The poet and journalist Carl Sandburg is most often credited with this bon mot for attorneys: If the facts are against you, argue the law. If the law is against you, argue the facts. If the law and the facts are against you, pound the table and yell like hell.
The problem with Gretchen Morgenson and Joshua Rosner’s These Are the Plunderers: How Private Equity Runs – and Wrecks – America is that while their moral and factual indictments of private equity operations find their mark, their pound-the-table-and-yell-like-hell tone detracts from its credibility. The book’s authors seem unaware that when you have the morality, law, and facts on your side, a quiet understated tone serves you better than hyperbolic overkill.
First, the facts. Over the past few decades, private equity (PE) ownership in the U.S. has increased to over 10% of total U.S. equity capitalization, and PE-owned firms employ about 7% of the U.S. labor force. Over the last five years, their assets under management have approximately doubled.
PE is particularly attracted to certain industries, especially retail because of its extensive and eminently salable real estate holdings. The temptation to load up a retailer with crippling debt to fund its takeover and sell off its properties and divert the proceeds into the PE firm’s coffers often proves too much to resist. While the rise of online shopping has not been kind to the retail industry, it has proved especially deadly to PE-owned firms, which account for two-thirds of retail company bankruptcies.
PE is also attracted to the healthcare arena because of insurance billing leeway. Here, the damage is even worse. PE firms own, depending on the statistical source, between 5% and 11% of nursing homes. Almost immediately after purchase, nursing staff levels fall and billing practices become more aggressive; a widely cited NBER study demonstrated that after a PE firm takes over a facility, revenue and mortality rise in tandem, by about 10%.
Hospital emergency room care, whose increasingly severe staff shortages have led to ever higher levels of outsourcing, also provides rich pickings. Just two PE firms, KKR and Blackstone, control nearly a third of external MD hiring. It is here where PE firms intrude most directly into patient care by pressuring ER physicians to “upcode” their services and push unnecessary but lucrative hospital admissions.
Morgenson is an immensely gifted investigative journalist with a sure eye for compelling narratives, which fill the book, the most prominent being the story of how Leon Black’s Apollo Global Management blew up Executive Life Insurance with junk debt originated by his old employer, Drexel. The authors detail how the family of a tragically injured young woman was forced into bankruptcy when the Executive Life legal settlement annuity paying for her care failed. (The Executive Life episode also provides a cautionary tale to those who believe that the safety of annuity payouts is backed by state guarantees, which in this case failed spectacularly when the California insurance commissioner, John Garamendi, stiffed the company’s beneficiaries. He soon after joined a PE firm and now sits in the House of Representatives. His official bio omits his involvement in PE.)
As with roadside wrecks, the reader will not be able keep their eyes off many of these disaster stories: the families who helplessly watched elderly parents die of COVID as PE-run nursing homes, in an effort to increase occupancy, filled previously unaffected and grossly understaffed facilities with acutely infected patients; the debt-hobbled Missouri aluminum smelter that extorted electrical utility rate reductions paid for by the impoverished community’s residents; dedicated ER physicians who lost their careers when they blew the whistle on fraudulent billings and superfluous but profitable hospital admissions; and patients who saw the price of their lifesaving medicines rise by a factor of 50.
The book also highlights the fact that prosecution of dishonest financial tactics that not so long ago would have outfitted corporate executives in orange jump suits now goes unpunished. Perhaps the most egregious of such practices is “dividend recapitalization,” a euphemism for looting if ever there was one, in which the proceeds from a target’s junk bond issuance are paid out as a special dividend that flows directly into the coffers of the PE firm.
Sadly, the book is devoid of nuance; the authors have made no effort to examine the free market case in favor of private equity. In their zeal to condemn, they occasionally get their facts wrong, as when they misrepresent a 2020 study published in the Journal of the American Medical Association that showed that the outcomes of cardiac patients in PE-owned hospitals were better than in non-PE owned firms. One expects better from a Pulitzer recipient.
But the book’s most egregious omission is its burying of the story’s real lede, which is the question of just what services should be highly regulated by, if not provided by, the government and nonprofits, and which are best left largely to the private sector. Not until nearly the end of the book do the authors finally inform the reader that PE firms are attracted to companies,
. . . such as healthcare and education, that had long been understood to serve a social function. These industries are expected to have inefficiencies and generate lower profits because they must stand ready to serve society. To provide this service, they require excess capacity or backup inventory, both of which cost money. The privateers’ “streamlining” of these industries promoted for-profit schools that gouged students and did not educate them. The efficiencies they brought to healthcare eliminated “excess” hospital beds, nurses, and ventilators, as well as undermining personal relationships with the family physician.
To take an extreme case, no one would outsource military preparedness, disaster response, or the running of elections to private companies. Or to take a more obscure but more widely applicable example, it’s well recognized that an adequate blood supply is more effectively and safely provided by volunteer donors paid with cookies and orange juice, and who bask in the warm glow of moral fulfillment than by commercial blood “donors.” Likewise, while U.S. higher education has its flaws and inefficiencies, no sane parent aspires to send their child to a for-profit college. I know few, if any, of my former medical colleagues who, should they suffer from an acute, severe illness, would get anywhere near a PE-run hospital.
Finally, unless you’ve been living at the bottom of a well the past few decades, you’re aware that U.S. life expectancies at birth have been falling, currently ranking just below those in Poland and Cuba (but just ahead of Panama and Albania). Given the slow and steady increase in U.S. per capita GDP, that’s quite a macabre trick.
The slow deterioration of overall well-being of the U.S. population shows up in other areas, a favorite of anthropologists, historians, demographers, and economists being height data. At the beginning of the twentieth century, Americans were the world’s tallest people; now we’re, on average, several centimeters shorter than northern Europeans. In the words of the world’s foremost height-ologist, Princeton University’s John Kolmos, “We conjecture that the U.S. health-care system, as well as the relatively weak welfare safety net, might be why human growth in the United States has not performed as well in relative terms as one would expect on the basis of income alone.” That a system that focuses only on the most profitable services and ignores those that provide the richest payouts, such as obstetrical and early childhood health, lowers life expectancy and overall health outcomes should not surprise anyone.
Even more astonishing is that neither this book nor the similar recent title, Brendan Ballou’s Plunder, mentions private equity’s ideological founding: In 1970, Milton Friedman posited in a famous 1970 New York Times op ed the notion that corporate executives’ sole responsibility was towards corporate shareholders, a notion that conveniently absolves them of any responsibility for the welfare of society at large, whether their company’s shares are owned publicly or privately. If an aircraft manufacturer kills several hundred passengers by knowingly selling a grossly defective product, as Boeing did with the 737 Max, it is sufficient that they be punished by the capital markets.
These are the Plunderers can be read by anyone with an interest in the roles of public and private enterprise in society, but with a skeptical eye. This reviewer awaits a more careful and wide-ranging volume on the subject.
William J. Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal. He has produced several finance titles, and four volumes of history, The Birth of Plenty, A Splendid Exchange, Masters of the Word, and The Delusions of Crowds about, respectively, the economic growth inflection of the early 19th century, the history of world trade, the effects of access to technology on human relations and politics, and financial and religious mass manias. He was also the 2017 winner of the James R. Vertin Award from the CFA Institute.
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The poet and journalist Carl Sandburg is most often credited with this bon mot for attorneys: If the facts are against you, argue the law. If the law is against you, argue the facts. If the law and the facts are against you, pound the table and yell like hell.
