Bad Company: Private Equity and the Death of the American Dream

by Megan Greenwell

Institutions like hospitals were “but expansions of the equipment of the physician,” the American Medical Association wrote in 1934. “No third party must be permitted to come between the patient and his physician in any medical relation.”

From the providers’ side, caring for sick people turned out to be a terrible way to make money. Some patients couldn’t pay but needed treatment anyway; others required therapies that cost more than a doctor could realistically charge. Running a hospital successfully but ethically seemed to require eliminating the need to profit.

The chief driver of a company’s success was no longer supply and demand, but back-end maneuvers both invisible and incomprehensible to the company’s employees, its customers, and often even its senior leaders.

Even Milton Friedman, the creator of shareholder value theory, had allowed that hospitals were a special case. Within a mere few years, though, this perspective began to look almost quaint.

As the New Yorker put it in 2012, “for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits.”

While it is true that millions of pensioners do rely on private equity returns, the evidence is far less clear that they must. Those returns also aren’t generated in a vacuum. Private equity often makes money by cutting costs and raising prices, both of which take the heaviest tolls on working-class people.

what they are in fact describing is a sort of zero-sum game in which cutting wages for working- and middle-class employees in one place helps working- and middle-class retirees in other places, a phenomenon labor journalist Hamilton Nolan has termed “capitalism’s washing machine.”

the Washington State Investment Board interrogated KKR executive Nate Taylor after they heard Liz’s speech about the Toys R Us workers. “Did anyone at KKR lose their job over the failure of Toys R Us? Did anyone have their bonuses cut, did anyone have their compensation cut significantly? Because that’s one of the consequences of free market capitalism,” board member Stephen Miller asked Taylor. (Taylor did not directly answer the question.) Liz even got the chance to briefly address Taylor herself. “How can you sit there and tell me you’re sorry when your shoes can pay my rent?” (He didn’t answer that question either.)

He started quoting the anthropologist Margaret Mead—possibly apocryphally, but no less inspirationally—at meetings: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.”

Chopping more and more services, Shell said, comes from a “scarcity mentality”—a term coined by The 7 Habits of Highly Effective People author Stephen Covey—while making rural hospitals work in twenty-first-century America requires an “abundance mentality.”

Growth, though, is more difficult at hospitals owned by private equity firms because of the need to keep shareholders happy through quick returns.

If they’re not beating the market rate of compensation for their investors, their investors are going to walk. They’re doing what they have to do to maintain their investment pool.” In other words, they have no choice but to maximize profits in the short term.

Friedman’s stipulation that bosses and workers have equal power requires bosses and workers to have equal information. In the fifty-five years since his essay, the growing dominance of private equity has destroyed that precondition. Workers often don’t know who their bosses are, much less what their business strategy is or whether they plan to drive the company into bankruptcy and profit off the scraps. If knowledge is power, private equity has managed to hoard full control for itself, with the blessing of the federal government.