Health regulators enter private equity fray

Washington’s crackdown on private equity managers has brought a new player into the policy game: America’s healthcare regulators.

Anti-trust officials at the Federal Trade Commission and the Department of Justice have made clear that they see the US healthcare market as a field to test their ideas. In March, when the FTC and DOJ formally opened a public inquiry into the role of private equity in healthcare, they invited Department of Health and Human Services (HHS) secretary Xavier Becerra to co-host.

“We need to do more to understand the impact of private equity and corporate dealmaking on our policymaking, regulatory decisions and enforcement actions,” Becerra said.

It wasn’t Becerra’s first march against private equity. In November, his agency released a study that claimed to show the quality of care in private equity-owned nursing homes was lower, on average, than homes owned by other kinds of businesses. Regulators at HHS’s Centers for Medicaid and Medicare Services used that study as evidence to support a rule change that widened the questions its bureaucrats asked nursing homes about their beneficial owners before certifying them to receive federal payments.

Among other things, the revised ownership form – called the 855 A – now requires would-be nursing home managers to “disclose additional information regarding their owners, operators, and management; for example, nursing homes will disclose individuals or entities that provide administrative services or clinical consulting services to the nursing homes. Nursing homes will also be required to disclose entities that exercise financial control over the facility, such as an organization the nursing home hires to manage all of its financial matters,” CMS said. The form asks nursing homes if they’re owned or run by a private equity firm or a REIT.

“It has become increasingly important,” CMS officials said in announcing the new 855 A questions, “to scrutinize ownership arrangements as recent studies… show that private equity ownership is associated with poorer staffing conditions and resulting decreases in quality of care. Today’s final rule includes definitions of private equity and real estate investment trusts, setting the stage for identifying whether a nursing home belongs to one of these types of owners.”

‘A target on their back’

For now, healthcare regulators say they’re just asking questions. Fund managers and their advocates are worried.

“Private equity firms have had a target on their backs,” said Devin Cohen, a partner with Ropes & Gray. “How are they going to regulate this?”

Like so many other private equity regulations under the Biden Administration, the ideas behind HHS’ inquiries aren’t new. But the tone is certainly more strident.

“I think CMS has been concerned about private equity for 10 years or more. But the language definitely has escalated in the Biden years,” said Robin Hillier, a former nursing home owner who now consults for the industry. “From their point of view, it’s a transparency issue. That did start under the Trump administration, when [then-CMS administrator] Seema Verma was in charge. She believed strongly that people have a right to know who owns the nursing home they’re putting their loved ones in.”

Verma was herself a veteran of private equity, having served as a senior adviser to Cressy & Co and TPG. Hillier, among others, wonders whether healthcare regulators are reading their data the wrong way around.

“What causes many facilities to be under-performing is not their lack of willingness to provide care; it’s that they don’t have the resources to provide the care,” she said. “They’re financially distressed.”

It’s at least possible, Hillier argues, that private equity firms are getting a bad rap because they’re taking on the hardest cases. Now, with an expanded ownership form – it includes questions about individual LPs in a venture – and the presumed CMS investigation into each of those answers before bureaucrats approve an application, it’s likely it will be even harder to close deals to turn struggling nursing homes around, Hillier said.

‘Blinkered’ approach

Private equity advocates say they’re not getting a fair hearing.

“We are writing to express our concern that the FTC is unfairly targeting productive private equity investments that support quality, affordable health care in the US and fund the development of new treatments and cures,” American Investment Council General Counsel Rebekah Goshorn Jurata wrote to the FTC ahead of the March announcement of the public inquiry into private equity’s role in healthcare markets. “If the Commission wants solutions to protect American consumers based on balanced data and information, it should create a working group to bring together various voices to truly understand a policy issue.”

The inquiry by the FTC, DOJ and HHS is, Goshorn Jurata wrote, “blinkered.”

Some advocates fear the expanded CMS form and the public inquiry into healthcare markets is a stalking horse for a crackdown. One private equity attorney said that checking the “private equity” box on the new form 855 A will mean CMS auditors will take harder lines on corrective action plans.

Part of advocates’ problem is that the worries over private equity in healthcare are bipartisan. In December, a month after CMS finalized its 855 A rules, the Senate Budget Committee announced it was organizing its own investigation into private equity’s impact on healthcare.

Ranking Senate member Charles Grassley, an Iowa Republican, not only supported the investigation but has also sent off a series of letters to Apollo, demanding answers about “a series of opaque and questionable acquisitions, mergers, and other related party transactions” that Grassley suggested was related to a series of “shocking events” where patients were assaulted by an orderly at a hospital in Ottumwa, Iowa, run by one of Apollo’s portfolio companies.

“The American people deserve to understand the potential impact of PE firms in the delivery of their health care,” Grassley and Budget Committee Chairman Sheldon Whitehouse wrote in a December 6 letter to Apollo chief executive Marc Rowan.

Apollo has said it is cooperating with Whitehouse’s and Grassley’s investigation. The company didn’t respond to requests for comment.

On May 1, the FTC, DOJ and HHS announced that they have extended the comment period for their inquiry into the healthcare market. The new comment period ends June 5.

PE Hub’s John Ross Fischer contributed to this report.