Why does the USA spend the largest percentage of its GDP on healthcare than any other country?
Why not? Say the private equity LBO specialists!
Over the course of the preceding nine months, the media has speculated and propagandized on their various reasons for the rising costs of American healthcare.
While several things are for certain: the existence of the price-fixing cartel of the pharmaceutical industry and the greed-driven rise in health insurance costs which has occurred in lieu of expectant legislation, many are left to still wonder about this muddled situation.
When the author, Josh Kosman, wrote The Buyout of America, he included an excellent chapter on leveraged buyouts of a small number of hospitals and their overall negative financial outcomes (not that the others could necessarily be typified as positive). (Reviewed previously at this Economic Populist site.)
Mr. Kosman was writing from the viewpoint of private equity and their overall leveraged buyouts, not the full spectrum of the health sector. His chapter on those hospitals, although outstanding, wasn't even the very tip of the iceberg.
From an article on healthcare leveraged buyouts by Tony Chen, dated April 13, 2007:
Is it me or has there been a tidal wave of healthcare-related private equity and investment deals recently?
Here are the highlights of recent healthcare private equity & privatization activities:
- HCA went private for $21B - the biggest LBO in history at the time.
- USPI went private for $1.8B - by far, they are the largest surgery center operator in the country
- Texas Pacific Group, a private equity firm, bought HealthSouth's surgery division for $945M
- Many speculate that we aren't done yet. I'm betting on LifePoint as the next big deal to break - this would be ~$2.5B deal
While Josh Kosman covered hospitals, the wide spread of leveraged buyouts across the health sector includes pharmaceutical companies, healthcare firms, medical services, medical equipment, diagnostic services and equipment, medical personnel agencies, biotechnology firms and many more hospitals.
These leveraged buyouts, although not always, routinely follow a similar pattern: the private equity firms first do a leveraged buyout, then proceed to leverage that into several more health sector purchases, borrow against the company's assets to pay themselves handsome management fees and dividends or interest to their investors, then, in the classic "pump-and-dump" sense, exit the firm (dump them, i.e., sell them off).
Overall, this leaves those companies with considerably greater debt, at no constructive value to those firms by these private equity (PE) leveraged buyouts (LBO). Also, routinely jobs and companies are destroyed in this self-serving process, and frequently many jobs have been offshored while still in the ownership of the private equity firms (using labor arbitrage to make the balance sheet appear more acceptable to future buyers).
Several graphs below, from the Buyout News web site, may prove interesting.
A brief survey of a small slice of the private equity firms can be made from the list at the end of this blog post.
Many, if not the vast majority of these LBOs, were made utilizing a special purpose acquisition vehicle or company (SPAV, SPAC); an offshore finance center paper construction used for tax avoidance purposes.
While the FASB recently changed its ruling on the QSPE, it will be interesting to see what future effect, if any, occurs in this manner. Most likely, it is already too late for the prevailing effect upon the health sector costs and the future of the American economy.
Together with the destructive costs of all those leveraged buyout "pump-and-dumps" across the spectrum of the healthcare sector, one must also consider the effects of speculation by those healthcare hedge funds along with the other costs and how much they add to the equation.
Given the private and offshore nature of those hedge funds, that is another aspect which is extraordinarily difficult to ascertain.
The end result: as one would expect from any financial engineering event, more money for the debt-financed billionaires, and higher healthcare costs and unemployment for the rest of us.
I will posit that the private equity leveraged buyouts, along with any and all speculation by those hedge funds, are the primary cost drivers in the unnecessarily rising costs of healthcare in America.
And I will openly challenge anyone to empirically prove differently.
For an excellent overview of healthcare costs in the USA in comparison to other countries, I would recommend the world-class graphs created by a gifted visual artist in the Puget Sound region (Washington state, USA), Francis Luu.
One appears below.
Short List of Private Equity firms involved in healthcare LBOs:
Avista Capital Holdings LP
Baird Private Equity
EGL Holding Co. (Thoma Cressey Equity Partners et al.)
Goldman Sachs Capital Partners
JPMorgan Partners LLC
Madison Dearborn Partners
Peninsula Capital Partners
RoundTable Healthcare Partners
Thoma Bravo LLC
Water Street Healthcare Partners