing levels or

supervision, or other concerns about quality of patient care.

333

In a New York

Times Magazine article on the moral crisis facing U.S. physicians due to health

care corporatization, the reporter noted:

[T]he physicians I contacted were afraid to talk openly . . . . Some sources I tried to

reach had signed nondisclosure agreements that prohibited them from speaking

to the media without permission. Others worried they could be disciplined or

fired if they angered their employers, a concern that seems particularly well

founded in the growing swath of the health care system that has been taken over

by private-equity firms.

334

Similar concerns about the use of gag clauses in physician contracts arose

in the managed care era in the 1990s. During this period, managed care plans

contractually barred physicians from discussing with patients the availability

of medically necessary treatment options not covered by the health plan.

335

Other gag provisions prevented physicians from making remarks that would

undermine confidence in the health plan.

336

While the plans contended the gag

clauses protected proprietary information and enhanced market competition,

critics worried they undermined patient safety, the ability of patients to

provide informed consent, and physicians’ clinical judgment.

337

332. Perlberg, supra note 318; Morgenson, supra note 16.

333. See Perlberg, supra note 318.

334. Press, supra note 16. Press illustrated this concern with a story of an emergency room

physician, Ming Lin, who was employed by private-equity-owned TeamHealth. Id. Dr.

Lin lost his post after publicly voicing concerns over his hospital’s Covid-19 safety

protocols. Id.

335. See generally Julia A. Martin & Lisa K. Bjerknes, Comment, The Legal and Ethical

Implications of Gag Clauses in Physician Contracts, 22 A

M. J.L. & MED. 433, 434 (1996)

(discussing the scope, prevalence, and legality of gag clauses imposed on physicians by

managed care organizations (MCOs)); Joan H. Krause, The Brief Life of the Gag Clause:

Why Anti-Gag Clause Legislation Isn’t Enough, 67 T

ENN. L. REV. 1, 2-6, 10-13 (1999)

(examining the incentives that MCOs have to withhold information and the

limitations of current anti-gag-clause legislation); Bethany J. Spielman, After the Gag

Episode: Physician Communication in Managed Care Organizations, 22 S

ETON HALL LEGIS.

J. 437, 441 (1998) (identifying subject matters commonly covered within gag clauses, as

well as how the law has responded to such matters, and addressing lingering

uncertainties about what physicians and MCOs are and are not required to disclose).

336. Martin & Bjerknes, supra note 335, at 444.

337. Spielman, supra note 335, at 445, 448; Martin & Bjerknes, supra note 335, at 449.

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577

Under pressure from the AMA and the public, several states passed laws

regulating or restricting the use of gag clauses in physician-managed care plan

contracts.

338

Most prohibit clauses that prevent physicians from discussing

treatment options, although some statutes more broadly protect physicians who

publicly express concerns about the plan—akin to an antidisparagement ban.

339

Despite the popularity of anti-gag clause laws during the managed care era,

retrospective assessments cast doubt on their effectiveness.

340

One problem was

the lack of precision about what constitutes a gag clause, leaving it unclear

whether antidisparagement or confidentiality agreements were covered by the

gag clause bans.

341

Another problem is that gag clause prohibitions were a “paper

tiger” because they did not change managed care plans’ ability to terminate

physicians without cause, the ultimate weapon to elicit physician compliance.

342

Thus, if states today want to protect physicians’ clinical autonomy from

control by investors, it is not enough to prohibit gag clauses. Such protections

should be paired with legal protections for whistleblowers as an exception to

the at-will employment doctrine.

343

In a state with such an exception, an

employee may not be terminated for exposing employer conduct that is against

the public policy of the state.

344

This exception may enable some to voice their

concerns.

345

Policymakers could also explicitly define the types of

noncompete, nondisclosure, and antidisparagement clauses that are against

public policy when applied to physicians by corporate employers.

346

Restricting the use of these various provisions in physician employment

agreements can help preserve physicians’ autonomy to leave or speak out about

practices that may pose dangers to patient care.

347

Additionally, courts’

338. Krause, supra note 335, at 3-4.

339. Id. at 20-24; Spielman, supra note 335, at 456-57. The state of Washington, for a brief time,

expressly protected physicians who criticized health plans. Id. at 457. But the provision

was repealed in 2000. Act Relating to Health Care Patient Protection, ch. 5, § 29(1), 2000

Wash. Sess. Laws 37.

340. Krause, supra note 335, at 2.

341. Id. at 10; see also U.S. GOV’T ACCOUNTABILITY OFF., GAO/HEHS-97-175, MANAGED

CARE: EXPLICIT GAG CLAUSES NOT FOUND IN HMO CONTRACTS, BUT PHYSICIAN

CONCERN REMAINS 5 (1997) (finding that there was “little consensus” about what

provisions constituted gag clauses), https://perma.cc/8SJB-66ZU.

342. Krause, supra note 335, at 12-15.

343. Jennifer L. D’Isidori, Note, Stop Gagging Physicians!, 7 HEALTH MATRIX 187, 210-11

(1997).

344. Id. at 212-13.

345. Id. Some state whistleblower laws, however, cover only criminal acts or apply only to

state employees. Id. at 217-18.

346. See id. at 213.

347. See, e.g., SCHEFFLER ET AL., supra note 32, at 34-35; Morgenson, supra note 16; Perlberg,

supra note 318.

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578

willingness to award punitive damages when whistleblowers are wrongfully

terminated for raising these concerns may embolden physicians who would

otherwise be chilled by the threat of termination.

348

As in eras past, professional

associations have published ethical guidelines to reiterate the primacy of the

patient’s best interests over financial profit.

349

Though responding to

contemporary commercialization in medicine, these professional and ethical

guidelines reference state laws, such as the corporate practice of medicine

doctrine, that are nearly a century old.

350

Thus, these ethical guidelines are an

additional reminder that the legal tools to regulate the contemporary surge of

PE investment in health care have been around for decades.

III. Toward Better Regulation of Private Equity in Health Care

The profit-seeking genie is out of the bottle. Rosy tales of health care’s

historically charitable and mission-driven nature have always been

exaggerated.

351

As long as there has been money to be made in health care,

there have been incentives for profit maximization.

352

So while we may

lament the corporate financialization of health care, there is no going back.

PE investment in health care is just the latest manifestation of the long

trend of increasing commercialization of medicine.

353

And so long as the

348. Brovont v. KS-I Med. Servs., 622 S.W.3d 671, 694, 703 (Mo. Ct. App. 2020) (affirming

lower court’s decision to submit the plaintiff’s wrongful-discharge claim to a jury and

reinstating the jury’s punitive damages award of $10 million against a defendant).

349. See Ryan Crowley, Omar Atiq & David Hilden, Financial Profit in Medicine: A Position

Paper from the American College of Physicians, 174 A

NNALS INTERNAL MED. 1447, 1460

(2021); Matthew DeCamp & Lois Synder Sulmansy, Ethical and Professionalism

Implications of Physician Employment and Health Care Business Practices: A Policy Paper

from the American College of Physicians, 174 A

NNALS INTERNAL MED. 844, 845 (2021); Am.

Med. Ass’n, Corporate Investors

1-2 (2019), https://perma.cc/CF7B-H4H4.

350. See STARR, supra note 232, at 215-20 (describing the development of the corporate

practice of medicine doctrine between 1900 and 1930).

351. See id. at 21-29 (describing the U.S. health system as one historically dominated by the

professional sovereignty of physicians, how that authority translated into economic

power, and how it clashed with hospital and corporate interests in the latter half of the

twentieth century).

352. See, e.g., Arnold S. Relman, The New Medical-Industrial Complex, 303 NEW ENG. J. MED.

963,

963 (1980) (lamenting the rise of the “‘medical-industrial complex,’ . . . a large and

growing network of private corporations engaged in the business of supplying

healthcare services to patients for a profit—services heretofore provided by nonprofit

institutions or individual practitioners”); Bruce Steinwald & Duncan Neuhauser, The

Role of the Proprietary Hospital, 35 L.

& CONTEMP. PROBS. 817, 818-20 (1970) (describing

the history of “proprietary” for-profit hospitals in the United States, dating back to the

late nineteenth century).

353. See STARR, supra note 232, at 428; see also McDonough, supra note 1 (writing in 2022 that

private equity has “achieved growing prominence as a force in the American economy

footnote continued on next page

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76 STAN. L. REV. 527 (2024)

579

United States treats health care as a market commodity, profit-seeking will

persist. One response would be to fundamentally rebuild the health care system

around the principle that health care is a human right rather than a market

commodity.

354

Nevertheless, reasonable minds differ about whether and what

role private ordering, and thus private profit, should play in delivering health

care within a universal care system.

355

Moreover, fundamentally restructuring

health care finance and delivery is, at best, a long-term goal.

Meanwhile, the incursion of PE threatens the health care system now, and

policymakers and enforcers need tools readily at hand. Thus, setting aside as

currently unattainable those reforms that would turn health care from a

commodity to a social good, the policy goal we propose—to address the

problems of PE in health care—is more instrumental, incremental, and

immediate. Rather than uprooting or barring PE investment in health care

providers altogether, we seek legal interventions aimed at curbing the aspects

of that investment that pose the most significant risks to patients, the

profession, and health care spending: the assertion of control by corporate

profit-maximizing interests over clinical decisionmaking.

and in the United States health care system” and continues the forty-five-year trend

toward the financialization of the American economy).

354. Although a full survey of this debate is beyond the scope of this Article, one of the

authors has written elsewhere about what such foundational reforms might look like.

See Erin C. Fuse Brown, Matthew B. Lawrence, Elizabeth Y. McCuskey & Lindsay F.

Wiley, Social Solidarity in Health Care: American-Style, 48 J.L.

MED. & ETHICS 411, 423

(2020) (“For next-step health reforms to move us toward greater social solidarity in

health care, reformers must contend with four legal fixtures—federalism, pluralism,

privatization, and individualism—that have stymied the ACA and previous reform

efforts.”); Wiley et al., supra note 23, at 661 (“We must reconstruct health reform, and

ultimately the health system, using new principles and a new method. Incremental

reforms . . . must be designed to be intentionally confrontational, with an eye toward their

place in the broader project of upending or transcending the legal structures that

undermine public health and propagate subordination and inequity.”).

355. See MARTHA MINOW, PARTNERS, NOT RIVALS: PRIVATIZATION AND THE PUBLIC GOOD 140

(2002);

Lindsay F. Wiley, Privatized Public Health Insurance and the Goals of Progressive

Health Reform, 54 U.C. D

AVIS L. REV. 2149, 2208 (2021) (concluding that private

administration can be compatible with solidarity principles of public health care

programs); Jon D. Michaels, Privatization’s Pretenses, 77 U. C

HI. L. REV. 717, 717-18 (2010);

David J. Meyers, Andrew M. Ryan & Amal N. Trivedi, How Much of an “Advantage” Is

Medicare Advantage?, 328 JAMA 2112, 2112 (2022) (concluding that research on

Medicare Advantage (MA)—the private insurance plans for Medicare beneficiaries—

suggests mixed benefits, with studies finding modest quality-of-care advantages but

significant overpayments to MA plans compared with traditional Medicare); see also

Megan Brenan, Majority in U.S. Still Say Gov’t Should Ensure Healthcare, G

ALLUP (Jan. 23,

2023), https://perma.cc/AG7U-RX2H (finding in public opinion poll that 57% of

American adults say that the government should ensure universal coverage, but 53%

say the health system should be based on private insurance).

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580

The specific harms can take the form of increased prices, diminished patient

access from consolidation, overutilization and overbilling, diminished quality

from inadequately supervised care or understaffed care, and constraints on

physicians’ autonomy and clinical decisionmaking from corporate controls and

restrictive employment agreements.

356

Policy tools to curb the harms of

corporate control of health care are as old as the health care system itself,

offering a small glimmer of hope. For the most part, we already have in some

form the legal tools needed to address some of the most worrisome risks of PE in

health care—they just need to be sharpened to apply to this particular problem.

These policy levers exist at the federal and state levels, including antitrust

laws, federal fraud and abuse laws, state prohibitions of the corporate practice of

medicine, state fee-splitting laws, and state employment laws.

357

As this Part

explains, legislative or regulatory tweaks may be needed to better target these

existing laws.

358

In other instances, however, new policies may be needed to

force PE investors to make their operations more transparent and to close the

payment loopholes that PE investors have exploited for profit. Policymakers are

not writing on a blank slate: They can build upon a foundation of federal and

state laws that have been addressing different forms of the same problem for

decades—the distortions created by a profit motive in the delivery of health care.

A. Improving and Better Using Existing Laws

1. Sharpening antitrust enforcement tools

Enforcement of federal antitrust laws can target harmful effects of PE-

driven consolidation, and federal fraud and abuse enforcement can recoup ill-

gotten revenues from PE-backed health care entities that engage in upcoding,

overbilling, or providing inadequate supervision as a revenue strategy.

At the federal level, the HSR Act’s reporting threshold for pre-merger

review could be revised to address the cumulative effect of the serial

acquisition of physician practices.

359

Various antitrust experts and

enforcement officials advocate such reforms as part of broader legislation to

strengthen antitrust enforcement.

360

356. See supra Part I.C.

357. See supra Part II.

358. FUSE BROWN ET AL., supra note 8, at 18-25.

359. MARTIN GAYNOR, BROOKINGS INST., WHAT TO DO ABOUT HEALTH-CARE MARKETS?

POLICIES TO MAKE HEALTH-CARE MARKETS WORK 23 (2020), https://perma.cc/QA2F-

S2WJ.

360. JONATHAN B. BAKER & FIONA SCOTT MORTON, ECON. FOR INCLUSIVE PROSPERITY,

CONFRONTING RISING MARKET POWER 4 (2019), https://perma.cc/7QHY-HWB3;

Gaynor, supra note 359, at 22-24;

FTC, Remarks of Commissioner Rebecca Kelly

footnote continued on next page

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581

This reduction of the HSR threshold for health care transactions would

allow more visibility, review, and oversight of all smaller health care

transactions (including facilities like hospices or behavioral health treatment

centers), not just those pursued by PE firms.

361

The 2023 merger guidelines

indicate that the FTC and DOJ will assess the market impact of accretive, add-

on acquisitions cumulatively, instead of individually.

362

Even more powerful

would be court precedent establishing that PE’s serial acquisitions strategy can

violate the antitrust laws, as alleged in the FTC’s case against U.S. Anesthesia

Partners and Welsh Carson.

363

Further, the FTC should use its subpoena

authority to shed light on health care transactions such as PE investments that

fall below the current reporting threshold.

364

Even if federal antitrust authorities were to take these steps, their resources

are too limited to oversee all health care transactions.

365

Thus, federal antitrust

enforcement should be augmented by state enforcement and oversight. Parallel

antitrust authority by state attorneys general allows them to also review and

challenge smaller acquisitions of physician practices.

366

States could require

notification of proposed transactions even if their dollar values fall below the

federal threshold.

367

Connecticut, Massachusetts, Oregon, and Washington

have already taken this step.

368

A 2022 California law requires prior notice of all

Slaughter as Prepared for Delivery: Antitrust and Health Care Providers Policies to

Promote Competition and Protect Patients 5 (2019), https://perma.cc/6LA6-TM7X.

361. Gaynor, supra note 359, at 23.

362. See generally U.S. DEP’T OF JUST. & FTC, supra note 123

363. See supra notes 137-38 and accompanying text.

364. FTC, Statement of Commissioner Rohit Chopra: Regarding Private Equity Roll-ups

and the Hart-Scott Rodino Annual Report to Congress

(2020), https://perma.cc/5ZRV-

YB89; FTC, Statement of Commissioner Christine S. Wilson, Joined by Commissioner

Rohit Chopra: Concerning Non-Reportable Hart-Scott Rodino Act Filing 6(b) Orders

(2020), https://perma.cc/74NW-BJ4N.

365. See, e.g., FTC, Remarks of Chair Lina M. Khan: Regarding the Proposed Rescission of

the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions

(2021), https://perma.cc/YL8Z-Y58T (noting the scarcity of agency resources for

merger review as justification for reviving prior approval and notice requirements for

future transactions by parties to consent agreements).

366. FUSE BROWN ET AL., supra note 8, at 20.

367. JAIME S. KING ET AL., SOURCE ON HEALTHCARE PRICE & COMPETITION, PREVENTING

ANTICOMPETITIVE HEALTHCARE CONSOLIDATION: LESSONS FROM FIVE STATES 9 (2020),

https://perma.cc/JC4L-DZ74.

368. WASH. REV. CODE ANN. § 19.390.030(3) (West 2023); CONN. GEN. STAT. ANN. § 19a-

486i(c) (West 2023); M

ASS. GEN. LAWS ANN. ch. 6D, § 13(a) (West 2023); OR. REV. STAT.

ANN. §§ 415.500-415.501 (West 2023) (requiring pretransaction notice, review, and

approval by the Oregon Health Authority for all transactions involving health care

entities including physicians, where one party had average revenue of $25 million or

more and the other party had average revenue of $10 million or more in the preceding

three fiscal years).

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582

material transactions involving health care entities—including physician

practices with twenty-five or more physicians—to the state’s Office of Health

Care Affordability (OHCA), which is authorized to conduct a market-impact

review.

369

Although the OHCA does not have the authority to stop a

transaction or attach conditions of approval, it may refer any worrisome

transaction to the state attorney general for further action.

370

Going beyond the

federal government, several states have created authorities to review a broader

array of health care transactions, including physician practice acquisitions by

PE investors, which may prompt more states to follow suit.

371

2. Sharpening the corporate practice of medicine prohibition

The corporate practice of medicine doctrine, although seemingly antiquated,

remains a viable tool to regulate the recent incursion of PE into the health care

marketplace. Many states maintain a medical practice act that controls, to

varying degrees, the ability of corporate lay-entities to own or employ

physicians and thereby control the practice of medicine.

372

Some states have

amended their laws in an attempt to modernize the delivery of care, while others

remain vigilant in protecting the medical profession from corporate interests.

373

The task for legislatures, regulators, and private litigants is to protect the health

care profession from dangerous levels of corporate control without squelching

desirable innovations or entrenching obstructive turf guarding.

By amending their medical practice acts, legislatures can narrow or close

the loopholes currently exploited by PE firms to circumvent the corporate

practice prohibition.

374

Through S.B. 642, for example, the California

legislature attempted to prevent the continued abuse of the MSO model

currently used by many PE health care ventures.

375

Requiring the medical

369. CAL. HEALTH & SAFETY CODE § 127507 (West 2023) (requiring prior notice of

transactions by health care entities that sell, transfer, dispose of, or transfer control of a

“material amount of its assets” on or after April 1, 2024); id. §

127500.2 (defining “health

care entity” to include physician organizations and medical groups with twenty-five or

more physicians); see Act of June

30, 2022, sec. 19, 2022 Cal. Legis. Serv. ch. 47 (West)

(enacting these sections of the California Health and Safety Code).

370. CAL. HEALTH & SAFETY CODE § 127507 (West 2023).

371. ALEXANDRA D. MONTAGUE, KATHERINE L. GUDIKSEN & JAMIE S. KING, MILBANK MEM’L

FUND, STATE ACTION TO OVERSEE CONSOLIDATION OF HEALTH CARE PROVIDERS 10

(2021), https://perma.cc/PZ6A-RXLN.

372. Zhu et al., supra note 255, at 965.

373. See Marous, supra note 231, at 160, 165 (noting that, although Illinois provides no

express exemption from the prohibition on the corporate practice of medicine,

Virginia is “more permissive”).

374. Zhu et al., supra note 255, at 967.

375. See S.B. 642, Cal. Leg., 2021-2022 Reg. Sess. (Cal. 2021).

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583

practice to maintain the reality—rather than just the appearance of—control

over its business operations makes the MSO model a less attractive private

equity investment.

376

However, legislatures must strike a delicate balance between protecting

the integrity of the health care industry and embracing innovation. Legislation

enacted in California permits health care providers to share a portion of their

professional fees with management organizations, presumably to promote

economic efficiencies and scale.

377

The legislation strikes this balance because

licensed physicians would continue to control key business decisions that could

affect patient care while still being permitted to contract with lay entities to

increase operational efficiencies.

378

Furthermore, the bill achieves this balance

while making the medical practice less attractive for PE, which would like the

maximal amount of control in order to quickly sell the practice for a profit.

For many health care regulators, necessary measures may be as

straightforward as enforcing the laws on the books. New York, for example,

maintains a strong prohibition against professional fee splitting.

379

Other

states, such as California and Illinois, prohibit fee splitting but have carved out

statutory exceptions that allow PE firms room to maneuver.

380

Nevertheless,

the nature of the PE investment and ownership possibly renders the corporate

structure unlawful. Illinois’ fee-splitting law, for instance, allows health care

providers to share their professional fees so long as the medical practice

controls the amount of fees charged or collected.

381

Due to the control PE

exerts over a practice’s business operations, it would not be surprising or

uncommon for the firm to have control over the fees charged by the

physicians. In many states, therefore, health care regulators need to look no

further than the business arrangement between the medical practice and the

PE investor to provide effective oversight.

Finally, private litigants can use existing laws in ways that creatively

challenge corporate control over the medical practice. In AAEMPG v. Envision, a

management services organization is suing PE-backed physician-staffing firm,

Envision, under California’s existing medical practice laws.

382

Although the

plaintiff is promoting its pecuniary interest, other organizations see this type

376. See id.

377. CAL. BUS. & PROF. CODE § 650(b) (West 2023).

378. See Cal. S.B. 642.

379. N.Y. EDUC. LAW § 6530 (McKinney 2023).

380. See supra text accompanying notes 300-09.

381. 225 ILL. COMP. STAT. ANN. 60/22.2(d) (West 2023).

382. Complaint at 4-5, Am. Acad. of Emergency Med. Physician Grp., Inc. v. Envision

Healthcare Corp., No. 22-cv-00421 (N.D. Cal. Jan. 21, 2022), ECF No. 1-1.

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584

of litigation as a way to combat PE directly in the courts.

383

Take Medicine

Back, a nonprofit organization seeking to “reclaim the professional integrity of

the field of emergency medicine,” has stated that “[e]nforcing, strengthening,

and litigating existing state prohibitions on the corporate practice of medicine

should become a priority.”

384

In July 2022, Take Medicine Back sent a letter to

Joshua Stein, Attorney General of North Carolina and president-elect of the

National Association of Attorneys General, urging him to use his leadership

position to help “launch a multistate investigation into the widespread lack of

enforcement of [corporate practice of medicine] laws in the United States.”

385

During the course of litigation in the Envision case, parties will inevitably

face complex corporate agreements that seek to disguise the level of control

private equity exerts over medical practice. Where sophisticated contracting

obscures de facto control on paper, litigants may turn to other sources of law,

such as federal fraud and abuse laws, to demonstrate PE’s level of knowledge

and influence over the medical practice.

386

B. Where We Need New Laws

Beyond simply sharpening the legal tools we have, in some cases, we need

new laws, administrative rules, or significant statutory amendments to

address the harms of PE investment in health care. These new laws fall into

three categories: (1) closing Medicare payment loopholes being exploited by

PE and others; (2) increasing transparency of PE ownership; and (3) altering

the tax treatment of PE investors. The first category is specific to health care

but not PE, while the latter two are the opposite—specific to PE but not to

health care.

1. Closing payment loopholes

PE has targeted physician practices to take advantage of two revenue

opportunities in Medicare payment policy: Medicare Part B payment

for physician-administered drugs and Medicare Advantage risk-based

payment policy.

387

383. MITCHELL LOUIS JUDGE LI, ROBERT MCNAMARA, NATALIE NEWMAN, MEGHAN GALER &

AAYLA SECURA [PSEUDONYM], THE RECLAMATION OF EMERGENCY MEDICINE: “TAKE EM

BACK” WHITE PAPER 5, 7 (2021), https://perma.cc/8GVZ-NKDE.

384. Id. at 5.

385. Letter from Mitchell Li, Founder, Take Med. Back, to Joshua Stein, Att’y Gen., N.C.

Dep’t of Just. (July 15, 2022), https://perma.cc/58FK-UAWQ.

386. See supra Part II.B.

387. FUSE BROWN ET AL., supra note 8, at 2, 18.

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585

The Medicare Part B drug payment loophole is part of the investment

strategy targeting procedural specialties, such as dermatology,

ophthalmology, and gastroenterology, offering ancillary services that

generate additional revenue beyond the office visit.

388

One such ancillary

service is physician-administered drugs that are delivered in the office, which

Medicare reimburses under Medicare Part B (for physician services) rather

than Medicare Part D (the prescription drug benefit).

389

Physicians purchase

Part B drugs and biologics and then bill the payer under a “buy and bill”

system, which pays physicians more to administer more expensive drugs.

390

Medicare Part B’s drug payment rules pay physicians an add-on payment

calculated as 6% of the drug’s average sales price, creating a perverse incentive

to prescribe more expensive drugs, even if cheaper alternatives are

available.

391

For example, Medicare Part B’s payment incentives influence

ophthalmologists’ selection of drugs to treat wet macular degeneration:

Physicians continue to administer a drug (Lucentis) that is at least forty times

more expensive, despite the availability of an equally effective, cheaper

alternative (Avastin).

392

Investors target certain physician specialties like

oncology that profit from the Part B payment incentive.

393

One way to narrow the Medicare Part B drug payment loophole would be

to alter the calculation for the add-on payment for Part B drugs, switching

from 6% of the average sales price to a flat payment, grouped by therapeutic

class and diagnosis.

394

A flat add-on payment change would flip the incentives

388. Id. at 13-14.

389. Kavita K. Patel & Caitlin Brandt, A Controversial New Demonstration in Medicare:

Potential Implications for Physician-Administered Drugs, H

EALTH AFFS. (May 3, 2016),

https://perma.cc/36ZD-PY5W.

390. Paul B. Ginsburg & Steven M. Lieberman, Medicare Payment for Physician-Administered

(Part B) Drugs: The Interim Final Rule and a Better Way Forward, B

ROOKINGS (Feb. 10,

2021), https://perma.cc/DSV6-5344.

391. See Patel & Brandt, supra note 389; Ginsburg & Lieberman, supra note 390 (describing

how Medicare statutes pay physician practices 106% of the average sales price).

392. NIH, Avastin and Lucentis Are Equivalent in Treating Age-Related Macular

Degeneration (Apr. 30, 2012), https://perma.cc/MSJ8-L77D; U.S. D

EP’T OF HEALTH &

HUM. SERVS., OEI-03-10-00360, MEDICARE PAYMENTS FOR DRUGS USED TO TREAT WET

AGE-RELATED MACULAR DEGENERATION 5, 12 (2012), https://perma.cc/F6YE-ETXS;

Peter Whoriskey & Dan Keating, An Effective Eye Drug is Available for $50, but Many

Doctors Choose a $2,000 Alternative, W

ASH. POST (Dec. 7, 2013, 8:25 PM EST),

https://perma.cc/C66B-UPVG.

393. See Jeah Jung, Roger Feldman & Yamini Kalidindi, The Impact of Integration on

Outpatient Chemotherapy Use and Spending in Medicare, 28 H

EALTH ECON. 517, 517-19

(2019).

394. BIPARTISAN POL’Y CTR., TRANSITIONING FROM VOLUME TO VALUE: ACCELERATING THE

SHIFT TO ALTERNATIVE PAYMENT MODELS 19-21 (2015), https://perma.cc/Z7TZ-DKHC

(recommending flat add-on payments and better methods of calculating average sales

prices for Medicare Part B drugs).

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76 STAN. L. REV. 527 (2024)

586

for physicians to prescribe the cheaper alternative, but it would require a

change in the Medicare statute.

395

Commentators and MedPAC recommend

this and other adjustments to Medicare Part B payment policy to address

lack of competition and price discipline for biosimilars and new,

high-cost specialty drugs.

396

Such reforms would narrow the opportunities

PE firms have to exploit payment loopholes and market power under

existing law.

One such payment loophole stems from the way Medicare pays

the private Medicare managed care plans known as Medicare Advantage

(MA) plans. Medicare’s “risk-adjusted” payment method creates incentives

to inflate beneficiaries’ risk scores through aggressive coding of diagnoses,

in order to draw higher payments.

397

Aggressive coding (or risk-score

gaming) can exaggerate how sick enrollees appear to be, which triggers

higher payments from Medicare.

398

This payment loophole draws PE

and other corporate investors to purchase primary care practices that

serve MA enrollees and push providers to aggressively code diagnoses.

399

Some investors even vertically integrate the primary care practices with

MA plans to bolster physicians’ incentives to generate higher payments.

400

MedPAC estimated that in 2021, MA plans’ coding practices resulted in

risk scores that were 4.9% higher than if the beneficiary had been

in traditional fee-for-service Medicare, causing $17 billion in overpayments

to MA plans.

401

In the six years from 2007 to 2023, MedPAC estimates

that excess risk coding in MA led to $124 billion in overpayments to

MA plans.

402

395. See Ginsburg & Lieberman, supra note 390.

396. Id.; MEDICARE PAYMENT ADVISORY COMM’N, REPORT TO THE CONGRESS: MEDICARE AND

THE HEALTH CARE DELIVERY SYSTEM 83-84 (2022), https://perma.cc/3JVV-TUEQ.

397. FUSE BROWN ET AL., supra note 8, at 15.

398. JP Sharp, Leslie McKinney, Scott Heiser & Rahul Rajkumar, Realizing the Vision of

Advanced Primary Care: Confronting Financial Barriers to Expanding the Model

Nationwide, H

EALTH AFFS. (Mar. 30, 2020), https://perma.cc/7P6X-GKBV; Abelson &

Sanger-Katz, supra note 221.

399. See Shah et al., supra note 10, at 100; Abelson, supra note 10.

400. Geruso & Layton, supra note 9, at 1009-10, 1022.

401. MEDICARE PAYMENT ADVISORY COMM’N, REPORT TO THE CONGRESS: MEDICARE

PAYMENT POLICY 324-25, 354 (2023), https://perma.cc/2NED-8S27.

402. Id. at 355.

Private Equity and the Corporatization of Health Care

76 STAN. L. REV. 527 (2024)

587

Risk-code gaming is a massively lucrative (or costly) phenomenon.

403

accounts for nearly half of total Medicare spending.

404

Some estimate that the

current payment policy and coding intensity will cause Medicare to overpay

MA plans by $600 billion over the 2023-2031 period.

405

The Centers for Medicare & Medicaid Services (CMS) could take certain

actions under its existing regulatory and enforcement authority to curb risk-

score gaming. First, CMS could increase the statutorily authorized coding

intensity adjuster to account for the extent of risk-score gaming by MA plans

that are driving historic profits for MA plans.

406

Under its existing regulatory

authority, CMS could modify the risk-adjustment formula to reduce the impact

of risk upcoding.

407

Currently, CMS applies the statutory-minimum

adjustment of 5.9%, but it has authority to go further, and some analysts

estimate that using a higher—but empirically justified coding-intensity

adjustment—would save taxpayers $600 billion in overpayments between 2023

and 2030.

408

Second, CMS could increase efforts to recoup overpayments from

unsupported coding practices through increased audit and enforcement of the

Overpayment Rule, which, among other provisions, requires MA plans to

return excess payments based on unsupported risk codes.

409

To do so, CMS

could expand the scope of its Risk Adjustment Data Validation audits of MA

plan coding practices and allocate more resources to investigation and

enforcement of Overpayment Rule.

410

Further, CMS could reweight the risk-

403. Richard Kronick & F. Michael Chua, Industry-Wide and Sponsor-Specific Estimates of

Medicare Advantage Coding Intensity 2-3 (Nov. 11, 2021) (unpublished manuscript),

https://perma.cc/EFP8-BTKJ (estimating that due to risk-coding intensity, Medicare

Advantage Plans will receive $600 billion in excess payments between 2023-2031); Paul

D. Jacobs & Richard Kronick, The Effects of Coding Intensity in Medicare Advantage on

Plan Benefits and Finances, 56 H

EALTH SERVS. RSCH. 178, 178 (2021) (finding that excess

coding intensity increased MA plan revenue by 1-4% in 2018); Abelson & Sanger-Katz,

supra note 221 (reporting on multiple fraud cases against MA plans for unjustified risk

coding used to inflate MA plan profits by billions of dollars).

404. Jeannie Fuglesten Biniek & Tricia Neuman, The Growth in Share of Medicare Advantage

Spending, KFF

(Apr. 7, 2022), https://perma.cc/HPX6-8FV8.

405. Kronick & Chua, supra note 403.

406. 42 U.S.C. § 1395w-23(a)(1)(C)(ii)(III).

407. See Erin C. Fuse Brown, Travis C. Williams, Roslyn C. Murray, David J. Meyers &

Andrew M. Ryan, Legislative and Regulatory Options to Improve Medicare Advantage, 48

HEALTH POLS. POL’Y & LAW 919, 935 (2023).

408. Kronick & Chua, supra note 403, at 2-3.

409. The 2014 Overpayment Rule requires MA plans to return any overpayments identified

by the plan within sixty days or else they become false claims under the False Claims

Act. 42 U.S.C. § 1320a-7k(d); 42 C.F.R. § 422.326 (2014); 42 C.F.R. § 422.330 (2015); 42

C.F.R. § 422.504(l) (2022).

410. Fuse Brown et al., supra note 407, at 935-37 (2023); Travis C. Williams, Erin C. Fuse

Brown, David J. Meyers, Roslyn Murray & Andrew M. Ryan, Medicare Advantage Audit

footnote continued on next page

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76 STAN. L. REV. 527 (2024)

588

coding formula and restrict the use of chart reviews and health-risk assessments

to target factors and practices that MA plans exploit most heavily to inflate risk

scores.

411

Notably, none of these steps would require an act of Congress; CMS

could take each of these measures under existing regulatory authority.

412

Just as recent legislation addressed surprise billing, PE’s appetite to acquire

physician practices could be diminished by closing the payment loopholes that

entice investment yet provide no value to patients.

2. Transparency in ownership

In a forthcoming article, political scientists Colleen Grogan and Miriam

Laugesen make the case that the lack of transparency in ownership and

financial structures hampers the ability of policymakers, regulators, and payers

to gauge the effects of PE investment.

413

Unlike publicly traded firms, PE funds

are not required to register with or make disclosures to the SEC.

414

Publicly

available sources of ownership information for health care providers often fail

to disclose the identity of the parent organization and obscure ownership

hierarchies of interrelated entities.

415

Accordingly, short of directly regulating

PE investment in physician practices, enhanced ownership transparency could

enable better monitoring of any effects on quality, price, utilization, and

patient experience. Two existing online databases that CMS administers—

Open Payments (for pharmaceutical and device manufacturers payments to

physicians) and Medicare Care Compare (which reports provider performance

on certain quality metrics)—could be adapted to include practice-ownership

status.

416

In 2023, Representative Pramila Jayapal (D-WA) introduced the

Changes Let Plans Keep Billions in Overpayments, HEALTH AFFS. (Feb. 27, 2023),

https://perma.cc/LE6Y-LMR7.

411. Fuse Brown et al., supra note 407, at 938-39.

412. Letter from Erin C. Fuse Brown, Andrew Ryan, Roslyn Murray & Travis Williams, to

Ctrs. for Medicare & Medicaid Servs., U.S. Dep’t of Health & Hum. Servs. (Aug. 30,

2022), https://perma.cc/87V7-Y4H7; Fuse Brown et al., supra note 407, at 930, 934-939.

413. Grogan & Laugesen, supra note 6 (manuscript at 7); see also COLLEEN M. GROGAN, GROW

& HIDE: THE HISTORY OF AMERICA’S HEALTH CARE STATE 356-57 (2023) (making a similar

point about the lack of transparency in private equity’s growing role and effects in the

health care industry).

414. Private Fund, SEC, https://perma.cc/D92R-T6S9 (last updated Aug. 23, 2023).

415. Yashaswini Singh & Erin C. Fuse Brown, The Missing Piece in Health Care Transparency:

Ownership Transparency, H

EALTH AFFS. (Sept. 22, 2023), https://perma.cc/Q3EB-XLRY;

EDICARE PAYMENT ADVISORY COMM’N, supra note 396, at 72, 81-82.

416. See Open Payments, CTRS. FOR MEDICARE & MEDICAID SERVS., https://perma.cc/5UEX-

TP4J (last updated Feb. 1, 2024, 12:30 PM); Care Compare: Doctors and Clinicians

Initiative., C

TRS. FOR MEDICARE & MEDICAID SERVS., https://perma.cc/A3KM-6QMD

(last updated Jan. 18, 2024, 12:16 PM); see also

FUSE BROWN ET AL., supra note 8, at 25

(developing this recommendation).

Private Equity and the Corporatization of Health Care

76 STAN. L. REV. 527 (2024)

589

Healthcare Ownership Transparency Act, which would require Medicare-

enrolled providers to disclose the identities of their owners, private equity

investors, debts, fees, portfolio performance, and political spending.

417

Although such legislation would provide significant visibility into PE

ownership of health care entities, key health care transparency bills advancing

though Congress in 2023 did not include ownership transparency.

418

Also, federal or state lawmakers could look to other aspects of corporate

and business law that require advance disclosure of anticipated transactions in

order to provide opportunity to vet their fairness or social impacts.

419

The

FTC’s 2023 proposed rule on the HSR pre-merger notification form would

require merging parties to provide the agencies with information about the

identities of the parent entity and minority shareholders, and officers and

board members.

420

In addition, the rule would require information about the

organizational structure of both the acquiring and acquired entities.

421

Finally, going beyond the anti-gag clause legislation that gives physicians

freedom to discuss their concerns, lawmakers could consider requiring

active disclosure to patients of key aspects of practice ownership or

management. Such a move could follow the pattern that arose in response to

controversy over managed-care incentives. In that era, the prohibition of gag

clauses was soon followed by state enactments that required providers or

insurers to inform patients about physician incentives and payment

arrangements.

422

These measures were meant to help patients understand

possible motivations behind treatment (or nontreatment) recommendations

so that patients could make more informed decisions.

423

Equivalent

transparency requirements regarding PE ownership or management could

offer similar advantages.

417. Healthcare Ownership Transparency Act, H.R.1754 § 2, 118th Cong. (2023).

418. Singh & Fuse Brown, supra note 415.

419. Possible analogues include advance notice of plant closings, 29 U.S.C. § 2101, or

disclosures in advance of takeover bids, 15 U.S.C. § 78n(d). Cf. Lucian A. Bebchuk &

Roberto Tallarita, The Illusory Promise of Stakeholder Governance, 106 C

ORNELL L. REV.

91, 133-37 (2020) (expressing skepticism that corporate leaders will, even if prompted,

seriously consider factors other than shareholder value).

420. Premerger Notification; Reporting and Waiting Period Requirements, 88 Fed. Reg.

42178, 42187-88 (proposed June 29, 2023) (to be codified at 16 C.F.R. pts. 801, 803).

421. Id. at 42187.

422. Krause, supra note 335, at 34-38.

423. Id. at 37.

Private Equity and the Corporatization of Health Care

76 STAN. L. REV. 527 (2024)

590

3. Tax treatment of private equity

The profitability of PE investment is enhanced by tax advantages. As

compensation for its management services, PE fund managers typically receive

a management fee calculated as 2% of assets under management plus 20% of the

profits generated by a fund.

424

The 2% fee is subject to ordinary-income and

self-employment taxes, while the 20% return on the investment profits

(known as “carried interest”) is taxed at preferential capital-gains rates and is

not subject to self-employment taxes for Social Security and Medicare.

425

Though the PE managers’ 20% share of the fund’s profits can be viewed as

compensation for the management of the investment, the tax code does not tax

these returns as ordinary income. Many argue this loophole gives an unfair tax

advantage to wealthy private equity fund managers compared to other capital

investors or regular employees and other service providers that pay higher

ordinary-income tax rates on their compensation.

426

Several bills and tax proposals have aimed to close or narrow the carried

interest loophole.

427

An earlier version of the 2022 Inflation Reduction Act

would have required PE fund managers to hold their assets for five years

(instead of three) to qualify for the preferred long-term capital-gains rate (of

20% rather than 37%).

428

Nevertheless, Senator Kyrsten Sinema (I-AZ) insisted

424. Briefing Book: What Is Carried Interest, and How Is It Taxed?, TAX POL’Y CTR.,

https://perma.cc/YZ5Z-5QDP (last updated May 2020); Victor Fleisher, Two and

Twenty: Taxing Partnership Profits in Private Equity Funds, 83 N.Y.U.

L. REV. 1, 3-4 (2008).

425. The PE fund managers’ 20% share of profits is subject to the 20% long-term capital-gains

rate, rather than the ordinary-income tax rate of 37% for top earners. See Greg Iacurci,

What Carried Interest Is, and How It Benefits High-Income Taxpayers, CNBC (Aug. 8, 2022,

3:09 PM EDT), https://perma.cc/SK23-B5ZU (describing how carried interest for

private equity managing partners is taxed); IRS, Self-Employment Tax (Social Security and

Medicare Taxes), https://perma.cc/NF6L-XKLF (last updated Aug. 3, 2022) (describing

self-employment tax rates); Tax Carried Interest as Ordinary Income, C

ONG. BUDGET OFF.

(Dec. 13, 2018), https://perma.cc/Z9S9-JDGC (describing how carried interest is

currently taxed, estimating that taxing it as ordinary income would generate $14 billion

in additional revenues from 2019 to 2028, and stating that “carried interest is not subject

to the self-employment tax.”).

426. See Briefing Book: What Is Carried Interest, and How Is It Taxed?, supra note 424; Ams. for

Fin. Reform, Close the Carried Interest Loophole that Is a Tax Dodge for Super-Rich

Private Equity Executives 1 (2021), https://perma.cc/AB9X-5UA5.

427. See, e.g., Press Release, White House, FACT SHEET: The American Families Plan

(Apr. 28, 2021), https://perma.cc/WR4W-W3W7 (proposing “to close the carried

interest loophole so that hedge fund partners will pay ordinary-income rates on their

income just like every other worker.”); Carried Interest Fairness Act of 2021, H.R. 1068,

117th Cong. (2021) (proposing to tax carried interest compensation to private equity or

hedge fund partners as ordinary-income tax rates, not capital gains).

428. Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. (2022) (enacted); see Alan

Rappeport & Emily Flitter, Carried Interest Is Back in the Headlines. Why It’s Not Going

Away., N.Y.

TIMES (Aug. 5, 2022), https://perma.cc/XYM6-NYH4; Erik Wasson,

footnote continued on next page

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76 STAN. L. REV. 527 (2024)

591

on removing the tax reform for PE as a condition of her support for the

Inflation Reduction Act, so this tax advantage for PE continues.

429

These tax

reform proposals would apply to PE broadly, not just their health care

investments, and they seek to put the tax treatment of PE’s earnings on the

same level with other investors, managers, or service providers.

Though it faces much stronger political headwinds than closing the

carried interest loophole, an alternative tax reform to achieve similar ends

would entail having equal tax rates for capital gains and ordinary income.

430

Physician-owners currently reap tax advantages when they sell their practice

to a buyer for a high acquisition price in exchange for employment contracts

for lower salaries for a period of years.

431

This deal structure permits

physicians selling the practice to convert some of their employment income

(which is taxed as ordinary income) into long-term capital gains (which is

taxed at lower rates).

432

Having equal rates for ordinary income and capital

gains would eliminate this form of tax arbitrage, whether pursued by PE or

other sources of capital.

Tax reforms such as closing the carried interest loophole or equalizing

ordinary-income and capital-gains rates would dampen the tax distortions

favoring capital over labor and corporate profit over professional

independence. These tax reforms might cool PE investors’ voracious appetite

for health care targets, but they would not eliminate it.

C. The Past, Present, and Future of Corporatization and Financialization

of Health Care

In years past, one of us has questioned the continuing need for certain laws

as the health care delivery system has changed—particularly with the rise of

managed care in the 1980s and 1990s.

433

Public enforcers seem to agree. The

corporate practice of medicine doctrine has fallen dormant, state fee-splitting

Democrats Drop Carried Interest as Sinema Paves Way for Tax Vote, BLOOMBERG (updated

Aug. 5, 2022, 4:26 AM PDT), https://perma.cc/3BKV-9QCD.

429. Andrew Ross Sorkin et al., A Tax Loophole’s Powerful Defender, N.Y. TIMES (Aug. 5, 2022),

https://perma.cc/HLH5-BKQ5.

430. See, e.g., Press Release, White House, supra note 427 (proposing to equalize ordinary-

income and capital-gains tax rates). Note that if the carried interest loophole persisted,

the returns on investment would still be exempt from self-employment taxes.

431. FUSE BROWN ET AL., supra note 8, at 26.

432. Barry F. Rosen, Sale to Private Equity—Part 2, GORDON FEINBLATT LLC (Dec. 14, 2020),

https://perma.cc/Z9XA-HM58.

433. See Hall, supra note 227, at 510 (noting, with respect to the corporate practice of

medicine doctrine, “[t]his puzzling doctrine is clouded with confused reasoning and is

founded on an astounding series of logical fallacies”); see also Marous, supra note 231, at

168-69 (discussing the rise of managed care).

Private Equity and the Corporatization of Health Care

76 STAN. L. REV. 527 (2024)

592

and physician-employment laws have largely gathered dust, and even federal

fraud and abuse laws have been critiqued for their inflexibility and burden on

the industry’s shift to value-based payment.

434

However, faced with the contemporary problem of PE’s rapid entry into

health care, we find ourselves revisiting past policy tools in search of ones well

suited to address the perennial concerns over the corporatization and

financialization of health care. Doing so brings new appreciation for what may

seem like outmoded measures, which may prove useful against the enormous

risks PE investment poses to the health care system. Moreover, existing legal

tools can be adapted much more quickly than new policies can be designed. In

some instances, broad new laws—like the No Surprises Act—are the only way

to close gaping loopholes. But such sweeping reforms are hard to pass, so we

should not focus solely on creating new policies when existing ones can be

sharpened and redeployed.

435

A second realization underscores state law’s importance in addressing the

risks of PE investment in health care.

436

Despite states’ traditional roles as the

regulators of medical practice,

437

the centrality of states may still be surprising

in this era of increased federal oversight over a sprawling health care

industry.

438

Sometimes, a state’s role is that of co-enforcer of federal laws or

their state equivalents (such as antitrust or fraud and abuse laws).

439

In other

434. See, e.g., Huberfeld, supra note 225, at 244 (“The corporate practice of medicine doctrine

is a relic; a physician-centric guild doctrine that is at best misplaced, and at worst

obstructive, in the present incarnation of the American health care system.”);

Modernizing Stark Law to Ensure the Success Transition from Volume to Value in the

Medicare Program: Hearing Before the Subcomm. on Health of the H. Comm. on Ways and

Means, 115th Cong. (2018) (statement of the American Hospital Association); Marilyn L.

Uzdavines, The Great American Health Care System and the Dire Need for Change: Stark

Law Reform as a Path to a Vital Future of Value-Based Care, 7 T

EX. A&M L. REV. 573, 575

(2020) (“Health care fraud and abuse laws are one of the main barriers . . . limiting new

payment options to support a value-based payment model.”); Anne B. Claiborne, Julia

R. Hesse & Daniel T. Roble, Legal Impediments to Implementing Value-Based Purchasing in

Healthcare, 35 A

M. J.L. & MED. 442, 455-57 (2009); Zhu et al., supra note 255, at 967

(observing that “states’ enforcement has been dormant” because “[w]ith the rise of

managed care and integrated delivery systems, the CPOM doctrine became perceived as

unnecessary and outmoded in the face of health care market innovations”).

435. See supra Part III.A.

436. See supra Part II.C-.D.

437. See, e.g., Patricia J. Zettler, Toward Coherent Federal Oversight of Medicine, 52 SAN DIEGO L.

REV. 427, 446 (2015); Nathan Cortez, The Law of Licensure and Quality Regulation, 387

EW ENG. J. MED. 1053, 1053-54 (2022).

438. Cf. Gluck & Huberfeld, supra note 23, at 1704-05 (describing and critiquing widely held

narratives of health care federalism as a trend toward national takeover of areas of

traditional state regulation and arguing instead for a more nuanced joint state-federal

framework for understanding modern health care federalism).

439. See supra Part III.A.1.

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76 STAN. L. REV. 527 (2024)

593

cases, the laws themselves are state created with no existing federal

counterpart. Corporate practice of medicine prohibitions and physician-

employment laws are obvious examples.

440

In short, relevant policy levers

exist within every branch and at multiple levels of government: state, federal,

judicial, regulatory, and legislative.

Nor are the laws limited to government enforcement.

441

Rather, there are

a variety of private actions that aggrieved parties can bring, whether

physicians, patients, would-be competitors, or qui tam whistleblowers.

442

The

good news is that we have a variety of existing tools to address the

commercialization of health care by PE.

443

But the bad news is that our

twentieth-century tools may not be up to this twenty-first-century problem.

PE is vastly resourced, shrouded in secrecy, and extremely nimble.

444

Against

the march toward corporatization and financialization in health care, we have

plenty of tools, but they may not be enough.

Conclusion

Six decades ago, Nobel Prize-winning economist Kenneth Arrow

articulated the core reasons for shielding physician practice from conventional

market dynamics of crass commodification and commercialization.

445

medical-cost inflation raged out of control, however, this position came under

attack for supporting physicians’ attempts to fend off any form of economizing

influence.

446

It was rightly felt that Arrow’s strong defense of professional

values needed to yield, at least to some extent, to market-driven efforts to

restrain and rationalize medical spending.

447

It now appears that the market-

professionalism pendulum has swung too far in the direction of unconstrained

profiteering. Some balance must be maintained between core professional

values in medical practice and the market economy in which medical care is

440. See supra Part II.C.2 (describing state corporate practice of medicine and physician-

employment laws).

441. See supra Part II.B.1-.2.

442. See supra Part II.B.1-.2.

443. See supra Part III.A.

444. Olson, supra note 35, at 8.

445. Kenneth J. Arrow, Uncertainty and the Welfare Economics of Medical Care, 53 AM. ECON.

REV. 941, 948-54 (1963).

446. See generally UNCERTAIN TIMES: KENNETH ARROW AND THE CHANGING ECONOMICS OF

HEALTH CARE (Peter. J. Hammer, Deborah Haas-Wilson, Mark A. Peterson & William

M. Sage eds., 2003) (reexamining Arrow’s observations on how traditional market

forces are often inapplicable to the market for health care).

447. See id.

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76 STAN. L. REV. 527 (2024)

594

practiced. Rampant PE investment in physician practices threatens to disrupt

that balance.

Through past cycles of this never-ending tug-of-war, various bodies of law

and regulation have been marshalled to guard the professional ground.

448

times, these defenses have been excessive, but now they appear unable to

withstand the assault.

The influx of PE in health care, the ongoing consolidation of the health

care market, and rising costs show that the corporatization of health care has

not delivered affordable, equitable, or accessible health care—quite the

opposite. The legal tools we have are ultimately unable to solve the bigger

issue: We still have not found the right balance between treating health care as

a social good or as a market commodity.

PE investment in health care is just the latest manifestation of the

commercialization of medicine, and it will not be the last. By taking

commercialization to new extremes, however, the influx of PE marks a critical

juncture for reassessment of the role of professionalism in health care delivery.

Without returning to a bygone era or complete capitulation to professional

hegemony, a more robust set of public policy mechanisms is needed to prevent

powerful providers and suppliers from dictating prices, gaming

reimbursement, and treating health care as an extractive exercise rather than a

social good—one that must be regulated, accessible, and affordable to all.

448. See Hall, supra note 227, at 446-48 (reviewing the history of legal attempts to balance

professionalism and profiteering in medicine).

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76 STAN. L. REV. 527 (2024)

595

Appendix: Policies to Address Private Equity Investment in Health Care

Policy Risk Addressed State, Federal, or

Both

Policy Change

Antitrust review Consolidation,

higher prices

Both (parallel

federal and state

antitrust

enforcement

authority)

Reduce or eliminate

Hart-Scott-Rodino Act

reporting threshold for

smaller health care

transactions; state

legislation to expand

merger review below

HSR reporting

threshold, including

serial add-on

acquisitions

Fraud and abuse

enforcement

Overbilling,

upcoding, risk-

score gaming,

overutilization,

self-referrals

Both (federal and

private

enforcement of

federal laws, state

enforcement of

state equivalents)

None; increase

enforcement under

existing laws

Corporate

practice of

medicine, fee-

splitting laws

Financial

conflicts of

interest, loss of

physician

autonomy

State Clarify laws to restrict

inappropriate uses of

MSO model

Employment

laws

Anticompetitive

restrictions on

physicians,

patient access to

providers,

quality concerns

Both FTC proposed rule to

ban noncompetes;

state legislative

changes to restrict

noncompetes,

nondisclosure/gag,

and

nondisparagement

clauses

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596

Policy Risk Addressed State, Federal, or

Both

Policy Change

Closing

Medicare

payment

loopholes

Overbilling, risk-

score gaming,

overutilization

Federal Federal statutory or

regulatory action to

change Medicare Part B

prescription drug

payment incentives,

adjust for Medicare

Advantage risk-score

gaming

Transparency Opacity of

private equity

ownership

obscures

accountability,

research

Both Federal or state

statutory or regulatory

action to require

transparency of health

care provider

ownership or advance

disclosure of anticipated

transactions

Tax treatment

of PE

Unequal tax

incentives for

private equity

investors

Federal Eliminate carried

interest loophole