Bob’s Journal for 6/13

Private Equity Funds and Your Health Care Costs

The role of private equity funds in medical care recently was identified as a problem by two prominent sources.

Private equity funds are investment partnerships usually created and managed by an investment management firm. The investors in the fund primarily are institutions (pension funds, foundations) and very wealthy individuals. The investors have little or no say in the transactions made by the funds.

The investment funds buy businesses with an eye toward making a profit by operating them and increasing their earnings, and, at some point, selling them.

The Wall Street Journal began a three-part series on the role of the private equity funds in the cost and quality of your medical care.

The Journal found that the investment funds spent hundreds of billions of dollars over the last decade to acquire various medical and health care entities.

The strategy generally is to buy providers and practices of the same type in the same geographic area. In other words, the private equity funds want to consolidate an area’s health care providers, a strategy known as a roll up that’s been used in many business sectors.

By late May, there were 180 private-equity deals in 2024 in which an investment fund bought a company to combine it with one the fund already owns. That’s 23% of 2023’s full year total of such deals.

Most doctors used to own their practices. Now, about three quarters of physicians work for a practice owned by a hospital or corporation. Most hospitals now are owned by a private equity firm or large medical system, according to the Journal.

The newspaper said use of the roll up strategy in an area seems to be followed by higher prices for medical care. Some people allege the strategy also reduces the availability and quality of care in an area.

Antitrust officials at the Federal Trade Commission (FTC) and Department of Justice are the second source questioning the deals.

The regulators are investigating the roll-ups of health care businesses and preparing to write new merger guidelines for them.

Last year, the FTC sued a company owned by a private equity firm, alleging it had purchased the largest anesthesiology practice in Houston and then purchased additional practices in the area. It continued this practice throughout Texas.

The result, alleges the FTC, is competition was eliminated or substantially reduced and prices increased.

The FTC might not win its case. It has lost a number of high-profile cases in the last few years.

But it’s probably worth your while to ask who owns a medical provider before choosing one. Before moving to a new area, you might want to find out who owns major hospitals and other medical providers. It could influence the future cost and availability of medical care.

A 160% Increase in Long-Term Care Insurance Premiums?

The biggest long-term care insurer, Genworth Financial, is asking the Massachusetts Supreme Judicial Court to overturn a ruling by insurance rate regulators.

The regulators turned down Genworth’s request for a 161.6% premium increase on some policies issued in Massachusetts.

The increase was proposed for a couple of types of existing LTC policies sold from 2004 to 2012.

Genworth says the policyholders are paying less than in other states and the increase is warranted.

In 2018, Genworth asked for a 92% premium increase. The regulators granted a 40% bump. Then the regulators denied a request for an increase in 2021.

The regulators say Genworth didn’t adequately inform policyholders over the years of the potential for premium increases or the extent by which premiums might rise.

Regulators also say Genworth used projections through 2081 as the basis for its request to increase premiums. Such a long-range projection includes many assumptions about the future. Yet, the request didn’t include an agreement to reduce premiums if the experience is more favorable than the projections.

Genworth says Massachusetts is far behind other states in allowing premium increases and benefit reductions. Massachusetts residents are paying substantially less than residents of other states for identical coverage.

Increased Wealth and Investment Income Keep Americans Spending

The Federal Reserve’s war on inflation is hamstrung by higher interest rates and asset prices.

In 2023, Americans had more wealth in assets than ever, according to a quarterly report from the Federal Reserve. Rising prices increased the value of Americans’ holdings of real estate, stocks and other assets.

The higher asset levels and interest rates translate into higher investment income.

In the first quarter of 2024, Americans earned about $3.7 trillion in interest and dividend income. That’s the highest level ever and about a $770 billion increase from four years earlier, according to the Department of Commerce.

Every income bracket benefited from the increases in wealth and investment income.

The problem for the Fed is this creates a wealth effect. When people feel they are wealthier, they’re likely to spend more.

The higher asset prices and investment income let households maintain their spending levels even as prices increase. Sellers have less incentive to control prices.

Interest rates and asset prices aren’t likely to increase at the same rates they did the last few years.

If so, households might be able to continue current spending but would be less likely to increase spending each month or pay higher prices.

A fall in asset prices or interest rates would cause consumers to curtail some spending and help the Fed reduce inflation.

The Data

Optimism increased among small business owners, according to the NFIB Small Business Optimism Index. The index rose to 90.5 in May from 89.7 in April.

That’s the highest level in five months. As in April, inflation was identified as their top problem by more business owners than any other issue.

The Consumer Price Index (CPI) was unchanged in May after rising 0.3% in April. Over 12 months, the CPI was up 3.3% through May and 3.4% through April.

The core CPI, which excludes food and energy prices, increased 0.2% in May following a 0.3% increase in April.

Over 12 months, the core CPI rose 3.4% through May and 3.6% through April.

There were 272,000 jobs created in May, according to last week’s Employment Situation reports. That’s an increase from         165,000 new jobs in April to mark the highest level in five months, and above the average for the last 12 months of 232,000.

Despite the number of new jobs, the unemployment rate increased to 4.0% from 3.9%.

Average hourly earnings increased by 0.4% in May, up from 0.2% in April. Over 12 months, average hourly earnings increased 4.1% through May and 4.0% through April.

Productivity increased 0.2% in the first quarter according to the second estimate, down from a 3.5% increase in the fourth quarter of 2023 and the initial first quarter estimate of 0.3%.

Output increased by 0.9% and hours worked rose 0.6%.

Over 12 months, productivity increased 2.9%, the highest level since the first quarter of 2021.

Unit labor costs increased 4% in the first quarter, a big change from the 2.8% decline in the last quarter of 2023. Compensation grew 4.2% while productivity rose only 0.2%.

New unemployment claims increased by 8,000 to 229,000 in the latest week, just below the eight-month high reached in May.

Continuing claims, which lag a week behind new claims, decreased to 1.792 million from 1.790 million.

The Markets

The S&P 500 rose 1.62% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.12%. The Russell 2000 lost 0.38%. The All-Country World Index (excluding U.S. stocks) fell 0.57%. Emerging market equities increased 1.22%.

Long-term treasuries lost 0.91% for the week. Investment-grade bonds fell 0.41%. Treasury Inflation-Protected Securities (TIPS) declined 0.52%. High-yield bonds rose 0.12%.

On the currency front, the U.S. dollar rose 1.23%.

Energy-based commodities increased 2.77%. Broader-based commodities rose 1.79%. Gold declined 0.48%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.