Private Equity and Our Dysfunctional Healthcare SystemPosted: August 14, 2011
By The Recalcitrant Gourmet
In my last article I wrote about the privatization and monopolization of the local UHS dialysis facilities at both Binghamton General Hospital and Pennsylvania Ave. Liberty Dialysis purchased both facilities to acquire a monopoly of renal care serves in the Greater Binghamton area. Liberty is currently the third largest for-profit dialysis company in the Unites States. They were founded merely 9 years ago in 2002. How did Liberty grow so quickly? As one can imagine, one needs a good chunk of capital (money) to purchase a dialysis facility, never mind hundreds of facilities.
The business model utilized to structure for-profit renal care is primarily Medicare funded (tax dollars): about 85%. Private health insurance funds only about 15%. Obtaining a traditional bank loan for this type of business structure must be a pretty daunting proposition considering the industry’s claim that Medicare does not provide adequate funding to cover the costs associated with most patients. Why would anyone lend a corporation money if the vast majority of their clientele have inadequate funding to cover their costs? The answer lies in the fact that Liberty itself is a way for larger companies, private equity firms (PE’s), to make money. These PE’s do it by gleaning fees from those other companies: in this case Liberty. Many times these PE’s claim they “partner” with the company they have invested in. However, many times the PE’s and their “partnered” companies lay off workers. The goal for the PE is to eventually sell the company through an Initial Public Offering (IPO), mergers and acquisitions, or re-capitalization at a profit. Re-capitalization is funded by current cash flow or by raising debt (or other securities) to fund the transfer of money back to the PE firm. In all cases the private equity firm gets paid, but in some cases the company that the PE has invested in goes bankrupt after the sale.
You, like Mark Caputo, the CEO of Liberty Dialysis, own a few dialysis clinics but want to expand to gain more profit and prestige on the corporate ladder. You decide to go to a local branch of Partner’s Trust and tell the loan officer that you want to expand your business; the fact that you are providing life- saving dialysis services to your local community members is incidental to your desire to make a profit. Yet (and this is according to Liberty’s own representatives) your main funding stream is Medicare, and Medicare does not provide enough revenue to cover your costs, much less give you a profit. And damn it; you want a big profit! So you explain that you will need a really big loan because not only do these clinics cost a lot of money, but you will have to live very comfortably as the CEO of your expanding business.
After explaining to the loan officer your business model, she asks you, “Where you will get the money to cover your costs? The model you laid out doesn’t cover your costs, by your own admission. And a profit?” She looks confused.
You answer her by telling her that you will simply bilk the “private” insurance companies by billing them 13.5 TIMES (or more in some cases) the Medicare rate. To put this in real dollars you explain to her that: Medicare pays about $3,500.00/patient/month for Dialysis Services. Private companies will pay about $48,000.00/patient/month for the same exact services because you have yet to negotiate contracts with them and you’re in no hurry to do so. You also explain that the larger your company becomes, the more the company can buy in bulk, like going to Sam’s Club. And just like Sam’s Club, buying cheap Chinese manufactured items (when you can) will cut costs as well.
She then asks you rhetorically. “Is it really the private insurance companies that are being bilked, especially in Greater Binghamton? There are still some private employers in the area that provide healthcare coverage for their employees, retirees and their spouses, but in Greater Binghamton approximately 43% of the workforce are public service jobs.”
She goes on to state. “That means really the taxpayers are paying a good share of these costs: directly or indirectly. So really your business model is to transfer and concentrate as much public money as possible into private corporate ownership. You yell, “I’m here to make money, that’s what we corporate folk do!”
She then informs you that she will have to run this loan application past her supervisors at the bank because this does not look like a sound business model that has a high probability of long-term success.
She comes back and tells you that her supervisor suggested that you try forming a non-profit organization to help the local community members obtain renal care services. That way you could lower your tax liabilities and not worry so much about your cost to profit margin. Of course you could still make a living, but reaching the top of the corporate hierarchy would probably be out.
She tells you. “This could dramatically influence the amount money you needed to borrow in order to expand.”
You politely tell the loan officer, “No I really want to make big bucks off the backs of the taxpayer’s, elderly, and sick. People have to get dialysis when their kidneys fail, and boy are people’s kidneys starting to fail thanks to diabetes, high blood pressure and just plain living longer in a country of fast food, microwave-able meals and chemically altered crops! Medicare is guaranteed money, plus with the ability to gouge the private insurance market as well, I’m sitting on a goldmine.”
What to do? No bank loan! No capital to expand your potential gravy train! Wait, then it strikes you like the ringing of the Dow’s closing bell, one of the connections you made getting your MBA at the Harvard Business School (Just like Mr. Caputo). You immediately call on the big-money man: Willard (yes, just like the 1971 social misfit and rat-o’phile of that classic horror film…Willard) Mitt Romney, founder of Bain Capital and 2012 Republican presidential candidate.
So you make a call. “Hello Willard.” “Yes, who’s this?”
“Your old buddy from Harvard. I have a business plan to expand my renal care business. I want to expand it in order to make a bundle of money, just like you, when you made that sweet $578 million off those companies! You remember American Pad & Paper (AmPad), Stage Stories, Dade Behering and GS Industries.
Willard replies. “Oh, yeah, the ones I bought using leveraged buy-outs.” Leveraged buyouts are the process of buying companies with money borrowed against their own assets. Then grooming them for sale, (i.e. laying off a bunch of employees, all the while charging huge management fees).
You come back. “Yeah man, those guys. What ever happened to those dudes anyway?”