In the late twenty-tens, local news outlets around the country began reporting on cases of surprise medical billing: patients who had been treated in hospitals that accepted their health insurance later received much larger bills than they were expecting. In one extreme instance, a forty-four-year-old schoolteacher in Austin, Texas, was admitted to a hospital after a heart attack, assured his insurance was accepted, and then received a hospital bill for $108,951. When patients complained, they were told that one or more of the doctors who had treated them at the hospital—an anesthesiologist, say, or a radiologist—was not actually in their insurance company’s network. In emergency situations, in which a patient was rushed to the E.R. by ambulance, there was no opportunity to disclose this or get consent. But some patients said that, even in cases of elective surgery, they weren’t given an opportunity to find a doctor who was covered by their health plan. The frequency and severity of the practice seemed to be increasing.
Outrage over surprise billing transcended partisan lines. A poll conducted by the Kaiser Family Foundation indicated that more than seventy-five per cent of the public wanted the government to do something to prevent it. Congress members starting hearing complaints from their constituents. In early May, 2019, even President Trump expressed a desire to address the practice, saying during a speech, “We are determined to end surprise medical billing.” That July, Democrats and Republicans in the House Energy and Commerce Committee introduced a bill, called the No Surprises Act, that would require medical providers to give patients twenty-four hours’ notice if they were going to be treated by a medical provider who was outside their insurance network, and would create a benchmark to restrict how far above the median price out-of-network providers could charge. In June, senators had introduced a similar bill, called the Lower Health Care Costs Act, which included an arbitration provision that would help manage disputes over how much out-of-network providers would be permitted to charge. One of the bill’s sponsors, Lamar Alexander, Republican of Tennessee, had been contacted by a father in Knoxville who had taken his son to an emergency room after a bicycle accident; the father paid a hundred-and-fifty-dollar co-pay but later received a bill for eighteen hundred dollars from the doctor, who was out of network.
The legislation seemed sure to pass. But, soon after the Senate version was introduced, a barrage of television ads criticizing the bills appeared across the country. The ads were slickly produced and ominous-sounding; they described the bills as “government rate-setting” that was likely to shutter hospitals and endanger lives. In one, a pair of emergency responders rush a bloody sixteen-year-old strapped to a gurney through the doors of a hospital, only to find that it has closed. Some highlighted the profits that insurance companies made in 2018—in the billions of dollars—and suggested that these companies were responsible for the surprise bills, and that they should be the ones to face increased regulation. At the same time, mailers were sent to people’s homes, and hundreds of thousands of dollars’ worth of ads appeared on Facebook. The ads all urged people to tell their representatives in Congress to vote against the bills. The campaign was paid for by an organization called Doctor Patient Unity, which was classified as a dark-money group and did not disclose its staff or where it got its money.
Eileen Appelbaum, an economist, had been following the saga, and thought she knew who might be behind the ads. Appelbaum has hazel eyes and speaks with passion about the intricacies of financial engineering. She taught for many years at Rutgers University and is now the co-director of the Center for Economic and Policy Research, a Washington, D.C., economic-policy think tank. Much of her research has focussed on the ways that private-equity firms—investment funds that purchase companies and try to increase their profitability—reshape the businesses that they buy. Appelbaum and her frequent collaborator, Rosemary Batt, a management and labor-relations expert at Cornell University, were in the midst of a research project looking at the role of private equity in health care. They knew that two of the largest private-equity firms, Blackstone and K.K.R., owned Envision Healthcare and TeamHealth, large physician groups that staff hospitals around the country with doctors; they found that bills from doctors within those groups were responsible for much of the sudden increase in surprise medical bills. (A spokesperson from TeamHealth said that the company does not send out-of-network charges directly to patients, but litigates them with insurance companies. A spokesperson from Envision Healthcare declined to comment.) “We already knew a lot about P.E. buying up doctors’ practices,” Appelbaum told me recently. “Now surprise medical bills were out of sight. That’s their business model.” Appelbaum suspected that the P.E. companies were behind the practice, as well as behind the ad campaign to stop the legislation.
Appelbaum grew up in Philadelphia, where her father ran an appliance store. Neither of her parents had gone to college; Appelbaum earned a master’s in mathematics and a Ph.D. in economics from the University of Pennsylvania. Her research centered on the relationship between workers and a company’s management. When Appelbaum started out, the prevailing view was that companies could make themselves more productive by investing in their workers. In the nineteen-nineties, she and Batt undertook a study and found that, for example, giving workers more decision-making authority over how work got done led to increased company profits.
The book that they produced from this research, “The New American Workplace,” was published in 1993. But in the years after, the thinking in the business world shifted. A newly dominant business philosophy, called “shareholder value theory,” held that companies exist primarily to deliver profits to their shareholders, and that managers should increase revenue and cut costs, with little regard for the long-term effects. Appelbaum and Batt saw this playing out in the real world. In many cases, companies were sending work to other countries where labor costs were lower. In others, they were practicing “domestic outsourcing”: subcontracting out parts of their businesses to other U.S.-based companies, to run their accounting departments, corporate cafeterias, or janitorial services, among others, rather than employing those workers directly. “They moved away from the idea of, How do we make our current workforce more productive? and to, How do we move workers off our payroll and onto a contract company? And then they can do whatever they want with the workers,” Appelbaum said. “And, if you’re a contract company, how do you get the contract? By being the lowest bidder. You’re at rock bottom, offering just barely enough to attract any workers at all.”
Appelbaum and Batt found that the pressure for these practices seemed to be coming from Wall Street analysts and shareholders. “People had a very old view of what the corporation was, as a kind of stand-alone, publicly traded entity, free to make decisions on its own,” Batt told me. “We understood globalization, deregulation, and labor markets, but we didn’t understand capital markets. There was this big hole in the academic research.” The 2008 financial crisis made the issue seem even more pressing, and they decided to focus their research on private-equity funds. “You needed to look at the most extreme example if you wanted to understand the idea,” she said. They endeavored to write a book about private equity aimed at people who dealt with labor issues, including union leaders, who often didn’t realize that, when they were negotiating with corporations over contracts and working conditions, the managers of private-equity firms were actually pulling the strings.
Private-equity funds typically try to sell the companies they take over in three to five years, either to the public, through an initial public offering, or to another company. Their task, then, is to make their portfolio companies more attractive to other buyers in a relatively short time; ideally, this is accomplished by making improvements to the business, such as by bringing in talented managers and making the company more innovative and efficient. But, in 2009, there was relatively little known about how the process actually worked. “It was very hard for us to get access to private-equity firms,” Batt told me. “We didn’t have too many interviews. We did a lot of reading.” They interviewed who they could, and studied documents and legal filings. The more they dug in, the less straightforward the industry appeared to be; sometimes, private-equity funds seemed to make money even when a company they had taken overstruggled or went bankrupt.
Appelbaum and Batt found that private-equity firms often engaged in financial maneuvers that brought them profits but weakened their target companies. Firms usually borrowed heavily to finance takeovers; the new debt was put on the books of whatever company was being purchased, and that company was responsible for making the interest payments. The firms sometimes used a strategy called “dividend recapitalization,” in which the target company borrows even more money and uses it to pay “dividends” to the private-equity owners. The target company was also often made to pay fees to its private-equity owners for consulting and other services. These strategies meant that the investors made returns right away, but they increased the debt load on companies that were often already heavily in debt. In 2005, for example, Toys R Us was taken over by K.K.R., Bain Capital, and Vornado Realty Trust, which put five billion dollars of debt on the company’s books to finance the takeover. In 2017, the company posted eleven billion dollars in sales, but much of that had to go toward interest payments on loans. In September of that year, Toys R Us filed for bankruptcy, went into liquidation, closed hundreds of stores, and laid off thirty-three thousand workers.
Appelbaum and Batt tried to acknowledge when they felt that private equity played a positive role—for example, when P.E. firms took over small companies that didn’t have access to more traditional business loans and helped them grow. Over all, though, they concluded that the firms encouraged short-term thinking that damaged industries. They found that the method that the firms used to report their returns also made them sound better than they actually were. The firms then used the inflated projections to pitch themselves to pension funds, which invest money for workers. Teachers, police officers, and firefighters all ended up providing capital to funds that were implementing layoffs or sending jobs overseas.
During the final push to complete the book, Batt was diagnosed with lymphoma, a form of cancer, and didn’t know whether she would survive. She spent five months in the hospital, on a feeding tube, and then spent several more months recovering at home, working on the book. “It kind of kept me alive, thinking, Oh, my God, we’ve got to get this book done,” Batt told me. The final study, “Private Equity at Work: When Wall Street Manages Main Street,” was published in May, 2014. Gerald Epstein, an economist at the University of Massachusetts, Amherst, wrote that, in it, Appelbaum and Batt “pull back the curtain on the shadowy world of private equity and its role in the management and mismanagement of our economy.”
In 2018, Appelbaum and Batt started working on a report for the Institute for New Economic Thinking, a think tank, about private-equity firms buying companies in the health-care industry. “It’s been an ongoing interest of ours because we felt that it was the worst sector private equity could be involved in,” Batt said. The stakes were higher than in toy retailing: health care was a complex and heavily regulated industry, and drastic cost reductions had the potential to affect people’s safety.
When they looked into it, they found that the patchwork structure of the health-care industry had created an opportunity for P.E. firms. Physician-staffing companies could choose to opt out of contracts with insurance companies, even if the hospitals where their doctors worked did have contracts with those companies. This left the staffing companies free to send much higher bills to patients treated there; the patients were captive customers, with no opportunity to shop around for doctors with more reasonable fees. (The same thing was happening with air-ambulance transportation companies, which had been bought up by P.E. firms.) “We think of it as a market failure,” a spokesperson for Senator Alexander told me. “This is something that happens when patients don’t have much choice between providers, whether in an emergency procedure or an elective procedure.”
In 2019, as debate about surprise billing started to filter into the news, and the bills were being formulated in Congress, Appelbaum wrote a short piece, for The Hill, called “Private Equity Is a Driving Force Behind Devious Surprise Billing.” In it, she was one of a handful of people to publicly make the connection between EmCare (a division of Envision Healthcare) and TeamHealth and their Wall Street owners. Soon afterward, the Laura and John Arnold Foundation gave Appelbaum and Batt a grant so that they could further publicize their research on the subject. In September, they published a longer article in American Prospect, which showed more definitively that the firms were behind the surprise billing practices and speculated that they were also leading the attempt to derail the legislation. A few days later, the Times published an investigation into the dark-money lobbying campaign, confirming that Envision Healthcare and TeamHealth were funding “Doctor Patient Unity.” “They had spent nearly thirty million dollars on ads,” Appelbaum said. “We fought them almost to a draw with our seventy-five thousand.”
Last December, the Senate and House committees combined their bills into one version that everyone could agree on; they intended to try to pass it that month. Then, about a week before the vote on the end-of-year spending bill, to which lawmakers hoped to add the combined bill, members of the House Ways and Means Committee suddenly introduced their own version of a bill, which effectively halted the process and forced everyone to go back to the beginning to try to reconcile the bills. Appelbaum and Batt questioned the motives of the new legislation, given that it came so late in the process; they noted that the congressman Richard Neal, a Democrat from Massachusetts and the chair of the House Ways and Means Committee, reported twenty-nine thousand dollars in donations from Blackstone during the three months before his committee introduced the new bill. “Its purpose was to put a monkey wrench in the works, which it did,” Appelbaum told me. (A spokesperson from Neal’s office said that the Congressman had been working for a year to find the best way to address surprise medical billing, and that “his campaign donations do not affect his policymaking on any issues.”) The spokesperson for Senator Alexander said, “The dark-money groups and the lobbying blitz on this issue, to us, proves how lucrative the exploitation of this problem can be.” (Greg Blair, a representative of Doctor Patient Unity, argued that the legislation would create a “financial windfall for the insurance industry” at the expense of doctors and hospitals.) Right now, the legislation is frozen as Congress focusses on addressing the economic crisis brought on by the coronavirus pandemic.
When I contacted Appelbaum recently, she said that the pandemic had made the issue of surprise billing even more important. Congress recently passed a bill called the Families First Coronavirus Response Act, which provides free testing for COVID-19 but not free treatment. Symptoms of the disease can come on quickly, sending patients to the E.R. without much warning. These, Appelbaum warned, are precisely the conditions under which surprise medical billing happens most frequently. And, with so many people flooding hospitals, it seemed only a matter of time before billing horror stories began to appear. (In March, Envision Healthcare, one of the physician groups, pledged that it would not send surprise bills pertaining to screening and treatment for COVID-19, although such promises are not binding.) Appelbaum urged the government to address the practice quickly. “As sick people come to hospital E.R.s, and as they are admitted to hospitals, we can expect the number of people getting surprise medical bills to explode,” she said. “Our representatives in Congress really need to get their act together.”
A previous version of this piece incorrectly described a congressional voting procedure.
