Latest / The Mental Health Evolution / Ep 12: Private Equity in Mental Health Care with Dr. Jane Zhu

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Ep 12: Private Equity in Mental Health Care with Dr. Jane Zhu · The Mental Health Evolution

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(Transcribed by TurboScribe. Go Unlimited to remove this message.) Hey everyone, welcome back to the mental health evolution podcast, where we
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are talking about how the landscape is quickly evolving in the mental
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health industry.
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Today, we are joined by Dr. Jane Zhu, associate professor of medicine
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at Oregon Health and Science University and core faculty in the Center
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for Health Systems Effectiveness.
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Dr. Zhu's research focuses on healthcare access and quality, particularly for
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mental health and behavioral health services, as well as provider incentives
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and organization of care.
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She has published in top journals, including JAMA, which is the journal,
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what does JAMA stand for, Jane?
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The American Medical Association.
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I knew she'd have it better than I do.
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The New England Journal of Medicine and Health Affairs, and has contributed
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to national policy efforts on improving behavioral health access.
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So as always, I'm going to dive into a couple of articles
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highlighted in the news so that you have an idea of kind
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of the background and the step on which we're stepping to have
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this conversation.
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So the first one I want to mention is an article called
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Private Equities and Roads into Mental Health Bring Concern.
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And this was from Psychiatry Online earlier this year in March, and
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it discusses the trend of private equity acquisitions in mental health
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practices.
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So this article discusses some of the recent data.
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Some of it, actually, this article references our podcast guest today and
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talks about the impact of what happens after private equity firms invest
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in health care.
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And the pattern is often a focus on increasing costs to consumers
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and increasing volume.
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The impact of client care is often of concern as well as
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staff turnover.
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In mental health specifically, the data shows that anywhere from 6 to
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20 percent of mental health facilities are owned now by private equity
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firms.
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The number varies greatly by state and calls attention to the fact
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that taking note of this impact on health care is really important.
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The article states that private equity could be a support to health
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care, allowing for investment and expansion that could improve, that could
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provide, excuse me, access to care.
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The challenge comes when investors need a return on investment of the
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funds given for expansion, and this can put pressure on from the
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get-go and raise prices and increase volume.
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Secondly, I'd like to talk about another article that talks about the
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curious case of private equity and health care's market failures.
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And this article examines policy oversight and ethical concerns as well, and
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it talks about interestingly kind of the history of policy in this
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industry.
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And the Senate Budget Committee issued in January 2025 a scathing bipartisan
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report titled Profits Over Patients that filled with outrages of private equity
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health care investors.
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In between, Congress has introduced an assortment of bills, including the
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Health Over Wealth Act, which specifically targets private equity investment
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strategies.
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And essentially there are states that have pursued reform, Oregon being one
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of them, New York, California, and Colorado.
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But then we have the FTC's suit against USAP and Welsh, Carson,
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Anderson, and Stowe, and allege that the company's serial acquisitions violated
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antitrust laws.
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Essentially they were acquiring so many businesses that they were creating a
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monopoly is what that means.
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And the article goes on to say that the consequences for doing
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this has been muted.
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So there are a couple of different ideologies here.
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One says that private equity in health care poses such great risks
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that it needs to be stopped.
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So that's one side of the argument.
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On the other side, there's the thought process that health care businesses
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have tried to maximize profits all along, and private equity firms are
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just being blamed for these things that have always happened.
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In short, the article talks about is the problem private equity or
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is it the broader financialization of health care delivery?
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And so that is something that we can dive into more in
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our conversation.
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But a second observation that has a lot of support is that
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when private equity acquisitions happen, they lead to higher prices for
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insurers and patients.
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So ultimately, there are a mix of variables with some bad actors
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having a negative impact, but other organizations experience a shift that is
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not leading to a decline in patient care.
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So the article ends stating that utmost urgency is to direct attention
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not just to the market effects of private equity, but also to
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the organizational strategies that private equity firms employ.
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A focus on organizational questions could not only inform why certain private
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equity firms wreak havoc in certain health care markets, but also how
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private investment could be channeled to improve the efficiency and quality of
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health care delivery.
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So with all of that stated, the question of private equity, I
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want to talk more to Dr. Xu.
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And I'm really excited to have you here.
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I want to highlight that Dr. Xu has done a published a
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research article as well entitled Geographic Penetration of Private Equity
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Ownership in Outpatient and Residential Behavioral Health.
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So we will certainly find out more from her about her data
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and some of the things that she found.
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So Dr. Xu, let's drive right in.
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Thanks so much for having me, Rachel.
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Yeah, I am beyond excited to get to the research.
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I told you before we jumped on, I am a research nerd.
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I love this stuff.
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It's how I ended up doing what I do in the mental
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health field and the business that I created.
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And so I would love to know kind of what motivated you
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to research private equity ownership and health care and mental health
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specifically.
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What was that spark for you?
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Sure.
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So one thing you didn't say in the introduction is I'm actually
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a primary care physician.
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So I see patients and they have driven a lot of my
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research questions.
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And so I'm a health services researcher.
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I spend most of my time using large administrative data sets to
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understand questions around access, quality of care, delivery of care.
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And when I was coming out of training about 12 years ago,
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this is when we first started learning about private equity owned practices
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as a sort of career option for people who are going into
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private practice.
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And at the time, there was very little data out there about
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this.
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And so out of personal experience, out of concern that my patients
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were expressing, I started looking into this issue.
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At the same time, I'm really interested in mental health, behavioral health
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in general as a research topic because as a primary care physician,
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I've increasingly been serving as a de facto mental health provider due
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to aggregate shortages, maldistribution of providers, not being able to find
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psychiatrists and specialty providers for my patients.
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Yeah.
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Yeah.
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That makes so much sense.
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So what about what...
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Tell us about your study and what it showed.
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What is the key pieces from that research paper that we need
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to hear about?
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Sure.
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So one thing to note is that data on private equity transactions
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is very opaque.
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It doesn't exist other than what private equity firms want to sort
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of publicly announce.
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And so that is a huge barrier to research in this area.
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So what we've done over the past several years and building on
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this sort of research platform is we hand comb data on transactions.
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And we verify that with press releases, with industry reports, with
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verification from clinic websites.
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And what we did was we looked at what private equity transaction
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look like in behavioral health specifically.
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And so we found that private equity owns between six to 7
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% of mental health clinics and substance use treatment facilities in the
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country.
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But these penetration rates really vary a ton by states.
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So in some states, North Carolina, Colorado, Texas, private equity owns more
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than 25% of all facilities in those states.
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And this is pretty consistent with other recent and burgeoning evidence.
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There was a study that sort of accompanied our study at the
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time by researchers at Yale and Penn that found that private equity
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owns about 14% of all freestanding psychiatric hospitals.
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And then another descriptive study that was published last year by some
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colleagues of mine found that private equity owns on the order of
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like 29% of all opioid treatment facilities, opioid treatment programs in
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the country.
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And those belong to just 11 parent companies, each owned by just
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one to two private equity firms.
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So what we're seeing is that private equity is entering behavioral health
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pretty rapidly.
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They're consolidating very quickly.
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And it's not a little bit here and there, it's actually a
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substantive amount.
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And then finally, we know that private equity, not just in the
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areas that we've studied, but they've invested in autism services where there's
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a lot of coverage mandates now for applied behavioral analysis.
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And that's introduced some predictable revenue streams and consolidation
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opportunities.
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Private equity is also a dominant player in residential eating disorder
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treatment centers, but we don't really have a lot of data on
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these other sectors of behavioral health.
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We're still early days, I would say, in the first five, 10
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years of investment in these areas.
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Interesting.
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Yeah.
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And so what do you think this means?
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As we're clearly seeing a trend that this is happening more and
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more, is there any risk there?
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What are the worries there?
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What are concerns?
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What should policy makers be looking at with this data?
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What are some of your thoughts on that?
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Yeah, I mean, I think first, let me just take a step
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back and just make a clear distinction.
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So private equity is simply a form of private capital.
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They are institutional investors, people, organizations that you might know,
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pension funds, sovereign wealth funds, university endowments that invest blind
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pools of capital into acquisitions.
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When we talk about private equity, sort of colloquially in research, in
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media, often what we're talking about are leveraged buyout models, which is
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a classic model of private equity investment.
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And a few features I think really stand out here.
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So one, leveraged buyout means that these transactions are primarily funded
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with debt that's borrowed money from the banks.
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And that money is loaded onto the acquiring company to pay back.
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So you can see that that sort of would create some perverse
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financial incentives.
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And this is in range of 70% or so of that
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transaction is debt financed.
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The second issue, I think, with leveraged buyout models is that they
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involve majority or controlling stakes in companies.
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So this is not growth capital where they're giving a little bit
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of money to help the company expand or use these capital investments
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for other things.
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They're taking over potentially significant business decisions.
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And in healthcare, that matters because it affects how healthcare is delivered,
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what services are prioritized, how clinicians are compensated.
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And then finally, I think the one other key issue that separates
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leveraged buyout models from other forms of capital investment is the
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investment horizon.
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So typically we're talking about three to seven years on average.
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And in fact, we have some studies that show that when we
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looked at private equity acquisitions of physician practices, most of those
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practices were sold within three years, and most often to another private
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equity firm.
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So you can imagine that that cycles through and creates with each
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resale creates different incentives, different ownership structures.
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And the clinicians in those cases have less and less control over
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those subsequent decisions.
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So the risks are, I think, quite clear, really introducing the tension
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between the duty to patients and a fiduciary duty to investors.
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There may be cost cutting, like you talked about, there may be
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effects on workforce.
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And what we really care about is access to care, quality of
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care, what prices and affordability of care.
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And so that is the risk.
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I will say though, that there are potentially benefits, particularly when
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you're talking about capital investment.
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So growth capital from private equity firms, maybe you can expand, use
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that money to expand capacity in under-resourced areas.
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Maybe you can invest in infrastructure that you really need to keep
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up in today's practice environment.
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So electronic health records, facility upgrades.
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One of the other benefits of consolidating these fragmented networks of small
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outpatient providers or SUD programs is you might be able to professionalize
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things, standardize things, lower input costs.
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And that could potentially improve efficiencies and administrative burdens for
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providers.
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So there are also potential benefits, at least on paper.
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Yeah.
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Yeah.
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And I mean, I think it's an interesting question, right?
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There's the business component of any healthcare business or practice.
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There's also the healthcare component, like if that's the primary thing.
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And so I think there's this interesting dance between the business side
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and the healthcare side.
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And something you said kind of sparked that for me when you
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were talking about, as these private equity firms maybe are owning a
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controlling stake, the clinicians don't have as much say in the company
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or potentially how care is provided.
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Yeah, a hundred percent.
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I think that's one of the key concerns.
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And in fact, there is tension there also in the evidence.
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So you had asked earlier and I hadn't quite gotten to that,
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but the proponents might say, oh, well, we as owners do not
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affect how clinical decisions are made, but there's lots of indirect ways
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in which that can happen.
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So you can decide what patients you see or the management structures
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can decide what patients you see, the payer mix, excuse me, what
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you charge for the services, your hours of operation.
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I mean, all these things, quality metrics that the clinicians are held
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accountable to, all these things are, and even the staffing, I would
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say, and all these things can affect the delivery of care downstream.
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And so when we talk about where the evidence sits, there's a
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lot of studies now that actually evaluate private equities effects on
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hospitals, on nursing homes, on physician practices, excuse me, frog in my
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throat.
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And so those studies actually give us a little bit of light
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into where private equity could affect behavioral health, even where that data
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doesn't currently exist.
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So in practices, in physician practices, we find that after private equity
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invests or acquires physician practices, ophthalmology, dermatology, GI, there
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are increases in charges, increases in allowed amounts, increases in volume in
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new patients.
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And these findings have been replicated across settings.
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So that might be an indication of increased throughput.
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So the clinicians are expected to do more and be more productive.
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Evidence on quality of care has been a little bit more mixed,
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but where some studies have shown maybe improvements in process measures, like
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things that you can check off, getting a aspirin after a heart
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attack.
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Others have really shown very concerning signs in hospitals and nursing homes
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in particular.
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So in one study, Medicare beneficiaries that were treated in private equity
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acquired hospitals experienced a 25% increase in hospital-acquired
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complications.
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And that was driven by a 27% increase in falls, a
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40% increase in central line infections, despite fewer central lines being
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performed.
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And that was compared to match control hospitals.
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And then another study in nursing homes acquired by private equity, they
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found a 10% increase in mortality compared to controls.
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And those were driven by reductions in frontline nursing staffing.
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So cost-cutting measures that have real impact on quality of care.
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But I think that overall, the brunt of the evidence suggests that
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private equity has potentially heterogeneous effects depending on the sector
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and depending on their playbook in physician practices.
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The playbook may be less about cost-cutting, which can have sort
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of negative effects on patient care and more about increasing negotiated
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prices, consolidating so that you have more market power.
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And so in those scenarios, maybe you have less of an incentive
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to sort of do cost-cutting that can result in poor health
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outcomes.
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Right.
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And I want to circle back to what you said about private
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equity and that a lot of that, I think you said 70
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% is really debt investment, right?
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It's coming from a debt perspective.
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And so then there's this payback cycle, right?
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And I always think about the kind of the business mantra of
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like a return on investment, right?
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So anything that someone invests in, eventually they expect a return on
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investment.
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And have there been any study, or what are you seeing in
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terms of that cycle?
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Are there shifts that happen where like the beginning part might be
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pouring money in, but then there's the demand to pay it back
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at a certain point?
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Well, that demand is there, but from the moment that you signed
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your contract to sell your practice.
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And so in the case of leveraged buyout models, you as the
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acquired entity are expected to pay back the terms of that debt
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that was borrowed.
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And so that is principally why the private equity leveraged buyout structure
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has such perverse incentives because the private equity company is not
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investing much of its own money, typically about 2% of its
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own money.
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The rest comes from institutional investors and then the rest comes from
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money borrowed from the bank.
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And so even if your company, your practice doesn't do well, private
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equity, the private firm can still walk away with pretty decent profits.
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So it's a classic case of moral hazard where they're gaining sort
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of benefits without introducing risk on their own part.
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So I think that's something that definitely clinicians that are considering
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private equity acquisition should really focus on understanding what are the
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terms that they're signing themselves onto?
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What are the trade-offs when the private equity company decides to
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sell their practice again to another private equity firm or to Optum
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or some other corporate entity and the clinician does not have that
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say in how they're going to be practicing and who's managing sort
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of their delivery of care.
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Yeah.
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It's giving up a lot of control potentially, really.
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Yeah.
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I mean, I think the other thing that a lot of business
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owners may consider are not necessarily selling their practice wholesale, but
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partnering with a management services organization that does all the back
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office billing and administrative tasks, scheduling, things like that.
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And many of those management services organizations are also increasingly being
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acquired and owned by private equity firms.
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So I think clinicians often are putting their heads down and they're
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really mission oriented to do the work and they may not be
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entirely engaging with the larger structural forces that shape how they
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practice.
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And so, I often tell younger trainees that are coming into the
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field now, clinical fields now, you really need to understand how organizations
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are structured and financed, how clinical priorities are set, who's setting the
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revenue pressures, who makes the decisions.
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That's becoming increasingly essential because clinicians are having less and
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less say in some of those larger structural forces.
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And so, PE is one of the structural forces that I think
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it behooves clinicians to just understand more about that phenomenon and sort
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of the pressures, the way that those financial pressures are set.
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That is awesome.
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And I think such a challenge.
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I think so many, at least in mental health, I can say
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so many clinicians might say numbers aren't my thing or I don't
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even know how to understand the first thing about that.
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Yeah.
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I mean, I think it's a challenge for a lot of clinicians
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in mental health in particular, behavioral health, where you have lots of
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solo and small group practices.
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They don't even have the administrative support to do billing and answering
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messages.
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These clinicians are doing it all on their own.
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And so, in the modern practice environment where you have electronic health
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records and care coordination and all these other expectations, billing and all
24:05
these other expectations, it's no wonder that some practitioners decide to sort
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of leave that all behind.
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It's sort of a Hobson's choice.
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They either go with a bigger provider where a practice management structure,
24:18
one of these new platforms where they don't have to deal with
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any of that at all, or they decide to go into a
24:24
cash pay market where they don't deal with insurance.
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They are their individual provider.
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They are the king of their own castle.
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And so, I think these dynamics are also what contributes to some
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of the inequities and the access challenges in the field.
24:45
Agreed.
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I completely agree.
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Because some of the best providers I know in mental health, honestly,
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sometimes it's kind of like a badge of honor to have to
24:55
not take insurance anymore.
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And that can be where everybody wants to get to because it's
25:02
easier.
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Because working with insurance is complicated.
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And insurance restricts your income potential too.
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So, there's all these reasons to do that.
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But the access to care, like you're saying, every time we take
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that, that's great, maybe.
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And how are we making sure that excellent care is still provided
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to everyone?
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Right.
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And I think the decision not to accept insurance is a rational
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one.
25:33
Yes.
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We're all humans.
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We are rational.
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The implication, and we do a lot of research on provider networks
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and mental health networks in particular, is that even patients that have
25:44
insurance coverage for mental health services cannot find the appropriate
25:48
providers to treat them because everybody is either at capacity or not
25:52
accepting insurance.
25:53
So, it's a hard situation.
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And private equity is essentially one of the forces in a larger,
26:01
broader system around financial and profit-driven motives in our system.
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And so, I think coming back to this topic around private equity,
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I think it's important to recognize it's not the only for-profit
26:18
player.
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There are certainly, as I mentioned before, structural features that make
26:25
private equity of particular concern, I think, to researchers and health
26:30
economists and policymakers and patients.
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But there's a lot of other corporate players, health systems, non-profit
26:40
organizations that do a lot of the same things.
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And so, the New York Times had an expose a couple years
26:46
ago about Acadia Healthcare.
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I don't know if you saw that at all, but it's a
26:50
large publicly traded company, and it owns a ton of behavioral health
26:55
facilities.
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And they recently agreed to pay $20 million to settle some allegations
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that they were billing fraudulently.
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They were billing for medically unnecessary inpatient behavioral health
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services.
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So, these are financial pressures.
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And bad responses that a lot of different ownership types are not
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exempt from.
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Wow.
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So, we are about out of time.
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But if there is one thing that you could kind of encourage,
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maybe someone seeking health care, mental health care, also clinicians
27:36
providing it, maybe even like group practice owners, what would be sort
27:42
of your one key takeaway that you would want to offer?
27:46
I think it's hard to regulate and monitor the effects of ownership
27:53
without ownership transparency.
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And so, this is bringing back to sort of my first point.
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Even for someone like me who studies this topic, it's so hard
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to know who owns a healthcare facility or a clinic.
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And I think it's even harder, you can imagine, for patients to
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know that.
28:16
Yeah.
28:16
Clinicians themselves may not know.
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And so, shedding light, the best disinfectant is light.
28:25
Shedding light on ownership types, I think, would be the most important
28:30
thing.
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And I think, honestly, the lowest hanging fruit here, the prior administration
28:38
had increased transparency around nursing home ownership, in part because of
28:45
the concerning data that was coming out of private equity ownership on
28:51
nursing homes.
28:51
But they haven't expanded that to private practices, physician practices, they
28:57
haven't expanded that to hospitals.
28:59
There are some efforts to do that.
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And in behavioral health, because it's so fragmented, because there's so many
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small and solo practices, it's even harder to do that.
29:11
So, I think focusing on transparency first is a key factor here.
29:20
I love that.
29:21
All right.
29:22
Well, with that, Dr. Xu, we're going to sign off, but it
29:25
has been awesome to hear about your research.
29:28
Thank you for the work that you are doing and for sharing
29:31
that with us.
29:32
Thank you for having me, Rachel.
29:34
It's been a pleasure.