Illustration of a dollar bill in shadows

Photograph: $1, 2002
© Abelardo Morell, Courtesy the artist and Edwynn Houk Gallery, New York
“Detail of photograph”

Laura Katz Olson Investigates Impact of Private Equity Investment in Health Care

In new book, Olson provides insight into private equity’s “playbook.”

Story by

Stephen Gross

From drinking a Dr. Pepper to Skyping with a friend or co-worker, from buying office supplies at Staples or popping Duracell batteries in the remote, private equity firms play a role in people’s daily lives, says Laura Katz Olson.

Private equity firms—investment firms which use other people’s money to buy other companies—are entrenched in nearly every industry, says Olson, Distinguished Professor of Political Science. However, not much is written about private equity and its impact on the United States’ health care system. Olson, who has studied health care and elder care throughout her career, investigates private equity’s impact in her newest book, “Ethically Challenged: Private Equity Storms US Health Care,” which has won two gold medals: one from the 2022 North American Book Awards and another from the 2023 Axiom Best Business Book Awards.

Olson first details a brief history of private equity firms, explaining the “destruction” caused in the 1980s when private equity bought big conglomerates and separated them because the parts were worth more than the whole. As a result, some went bankrupt.

Private equity’s “playbook,” Olson says, has a single goal: to make outsized profits. Using rarely more than 2% of their own money, private equity firms typically invest with money from public pension funds, wealthy individuals and university endowments, she explains. The rest is funded mostly by junk bonds, low-rated bonds issued by banks and lately private equity firms themselves, that feature a high rate of return, but also a higher rate of default than other bonds. Without the outsized profits, investors would rather have their money in the stock market, which they see as less risky.

The cover of Laura Katz Olson's book

Laura Katz Olson's newest book, “Ethically Challenged: Private Equity Storms US Health Care.”

“I don't think that you can understand the dangers of private equity without understanding how the playbook works,” Olson says.

Private equity owns a range of services in the health care industry, including autism agencies, alcohol and drug treatment centers, hospice care, home care and dental and physician practices.

Most health care businesses purchased by private equity through leveraged buyouts are already profitable, Olson explains. Private equity uses the capital from the profitable health care companies it acquires to purchase additional companies with more borrowed money as add-ons. One of their “tricks,” she says, is that the private equity firm doesn’t pay back the debt but rather the target establishment itself. Value is added by obtaining more companies and consolidating them to gain control over a market. In this practice, the private equity firm assumes almost no risk, while, at the same time, it “squeezes operations” to pay back debt, she says.

The frontline staff of health care services accounts for a majority of operating costs in health care, Olson says, so when private equity owners try to save money by cutting or not training the staff adequately, quality of care suffers. Communities also suffer when companies they depend on, such as those that provide home care or autism services, raise their prices, provide low-quality services or even go bankrupt, Olson explains. And with trillions of dollars in “dry powder”—available funds that haven’t been committed yet—private equity is going to take over more and more of our economy, she says.

Olson argues that private equity doesn’t care about the particular industry it invests in. Rather, those dealing in it simply “go where the money is.” The firms only care about supersized earnings for themselves and their investors, she says. Compounding the problem is the “revolving door” through which private equity managers leave private equity to run for office or hold high-level federal positions, including with the Securities and Exchange Commission or the Federal Trade Commission, and later return to private equity.

“That's a key to why very little has been done to stop them, in my opinion,” Olson says. “Some of them become billionaires from simply extracting value from businesses, including our health care system. And it is going to spread in the near future.”

Laura Katz Olson’s research interests include aging, health care and women’s studies. She has been a Scholar at the Social Security Administration, a Gerontological Fellow, and a Fulbright Scholar. Olson received her Ph.D. from the University of Colorado.

Story by

Stephen Gross

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