May 16, 2024
May 15, 2024
Jonathan Kanter
Assistant Attorney General
Antitrust Division
U.S. Department of Justice
Lina M. Khan
Chair
Federal Trade Commission
Xavier Becerra
Secretary
U.S. Department of Health and Human Services
To: Assistant Attorney General Kanter, Chair Khan, and Secretary Becerra
I am Eileen Appelbaum, Co-Director of the Center for Economic and Policy Research (CEPR) and co-author of Private Equity at Work: When Wall Street Manages Main Street as well as several research reports on private equity in health care. I am submitting comments today on behalf of myself and my colleagues and coauthors who work on this topic – Cornell University Professor Rosemary Batt and CEPR colleagues Emma Curchin and Brandon Novick. We are pleased to have this opportunity to respond to your Request for Information on Consolidation in Health Care Markets.
CEPR has joined with a broad coalition of interests, led by Americans for Financial Reform, concerned about the harmful impacts of transactions that affect consolidation in health care. We will have submitted a joint letter to the Department of Justice, the Federal Trade Commission, and the Department of Health and Human Services to provide analyses and policy recommendations for addressing the harms of consolidation in health care. The letter details private equity’s (PE’s) role in the consolidation of health care and its troubling impacts on workers, patients, and communities. Private Equity’s laser-like focus on earning outsized returns over just a few years in health care prioritizes profits over the health needs of the public and the quality of patient care. PE’s profit-making strategies1 – roll-ups, high levels of debt, sale-leasebacks, dividend recapitalizations, and monitoring fees collected directly by the PE firm – divert funds that should be used for patient care to line the pockets of PE firm partners and investors. These financial strategies are especially insidious in health care where higher prices may limit access to care and where increased suffering and even death may occur when care quality deteriorates. The coalition’s letter details the many health care segments where private equity acquisitions have driven consolidation and the negative consequences this may have for patients, clinicians, workers, taxpayers and communities. CEPR has contributed to much of this research with analyses of PE’s role in the consolidation of hospitals, physician practices, clinics, and medical debt collectors;2 hospice,3 home health,4 and autism.5 We have discussed the harms to hospitals and their ability to serve their communities resulting from private equity picking off profitable hospital departments – orthopedics, oncology, diagnostics – as though they were logo pieces and turning them into PE-owned outpatient centers. This deprives hospitals of the profits they need to subsidize low margin but necessary services and threatens their survival.6 Antitrust regulators should consider the effect of PE’s acquisition of hospitals’ ‘crown jewels’ on their survival, especially rural hospitals, when evaluating the effects on healthcare markets.
Private equity’s business model is fundamentally incompatible with the mission of healthcare. But the financialization genie appears to be out of the bottle. As the coalition’s letter details, however, there are many actions the three agencies can take to provide guardrails that prevent price gouging while assuring high quality care. The agencies can step up use of their oversight and enforcement powers to rein in fraud and abuse, increase transparency, promote competition, and improve patients’ access to quality health care. We welcome the steps the three agencies have already taken to counter private equity’s aggressive consolidation of health care that raises prices and leads to substandard care. These include the new HHS reporting requirements on ownership or financial backing by private equity and real estate investment trusts; the new merger guidelines from the FTC that are attentive to the nature of the PE business model; and the stricter prosecution by the DOJ of fraud in billing Medicare for substandard or no services. But, as detailed in the coalition letter, there is much more that can be done.
It is not necessary to repeat this research and policy analysis here. Instead we will focus in our response to the RFI on a different culprit in the consolidation of health care and, answering the question in part 5 of the RFI, on a new area of concern.
Competition and a free flow of information about prices and quality improve access to care and increase the likelihood that decisions will be made in the best interests of patients and communities rather than in the interests of investors’ financial returns. A well-documented effect of consolidation in healthcare markets, on the other hand, is that it leads to higher prices for procedures and to higher premiums for consumers, lower wages for workers, and adverse quality effects.7 DOJ and FTC favor more market competitors and smaller market shares for participants to hold down increases in health care costs and improve access and quality of care. In contrast, HHS is committed to the use of capitated payments – which it describes as ‘value-based’ payments – to reduce health costs and improve access and quality of care in its Medicare program.8 Our view is that consolidation drives up prices in health care and that capitated payments in Medicare services have (1) not saved money for Medicare and (2) provided perverse incentives that have led to private equity firms and health insurance companies driving consolidation in health markets. Capitated payments without meaningful and enforceable quality standards and without sufficient transparency around ownership of related companies and related company transactions make roll-ups and other acquisitions attractive for PE firms and health insurers that sponsor MA plans. This is because they increase revenue and aggregate profits, and may increase profit margins, for PE firms and health insurers in health care segments where capitated payment models are used. The stated goal of the Centers for Medicare and Medicaid Services (CMS) is to have all Medicare beneficiaries in capitated plans by 2030.
Medicare’s funding models and their evolution from fee-for-service to capitated payment systems were intended to curb incentives for volume-based care and shift to paying for outcomes via capitated payments. In capitated payment models, provider organizations assume some risk for patient care management. Providers receive a predetermined flat fee per person served and keep whatever savings they can achieve by managing care more effectively or pay the extra costs themselves if they can’t. However, instead of passing the benefits on to patients, as intended, both private equity firms and large health insurance companies have exploited the capitated payment system to enrich their organizations and their top executives, owners, partners, and shareholders. We present evidence from three health care programs we have studied – hospice, PACE (the Program of All-Inclusive Care for the Elderly), and Medicare Advantage plans. In these payment systems, CMS contracts with provider organizations to manage the health care of seniors. The provider – a nonprofit agency, a for-profit or private-equity owned company, or an insurance firm – receives a flat payment in advance from Medicare for each Medicare beneficiary they enroll, without regard to whether the individual receives care or the quality of the care provided. Profits are higher for provider organizations when they hold down the cost of care.
This contrasts with traditional fee-for-service Medicare which only pays a reimbursement for actual services provided to beneficiaries. The theory is that doctors in traditional fee-for-service Medicare have an incentive to order more tests or otherwise increase utilization of health services in order to increase their earnings. As a result, Medicare beneficiaries over utilize health services driving up health expenditures.9 In contrast, in capitated payment systems, the argument goes, doctors have an incentive to hold down the cost of caring for patients in two ways: first, by not ordering unnecessary tests and treatments or referring patients to expensive specialists or hospitals and second, by early intervention for those with chronic conditions to reduce costs of care later on. Studies have shown, however, that excessive demand for health services is not what is driving increases in health spending.10 It is the rise in the price of these services, driven by consolidation and the resulting lack of competition, not unnecessary care for seniors, that is at fault. Utilization of health care is no higher in the U.S. than in other countries with far lower health expenditures.11 Restricting seniors’ access to care is not the solution.
CMS views capitated payments as ‘value-based’ or ‘risk-based’ because participating organizations have higher earnings when the cost of patient care is below the capitated level and risk lower earnings when their costs exceed that level. CMS argues that this model pays for outcomes, not the volume of services; and in doing so, improves care quality while reducing costly utilization of unnecessary services. CMS’ argument is that capitated payments will induce providers to focus on preventative care and care coordination to improve quality, reduce costs, and realize a higher net operating income.
But this view of capitated payments has come up against the harsh reality that financial actors increasingly drive healthcare decision making. Unlike the theoretical benefits that motivated CMS’ introduction of capitated payments, healthcare providers can simply increase their profits via direct cost cutting – denying necessary care, increasing enrollment without a commensurate increase in staff – as opposed to preventative care. And Congress has not established or funded the necessary regulatory oversight to ensure that capitated payments are used to enhance care quality. Moreover, Wall Street firms, with little or no experience in health care, increasingly own and operate healthcare provider organizations. The mission of financial actors like private equity or health insurance firms is to maximize investor or shareholder profits, not to provide the highest quality patient care. In sum, CMS’s use of capitated payment models has facilitated the move toward profit-driven rather than patient-centered care.12
Medicare began paying hospice providers a flat fee for care of terminally ill patients with a doctor-documented life expectancy of 6 months or less in 1983. It was not long before for-profit firms entered the industry. By 1991, the number of hospices rose to 1,040 due mainly to the growth of for-profit hospices. But these still accounted for just 10 percent of the total. By 2000, 70 percent of hospices were for-profit.13 For-profit hospice agencies have consolidated small agencies into large chains and converted nonprofit providers to for-profit businesses. As a result, caring for the dying was a booming $22.4 billion business in 2022, up from $12.9 billion in 2010.14
CMS makes a capitated payment to the hospice provider for each patient, for every day the patient is enrolled, whether the patient receives care services on that day or not. In fiscal year 2023, the payment for routine home care (days 1-60) was $211.34 and $167.00 (days 61+).15 The design of the payment model – a capitated daily rate whether the patient receives services or not — enables profit-driven providers to gain at taxpayers’ expense. This makes hospice an attractive target for providers who may find it tempting to cheat patients of required care while billing Medicare for payment of the per diem fee.16
The capitated payments provide incentives for profit-driven organizations to enroll individuals who are not within six months of death and do not require care. They also tend to enroll more dementia patients that live longer and are less expensive to care for than cancer patients that need skilled nursing care to manage pain. They tend to provide fewer nurse visits and are less likely to visit the patient in the last days of life. All the while, they bill Medicare for services that may not have been provided. Opportunities to game the payment system are rampant and, in the worst cases, may lead to fraud, abuse, and neglect.17
The U.S. Department of Health and Human Services Office of Inspector General (OIG) investigated hospice agencies for Medicare fraud. The investigation found (1) evidence of billing by agencies for patients who are ineligible for hospice care or for services that were under-provided or not provided at all and (2) that some hospice patients have been seriously harmed by poor care. In addition to enrolling patients that were not terminally ill, agencies altered patient records, provided false documentation, and charged Medicare for services they failed to provide. This fraudulent billing cost Medicare and taxpayers billions of dollars. OIG also found many instances of inadequate patient care.18
Despite on-going consolidation into chains with as many as 500 agencies, the hospice industry is highly fragmented; even the largest providers only had a market share of 5 or 6 percent in 2021. This has made hospice an attractive space for private equity (PE) funds because of the huge opportunities to buy up small agencies and consolidate them. In hospice, as in health care more generally, this often means buying a successful company (the ‘platform’ company) and then building scale and market power by rolling up smaller competitors and bolting them onto the platform.19 Few barriers to entry, lax regulation, little enforcement, and the secure revenue of Medicare payments made hospices an attractive investment to for-profit firms. Since 2010 private equity (PE) firms have emerged as the largest acquirers of hospice agencies, nearly three-quarters (72 percent) of which had previously been nonprofit providers. The number of Medicare beneficiaries cared for by PE-owned agencies more than tripled.20
The evidence indicates that for-profit hospice providers skimp on care while profiting from capitated payments.21 Gaming capitated payments to reduce spending on patient care contributes to profitability. While care is often worse, capitated payments lead to net Medicare operating margins that are three times higher in for-profits than in nonprofits, 19 percent compared to 6 percent or less.22
PACE is a federal community-based home health program that provides a comprehensive set of services to frail, elderly patients above age 55 who qualify for both Medicaid and Medicare. PACE programs are designed to provide a range of integrated preventative, acute, and long-term care services to manage the often complex medical, functional, and social needs of its beneficiaries while keeping them in their communities.23 Until 2016, for-profit firms were barred from participating in the PACE program and could not receive public funds for providing services to this population. CMS pays providers on a capitated basis. Net operating (“profit”) margins in PACE programs could be as high as 15 percent.24 The program was an attractive target for private equity.
Private equity firm Welsh, Carson, Anderson & Stowe (WCAS) saw the potential for profit from the capitated payments CMS paid to PACE program providers. In 2016, WCAS acquired PACE provider organization, InnovAge, then used its political connections inside CMS to change the regulations and open PACE to for-profit providers.25 Private equity-owned InnovAge, now a for-profit provider, became the largest PACE provider in the country. With profit as the central aim, and revenue dependent on the patient census, enrollment rose dramatically, without a commensurate growth in staff to provide patient care. Patients reported delays in response times and inferior care.26 Government inspections at many of the company’s sites found conditions sufficiently egregious that CMS employed a little-used disciplinary action and forced the company to suspend enrollment in six states until conditions improved.27
The capitated payments PACE providers receive make owning a PACE agency attractive, especially to private equity firms. Lump sum payments per patient provide incentives to cut corners in patient care and staffing while collecting $7,500 a month per client or $90,000 per patient per year28 ostensibly to provide outstanding care for patient populations with complex needs. In theory, the value-based payment structure provides incentives for cost-effective preventative care. The loophole in this “value-based” payment system is that there are strong incentives for for-profit providers to enhance revenues by increasing the volume of patients without a commensurate increase in staff or services. The resources of federal and state agencies to monitor and enforce standards are typically inadequate and actual sanction may take years to enforce.
The roots of Medicare Advantage (MA) can be found in the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, which introduced capitated payments into Medicare. Medicare was now allowed to contract with private health plans to be paid a monthly, fixed, risk-adjusted, per-enrollee payment to manage the care of Medicare beneficiaries. The goals of MA were to save public money by reducing Medicare’s costs while increasing beneficiaries’ choices. From its earliest beginnings, however, capitated plans failed to save money and led to higher costs for Medicare.29
Efforts at cost containment in Medicare Advantage in the late 1990s led to a decline in the number of private plans. A Republican-led administration and Congress looked to more generous reimbursements and a larger role for health insurance companies to grow the number of private plans and beneficiaries in MA. Generous payments attracted health insurance MA plans which were required to use part of these payments to lower premiums and/or provide additional benefits such as vision or hearing not available in traditional Medicare. With these enticements, enrollment in MA plans soared. According to the Medicare Payment Advisory Commission (MedPAC), one in four Medicare beneficiaries were enrolled in Medicare Advantage by the end of 2009.30 The higher reimbursements meant that Medicare payments to the average MA plan were higher than what it would cost to care for beneficiaries in traditional Medicare fee-for-service plans by an estimated $10 to $12 billion in 2009. In this context, provisions of the 2010 Affordable Care Act, enacted by a Democratic Administration and Congress, included significant reductions in basic payments to MA plans.31 To offset this for high-performing plans, the ACA also established the use of a quality bonus program. Any plan with at least four stars out of five receives a five percent bonus and a further rebate.32
The capitated payment model CMS uses to pay health insurance-owned MA plans leads. by design to overpayments to MA.33 These payments are benchmarked against the cost of caring for a patient in traditional Medicare in a particular geographic area. MA plans submit bids – estimates of what it will cost to provide coverage for a year for enrollees in average health. The bids submitted by most MA plans are below the benchmark, typically 85 percent of it. CMS counts that difference as savings to the Medicare program. It rebates about two-thirds of these savings to the MA plan which is required to spend it on its enrollees via lower premiums or additional benefits. These rebates have doubled between 2015 and 2022, from $80 per beneficiary per month to $164. In total, CMS paid out $12.7 billion in rebates in 2015 and $47.2 billion in 2022.34 Actual payments to MA plans are higher than the plan’s bid. The actual payments are risk-adjusted so that CMS’s payments are higher for sicker enrollees.
The benchmarking process is rife with problems that inflate the rebates paid to the plans.
Differences in the health status of beneficiaries is a major source of inflated benchmarks and significant overpayments to MA plans. Sicker Medicare beneficiaries or those who anticipate health issues in the future are more likely to enroll in traditional Medicare.35 MA plans typically enroll healthier beneficiaries that are less expensive to care for on average than patients in traditional Medicare. This leads to overpayments to MA plans that grow worse as enrollment in MA plans increases.36 The overpayments to MA plans are draining the Medicare trust fund.37 According to MedPAC, the overpayment to MA plans from favorable selection was 11 percent in 2019. The lower premiums and/or added benefits financed by these overpayments are fueling the growth of MA plans.38
The use of risk adjustment to calculate the capitated payments is necessary to account for the higher cost of caring for sicker beneficiaries. However, it also provides a financial incentive to make enrollees appear sicker than they are and to upcode risk scores and fraudulently overcharge Medicare. Insurer-owned home care risk assessment companies are increasingly used to assign risk codes, a clear conflict of interests. The Office of the Inspector General (OIG) at HHS has found that, in this context, risk assessments are vulnerable to abuse by MA plans.39 Audits by the OIG turned up cases where MA plans provided codes for risk adjustment without providing any care for chronic or serious health conditions in the risk assessment. The OIG believes it has evidence of overbilling by UnitedHealth Group, Humana, and CVS/Aetna – and, indeed, at all the top 10 insurers with Medicare Advantage plans except Centene. Humana settled with Medicare in 2018 and Cigna settled in 2023.40
MedPAC’s most recent estimate is that upcoding leads to payments to MA plans that are 106 percent of the cost in traditional Medicare. This translates into a projected overpayment of $27 billion in 2023 from overstating health risks.41 Overpayments from favorable selection of healthier beneficiaries by MA plans (11 percent) and from upcoding (6 percent) are additive and resulted in overpayments of 17 percent in 2023.
Quality bonus payments (QBPs) are another source of revenue for MA plans. The ACA created the quality bonus program (QBP), with bonuses determined by a star-rating system, to encourage MA plans to compete on the basis of quality. There is a concern that there is “star inflation” and that the stars do a poor job of measuring quality of patient care. MA bonus payments quadrupled from 2015 to 2023; in 2023, CMS paid out $12.8 billion in bonus payments to MA plans, with UnitedHealth Group and Humana getting nearly half of the total.42
Abaluck et al.43 find no correlation between quality star ratings and plan mortality effects. They find that transferring beneficiaries out of the bottom 5 percent of plans could save the lives of tens of thousands of Medicare beneficiaries each year.
Despite the fact that MA plans’ bids for annual payment are below the fee-for-service benchmark, CMS’s payments to MA plans on a per-person basis have generally been higher than in traditional Medicare and range from 95 to 115 percent of local fee-for-service payments.44
In a welcome development, CMS is now cracking down on some of the fraudulent means by which MA plans have overcharged Medicare. These efforts will save Medicare $5.5 billion in 2024. But problems in the basic design of the capitated payment model will remain and will grow more serious as the number of MA enrollees continues to increase.
We understand that the use of capitated payment models is mandated in the Affordable Care Act and that it will take action by Congress to alter this. That means that government agencies concerned about consolidation and anti-competitive market conditions driven by powerful financial interests must use their oversight powers to increase transparency about ownership of health care agencies and facilities and carry out more extensive oversight of the quality of care provided by for-profit healthcare organizations. Using existing statutory power, the Department of Health and Human Services (HHS), Federal Trade Commission (FTC), and the Department of Justice (DOJ) should adopt several reforms to increase transparency of ownership, including ownership of related party businesses.
HHS is to be commended for its recent decision to collect ownership data for organizations that provide services to Medicare beneficiaries. While the Centers for Medicare and Medicaid Services (CMS) has recently moved to collect ownership data, it needs to make such information public and use its power to expedite data collection, especially for entities with evidence of poor behavior.45 On November 17th, 2023, CMS published a final rule which required all Medicare-enrolled providers to disclose whether a private equity company (PEC) or real estate investment trust (REIT) has a 5% or greater direct or indirect ownership interest as part of the Form CMS–855A.46 Providers and suppliers have to fill out the relevant form when they initially enroll in Medicare and every five years thereafter. Therefore, it will take up to five years for CMS to catalog all providers owned by PECs and REITs. Yet, CMS has and should use its capability to force providers to fill out the form before they are otherwise required to through off-cycle revalidations. Additionally, data collection is of very limited aid to consumers and researchers unless made transparent. Thus, CMS should commit to making this ownership data publicly and easily accessible through its online database.
Moreover, CMS should use its existing authority to mandate that state Medicaid agencies collect more detailed ownership information from all Medicaid-enrolled providers.47 As described in 42 CFR 455.104 under the statutory basis of 42 U.S.C. 1302, CMS currently requires states to collect the names and addresses of individuals and organizations with a 5% or greater direct or indirect ownership interests in Medicaid providers and fiscal agents.48 However, this requirement neither tracks whether owning interests are PECs or REITs nor does it mandate that state agencies make the information publicly available. Following the November final rule, CMS can promulgate additional regulations for Medicaid providers, requiring reporting of PEC and REIT ownership; and, the agency should require transparent disclosure of collected information in an publicly accessible and user-friendly database.
HHS, FTC, and DOJ should also focus their oversight and transparency initiatives not just on private equity funds, but all for-profit actors which have a history of anticompetitive consolidation and malpractice across the healthcare industry. Further, HHS should increase the number of inspections of healthcare entities it conducts and – along with FTC and DOJ – utilize the stricter punishments for illegal behavior granted by statute in order to sufficiently deter bad behavior. HHS – through CMS – should further improve the integrity of the Medicare Advantage program by following MedPAC’s recommendation to replace the current quality bonus program with one that incentivizes better value and higher quality coverage. Lastly, while capitated payment models are required by the Affordable Care Act, HHS and CMS should direct the CMS Innovation Center to develop pilot projects to explore payment model alternatives to capitated payments.
Transparency measures must not only target private equity, as the anticompetitive effects of transactions, mergers, and acquisitions along with poor behavior have and continue to exist predominantly with for-profit healthcare entities overall. For example, vertical integration between insurance giants and pharmacy benefit managers (PBMs) – such as UnitedHealthcare and Optum Rx along with CVS’ Aetna and CVS Caremark – helps to raise pharmaceutical prices and destroy independent pharmacies. For-profit hospice agencies are more likely to game the per diem CMS payment system compared to nonprofits by decreasing quality of care for dying patients while recruiting those who require the least amount of care. Increasingly consolidated pharmaceutical companies own and withhold the underlying data from their clinical trials, preventing doctors and patients from fully understanding the safety, efficacy, and limitations of FDA-approved medical products. Ultimately, for-profit actors have an inherent purpose to maximize profits by selling their products and services at the highest prices, and the healthcare market is significantly and uniquely complex and opaque to consumers. This dynamic produces a power imbalance requiring government action in the public interest to maximally provide transparency and crack down on bad behavior.
Wherever possible, HHS must conduct more inspections and oversight of healthcare entities and – along with the FTC and DOJ – fully utilize its enforcement authorities to crack down on behavior that harms patients and/or is anticompetitive. Federal statutes and regulations are only as powerful as they are enforced, and agencies have not utilized sufficient enforcement mechanisms to uphold the law. For example, the hospice industry has been rife with fraud over the last decade, as CMS failed to sufficiently inspect many hospices, as they are surveyed only once every 3 years.49 In addition to outright fraudulent ghost hospices by fly-by-night small for-profit operators, for-profit hospices have operating margins three times those of nonprofits due to decreasing quality of care and targeting low acuity patients.50 While CMS has the authority to fine, suspend payments, appoint temporary management, delicense hospice providers, the body has taken only very limited action, such as cutting payments by 4% for failing to report quality data.51 Overall, CMS and other agencies within HHS need to conduct more inspections and oversight in order to identify illegal and improper behavior by healthcare providers. When evidence of such misbehavior is known, they must use stricter enforcement mechanisms for deterrence.
The DOJ’s usage of Corporate Integrity Agreements (CIAs) is a premier example of such a policy. In 2012 and 2013, the DOJ made GlaxoSmithKline (GSK) and Johnson & Johnson (J&J) pay $3 billion and $2.2 billion, respectively, for proven and alleged illegal behavior, such as illegal marketing of pharmaceuticals along with failure to report safety data.52 On top of fines, the companies signed CIAs with the DOJ mandating that they undertake various policies in accordance with the law and good clinical practices.53 Shortly after both cases, GSK and J&J voluntarily initiated programs to share underlying clinical trial data with researchers in a fashion more transparent than legally required and surpassing that of other pharmaceutical companies.54 Ultimately, DOJ enforcement policy was essential in reining in illegal and poor behavior.
Furthermore, while we applaud recent CMS’ actions to curb fraudulent behavior in Medicare Advantage – such as upcoding and gaming the star system – the agency should additionally follow MedPAC’s recommendation to replace the current quality bonus program with a “value incentive program.”55 In its March 2024 report to Congress, the Commission highlights how the QBP “does not effectively promote high-quality care,” does not help beneficiaries differentiate between MA plans, and incorporates measurements that are not salient to patient outcomes and experiences among other flaws. This program costs taxpayers an additional $15 billion in annual program spending. By adopting MedPAC’s recommendation, CMS would replace the QBP with a system that uses “a small set of population-based measures, evaluates quality at the local market level, uses a peer-grouping mechanism to account for differences in enrollees’ social risk factors, establishes a system for distributing rewards with no ‘cliff’ effects, and distributes plan-financed rewards and penalties at a local market level.” Such a program would more likely push MA to actually reward quality coverage.
While replacing the QBP will help to improve Medicare Advantage, HHS and CMS should also direct the CMS Innovation Center to focus on pilot programs that use alternative payment models that are not capitated payments. As previously outlined, capitated payments in effect are not “value based.” Within the current system of large, for-profit entities, capitated payments lead to consolidation and provide incentives to insurers and providers to prioritize cutting costs over providing the best possible care. Additionally, capitation to reduce utilization is not an efficient cost-cutting approach, as the United States does not use healthcare services more than the other countries who spend far less, and the same is true for Medicare compared to similar foreign populations.56 Rather, U.S. healthcare prices in the United States are simply higher than other countries.57 This reality is a result of factors like market consolidation, patents, administrative waste, and more.
The FTC, DOJ, and HHS should be aware and apply scrutiny to increasing private equity transactions involving clinical trial sites. Industry-sponsored clinical trials are more likely to have pro-industry results and conclusions for their medical products compared to research outside of industry. This reality, to a significant extent, stems from trial design biases that industry can utilize largely through for-profit contract research organizations (CROs). Additionally, outside of the basic FDA approval process, medical professionals, researchers, medical journal editors and peer reviewers, as well as the general public lack access to the underlying clinical trial data that is necessary to truly understand the safety, efficacy, and limitations of FDA-approved medical products both absolutely and in relation to existing treatments.
While industry sponsors clinical trials and CROs manage them, clinical trial sites and investigators actually conduct the research. Clinical trial sites have a financial incentive to attract large industry sponsors and their corresponding CROs to increase trial volume in order to maximize revenue and profit. Private equity involvement in clinical trial sites can further jeopardize the integrity and validity of clinical research, as investigators are further incentivized to prioritize speed and producing positive results to earn more industry contracts rather than being motivated by a commitment to public health. Additionally, as we have seen in numerous areas throughout the healthcare sector where PE firms have consolidated companies, they have pursued quick profits through increasing volume and cutting labor costs. Due to the opacity of clinical trial data, it would also be difficult for any actor to verify clinical trial integrity outside of legal proceedings and/or whistleblower complaints.
In recent years, private equity firms have begun buying up clinical trial sites with the explicit purpose to consolidate a market that has historically been fragmented.58 A managing partner at Maris Capital – a PE firm that created Alcanza Clinical Research at the end of 2021 – publicly stated, “We find the space exciting, because it’s large and growing, there is demand for good quality and highly-integrated providers. And consolidation will help with recruitment, efficiency, consistency and quality of data.”59 Similarly, a partner at the healthcare focused PE firm Grant Avenue – which created Helios Clinical Research in November 2022 – admitted “we’re in the early innings of consolidation in the clinical trial site space.”60 In 2023, the Private Equity Stakeholder Project (PESP) found 38 PE deals involving clinical research, including clinical trial sites.61
Additionally, PESP has tracked private equity transactions and consolidation involving CROs. Industry sponsors dramatically shifted from relying predominantly on independent, academic investigators and academic medical centers (AMCs) – 80% of industry funding went to AMCs in 1991 – to instead largely hiring for-profit CROs by the mid-2000s – only 24% of funding went to AMCs by 2004.62 Companies shifted towards CROs due to their greater efficiency, principally in bypassing academic red tape and increasing the speed of clinical trials, allowing for millions of dollars in higher earnings.63 Critically, contracts between industry sponsors and CROs largely grant industry control over study design. Editors of major medical journals have called out the debilitating effect that industry control has on the clinical research process; for example, in a 2001 letter, editors wrote:
[C]orporate sponsors have been able to dictate the terms of participation in the trial, terms that are not always in the best interests of academic investigators, the study participants or the advancement of science generally. Investigators may have little or no input into trial design, no access to the raw data, and limited participation in data interpretation. These terms are draconian for self-respecting scientists, but many have accepted them because they know that if they do not, the sponsor will find someone else who will.64
Private equity transactions involving buying and consolidating CROs can exacerbate the existing conflict between the profit motive driving industry control of clinical research and the interests of public health. The PE business model generally prioritizes earning profits quickly in order to sell a company roughly 3-7 years after acquisition. Phase III clinical trials – which precede and are very important for obtaining FDA approval – alone can take up to 4 years to complete, and this does not include the time it takes for doctors to begin prescribing and utilizing medical products post-approval.65 Therefore, PE firms can manage their CROs to maximize the number of lucrative contracts with industry sponsors while they maintain little connection to the actual results of the trials, as trial outcomes often wouldn’t reach physicians until after the PE firm exits. This dynamic further incentivizes PE firms to chase the interests of corporate sponsors and, thus, put their own profits ahead of public health and scientific advancement.
HHS can address the existing issues with industry influence over clinical research and the potential for private equity exacerbation of the problem of industry influence over trial results through increasing transparency. More specifically, the FDA has the statutory authority to release the underlying clinical trial data both retroactively and prospectively upon FDA approval.66 The agency can also release data from post-marketing Phase IV trials that further examine safety and efficacy. Redacting identifying trial participant information, the FDA can release de-identified individual participant data, full clinical study reports (CSRs), and the trial metadata which includes key information like the study protocol, design, and statistical analysis plan (SAP). The release of this information will allow researchers, medical professionals, and the public to assess the true safety, efficacy, and limitations of a particular product. Importantly, it will also allow experts to identify potential areas of study manipulation and design bias.
The FDA has authority for retroactive and prospective release of data from the Federal Housekeeping Statute which grants HHS, including its agencies like the FDA, custody and use powers over all its “records, papers, and property.”67 The Supreme Court upheld this reality in Chrysler Corp. vs. Brown (1979) unless the disclosure violates substantive laws such as the Trade Secrets Act (TSA) that explicitly bar certain types of disclosures.68 However, release of clinical trial data is not precluded by the TSA, as the law only prevents federal employees, officers, departments, and agencies from disclosing certain information when not authorized by law, and the FDA is authorized by law to disclose the safety and efficacy data it collects from clinical trials. The Food and Drug Administration Amendments Act of 2007 granted the FDA the mandate to “improve the transparency” of drug information and “allow patients and health care providers better access to [such] information” by creating a website that “improves communication of drug safety information to patients and providers.”69
Moreover, disclosure of the underlying data from clinical trials does not qualify as trade secrets under the TSA, and federal courts have upheld this interpretation.70 For example, the U.S. District Court for the District of Columbia ruled in Public Citizen Health v. Dept. of Health (1979) that claiming data constitutes trade secrets or confidential information is frivolous” when the data does not regard “fees, payment schedules, or other commercial arrangements” along with “information about secret formulas or rare treatment methods.”71 As legal scholars Christopher Morten and Amy Kapczynski explain, “by its nature, safety and efficacy data has little or no direct value to brand-name competitors developing alternative compounds and thus will confer minimal or no competitive advantage.”72
