In the following guest post, Sarah Abrams, Head of PL Claims at Bowhead Specialty Underwriters, takes a look at the D&O insurance underwriting and claims implications of private equity investment in managed care organizations. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
Private Equity (PE) investment in health care grew in 2020 to $95.6 billion in 938 transactions, up from $58.2 billion in 2007, and it ended the first quarter of 2021 with $20.2 billion of investment in 182 deals.[i] Notably, the July announcement that Apollo Global Management’s Lifepoint Health would acquire Kindred Healthcare thereby creating-the largest PE-owned healthcare company in the US, has brought renewed interest and scrutiny.[ii]
D&O insurers of Managed Care Organizations (MCOs) should be considering the impact of this increased PE investment.[iii] The projected increases in health care spending, tremendous stores of uninvested capital already dedicated to private equity funds, and market disruption caused by the COVID-19 pandemic has provided a favorable environment for healthcare PE opportunity.[iv]
Given the continued prevalence of MCOs, including in the implementation of states privatizing Medicaid, the value-based care model that PE firms often employ in healthcare investment may have a positive effect on a MCO insurance risk profile.
MCOs, health care organizations which constitute “health plans,” have an inherent interest in partnerships with health care providers that have procedures in place that will not place the MCOs at risk for False Claims Act actions, whistleblower lawsuits or other administrative fines/penalties.[v] Most PE firms have sophisticated legal counsel that will examine Fraud and Abuse Laws that may create exposure for MCOs. In addition, post- acquisition the PE firm can install seasoned talent to oversee the managed care contract execution of billing for services rendered.
However, recent press has brought to light various arguments adverse to PE involvement in health care. Particularly, that the investment return PE demands has resulted in loss of control by doctors of decision-making and that excessive debt and cost pressures push for an increase in patient volumes to reduce costs and increase unnecessary procedures to expand revenues.[vi] This purported impact on providers may lead increased disputes and litigation where a joint venture has been entered into with the PE healthcare system and MCO.
Notably, the risk of antitrust litigation stemming from joint ventures has only increased in the health care space. Despite a favorable decision in The Medical Center at Elizabeth Place, LLC v. Atrium Health System, et al.,[vii] by US Court of Appeals for the Sixth Circuit affirming summary judgment dismissing federal antitrust conspiracy claims against four defendant hospital systems and the company under which they operate, the sheer cost to defend antitrust has already impacted the MCO insurance market.[viii]
It would be prudent to include in evaluating the D&O risk profile of MCOs a review of PE investment in plan providers. How long has the PE firm been engaged, what steps have been taken to install executives and legal teams with health care regulatory experience as well as the overall impact to employed providers, particularly physicians should be examined. While the debate regarding PE healthcare investment rages on, the market for MCOs remains hard and full of opportunity.
[i] US PE Breakdown, PitchBook (https://files.pitchbook.com/website/files/pdf/PitchBook_Q3_2021_US_PE_Breakdown.pdf)
[iii] While MCO D&O and E&O insurance policies are often purchased together, this piece solely focuses on the D&O risk implications to MCOs when PE invests in healthcare.
[vii] No. 17-3863, 2019 WL 1848532 (6th Cir. Apr. 25, 2019).