Jessica Reilly/Telegraph Herald via AP
Private equity is entrenched in the home health and hospice industries, with two dozen of its companies employing over 233,000 workers.
Legislation with the size and scope of the $4 trillion “Build Back Better” agenda is like a Bat-Signal for lobbyists, urging them to swarm Capitol Hill without delay. Literally thousands of companies, organizations, and trade groups have lobbied on one or more of the bills in this package. But one industry’s representatives keep showing up over and over again, whether in formal lobbying sessions in Congress or more informal meetings: private equity.
“At every point, private equity lines up at the trough,” said one observer close to the discussions. “There’s just somebody in every fucking meeting.”
Private equity lobbyists have multiple interests in the bills being discussed. They obviously want to keep any tax increases away from their industries, and successfully fought to keep tax hikes out of the $550 billion bipartisan infrastructure bill, which is slated for a House vote on September 27. Those tax hikes got shifted to the reconciliation package known in Washington as the Build Back Better Act, and private equity has kept up the pressure there.
But the industry has another reason to be involved in the reconciliation bill. The blueprint includes hundreds of billions of dollars in investments to expand home and community-based services for elderly and disabled people under Medicaid (initially set at $400 billion over ten years), and to provide subsidies for high-quality child care programs (set at $225 billion). Private equity happens to be deeply invested in both of these industries, with dozens of home care and child care companies in their portfolios.
Given that the private equity model involves extracting as much value from portfolio companies as possible, regardless of the quality or success of that underlying business, critics fear that we could end up with a situation where a large amount of money is sent out by the government as a sitting target for fund managers to pilfer. This could end up making these services even worse for the families that use them and the workers who perform the tasks, despite the large federal investment.
That concern has led one coalition, Americans for Financial Reform, to recommend measures to policymakers that would ensure public money is used as intended, to improve accessibility and quality in home and child care, while improving the wages and conditions of workers in those industries. With the premise of safeguarding public funds, the private equity industry could see many of its long-running schemes exposed and made unlawful.
PRIVATE EQUITY IS ENTRENCHED in the home health and hospice industries, with two dozen of its companies employing over 233,000 workers, according to figures compiled by the Private Equity Stakeholder Project.
The industry’s role in nursing homes and assisted living, and the horrors that has produced, is by now well known. But there has been a shift into home health care, just as seniors have begun to express their preferences for aging in place. You can almost see it as a hedge for the industry, especially given the negative headlines coming from their nursing home investments during the pandemic. If the money moves out of facility-based care and into home-based care, private equity can move with it.
That creates an additional opportunity, said the Private Equity Stakeholder Project’s Eileen O’Grady in an interview. “Home care is still relatively fragmented as an industry, and it poses a great opportunity for private equity to roll it up.”
In 2019, there were over 600 private equity–based health care deals. In home health, the biggest formed BrightSpring, co-owned by venerable firm Kohlberg Kravis Roberts (KKR) and Athyrium Capital, with a minority investment from the parent company of Walgreens. KKR merged BrightSpring with PharMerica, a specialty pharmacy, for $1.32 billion in 2019. The company has 56,000 employees.
Other large home health firms with private equity ownership include Elara Caring (Blue Wolf Capital, Athyrium, and Kelso), Team Services Group (HarbourVest Partners, Neuberger Berman, Pantheon Capital Partners), AccentCare (Advent International), and Synergy HomeCare (NexPhase Capital). Some of these involved roll-ups of smaller home health operations into a larger conglomerate. Private equity has also targeted hospice care for mergers of late, with one analyst describing the industry’s “bullish sentiment” on the sector.
The concerns with this gold rush, combined with the potential $400 billion federal investment, are fairly obvious. Private equity seeks returns of 20 percent or more over the handful of years they hold a business in portfolio. “That can be hard to achieve in any kind of health care company without substantial cost-cutting tactics that really hurt patient care,” said O’Grady.
Critics fear that we could end up with a situation where a large amount of money is sent out by the government as a sitting target for fund managers to pilfer.
The firms are bought using large amounts of debt, which is then thrown on the company, forcing it to use money intended for operations to service debt. Private equity managers use methods like dividend recapitalizations to pull money out of portfolio companies. Sale-leaseback schemes, where the real estate is split off from the business, can also divert operations money into new rental payments.
To compensate for the extracted value, companies can cut staff, rely on under-licensed practitioners for caregiving, enact aggressive or even illegal medical debt collection practices, or devise dangerous revenue-generating schemes. In dental care, for example, this has manifested itself in high-pressure sales of unnecessary services to patients—like root canals for young children or even babies—and drilling into healthy teeth to create problems that subsequently get fixed. With home care, it could lead to untrained nurses performing tasks, or short staffs that raise prices for families to their current intolerable levels.
Private equity also has a footprint in child care; investments include Learning Care Group, The Learning Experience, Spring Education Group, Big Blue Marble Academy, Rainbow Child Care Center, and Endeavor Schools. This is another high-touch, labor-intensive, low-wage industry that has grown unaffordable for many families, and as a maturing industry it’s primed for more private equity consolidations. With hundreds of billions of federal dollars flowing into child care, the opportunity for profit-taking is great.
“It’s obviously wonderful that there’s going to be a very large increase in spending” on home and child care, said O’Grady, “but we need to make sure it’s going to the right places. Not the pockets of private equity firms that own these companies, but increased staff pay and quality of care.”
HOW YOU ACTUALLY DO THAT is the subject of the recommendations Americans for Financial Reform has sent to the various congressional committees, the Treasury Department, and the White House. The goal of those concerned with private equity is to set conditions on federal funds. A few of the solutions look fairly familiar: requiring strong labor standards like wage and benefit floors, or data disclosures to track the money.
But other recommendations share provisions with what Sen. Elizabeth Warren (D-MA) put out during her presidential campaign, known as the Stop Wall Street Looting Act. That bill, first introduced in 2019, hasn’t gained much traction in Congress. But the reconciliation bill can give a version of the bill a second life, by framing it as a way to ensure federal dollars serve the care economy and its workers, rather than financial players.
First among these provisions would force private equity firms to accept joint liability with the companies receiving funding. This would prevent bust-out scenarios where private equity takes all the value and leaves the portfolio company as a husk: Instead, the investment firm would be on the hook for bankruptcy, pension obligations, or legal judgments.
Other recommendations would bar charging fees to portfolio companies; prevent the use of federal money for dividend recapitalizations, leveraged buyouts, or other forms of financial engineering; set compensation limits for limited partners and portfolio firms; and require companies receiving federal funds to disclose their beneficial owners.
These are significant threats to the private equity business model, at least in the home health and child care space. Joint liability would effectively stop the extraction of value from portfolio companies. And compensation limits, along with restrictions on dividends and other distributions, limit that extraction possibility further. Forcing disclosure of beneficial ownership would give more insight into the corporate structures of these private equity roll-ups and may show the full extent of their market share.
These are significant threats to the private equity business model, at least in the home health and child care space.
This can help explain why the American Investment Council, the main trade group for the private equity industry, spent $540,000 on lobbying in the second quarter of 2021 on (among other things) “legislation affecting the regulation of private equity” and “legislation related to beneficial ownership of corporations.”
In a statement, a spokesperson for the American Investment Council told the Prospect: “The private equity industry backed the jobs of more than 11 million American workers through the uncertainty of the pandemic, helping more than 13,000 small businesses remain open, and invested in every economic sector—from health care to renewable energy. As the American economy recovers, policy makers should take steps to encourage more private investment in communities across the country.”
Other private equity firms that lobbied on various legislation in the second quarter include Walnut Capital Management, Versa Capital Management, Annaly Capital Management, Cerberus Capital Management, and Carlyle Investment Management. In addition, TeamHealth, a physician practice whose parent company is private equity giant Blackstone, spent $210,000 lobbying in the second quarter on “issues related to healthcare.” That’s likely in response to the Build Back Better Act’s potential expansion of Medicare, which offers lower reimbursement rates than private coverage.
All that lobbying muscle could stave off a worst-case scenario where a bill poised to shower resources on private equity–owned firms becomes a foot in the door to attack certain industry practices. But if private equity is, as they claim, skilled at rehabilitating companies and building successful businesses, they should be happy for the federal support even with strings attached, experts contend.
“If private equity is investing in ways to make companies better,” O’Grady notes, “they can find ways to make money off them while still complying with these requirements.”
