In her sharp and deeply alarming Ethically Challenged: Private Equity Storms US Health Care, Laura Katz Olson likens private equity to an omnivorous and “clawed” beast sucking up businesses across the spectrum of US consumer markets. Olson shows that private equity, far from a picky eater, has begun to aggressively gobble up a greater and greater share of the health care sector over the past decade, often to the detriment of patients and providers. However, the unceasing litany of private equity deals and their outcomes, combined with the deeply obfuscatory nature of their activity, leaves one to wonder if private equity is truly a landbound beast replete with claws and gnashing teeth. Instead, Olson paints a picture of a ravenous leviathan lurking just below the surface of the dark and ominous waters of capital markets, its many tentacles fleetingly breaching the surface. She makes a convincing case that private equity will go wherever there is profit to be extracted, devouring passing ships seemingly at random.
Private equity is an alternative investment class wherein limited partners—the investors—provide capital to general partners—the firms—to invest in the acquisition of private companies. Less commonly, the fund is used to gain control of a public company and take it private. Private equity makes its money in numerous ways. Private equity funds generally hold a company for years before it is sold, when the proceeds are distributed to investors. Funds sell companies to other companies, or they can take the company public and list it on the stock exchange. Either way, this is only one source of income for both investors and firms. Investors also receive periodic dividends through numerous strategies, such as adding additional debt to the acquired company to fund such dividends; by capturing tax deductions given to the acquired company; or through more mundane operating profits. Private equity funds make money throughout the investment period using their customary “two and twenty” fee arrangement: firms receive 2% of assets under management as an annual management fee, and they receive an additional 20% of profits above a certain predefined benchmark. While fees are high and invested funds are illiquid for the life of the investment, private equity more than makes up for this by providing returns far above what can be found in more traditional forms of investment.
While the habitat of such a leviathan is difficult to map, Olson does an excellent job pulling together what information she can on this notoriously secretive sector's (Stiglitz 2019) forays into health care. Indeed, her book represents one of the first such efforts to do so for a topic that is surprisingly understudied within academic circles. Ethically Challenged pulls together much of the investigative journalism done on various acquisitions, combines it with available PitchBook data, and seeks to supplement it with interviews of the founder-providers whose offices compose most private equity acquisitions.
Olson acknowledges facing difficulties in her data collection. First, PitchBook only has access to certain kinds of data regarding the private equity sector, and much of the most important information is kept confidential by the firms. In addition, only certain very large funds have any specified reporting requirements. Given that many health care private equity funds increasingly focus on relatively small companies (generally based on their earnings before interest, taxes, depreciation, and amortization, or EBITDA) and that purchase price is generally some multiple of EBITDA, most acquisitions fall below these reporting requirements. Second, in conducting founder interviews, she points out that most sign restrictive nondisclosure agreements at the point of sale.
Olson ties her thorough, detailed analysis into a broader theory of neoliberal governance, particularly its role as an engine of financialization. As she raises concerns throughout the book about the transformation of patients into commodities, she shows that the gaps in the data are themselves indicative of the neoliberal governance technologies of showing and hiding. This fact is particularly evocative of the neoliberal state's strategy of perpetuating systems of artificial competition (Foucault 2008). These are in effect “show” markets with “show” customers, touting competition and the reification of consumer choice while engaging in processes of “creative destruction” (Harvey 2007). Olson notes that private equity's activities as documented in Ethically Challenged certainly suggest such a self-congratulatory sense of inevitable progress through open competition, despite two ways in which the sector's activities contradict this messaging: first, private equity functions as a major driver of consolidation and regional monopolies in a given market; second, the state plays an essential role as both a source of income and a primary customer of private equity.
What does it mean for the state to be both funder and customer? Olson draws out the multiple, complicated, and contradictory enmeshments that private equity firms have with the state. First, firms often acquire providers who derive a large proportion of their reimbursement from Medicare and Medicaid funds, whether those are tied to dental care, elder care, substance abuse, eating disorders, neurodevelopmental disorders, behavioral health concerns, or ambulatory care. Likewise, these firms take advantage of the labyrinthine US tax code to claim various—and generous—tax deductions that are then redistributed as dividends to their partners. These tax deductions include those provided for the debt payments used to fund provider acquisitions, those provided for unpaid and obscenely high balance bills (Appelbaum 2019), and investor dividends being taxed under the lower capital gains tax. It is this combination of direct and indirect subsidies that has made the “magic” of high returns for private equity investment possible.
Second, public funds have historically provided a large proportion of the capital for firms through their role as limited partners. University endowments and public pensions make up a significant proportion of the limited partners engaged in private equity investments, particularly during the crucial period of private equity's reemergence in the late 1990s through to the 2010s. While other limited partners, such as high-net-worth individuals, corporations, and sovereign wealth funds, have started to make up a larger share of investments, the immensely important role of these public limited partners in the early expansion of private equity cannot be understated. It is these numerous enmeshments that make the hidden nature of private equity, demonstrated by Olson's difficulty in accessing primary sources of data, so tantalizing. Representing a common theme of welfare state scholarship, such a grow-and-hide regime of public financialization of health care seems to be an alarming new direction for the “shadow welfare state” (Gottschalk 2000).
Olson's work challenges an oft-repeated refrain among private equity firms and their various hangers-on. Lamenting bad coverage by news outlets, advocates strategically and persuasively deploy choice anecdotes in making their case for greater involvement of private equity in health care provision. Citing an endangered rural psychiatric office or a distressed public inner city hospital, private equity collects and deploys these stories to forestall critique and to demonstrate their “value add” to a distressed health care system. Olson relentlessly exposes the corollary of these positive anecdotes: a litany of horrendous acquisitions, lies to providers, mass layoffs, and liquidations that demonstrate a fundamental lack of concern for the quality or availability of health care.
Ethically Challenged presents an excellent mapping of the many-tentacled entity that is private equity and its entrance into health care. It also provides several directions for future researchers to explore. While the wide-ranging narrative is necessarily limited in the amount of attention it can provide to any single area, this is not a fault; instead, it demonstrates the sheer scale of private equity engagement in the health care sector. The book is also eminently accessible. Writing in clear, direct prose, Olson makes a convincing bid for further attention from academics, providers, and the entire community of people in the United States who rely on health care to live successful and fulfilling lives.