Vermont Legislature SmartTranscripts:

[Rep. Lori Houghton (Chair)]: Good morning. Today is January 21 and this is House Healthcare. Today we are starting testimony on bill H583. And really curious how whole Frankly, I'm curious how this whole bill is going to go. We have with us joining by Zoom. I think we're going to start with Maureen Henslee Quinn.

[Dr. Zuri Song]: You are so good too. I know that's attention. Like, talking.

[Maureen Hensley-Quinn (NASHP)]: Good morning. You so much for accommodating I the

[Rep. Leslie Goldman (Member)]: appreciate it.

[Rep. Lori Houghton (Chair)]: No, no problem whatsoever. And we really appreciate you joining us.

[Maureen Hensley-Quinn (NASHP)]: Oh, I'm so happy to do it, and I really appreciate your time this morning. I have a PowerPoint that I will share, and with apologies that I literally just sent it over. I apologize

[Rep. Leslie Goldman (Member)]: for the delay. It looks

[Rep. Lori Houghton (Chair)]: like we already have it on our page.

[Maureen Hensley-Quinn (NASHP)]: So Oh, fantastic. Fantastic. It's because the staff supporting this committee is incredible. So thank you very much. I'll briefly introduce myself, but get right to the crux of the policy and share a little context behind why NASHP is supporting states in this effort. So I'm Maureen Hensley Quinn, ASHPE's Coverage, Cost, and Value team. And that team's portfolio does include our efforts to support state officials to address healthcare costs, which do include prescription drug and hospital costs. That is at the direction of state officials in our academy who asked that we start looking into this with them. Today, I'm going to talk about consolidation and very specifically, NASHP has a model bill that has three major components within it. So the first is creating an opportunity for states to have oversight into healthcare transactions. The second is going to be the bulk of what I know this committee is talking about today, strengthening the prohibition on corporate practice of medicine. And then there is a third part, which is focused on ownership transparency. I'll just share the context behind this model, and quite frankly, all of our model legislation is that states have asked us to help them address consolidation. And one of the areas that many states will share is consolidation that not only is just happening at the hospital level, which is a concern for many, but that is also happening at the provider level outside of hospitals, and in particular, when a private equity firm or investment takes place and ownership of that provider's office ends up being transferred to the private equity investor. As we talked with state officials who have some oversight transaction in place, notably Oregon, Massachusetts, some others. We said, What do you wish you had that you don't have? And they said, We need stronger protections on the corporate practice of medicine. And so that's what sent us down this pathway and that's what created our model bill. And I did take a look at the introduced bill that this committee is discussing, and there are a lot of similarities between NASHP's model and what's in the introduced bill. The other state I'll point to that's done quite a bit of work in this area is Oregon. Oregon has passed a corporate practice of medicine restrictions, a number of prohibitions to support providers retaining their decision making, but that would ultimately allow an investment by an outside entity, including private equity. However, it does set things up so that the provider ultimately retains ownership and retains its clinical decision making capacity. And that's the goal of the model and the goal of what the states we were working with wanted to pull together. So, Lori, yes.

[Rep. Lori Houghton (Chair)]: It just occurred to me, some people may not know who NASHP is. Can you just really briefly explain your mission and?

[Maureen Hensley-Quinn (NASHP)]: Yes, thank you. I skipped right over that. So NASHP, the National Academy for State Health Policy, does in fact have an academy. We have members who are volunteers. We are not an association, but our membership spans, I want to say, 70 different state officials across now 47 or 46 states. Those state officials hold responsibility in states that touch healthcare. So, it's everything from what you would anticipate. Public health, Medicaid officials, but also governor's offices. We do have some legislators and just across the board. As we do our work, we get funding primarily right now from foundation grants, but we also have federal contracts, federal cooperative agreements, and other things. We are nonprofit, we are nonpartisan, and the work really is directed by our state academy officials. And the reason why we got into this space of cost really started in 2016 in which we convened our academy members and asked what is keeping you up at night? And they said drug costs. And as we started supporting states in looking at what levers they have to lower drug prices, they said, we don't want white papers, We want something more actionable that we can use. So as states were identifying like their top policy areas to address, they really did ask us to write model laws that they could lift, adapt, change for their circumstances. So that's why we have model legislation. We recognize that it is not going to work for every state. We recognize that this is from our perspective, a technical assistance document in which we're pulling together outside expertise from legal minds, from national experts on these issues, but also from state officials that are struggling with the same issues as their peers. So I'm not here to lobby for you to pass something. I'm just here to explain what other states are facing, what they've told us about, and why we produced the model legislation we produced, which we know for every environment, every state will have to be tweaked to meet your specific needs. And we're happy to provide technical assistance, not just at the beginning of a policy, but throughout implementation.

[Rep. Lori Houghton (Chair)]: Great, thank you so much.

[Maureen Hensley-Quinn (NASHP)]: Thank you for interrupting. I really appreciate that. Context is very important. So here you'll see that the policy concern really stems from corporate or business control over physicians. We see this coming up in different ways. I don't know the specifics of how it's presenting in Vermont, but what we have been told by some other states is that a private entity firm may invest through a management service organization contract, which I can get into more specifics, or it could be infusing funds that a provider office needs to support telehealth, to support other IT functions. It's usually a more administrative, which is critically important, obviously, that physicians get administrative supports. But when some of these contracts between the physician's office, the physician lead, and the investing firm, particularly private equity, there may be language within those contracts that serve the private equity firm more so than the physician's office. So some of the things that we've seen are once private equity gets the return on their investment, they will leave and they will take the return on the investment with them and the providers are left where they were, but in the beginning of the interaction, but maybe even with less funds available. We have also heard that private equity will come in and optimize billing. And that can take over different ways. It can be increasing prices. It can be minimizing public payers. It can be aiming to increase how many private patients are coming into the office. It can be reducing service lines that are not profit generators. Those are typically primary care, behavioral health. We hear a lot about maternity care, all things that get minimized in order to drive up profit, in order to meet the investment goals that the private equity firm has. This is not necessarily done with malice as its intent. It's simply that private equity and corporate owners are driven by profit, which is not necessarily a bad thing, but we know that physicians are typically driven by a mission to serve their patients. And when these two things align, it's wonderful. However, they don't always. And we wanna make sure on behalf of states that providers are able to seek investment, but also maintain their practices ultimate goals to serve patients and that they get to make decisions on billing, they get to make decisions on coding, on clinical practice, and they are not beholden to contracts that require them to check with their investor before they make hiring decisions, before they decide to sell or retire from their practice and things like that. As you can see, corporate practice of medicine does not address corporate or for profit control of hospitals. It really is meant to target physician practices. We know that states across the country have levels of corporate practice of medicine laws in place that were put in place decades and decades ago. However, we're told by states that either those laws are not enforced because they're very arcane and very old, or they simply do not meet the needs of where we are now, which is private equity and corporate control of physician practices. So one of the things that is happening to circumvent the corporate ban that is in place in many states, which is physicians must make medical decisions, it comes or a corporate entity can't take control or ownership over a provider office. Essentially, the workaround is these management service organization contracts or MSOs. And the MSOs, like I said, are typically done so that doctors don't have to focus on some of their administrative tasks, which we understand is not why they went into medicine. So it's things like billing, having a contract with an entity to do marketing, to manage HR, things like that. But these contracts are used to take over some of the clinical functions. So what we did with the state officials who asked NASHP to help them craft this model, essentially they sought to ban a number of the things that they saw happening in providers' offices that they heard from providers they didn't want to happen. So interfering with clinical decisions, taking ownership or employing doctors that the physician in charge doesn't have oversight over, requiring that there be non competes, that there is transparency and that doctors aren't subject to gag clauses. There's a number of different pieces within the model and I know within Vermont's introduced bill and we sort of paused while we were working with states and pointed this out. We said there's a lot of prohibitions in here and they're very spelled out. Is this what you want to put out into the world? They very much said yes. They said we know that these are the issues that physicians are telling us they want to address within this corporate practice of medicine. And we know that in a legislative environment, there will be discussions, there will be compromises and there should be, but let's start with what we really want. So I just wanted to highlight that and highlight why there are so many and recognize that there may be discussions in which Vermont needs to take some of those out, needs to qualify some of them. But I just wanted to give a little bit of background on where this came from, why states are interested in this right now. And I'll also add we know that there are a number of physicians that are supportive of this. I have been asked to present and speak to different physician groups at the state and national level. Again, we are not trying to suggest that physicians' offices don't need investment. We know they need investment. We just want that investment to come with some guardrails and to allow the physicians to maintain ultimate ownership over their practice and ownership over the clinical decisions that they have to make. I think that's all I have for now, but happy to answer any questions or I can be available for further discussion. I know there are other individuals that are gonna testify.

[Rep. Lori Houghton (Chair)]: Just for clarity sake, for everyone's sake, can you explain what a non compete or a gag clause is?

[Maureen Hensley-Quinn (NASHP)]: Of course. So a non compete is something that has been written into physician contracts, employed physician contracts. For instance, a primary care physician practicing in Montpelier may join a practice and sign a contract. And within that contract, is language that says if they leave, if that physician leaves that practice in Montpelier, they can't practice within a 100 mile radius, 200 mile radius for a certain amount of years. We have been told by a number of state officials that when they became aware that this was a common practice, and it is a common practice, especially when there is a corporate entity that is investing and sort of takes more ownership over things, for instance, and I don't mean to call out somebody in particular, but Optum has ownership interests across the country. If a physician has signed a non compete where Optum is on the other side of that, they may be sidelined for two years because there's nowhere for them to go in order not to be breaking that contract. So they wouldn't be able to practice in Montpelier, but they also may not be able to move to another location because of the footprint that some of these private equity or corporate investors have. So then you have a physician that's licensed, that's not being able to practice just because of a contract, not because of clinical mismanagement. Also gag clauses. So we have heard that a number of physicians have wanted to come forward and highlight to state entities that there are decisions being made within their clinics about billing. For instance, there may be certain things going on where a corporate entity is requiring certain codes be used versus other codes, and the physicians can't call those things out because they have a gag clause in place and they are prevented from sharing that information. So putting some of this in place would allow for more transparency and hopefully would also prohibit such things going on where there's direction about how to code for certain things, but it would also allow some level of transparency.

[Rep. Lori Houghton (Chair)]: Great, thank you. Any questions for Maureen? No questions. We haven't done a walkthrough of our bill yet, so we're still a little bit naive on some of this. You're our first testimony.

[Maureen Hensley-Quinn (NASHP)]: I understand. I understand. Now you know a little bit of the background.

[Rep. Lori Houghton (Chair)]: Yes. Now we know the background and we know sort of where this bill came from. Brian, did you

[Rep. Brian Cina (Member)]: have a I do have a question because you're right, we haven't read the bill yet and I'm still trying to process what it all means. But I'm wondering if there are some nationally recognized candidates for determining how these corporate practices might be restricting access to healthcare people.

[Maureen Hensley-Quinn (NASHP)]: So there have been studies, and I'm happy to share some of those with this committee. A lot of the work is coming out from Doctor. Zuri Song, who is actually a practicing physician, but also a researcher out of Harvard University. There's also work coming out of Brown University, specifically looking at data related to what's happening with physician practices as a result of private equity investment. Some of the things that they have surfaced include just the softer side of things, physicians not really loving working in medicine anymore. They feel like they're in a business environment rather than a clinical environment to provide care. There is also some evidence that quality has either maintained the same or gone down, that there are more medical errors that are happening and it's related likely to the corporate interest to decrease the number of staff, but increase the number of patients that that clinic sees. So it's things like that, but I'm happy to provide more information.

[Rep. Brian Cina (Member)]: Thank you. I was asking because I'm hoping we can get more testimony from others who are, for example, the people conducting studies or reviewing the study. So thank you for those recommendations.

[Rep. Lori Houghton (Chair)]: Well, you've set it up very well because our next witch is Doctor. Song.

[Rep. Brian Cina (Member)]: Oh, okay. What do you know?

[Rep. Lori Houghton (Chair)]: Daisy, do have a question?

[Rep. Daisy Berbeco (Ranking Member)]: Yeah. I'm Lorraine. Thank you so much for joining us. I'm curious if you can speak to I just want to play devil's advocate a little bit here. Our health care system is so dysfunctional that is there any benefit in allowing some of these entities to come in and streamline the way that health care is delivered?

[Maureen Hensley-Quinn (NASHP)]: And I could be really naive about this, but I really do believe that there could be other investors that come in and help with both investment and with employing business practices or giving advice to physicians who find themselves running a business because I recognize that's what healthcare has become. Physicians have practiced and studied to provide clinical care, not necessarily run a business. So I do believe that this legislation would still allow that kind of advice, would still allow somebody to contract with an entity to say, help us figure out how to streamline some of this. Are we billing appropriately? But still maintaining the ultimate decision making for those pieces of information, for that action with the physician. That is ultimately the goal that we're trying to provide. And I will say we have seen evidence that there's like venture capital being different than private equity, venture capital having a longer lead time, not necessarily trying to make an immediate profit, that there could be some more opportunities there. We don't wanna keep And we also know that not all private equity is bad. It's not inherently a necessarily bad thing, but to ultimately allow physicians to have control over their decision making within their community really is the goal that we're trying to achieve while still allowing some level of financial investment to come into providers.

[Rep. Lori Houghton (Chair)]: Oh, I think Brian has another question.

[Rep. Leslie Goldman (Member)]: Leave it longer than

[Rep. Brian Cina (Member)]: people think of. It's true. We're digesting. It's like a new food. So I'm curious why would people want to invest in healthcare when it seems like it's a sector in which money is lost, where there's not a lot of We're struggling to pay providers, they're struggling to pay their loans, patients are struggling to pay for the care. It seems like it's a strange financial environment. Why would someone want to, who's not already involved in it, want to get involved in it? What profit is in it for that?

[Maureen Hensley-Quinn (NASHP)]: There's actually quite a bit of profit in healthcare. I know that it's not going to patients. I know that there are providers that are truly suffering financially, but there are also entities that are actually profiting from providing healthcare. And we know, and I'm thrilled that Doctor. Song is here because he has more evidence of this, but we know that private equity has done pretty well by investing in healthcare over time. I'm not saying that all areas are the same. I know that Vermont is a very rural state. I know it's an older state. I know that its picture is different than the picture, say in Boston, in Miami, things like that. But there are still entities that are doing pretty well by investing in healthcare and making a profit off of that.

[Rep. Brian Cina (Member)]: And Do you know, or maybe our next witness or other witnesses will know, how? Example, we learned that University of Vermont Medical Center was charging more, overcharging maybe one could say for certain services, and that was a way that the organization was making money. They were charging more than other organizations for the same pharmaceutical. That's one example, like the markup. What are the methods that are used to make a profit off of these healthcare services? An example of one, Is that an example? Is that one way it might happen? Like an MSOPC, is that what it's called? Yes, an MSOPC comes in and is marking up the price of drugs in a practice that it runs or

[Maureen Hensley-Quinn (NASHP)]: It could be. We've heard from other states that, for instance, an MSO agreement could be reached with a provider entity and they're providing telehealth services. And those telehealth services are, the cost of those are increased. They build within the structure of that contract. A portion of the funds will go directly to the private equity firm and the physician office never sees that increased cost. And then the patient bears the increased cost and the physician never actually sees that because the private equity firm takes some funds right off the top of that. So it's very tricky. You have to follow the dollars. On my team, I work with an accountant who literally will track funds through different entities that are part of a doctor's office, that are part of a hospital or a health system, there's actually quite As you expand with additional entities that either help co own or that are even just have a monetary connection to a practice, to a hospital, to a health system, you are expanding the ways that profit can be made and who gets that profit.

[Dr. Zuri Song]: Thank you. All

[Rep. Lori Houghton (Chair)]: right, thank you so much for joining us and welcome to stay And we have the aforementioned Doctor. Song, and I am apologizing. I'm not quite sure how to pronounce your first name.

[Dr. Zuri Song]: Oh, thank you. It's Zuri.

[Rep. Lori Houghton (Chair)]: Thanks for joining us today.

[Dr. Zuri Song]: Thank you for having me. It's an honor to meet you all and share this time with you.

[Rep. Lori Houghton (Chair)]: Yeah, if you want to introduce yourself and share with us your expertise.

[Dr. Zuri Song]: Sure. My name is Zuri Song. I am a professor in the Department of Health Care Policy at Harvard Medical School, where I was trained as a health economist. I also am a practicing physician at Massachusetts General Hospital. I practice internal medicine. I see patients in primary care two days a week and also staff the inpatient wards with our resident teams about four to five weeks a year. My work over the last five or six years has centered around the impact of private equity acquisitions of US hospitals and physician practices, and now hospices and some other parts of the delivery system. So I'm happy to walk through some of the evidence around this area of research to show the scope and the impact of these acquisitions. And the aforementioned question about how these profits are generated is also very germane to what I think we can talk through.

[Rep. Lori Houghton (Chair)]: Yeah, that would be really helpful. We're just learning on this topic, although we did do some last year kind of an introduction, but it was a year ago.

[Dr. Zuri Song]: Got it. Got it. Well, thanks so much for having me. Let me just take one moment to share my slides on your screen, and let's see if they show up.

[Rep. Brian Cina (Member)]: Is It

[Dr. Zuri Song]: It worked. Okay. All right, great. So I really want to respect your time. And I'm going to go through some things quite quickly. And please slow me down if you would like. I'm happy to go into anything in more detail. But I want to spend most of the time that we have on the actual evidence around the impact, how we know what we know, what are the limitations of our knowledge, and what does that mean for policy levers and what we can do from a state perspective to respond. And just quickly, by the way, my state of Massachusetts had this sort of a journey with the Steward Health Care System over these last couple of years. I'm happy to share any insights from that if you would like. All right, so I'm actually going to go through the initial part of this very quickly. I just want you to know what's here. And if you want me to back up or dive into any of this, I would be happy to. But my initial couple of remarks are just to center private equity acquisitions in the context of broader consolidation in the healthcare system. There's way more consolidation that's not private equity. Private equity is just one version of ownership of hospitals and physicians. So here's evidence that just shows you about 80% of physicians are owned and employed by hospital systems today on the top. On the bottom, hospitals across America keep merging. Even if the mergers have slowed, more and more hospitals keep getting merged every year. We only have about 5,000 Medicare certified hospitals in the whole country. So as they merge, you have more hospitals in a health system on the top left here and fewer hospitals not in a health system. My understanding in your state of Vermont is that we have about, I think, something like 18 hospitals or so. There's one large system, UVM. There are many smaller hospitals. Many of them are not in the system, but five of them are now in a consortium, if you will. This is the that's happening across the country. And in both rural and urban areas, it's the same type of thing. On the right, I'm just giving you examples of what's called cross market mergers. These are mergers that are happening with a lot of land in between. It did not used to happen like this. Mergers used to be hospitals across the street from each other or in the same town or in the same region or state. But now we're having mergers of very large systems from the East to the West Coast to the Midwest to the South, just with a lot of land in between. The impact of all of this is a price increase in our healthcare services relative to all the other things we buy in our lives in our economy. And to get to the gentleman's question just before with Maureen, the price difference, if you look at it this way, between commercial services and Medicare services has always hovered around 2. In hospitals, your prices for commercial services are basically twofold that of Medicare. And if it's hospital outpatient, it's even more. It's about a 2.4 ratio with lots of variation. And so this gets to the issue of the payer mix, which we'll get into with private equity. What are the strategies when private equity comes and owns your hospital in terms of generating a profit? There are several levers they can pull. One of them has to do with this, this underlying fact of price differences between commercial payers and public payers. Alright. So couple of wrinkles that matter a lot for private equity. One is in network versus out of network. This is a slightly older paper of an enduring fact, which is in our country, the Medicare price is basically administered by the federal government nationwide with a little bit of regional variation for cost of living. But for commercial prices, they're always higher than Medicare prices when they're in network, and they're even higher when they're out of network. And here's another strategy that we're foreshadowing. Private equity firms can keep physicians, and sometimes hospitals, but we know more stories of keeping physicians deliberately out of network, even if your building or your ER or your facility is in network. And that generates the confusion that leads to surprise out of network billing. And that takes advantage of this underlying fact that's always existed. A second wrinkle is that rural hospitals actually have more market power than urban hospitals, sometimes a counterintuitive fact. But this is also a longstanding issue in The US health care system. In urban areas, you might have the large academic tertiary health systems that we know well, and we tend to think of them as the most expensive and they are high priced. But it turns out that on a relative basis, your rural hospitals in America actually have more market power. They actually charge and they're able to get higher commercial prices in rural areas because of the lack of competition. Even though they're smaller, even though they're not tertiary, even though they don't have all the technology that a large urban center has, the rural hospitals down here this is ratio relative to Medicare prices their ratios in rural areas are actually a lot higher. So that wrinkle, this enduring fact, foreshadows the strategy of acquisitions in rural and suburban areas. So private equity firms are not going after large urban places. They're more likely to go after smaller hospitals, and this is part of the reason why. All right, so now for private equity acquisitions, we have many examples across the country. These are more or less examples from the Northeast, where we are and where you are, but it follows a similar playbook. And so let me just quickly go through this playbook with you. This is a diagram that I would do on the board by hand if we were together in person. But basically, imagine a private equity firm that's off the screen. The firm creates a fund. The fund is just a pot of dollars. And the firm is going to assign one of the general partners that it has to the fund. So there's some human being that's going to run this fund. This fund is then going to be used to buy, in this case, a hospital or nursing home or physician practice at an acquisition price. So this blue box in the middle is a little piece of this fund. So the fund chips off a little piece to buy a hospital, let's say. That acquisition price, which makes private equity unique, is comprised of a small portion that's existing dollars. That's the small portion that you've already raised as the private equity firm. That's called equity. For what it's worth, that's the word that's used. Equity means existing dollars. 98% of that, that little piece, which in this diagram I've drawn as 30% of the acquisition price, the vast majority of that 30% comes from your investors. Your investors in America are, in order of how common, number one, US pension funds number two, institutional endowments number three, basically institutions, like banks and even hospitals or health systems. Number four, the sovereign funds of other countries. And number five, the wealth of wealthy individuals. So those are the sources of dollars that basically finance the fund. So when a fund chips off a little piece to buy something, the vast majority of what it chips off comes from your investors. The parent private equity firm also puts in a little skin in the game, but it's small. It's, in this classic diagram, 2% of the 30% of the acquisition price. So if I ask you, what is 2% of 30%? That's less than 1%. That's 0.6% of the acquisition price, which means 0.6%. Less than 1% of what you use to buy something actually came out of your pocket. Imagine going to the grocery store and paying less than a penny on the dollar for what you've chosen to buy. The reason this is possible is that the majority of the acquisition price is borrowed money. This is debt. Another synonym for this is leverage, and it's leverage because you've borrowed money from a lender to allow you to buy something. In the classic old days, this used to be a bank more commonly. And a bank would loan you the 70% debt as a loan and expect a fixed rate of return back. And this seventy-thirty mix of debt to existing dollars, debt to equity, was very common in hospital acquisitions. I would say it's still quite common today, but there are some important details that have changed. Nowadays, this lender is no longer just a bank. It's most often or more often a second private equity firm. You get these joint ventures in interesting ways of a second firm helping out the first firm by loaning it the debt. In any case, this combination of debt plus existing dollars is then used to buy what we'll loosely call here a health care provider. This could be a hospital or physician practice. A second distinct feature of private equity acquisitions, these so called leveraged buyouts, is that the collateral for this loan, the reason that a bank will give you this money is that you've got to put something on the hook. And the collateral for this loan is actually the belongings and the goods and the things that the acquired entity owns. The collateral comes from the acquired entity, not the parent private equity firm. So if you think about the parent private equity firm making this decision, it is using largely 99 plus percent of other people's dollars. And what's put on the hook for this new loan is the belongings of the acquired entity, not the home parent private equity firm. So just one quick fact that I'll foreshadow here for later on. For physician practices, the exits are really fairly quick. Within three years, 55% of physician practices are already sold off. Twothree of them are sold to a second private equity firm. 20% of them are sold to corporate entities, entities that we are familiar with, the nation's largest private insurer, the nation's largest pharmacy health system, the nation's largest online retailer. These are examples of corporate owners that take over, and about five to 10% come asking for financing from the public through an initial public offering on the stock market. That's for physician practices. For hospitals, they're held for much longer, and we can talk about that a little bit more. All right, so now the final kicker is how the money flows, and I've drawn you these green arrows to show this. The key thing for the parent private equity firm is that it gets two streams of what's called management fees. One is from the limited partners, which are the investors. So for the privilege of having your money be managed by a private equity firm, you have to pay management fees back to the firm, which basically go to its fund. These management fees are 2%, classically 2% of the value of this fund per year, even if the fund doesn't invest your money. So even if the fund just sits on it, what's called dry powder, and doesn't do anything with it, you still have to pay management fees for the privilege of having your dollars be managed there. Those management fees are not trivial. They're pretty large. And then for the acquired entity, for the privilege of being managed by the management expertise of a private equity firm, you have to also pay management fees back to the private equity firm. This is not always the case, but it's often the case. The management fees from the investors are always the case. The management fees from the acquired entity are often the case, not always. But if you add up these two streams of management fees and you ask the simple question, if I'm the private equity firm sitting there and just getting these management fees, regardless of what I do with the funds and regardless of how I manage the acquired entity, how long does it take before the management fees themselves exceed the less than 1% of the acquisition price that's my own skin in the game? So if you buy something for $1,000,000 less than 1% of the acquisition price is going to be something like, if I got my math right, it's less than $10,000 So it's going be, let's say, 6,000 is 0.6% of $1,000,000 So if the acquisition price is $1,000,000 if I have my math right off the top of my head, your skin in the game is $6,000 So the question is, how long does it take to sit there and just collect management fees to get $6,000 off of management fees before you are risk free? You've exceeded your skin in the game. I think the answer is quite quickly. Six months, twelve months, eighteen months, something like that. It's fairly quickly you've exceeded your skin in the game. And then as the parent private equity firm, you're basically now risk free. You have some reputational risk. You don't want everything you buy to go under and become a news story. But from a purely financial standpoint, you're already home free. And this explains a lot of the financial engineering that happens. So why would you take financial risks with the hospital you just bought? Why would you sell the land and the buildings from underneath it, making it harder for it to survive? Why would you cut staffing, cut supplies, and make it a little harder for frontline clinicians to deliver care but getting you a bigger margin while you do it? Well, the reason is if the thing goes under, you are still coming out on the positive side of the ledger. And part of that's the management fees. That's why these two green arrows matter a lot. All right, finally, when you sell the acquired entity, when you're done and you exit this investment, that's where the big money actually is. So if it doesn't go bankrupt and it doesn't close and you actually get to sell it, the proceeds from that sale go to your investors and to yourself. Here, your investors get most of the proceeds. There's something called the hurdle, which is the first x percent of the sale proceeds. In this example, I've written that as eight. So the first 8% of the sale proceeds go all to your investors, and they're happy about that. Then percentages nine through a 100 go back to you percentages nine through a 100, sorry, get split between your investors and you. And in that split, the majority, I've written here 80%, still go to your investors. 20% after the so called hurdle go back to you. So management fees all come to you as the firm, but if you sell the acquired entity, the vast majority of the proceeds go to your investors. So there are a lot of other things here on this diagram that I haven't written that are relevant for hospital acquisitions or health care in general. One of them is dividend recapitalization. What that means is six or twelve months into this deal, you have thirty percent of this thing you just bought as existing dollars. You own that value. But perhaps you wanna give a slice of that to your investors in the short run as a quick dividend, a quick sugar high to give them positive reinforcement that they've invested in you and they've received rewards for that. So six or twelve months in, you might take 10% of the value of this whole thing you just bought. So take a third of this 30% that's existing valuation, chop off a third of that, so 10%, and just liquidate 10% and give that back to your investors as a dividend and make it a 20% equity, 80% debt deal as opposed to a 37, thirtyseventy deal. And you can do things like that to make it more debt heavy and less equity heavy, which puts more pressure and debt onto the acquired entity, but it gives your investors this positive reinforcement in the short run. And the reason you do that is while you're managing this acquired thing you just bought, you're still raising the next private equity fund, hoping your investors will invest in the next fund. This could be your fund one, and you're busy creating fund two and fund three. Debt obviously comes with interest. The party responsible for paying back the interest is the acquired entity, not the parent private equity firm. So the more debt placed on the acquired entity, the more pressure they have to generate revenue and also pay down debt. All right, so private equity is different from venture capital. Here's a table that gives you these differences. I won't go through this in detail. The takeaway is basically private equity tends to acquire big things and assure itself of certainty in returns, but the returns are smaller folds, like twofold, fourfold returns in this table. But the deal sizes are large, and you're taking complete ownership. In contrast, venture capital is almost exactly the opposite. It's taking small minority stakes, not ownership. It's not making ownership decisions. It's not acquiring the whole business. It is instead acquiring an idea or buying a piece of an idea or a piece of an entrepreneur, so the acquisition prices are much smaller. It's looking to hit home runs, 50x returns, 100x returns, knowing that 99 chances it takes out of 100 won't work out. And it's just hoping for that one home run to make it all worthwhile. It's very different from traditional private equity, which is a certainty of success from their perspective. So- Doctor.

[Rep. Lori Houghton (Chair)]: Song, we have a question actually on the last slide. And sorry, I didn't get to that before.

[Dr. Zuri Song]: No problem.

[Rep. Brian Cina (Member)]: Unless you only have like two left. I don't know how many you have, but I don't want to get too far ahead of this.

[Dr. Zuri Song]: No, no, please go ahead.

[Rep. Lori Houghton (Chair)]: Okay.

[Rep. Brian Cina (Member)]: Where it says US pension funds, can you explain what that means a little bit more? I have three questions, so that's the first one.

[Dr. Zuri Song]: Sure. So retirees, this is so an example would be CalPERS in California. CalPERS is one of the nation's largest investors in private equity in general. I mean, it's a huge population of retirees. But also, have pensions from teachers, from manufacturing industries. Those are just if you're running a pension fund, you obviously face the pressure of paying for people's retirement as people age and as people live longer, which is certainly a good thing. But you have this pressure to generate returns and you have a choice. Do you buy stocks with those dollars? Do you buy mutual funds? Or do you put them into private equity? And private equity will come to you and advertise that they can get you 12%, 15%, 17% returns, whereas the stock market and mutual funds get you single digit returns. And facing a pressure like that, it's understandable why pension funds would choose private equity over other vehicles.

[Rep. Brian Cina (Member)]: So The US just means United States pension funds, like retirement accounts from inside The United States. Public and private.

[Dr. Zuri Song]: Yeah.

[Rep. Brian Cina (Member)]: So that means if I have a four zero one with a financial advisor, a piece of that might be going into this kind of stuff if I don't ask?

[Dr. Zuri Song]: Correct.

[Rep. Brian Cina (Member)]: I'm asking. Okay, moving on. Next we have this, it says collateral,

[Rep. Lori Houghton (Chair)]: that

[Rep. Brian Cina (Member)]: the collateral is the property goods infrastructure, not the human resources, but the other resources of the acquisition.

[Dr. Zuri Song]: Correct, of the acquired entity.

[Rep. Brian Cina (Member)]: Thank you, of the acquired entity. What I'm wondering is, is there any way that we measure how much public investment is going into the collateral that then gets sold by a private equity firm?

[Dr. Zuri Song]: That's a great question. I'm sure you could back that out. If it's a hospital with public investment of its concrete infrastructure, let's say, you could probably go back and figure out how much taxpayer dollars and public resources have gone into that facility and then get a rough sense of how much public resources are now on the hook for paying back this loan that was decided upon by a private firm rather than the public. Would

[Rep. Brian Cina (Member)]: it be fair to say, I just want to make sure I'm understanding this right, because people are going to ask, I know they're going to ask about this. I think my constituents are going be very concerned about these practices. As we expose more about how they're playing out, would it be fair to say that current practices of private equity acquisition allow public investments to flow into private hands? Taxpayer money is essentially investing in things that then get liquidated and the profit goes into certain private funds.

[Dr. Zuri Song]: Yeah, I think that there's a lot of truth in that narrative, way you've described it. I think it might be a little bit more complicated than that. I think in general, you're not wrong in putting it that way.

[Rep. Brian Cina (Member)]: So is this similar to how private equity firms are buying housing and sitting on it and then flipping it?

[Dr. Zuri Song]: It is similar in some respects, but it's different in that when they buy hospitals, these are much larger sized deals. And so yes, you're right that private equity firms have now ventured into single family housing. There are a couple of books and some articles that describe that. And you could have a lot of concerns about that, similar from the concerns you learn from healthcare and other industries. And there, it's less about consolidation per se. Here, there's a lot of roll up in consolidation activity, which hopefully we'll have some time to talk about. But it's similar in the sense that there's debt involved, there's collateral involved, there is the management fees, when it's sold, how much of the profits are coming to the investors. Those are all analogous.

[Rep. Brian Cina (Member)]: And appreciate you highlighting that it's way more complicated within this case, because there's a lot more collateral, so to speak, in terms of like And also, there's people involved and there's services involved that the community was So relying I'm not trying to equate them. I think what I'm seeing is similar is it seems like it's a predatory practice across the board that they're engaged in. It's just

[Dr. Zuri Song]: Well, yeah, certainly a lot of people would agree with that characterization. I think from a conceptual standpoint, it really matters what you do with the tools that you have. Private equity need not be predatory. This kind of acquisition doesn't have to end up badly for patients and providers and for community access. It has done so in many key instances, and we'll go through some of the evidence that research I've been involved in has found. But conceptually speaking, it doesn't have to end up that way. So there are choices along the way here. There are a lot of choices here, a lot of normative choices, a lot of financial strategies. So let me give you another example. We talked about the dividend recapitalization. There's also use of the bankruptcy markets. There's a lot of gaming in that. And so by the way, this model of acquisition was perfected outside of healthcare for about two and a half decades before it ventured into healthcare. From a Wall Street quote unquote perspective. This kind of acquisition model began in the 1980s, and it worked through manufacturing, service sectors, and consumer products, and everything, the other fivesix of The US economy before it came into health care in the mid-2000s and started acquiring hospitals. And now it's flourishing in physician practice acquisitions and hospice acquisitions and addiction treatment facility acquisitions and women's health and practice acquisitions. So in those first two and a half decades, there was a lot that was refined and perfected, if you will, from a strategic standpoint. So one of them that also is not in this diagram is the use of bankruptcy markets. Imagine you're the bank here. You're the bank of, or fill in the name blank, bank, and you've loaned this 70% debt, this 70% loan to the private equity firm. Now suppose the private equity firm asks for a meeting. They come to your office and they say, you know that loan you gave us to buy this hospital? I just wanted to let you know this hospital's not doing great. It's on shaky financial footing. It might go under. It might go bankrupt and close. If it goes bankrupt, you're gonna lose most of your loan. And so I just wanna give you a chance to think about that and let you know that there is this risk. Now, what they may not tell you is that perhaps part of the risk that came about was that the land and the real estate was sold or other things were done, or the equity was traded off for dividend recapitalizations that made it more risky. They may not reveal all that to you, but they'll say, look, next year it might close. That puts you in a tough spot. So now your decision as a bank is, okay, do I refinance this loan with you or do I take my chances of getting my money back? If you take your chances and the thing closes, you're sort of out of luck to some degree. But if you refinance the loan and say, alright. I will take 60% of the money I loaned you back for sure, and I'll just give up the other 40%, but I'll walk away with 60%. Would you do that? And sometimes the bank would do that. The bank would take the 60% back and walk away. But in doing so, the private equity firm just just made out with the other 40%. So the threat of bankruptcy is a financial strategy that's been written about. When a hospital or physician practice or acquired entity actually goes under, the parent private equity firm can buy it right back the next day from the bankruptcy market at a lower price, therefore, again, generating a margin. That's a financial strategy. So all of this has been written about, too. There's a lot that can happen. So when you say predatory, again, a lot of people would agree with you. The issue is from a conceptual perspective, it doesn't have to be that. It's not like a given. These are choices. This is not a certainty, but this is how things have gone in many instances. It's also true that in many other instances, things have not gone in this way. It's not that all private equity acquisitions have ended up in bankruptcy and closure and patients harm. So I think it's, when I've spoken with other states, legislatures, I think it's been helpful to try to bring in some nuance around how these things work and that it's not all the same. And we probably should not paint too broad of a brush across all these acquisitions. And yet, we should learn from the egregious cases and think about the guardrails we could construct to prevent them. So if you'll allow me, I'm going go through some of the evidence Great. Real I I wanna respect your time here. So very quickly, on the left are hospital acquisitions from just a few years ago. On the right is a so called heat map of physician acquisitions. We do not need to go into this in detail, but I do wanna show you that the map on the left, which is from 2018 data, becomes this map, which is 2024 data, very quickly. So the pace of these acquisitions is still quite striking. Vermont doesn't have one of these the so called, these blue dots so far. So I know that this is also a bit nuanced, the involvement of private equity in Vermont so far. But this is sort of a national glance. Now we're right at four eighty eight or just under 500 hospitals that have been acquired, eight percent of all private hospitals, 22% of for profits serving a little over a quarter of rural residents. Remember that wrinkle about rural? Why would they go after rural hospitals? The market power issue. You see that in this behavior. Just the quick glance through the rest of the delivery system. Cardiology practices on the top left, fertility clinics, including a couple in Vermont or at least one on the top right, behavioral health facilities, including some in Vermont bottom left, opioid treatment programs, what we used to say clinically, methadone treatment centers on the bottom right, which definitely have a bunch of blue dots in Vermont dermatology acquisitions, top left. Women's health practices, OBGYN practices, top right, with, I think, one dot in Vermont there. Nursing homes, bottom left, which I know has been an issue in Vermont. And hospices, increasingly how we die in America has something to do with private equity. I can go through some of this at the very end. We're just working on this with a paper under review. All right, so for hospitals, I just wanted to give you some concrete numbers. This is a study that came out in 2020 led by one of my students now at the University of Chicago. And we're studying here roughly 200 private equity owned hospitals versus five thirty control hospitals. And what we basically see, I'll just give you the results here, hospital profitability definitely goes up after private equity acquisition. And if you're a hospital CEO, if you need the money, if you need just more net income, you can see private equity as a good thing. We measure this relative to control as a 27% increase in net income three years after acquisition, so on average across those three years. What's driving the net income? A quick framework that I think is always helpful is spending. So society's spending on health care is, if you flip it around, it's revenue for the health care system. So revenue or spending will always equal price times quantity. And anytime revenue changes, you can always ask, is it because of changes in price or changes in quantity? Here, we're able to see that this 27% increase in net income was driven largely by an increase in prices. These are the asking prices by hospitals, the charges. Charges go up by 7% to 16% relative to the control hospitals. The control hospitals are non private equity. The coding intensity, or case mix, goes up. And the reason I say coding intensity is that later on, we're better able to document that this is more of a coding effect rather than actually sicker patients walking through the door. And the percent of patients coming through that are Medicare, so publicly insured as opposed to commercial, remember that price gap between commercial and Medicare that we went through at the beginning? That comes back in here too. So the percent of patients admitted that have Medicare goes down. The percent with commercial goes up to replace the Medicare patients. So that's how hospitals can become more economically profitable after private equity acquisition. What's not in here are the staffing cuts and the cost cutting, which I will get to, and that's part of the story too. But if you think of as price times quantity equals revenue, this is probably largely a price effect. All right, so now if we think about the clinical impact, I will then get to the profit side for the private equity hospitals in a little more detail. But if we look at the clinical effects, we did a follow-up study that was using 100% of Medicare claims data to study these CMS defined quality measures for hospitalized patients. These are things that are, by definition, adverse events that are preventable, which can only happen after hospitalization. If you just look at this list, these are by definition things that you cannot walk into a hospital with. You have to get them inside a hospital. So we studied these measures as defined by the federal government. And what we basically find is that private equity hospitals in red here, right before acquisition So acquisition is this vertical red line, which is the so called time zero. Time zero is when they got acquired by private equity. We're showing you three years before this acquisition among private equity hospitals relative to their control group. The control non private equity hospitals are in blue. So private equity hospitals were actually they had a lower rate of adverse events before acquisition relative to their peers. But after acquisition, they start to have a higher level of adverse events relative to their peers. It just jumps up right away, and it sort of stays above the blue for three years afterwards. So that's basically the story. If we break that down, what we can measure is a 25% increase in these hospital acquired adverse events. The acronym is HAC because it stands for hospital acquired complications or hospital acquired conditions. In either case, it goes up by twenty five percent. So that 25% is the after level minus the before, net of the control group. So what explains, what drives this twenty five percent increase in adverse events? Was a 38 increase in central line bloodstream infections, and a twenty seven percent increase in patient falls relative to the control group. Now, that thirty eight percent increase in central line associated bloodstream infections occurred despite sixteen percent fewer central lines being placed. There was also a doubling of surgical site infections at private equity hospitals while they declined at control hospitals. And that was despite eight percent fewer surgeries being done. And so why were there 8% fewer surgeries and 16% fewer central lines done to begin with? It's because after acquisition, the first thing that happened was that private equity hospitals on average transferred sicker patients out to other hospitals. So the sickest of the sick get transferred first to other hospitals, which has an effect on other hospitals that we haven't really studied yet, to be honest. But the population that remains in the private equity hospitals are on average a little healthier. We know this because we can show that they're younger and they're less dual eligible for Medicaid. So they're younger and less disadvantaged. That was from this 12% increase in transfers. Now, if the patients you're keeping are younger and lower risk, of course, they're going to need fewer surgeries and fewer central lines. That's not surprising. What is surprising is that despite getting fewer of those things, more adverse events occurred. All right, so then in this most recent study in September, we went one step farther and studied the emergency departments. So everything I've showed you up to now involves patients who actually got admitted to hospitals. As we all know, many, many more patients walk into hospitals every day than those that actually get admitted. It's only a small share of patients that get admitted into the wards. Most people walk into the ED or get brought to the ED. So we had heard about all of these stories of patient harm and even patient death in the ED, both in Massachusetts and in other states, that we just wondered, okay, can we just directly take a look at the EDs and figure out what's going on there? So we just repeated this study with 100% Medicare ED visit data, Again, private equity hospitals versus the control group. And this study just came out in September. And please don't worry about the small text on the right. I'm going to show you the main finding here. The graph on the right shows you ED mortality. So this is an ED discharge status of death. To begin with, what happened after acquisition was that the sickest of the sick patients from the ED got transferred out to other hospitals first. So that same transfer effect also happened in the ED. So in the ED, you're left with slightly healthier, slightly lower risk patients. Among those slightly healthier, slightly lower risk patients, this blue line is the ED mortality rate among private equity hospitals. So before acquisition, the average was fifty two right here. And the table gives you the numbers of what the graph shows. It's basically fifty two deaths per 10,000. That's your pre acquisition baseline average. After acquisition, the fifty two moves up gradually to about fifty seven. So fifty two goes to fifty seven deaths per 10,000 ED visits. But the control group, the so called counterfactual, which means the state of the world that you would have expected if the private equity acquisition did not take place, The control hospitals mortality in the ED dropped. It went from forty nine to forty five, if you round up, forty nine to forty five. And you can see that. It just goes down. It slightly trends downward. And that makes sense because hospitals across America, on average, are getting safer over time because of checklists, handwashing, all the trainings that we do, and just better technology, better monitoring. Hospitals generally are getting safer, private but equity hospitals go the other direction. So these two lines start to separate. That separation is seven additional deaths per 10,000 ED visits. If you divide that seven into your baseline average of 52, seven divided by that fifty two gets you this study result, thirteen point four percent increase in ED mortality. So that's the top line result from this September paper. It complements and verifies what we've heard in investigative journalism and the reporting out there, that there are these deaths in the ED. What explains this? The next question is, what's the mechanism for this? We think it's mostly staffing cuts. So what I've not shown you on this slide is what's in the table here. ED salary spending went down in the private equity hospitals, while it goes up at the non private equity hospitals. So ED salary expenditures goes down by, on average, 18% after acquisition. We also study the ICUs in this work. ICU salary spending also goes down by 16%. In the ICU, mortality did not change, statistically speaking. But what also happened in the ICU is that the sickest of the sick people got transferred out. We know this because patients with dialysis, patients on a ventilator, and patients receiving blood transfusions, they were the patients most likely to get transferred out to other hospitals first. So the remaining healthier patients did not die more or less, but we know that the patient mix changed, just like the inpatient unit from the prior study. All right, and I'll skip over this. These are just the graphs that show you the staffing expenditure cuts. So there are two ways to cut staffing. You can pay your staff less on the salary side, or you could just cut total numbers of hands on deck. We see that both happen. Total salary spending goes down. Total FTE cuts goes down by also something like 15%. So it's in the same neighborhood, same ballpark, total staffing and salary expenditures. All right, the contrast is this from the US Bureau of Labor Statistics. Across US hospitals during our study period, which is this blue line. So our data comes largely from hospital acquisitions from 2009 through 2019. During this period, US hospitals are definitely staffing up. This is just monthly employees at US hospitals, and private equity hospitals are just going in the other direction in terms of staffing. All right, these are my colleagues at Mass General. I'm gonna not talk about this. Any questions? Let me back up for a second.

[Rep. Lori Houghton (Chair)]: Oh, I think we had one question. Val, could you?

[Dr. Zuri Song]: Yes, please.

[Rep. Leslie Goldman (Member)]: Thank you for being here today. So when the very sick patients are sent to another hospital, why does that hospital take those patients? What is that agreement? I understand why.

[Dr. Zuri Song]: Yeah, thank you for that question. It's a really good question. When patients get transferred to another hospital, typically, the receiving hospital has to have some capability that the sending hospital does not. So for example, when I was in residency training at Mass General, just because of the fact that Mass General is kind of a bigger hospital with ICUs and lots of resources, hospitals would call Mass General and say, Can we please send you this patient? And when I was on the service fielding transfers, what we would do is speak with our nursing supervisors, speak with our physician colleagues, and we'd figure out, is there something that Mass General can do for this patient that the sending hospital can't? And if that's the case, then we'll take the patient. But if the sending hospital can already take care of the patient, then we typically would not accept the patient. And I would say on average, probably over 90% of transfer requests have to be turned down, unfortunately, because of just bed shortages. So only the sickest patients who really need an ICU bed or a ventilator, or they really need an ECMO machine, they get transferred. Most transfer requests are turned down because either the sending hospital could take care of the patient or we just don't have the bed capacity. And so when you think about it in this case, this is where that rural versus urban wrinkle comes back into play. Most private equity hospitals are smaller ones. They're medium to smaller, suburban to rural. So they're going to be the ones sending downtown. So if they can make an argument that, look, we can't take care of this patient because we don't have enough staffing. Maybe it's because staffing got cut. We don't know. Or we don't have enough supplies. Maybe it's because supplies got cut. We know that happens too after acquisition, but we can't prove that in these data. But if they can make an argument that you have to take this patient because we can't take care of this patient, the receiving hospital will ultimately take a lot of those patients. They don't have to, but the data do show that the patients are moving.

[Rep. Lori Houghton (Chair)]: Thank you. Sure.

[Dr. Zuri Song]: Yes, sir?

[Rep. Lori Houghton (Chair)]: I have a question. Thank you. We have

[Dr. Zuri Song]: an organization, a nursing home or a clinic or a hospital that has been going under, and chances are it will go under. And we do not allow private firms to come in and purchase this. What's the solution to that? Yeah, great question. I really want to talk about this with you. This is one of the best questions and also one of the most common pushbacks from our colleagues in the industry when we talk about this. Let me get to this with I'm gonna skip over some stuff and I'm gonna get to this question with this. All right, so we studied this question that you're asking, the first part of it, and then I'll get to the second part. We studied this question of are private equity hospitals actually acquiring distressed entities? I'm sorry. Are private equity firms actually acquiring distressed entities? Are they actually doing what they're saying? Many of our colleagues on the industry side have said exactly sort of the setup for your question, sir, which is private equity firms buy hospitals just on the edge of tipping over. They're just about to go under or close. They need the financing. And if it were not for private equity firms coming in to save them, they would have gone under. So rather than being critical of the acquisition, you know, the implication is perhaps we should be grateful that they tried. And it's a really compelling argument, and we just didn't know to what extent that was true. So we did this study in the 2024, and we actually looked at two forty two private equity hospitals that got acquired, and we compared them to eight seventy matched control hospitals that were never acquired. And we asked, before acquisition, in the same year and the same time, but before acquisition, compared to their peers, were private equity acquired hospitals actually financially more at peril? Were they actually doing worse financially? So we measured it in a bunch of ways, earnings and revenue. Here's the takeaway. On financial characteristics, hospitals that got acquired by private equity firms had basically the same earnings, statistically no different. They basically had the same operating margin. And it turns out, if you squint here, you could argue the operating margin was actually bigger, but statistically looks like no different. And on the equity ratio, which is the amount of stuff they have that they actually own, that's the colloquial way of saying this. The equity ratio is the amount of stuff that you have in your building that you actually own as opposed to are borrowing, the higher the better, private equity hospitals had a way bigger equity ratio than their matched control peers before acquisition. So on financial characteristics that we can observe, you can always argue there are ones that we can't observe, and I concede that. But on the financial characteristics that we can observe, private equity hospitals were financially healthier before acquisition than their matched control counterparts at the same time. What about clinical characteristics? What about in hospital mortality? All right, looks like it's three versus 2.8, so maybe a little bit higher, but statistically, no different. What about hospital acquired complications? Those adverse events we looked at earlier. Well, private equity hospitals actually had fewer complications before acquisition than their control counterparts. But you already knew that from the graph earlier where the red line was below the blue and then jumped above the blue later after acquisition. So that's no surprise. Statistically, I'm not even making that argument here. I'm just gonna say it's a wash. So clinically, it's basically a wash. Financially, it's basically a wash with the exception that private equity hospitals before acquisition owned more of the stuff they had. So what we take away from this is that although this argument that private equity firms buy your distressed hospitals in your state or your community for the purpose of trying to turn them around, and they're doing a public service for you. And we should be grateful that they tried rather than be critical of whatever tactics they're going to use. There are cases that that's true. There are a few cases of so called distressed investing where private equity firms can go into a distressed entity, put in the capital, put in the management expertise, turn it around. The community benefits from continued access. The hospital benefits from more profitability. The investors benefit from more returns, and the private equity firm benefits from returns. It could be a win win win, but those cases are far and few in between. Those are the exceptions. That's not the rule. That's the exception. In the vast majority of cases, private equity hospitals are not buying the distressed entities. They are buying financially healthier hospitals to begin with. Why does this make sense? If you go back to that initial diagram of the leveraged buyout that I showed, it makes sense because immediately upon buying a hospital, you're loading it with more debt. So what kind of hospital would you buy? One that's just on the precipice of tipping over, that you'd put more debt on it and it might just close the next day, or a hospital that's financially healthy enough to take on new debt, still continue operating, still continue seeing patients, and generating revenue for you. It makes total sense to us, on the academic side at least, that you would buy the financially healthier hospital. And now we have this data to back that up. And I just think that it doesn't oppose the argument that you're giving. It just puts it in context. So what you said is true. There are hospitals that need capital. We should support them. And if private equity were not in the picture, how would society respond? What would policymakers do? It's a tough question. How do you use taxpayer dollars resources to keep a hospital's doors open when this patient makes us largely Medicare and Medicaid and when it's struggling? Would you let private equity firms come in or would you not? Well, I think the first thing we need to do is realize that those situations are way more rare than the way more common situation of private equity hospitals buying a financially healthier hospital to begin with and then stripping it of its assets, selling its land in the buildings, cutting its staffing, that's a separate thing. But if you then just look at the few distressed acquisitions, I agree with you, it's challenging. And I think then goal of policy is to create the guardrails. You can let the private equity firms come in, but then you can just create I'm not saying this is easy, but you can think about creating the guardrails that allow the private capital to help keep the hospital open, but don't let it become an extractive journey, an extractive acquisition. Don't let it cut the staffing, cut the resources, sell the real estate, strip the assets. Protect the patients first. First, do no harm. Protect your frontline clinicians, your nurses, your doctors, and then let it have a chance to make money. But don't let it do that at the cost of hurting people. I think that would be the way to think about it. But I think this study just at the very outset puts that in a very small minority of cases. If you look at the total pie of private equity acquisitions, both outside and inside of healthcare, well north of 90% are not distressed investing. They are investing in financially successful, healthy businesses because those are the ones you can extract from. They have stuff to extract. A very small share of acquisitions are actually truly a distressed investing nature. But in the policy discussion, in testimonies and public discourse, the distressed investing plays a big role because it frames the acquisition in a more positive light. And again, I'm not disagreeing with that. I'm just saying it's a minority of cases.

[Rep. Lori Houghton (Chair)]: Brian. Thank you. Thank you, Chittenden. Well Did you have have no more slides than you have. So

[Dr. Zuri Song]: I have more to say. If you if you

[Rep. Leslie Goldman (Member)]: I think you'd like to maybe finish.

[Dr. Zuri Song]: I'm I'm happy to yield time back to you. I I really respect your time and I don't wanna take up your time. If you would like, what I could do is just quickly run through what else is here and just let you know what's here. And if you would like, we can talk at a later time about the details of what's in here. Just have some more evidence to show you.

[Rep. Lori Houghton (Chair)]: Let's do that. Let's hold questions till the end only because This is fascinating. Yeah. And I get the feeling you could talk about this and I could listen about this for hours and hours and hours. So let's go through really quickly what you have left and then let's hold the questions till the end.

[Dr. Zuri Song]: Okay. Let me do that. Thank you. So the the study we just skipped over was this one about COVID. I have a revised version of this. It's under review, so this is a little bit old. But the basic takeaway is during the pandemic, when staffing was further stretched, the question is how did private equity hospitals fare? How did the patients in there do? The basic takeaway is that for patients who came in with non COVID reasons, which is the vast majority of patients, they actually had a higher mortality rate, a larger increase in mortality as opposed to non private equity hospitals. So it's another setting in which we saw patient harm in the private equity hospital setting, and probably because staffing was already thin and it got further stretched. This is a study that is a checkmark in the column of our private equity colleagues. I want to show you this because this is an important piece of nuance. Many private equity firms have said in public settings, and also private settings when we have a chance to talk with them that they're all different. They don't do the same thing. Please don't paint us with too broad of a brush. And I think they have a point. In this study, we looked at hospital acquisitions by firm. So firm one, two, three, four, five, six, seven. And one of the firms is Hospital Corporation of America. That's the first one to get acquired. That's the first large private equity acquisition in the mid 2000s. So here's the takeaway. Firms do slightly different things. So I just wanna validate and kind of respect that view, that pushback that they're not all the same. They do slightly different things. But how slightly different is in the eye of the beholder. It's sort of up to your own normative judgment. So when it comes to staffing salary cuts, you've already seen the national average. What about for each firm? Well, some firms cut staffing by as much as 27%. Some firms cut staffing by as much as 12%. So in the eye of the beholder, do you think 12% to 17% is a large range or is it a small range? You can argue either way, but there's a range. It's not everybody's cutting it by 15%, the same number. Hospital Corporation of America actually took a different tact. They didn't cut staffing at all. So how did they make their profits? They raised prices more aggressively than everybody else. They just did more stuff and they did more volume. So here's where I'd like to give you another quick framework. Profit equals price times quantity, which we'd already talked about. Price times quantity is kind of like revenue, but revenue is just total money coming through the door. Profits is revenue minus what you spend to deliver care. So profits is simply price times quantity minus the cost of delivering care. Well, what are the costs of delivering care? In health care, especially in hospitals, it's mostly your staffing. So what HCA demonstrated in the mid-2000s was you can, quote unquote, succeed in health care as a private equity firm by raising prices, raising volume, and not cutting staffing. But what the follow on behavior across all these other firms did was they used a much more classic private equity strategy refined from other industries, which is they came in, cut staffing, and walked away. They didn't really raise volume. They didn't try to do more stuff. They just cut a lot of stuff, staffing, sold the land and the buildings, gave the dividend recapitalizations, and then walked away relatively quickly. And that's where you have this patient harm because you're stripping the assets and not You can make a lot of money by doing more stuff. That's a separate conversation we could have someday about the appropriateness of care. Are you doing a lot of low value imaging tests and procedures? Are you doing stuff that patients don't need because it's profitable? That's a slightly separate conversation. This was just the contrast between firms of how you can walk away quickly by cutting staffing and not even worrying about the price and the quantity side. All right, on to physician practices. I just want to show you a bit of evidence here. We're now pivoting from hospitals. These are examples of specialties that were initially acquired. In Vermont, there's definitely activity here. So if you look at the last five years or so, 2019 through 2023, so we're a couple of years past that. But if you look at the percentage of acquired physicians by who's acquiring them, this is nationwide, sixty five percent of all physician acquisitions are done by private equity firms. So they are now just dominating the physician acquisitions market way more than actually private equity firms are dominating the hospital market. In hospitals, it's still mostly large health systems acquiring another hospital. In physician practice land, it's mostly private equity firms. So these are the specialties now, the percent that are under private equity. I have the stat at the bottom here from our colleagues at Berkeley. I won't read it just to save time, but it's just the growth and the acquisitions. What happens when physician practices get bought by private equity? In a similar type of study, about 600 private equity acquisitions of physician practices versus about 3,000 controls. My colleagues and I, the same kind of study design. We basically find that there's a 20% increase in charges, that's the asking prices, and an 11 increase in the actual negotiated commercial prices. And you see this acquisition dotted line here. Right after acquisition, the price jumps. And as you know, in healthcare, we negotiate fee for service contracts every year, mostly between payers and providers. And look here, when you plot this by quarter, right after acquisition, quarter one, prices jump a little bit. Quarter two, jump a little more. Quarter three, jump a little more. By quarter four, all your fee for service contracts have been renegotiated. Now you just flatten out the rest of the way. So very quickly on that next negotiation, prices go up. Not only do prices go up, but quantity also goes up. We see more patient visits too. More unique patients, more new patients, more long visits. The funny thing here was that how do you actually, in a twenty four hour day, how do you see more patients, more unique patients, and see everybody for longer? And it didn't make sense to us, but it turns out that it's mostly a coding effect. Increase in long visits is a coding of what is supposed to be a long visit, but you don't have to actually spend that time. You can just code it as a longer visit. That's probably what's going on. The reason is that we see a staffing cut here on physician practices as well. This is a separate study. I'm just going through it quickly, but relative to non private equity practices, the private equity ones, they turned over physicians more and they replaced physicians more with nurse practitioners and physician assistants. So lower cost forms of labor coming into substitute for higher cost forms of labor. And that's another way to cut your staffing costs and generate a larger margin. All right, other ways that they've made returns. One is to raise professional fees. Here on the left, it's a separate conversation there. Won't go into that in detail. One of the common pushbacks from industry is we're no worse than your academic health system buying you. They raise prices too. So do we. And this is a study that says, well, that's not exactly true. When private equity firms buy your practices, they actually raise your prices a bit more. But we can just leave that as a detail for now. For retina practices, the use of expensive medications, physician injected medications. You're probably familiar with the 340B program and the Part B drugs part of healthcare spending. So here's a study that shows that after acquisition, private equity firms are more likely to have their practices use physician administered drugs, which come at a higher markup. Dermatology practices after acquisition, they raised their prices. Sorry, anesthesia staffing firms after acquisition, they raised their prices. And here, there's an increase in the probability that the anesthesiologist is out of network, which connects to our prior wrinkle about out of network prices and surprise billing. So there's a connection between the private equity journey and the surprise billing journey here. And this is what I've said before, 55% of physician practices are resold to a second private equity firm within just three years. And finally, how do physicians feel about this? Broad takeaway from this survey study is basically, as you've seen in Vermont, physicians in independent practice, they feel that private equity ownership is sort of not all that different compared to other forms of corporate ownership, other for profit hospitals owning them, or even a nonprofit health system owning them. And that's because this blue bar in the middle, about the same answer, most physicians, this is like a plurality, it's not a majority, but the plurality of physicians would say, well, being owned by private equity is about the same as being owned by these other types of corporate owners. But if you ask them, how does it feel relative to being truly independent? Well, still across America today, most physicians say being owned by private equity is much worse or somewhat worse than being truly independent. And if you poke into why, physicians will tell you that for a bunch of things they care about, like physician well-being, patient well-being, quality of care, access, health equity, they will have a generally more negative view of private equity. So the much more negative parts of the bar are basically your majority or plurality. But there's one thing where private equity wins, and that's healthcare innovation. What that means is having the capital to buy stuff. There's just no, it's like the gentleman's question earlier. There's just no substitute for having the private dollars to be able to hire and buy things that you want. Private equity gives you that. And so for healthcare innovation, physicians are much more positive about private equity. This is the tough part of policy around this area. It's the trade offs. Here's some evidence on fertility clinics. I'm just gonna skip the fertility clinics part of this. Most fertility clinics in The US are owned by private equity these days. Every IVF cycle is really expensive. That's just a longer story. This is nursing homes. Nursing home acquisitions are associated with more ED visits, more hospitalizations, and a ten percent increase in our Medicare patient mortality. Why is that? It's because nursing assistants per day get cut. It's the same kind of staffing cut, hands on deck type of story. When healthcare at the bedside is still largely a person to person, hand to hand type of work, cutting the number of hands on deck, I think, really matters for patient outcomes, and here's another example where it does. For hospices, the fastest growth in hospice ownership in The US is private equity. That's the light blue line. If you add up publicly traded in dark blue, private equity in light blue, and for profit in orange, these three types of for profit, they dominate the nonprofit. Nonprofit's still a plurality, but if you add up the for profits together, they become the majority. So we're just starting to understand what's going on in hospices. My one takeaway for you right now is that after hospice acquisition, we're finding that Medicare spending goes up because length of stay goes up. And the reason the length of stay goes up is that hospices have always been paid by Medicare on a per day basis that's not risk adjusted. If you've had family members or loved ones in hospice, every day they survive in hospice, Medicare pays the hospice a non risk adjusted capitated fee. It does not matter how healthy or sick that patient is. So what's the incentive, financially speaking, for private equity hospices? It's to basically enroll patients who are healthier so that they can sit there day to day and not use a lot of services so you keep the capitation dollars coming through the door. Now, if I were to tell you, which is true, that hospices generally have two types of patients, but this is an overgeneralization, the two types being patients with cancer and patients with dementia, what would be your guess for what private equity would do in choosing the two types of patients?

[Rep. Lori Houghton (Chair)]: In particular, we choose get much up and

[Dr. Zuri Song]: Yeah, it's exactly what we see. The neglect of that part. We see that there's an increase, this bottom red arrow, there's an increase in the share of patients with dementia after private equity acquisition. So of course, they live longer. Of course, they're getting discharged alive more. It's just a change in the patient mix. And because they're patients with dementia and not patients with cancer, they use less services, so the hospice keeps more of the Medicare capitated payment every day. All right, this is my study about policy levers, but this is your world, not mine. This is just one academic's framing of a bunch of policy levers. Why don't I stop here? I'm happy to share all of this, but I can take any other questions or just yield your time back to you. Thank you for allowing me all of this time.

[Rep. Lori Houghton (Chair)]: Thank you. Well deserved, allotment of time. If you could send your slides also, that would be great. I think we have a couple of questions. I'm going to start with Brian because I cut you off last time.

[Rep. Brian Cina (Member)]: Oh, it's Okay that you did too. And think it's

[Rep. Lori Houghton (Chair)]: then Leslie. And then we need to move on.

[Rep. Brian Cina (Member)]: I appreciate that you want to respect our time, and I want to respect yours too. So if these questions are too in-depth, you can even give us pointers, or we can have you back if that works for you or everyone. One of them, I do want to know more about acquisition of opioid treatment in Vermont, because that was concerning to see that that's the sector where there appears to be the greatest acquisitions occurring. And as you're well aware, we're in the middle of a national pandemic of poly substance abuse, so it's concerning that they're eating up our clinics. And I'm curious, what I'd like to know more about is, are these the hubs of our hub and spoke system? Are they the spokes? What are those assets? And then my second question is, if you could direct us to more data about dementia care and sort of with the hospices, is there any evidence that one of the benefits for acquiring them is that because the patients have dementia, they aren't reporting lack of care the same way, because anyone who's had a relative with dementia knows how that is. Anyway, those are my two questions.

[Dr. Zuri Song]: Got it, thank you. I'll try to be fast. On the opioid treatment centers, one of the things that I think is worth watching for is the platform plus roll up strategy. This is what's been done in the physician practice space a lot, where a firm will come into an area, acquire an initial large practice of a given specialty, and then roll it up with other practices of the same specialty in that geography. The way that that manifests itself is more market power to negotiate for higher prices from commercial insurers. And that is how you get the 20%, or sorry, the 11% increase in negotiated commercial prices in physician practice land. Opioid treatment centers have that feature of you have many of them in a given area, and a private equity firm could come in, set up shop, and then slowly, in a circumference, in an area, just acquire all of the others and then pool the market power. Now, day to day, what's one thing to watch out for? One of the New York Times investigative reports from a few years back actually suggested that for opioid treatment centers, there is a lot of discretion in the tests that you do for patients. So clinically, when a patient comes in, we run a lot of urine toxicology screens, like the EDs will do them. Urine toxicology screens can be quite profitable. So there are stories of not only private equity, to be clear, but privately owned or for profit methadone treatment or opioid treatment centers that basically do a daily opioid, a daily urine toxicology screen on all of his patients. Every day, test the urine, which is clinically not necessary, probably inappropriate, probably low value, but every test is another fee. And then the corollary to that, which I have studied in the past is what is the price of that urine test? Well, it turns out that if you keep that lab that you send the urine test to out of network from insurance, now you get an out of network lab price as opposed to an in network lab price. So not only are you testing every day potentially inappropriately, every inappropriate test comes at an out of network price. So I can send you some papers about that. And that's Thank you. Those are the two things I would watch out for.

[Rep. Brian Cina (Member)]: Thank you. That's helpful.

[Dr. Zuri Song]: On the dementia side, I don't know that we have data on what patients are reporting yet. So I respect your hypothesis. There's no way to know at the moment.

[Rep. Brian Cina (Member)]: Thank you again, yes.

[Dr. Zuri Song]: Sure.

[Rep. Leslie Goldman (Member)]: Thank you so much for joining us. This is fascinating. I'm curious, though, you said something earlier regarding rural versus, I guess, urban hospitals and desirability because of the financial distress of hospitals. So I learned that rural hospitals are, in general, more distressed. And so it seems like there's a fallacy there in terms of how is private equity advancing so rapidly if our hospitals are in such poor condition and they desire hospitals that are not in such poor condition?

[Dr. Zuri Song]: Yeah, that's a great question. Thank you. I think there's a lot of variation in the rural hospitals to start with. On average across America, hospital bed occupancy in rural and suburban hospitals is something between 5060%, unlike your downtown hospitals where 100% of beds are full and patients are in the hallways. Rural hospitals don't usually fill their beds on a given day, but that average between 5060% has a lot of variation around it. So I think that if you're a private equity firm, the quote unquote due diligence you would do before making an acquisition is you would go into an area and study all the potential acquisition targets. And you'd basically figure out which ones you would wanna target for acquisition and which ones you would not. And I think what our study shows from how these hospitals were doing pre acquisition is that it's not random. They don't randomly pick off rural or suburban hospitals. They basically go after the financially more stable ones. So it can be true at the same time that on average, rural hospitals are struggling, but the ones that get acquired are on average not the struggling ones, relatively speaking, the less struggling ones. It's because they have to load more debt onto these hospitals day one after acquisition. And what they don't wanna do is to have a hospital go under right away, create a public disaster for a community to lose access and for a ton of pushback. That's not something they would invite either, at least not right away. So I think that if their game plan is to eventually sell the land and the buildings and liquidate the real estate, give that back as dividends, which we've seen happen across America, it's gonna take a little bit of time. So they need a hospital to stay open for a while. And because of that, they probably don't wanna go after hospitals that are really on the precipice of financial distress or closure. So ultimately, like in the Massachusetts case, we had public testimony in our state house on a day in March 2023, I think, similar to this. I participated in a testimony and a few speakers after me showed some, I don't know where they got this, but this is all public on an online video. But they showed a slide of some internal documents between the private equity owned real estate investment trust that came in to buy the land and the buildings from the Stewart hospitals. And one of the investors, I think on a call or something raised the concern, as you did, why would we be interested in distressed assets like this? Hospitals that have mostly Medicaid and Medicare patients and what the private equity owned real estate investment trust, the landlord, this is MPT, what they said on the record was, Don't worry. Policymakers and communities can't afford to let these hospitals close. So if they actually proceed to closure, taxpayers will bail us out. We're counting on that. And it happened. I mean, eventually at the end of the day, what they predicted happened, But it was very upsetting to people to see that that was part of the financial strategy upfront. It was to sort of take advantage of the goodwill of the public. I never forgot that. I never found that piece of evidence. I don't know where they got that document from, but it was a clear strategy that sometimes it's okay to go after distressed assets, not because we feel the pressure of them going under, but because we know that society is gonna be unwilling to have them go under. So we've got a backstop in the taxpayer dollars.

[Rep. Lori Houghton (Chair)]: Leslie, I'm going to ask one question. We really need to take a break if people can tell we've been sitting for a while. I think we're going to move, I mean, we have our Ledonia Council with us, I think we're going move a walk through to 01:00 and we have a provider who's coming in who's obviously their schedule is a little tighter because we have to work around their clinical. And so that's what we're going to do and we're going to have Sam and Mike be fixed. So let's really quickly pivot to the last question and then we're going to let Doctor. Song get back to his work as well.

[Rep. Leslie Goldman (Member)]: Thank you, thank you, Doctor. Song. Fascinating, yeah. And I changed the chair asking you to send me the slides so we can look at them, you know, at our quiet bar. Take it in. My first question, I think I get, but I just want confirmation. Why would a non distressed hospital choose to sell to private equity? Would it be just to get it stopped, or is there another reason?

[Dr. Zuri Song]: Yeah, great question. For a hospital, there are benefits, just like for a physician practice, of selling to private equity. You first don't have to do the management anymore. You do get an influx of capital, but there's just strings attached to that. You basically give up ownership, give up control, give up management. The private equity firm can also institute new leadership into the hospital. But you basically have somebody else taking on the responsibility of paying for the land, paying for the real estate, paying your malpractice, doing your schedules, doing everything. And I think hospitals have sought So it's a two way street. There have been private equity firms pursuing hospitals, but hospitals pursuing just extra capital that have ended up with private equity. I think for hospitals initially, the journey to private equity is not a direct linear one. I think hospitals initially will try to raise prices, if they can, off of commercial insurers. So if they can get bigger and negotiate for higher prices, they will do that. If they can generate more revenue to get more dollars through the door, they will do that. I've written separate studies related to this showing that hospitals increasingly have venture capital arms of their own. So US hospitals, especially larger ones are now investment vehicles as well as healthcare delivery places. And so they'll try every which way. But I think private equity is one of those somewhat of a last resort. Medicare is not paying them higher prices. Medicaid is not doing it. And if they can't get it off the commercial market, they're going to find it from somewhere. But at the point of a transaction, they have to make the trade off. Do we want to give up control for this extra money? And I think a lot have just, many have said yes. Now for physician I have

[Rep. Lori Houghton (Chair)]: one last question, I'm sorry, this is the important one for me.

[Rep. Leslie Goldman (Member)]: I don't know if this has been studied yet. Our bill number is age five eighty three. I'm wondering if bills like this, maybe in Oregon, have changed outcomes like adverse events, stripping of assets, protecting things. So I'm thinking about the effect of this bill as before.

[Dr. Zuri Song]: Yeah, I am too. Thank you for that question. I've thought about this. Massachusetts, Oregon, Indiana, now California are states that have passed legislation at the state level. We're obviously too early in this timeline to tell whether things have changed post versus pre and ideally relative to a control group. So that kind of rigorous evidence does not yet exist. What I've heard on the ground are some discussions. I mean, this is really anecdotal. It's really debate about whether these state laws have dampened the enthusiasm of private equity firms to come into a state in the first place. So some lawmakers have said, I'm happy about that. That was the point. We wanted to make our state less attractive to private equity. So if they don't want to come in anymore because we have the state law, great. That's what I was looking for. Others have said, That's not the best outcome because what we wanted to do was to construct guardrails and transparency to allow the private dollars to come in and still do the good part and just avoid the bad part. So for them, shutting off the flow of private capital is not necessarily good Cause then you have constituents saying, I need extra capital now. There's no way to get it. I don't know which anecdote is the dominant one and it probably varies by state. But Oregon's law only deals with physician practice acquisitions through the corporate practice of medicine doctrine. Indiana is largely transparency. Massachusetts is largely transparency with one ban. It's only banning the sale of real estate from on campus main hospital real estate. But if you have a satellite building, you can still sell that. So every state's law is doing something different too. So it's hard to generalize. But I think in a couple of years, we'll probably have at least anecdotal evidence, if not some data to answer your question better.

[Rep. Lori Houghton (Chair)]: Thank you. Thank you so much for joining us and thank you for your expertise in this.

[Dr. Zuri Song]: Thank you.

[Rep. Lori Houghton (Chair)]: We're going to take some time with this bill. So if at a later date, possibly we want to reach out and have you come back. We learn more, we may have more questions and it seems like you're a really good person to ask those questions too. Thank you. Thanks for joining us.

[Dr. Zuri Song]: It's an

[Rep. Lori Houghton (Chair)]: honor to be

[Dr. Zuri Song]: here. Take care.

[Rep. Lori Houghton (Chair)]: We're going to take a break for ten minutes. Ten minutes.