An interview with Bethany McLean

On how financialization broke healthcare

SO long ago (seriously, December 2023), I interviewed Bethany McLean, a journalist and the author of The Smartest Guys in the Room and All the Devils Are Here (about the Enron scandal and 2008 financial crisis, respectively). My intention was to start an interview series for this newsletter, but then a lot of work and life stuff happened that got in the way.

But this interview is too good to keep in my personal folder and not share. Her latest book, The Big Fail: What the Pandemic Revealed About Who America Protects and Who It Leaves Behind, cowritten with Joe Nocera, is about how Covid policy failed. We talked about how financialization weakened the healthcare system, and how supply chains were stretched too thin to handle the stress of a global pandemic. Finally, we touched on how the public health policies of the pandemic disproportionately fell on those who were already suffering most.

This interview is condensed and edited for clarity.

Two critiques of the system

Olivia: In reading the book, I noticed two broad critiques that I think you and Joe were making. One critique was of policies and trends that predated the pandemic, so financialization and supply chains. And the second bucket of critiques was policies and statements following the initial spread of the virus, in late 2019, early 2020.

Bethany: That's a really fair way of putting it, I might have to start stealing that.

One of the things Joe and I like to do, and we did with the financial crisis — and to an extent, I guess I did it in the Enron book — is to not just do the tick tock of how something happened, but to go back and say, what were the preconditions that set the stage for this playing out the way that it did?

Because my belief is there usually is a story behind the story. It's not just the tick tock of the events unfolding as they did, but it's the way in which the stage was set.

And so that's what we got interested in with the pandemic. There's a statement in the prologue that is probably too big a statement—but only slightly too big a statement—which was that we couldn't have done much better with Covid than we did because so many of those preconditions from the fragility of our supply chains. [The preconditions] prevent us from being able to get PPE when we needed it. The state of our healthcare system had been put in place before Covid hit.

There is also a critique of Covid policies as they unfolded. I don't know that doing something different would've made a difference to the death rate per se. There's an ongoing argument that it would've been worse if we hadn't locked it down that I think Joe and I don't subscribe to.

But I do think what we did has left us in worse shape afterwards, in terms of children's education, the state of small businesses, and the sheer amount of money we had to spend to save the economy.

Private equity’s impact

Olivia: I'm the one who used the term, but could you explain what financialization means?

Bethany: Yeah. This was really stunning to me, but around 2011, in the decade before the pandemic hit a huge chunk of America's hospitals, I think seven of the eleven largest publicly traded hospital chains were owned by private equity firms.

Private equity got really interested in hospitals as a place to make money after the Affordable Care Act was passed, and their theory didn't turn out to be true. It didn't result in a boom in hospital revenues and profits.

Instead what they did was come up with means of extracting big payments from the hospital chains they owned, [including] through dividend recapitalizations, which basically means when a private equity firm owns a business, they layer on a whole bunch more debt. [They] take that not to improve the business and not to make the underlying company better, but to pay themselves a dividend. And in the decade before the pandemic, in the wake of the financial crisis with interest rates as low as they were, that was a tactic you could do.

And then the other thing private equity firms did, and they did this in nursing homes too, was to sell the underlying real estate — because both hospitals and nursing homes obviously own real estate. And if you can split the two things apart, then you can make the hospital or the nursing home that you now control pay rent on property they used to own. And you can take the money from the sale of the real estate and pay yourself a big dividend.

So that was another way that private equity firms got money out of hospitals and out of nursing homes. They left behind a system that, in the case of hospitals, while no longer obviously controlled by private equity, was staggering under a lot of debt.

And it's difficult to draw a straight line and say, well, that caused more people to die. But for sure it hasn't been good for America's healthcare system.

Olivia: What were the series of policies that led to private equity being really involved in healthcare?

Bethany: Let me tackle that in two ways. So one is that, as hospitals became a business, private equity saw a way to make money. One of the first takeovers was a big takeover of Hospital Corporation of America, HCA, and it made a ton of money for the private equity firms involved. In private equity, people are often copycats, so that somebody sees somebody make money and they're like, we'll go do that too.

But I think more broadly, we never really did decide what we wanted our healthcare system to look like, whether we wanted it to be part of, quote, the free market, or whether we wanted it to be something that sat outside of the capitalist ethos.

So we kind of let it be both at the same time, and that has made a mess of things. And what I mean by that is that we have a system, particularly with hospitals where it's really societally constructed who makes money and how, because the government essentially decides Medicare and Medicaid reimbursement rates, which make up a huge percentage of hospital revenue.

So that's not a free market, right? That's not rewarding. The hospital that offers the best care at the lowest price the way you would like capitalism to do, that's rewarding the hospital that figures out how to get the right mix of commercial payers and Medicare and as little Medicaid as possible and games the rules in order to get themselves the most reimbursement.

So we created that system, but then we didn't say, Well wait. If we're doing this and we're societally constructing who makes money, and this isn't really capitalism, then maybe we don't want to pretend it is. And we don't want to allow private equity firms to come in and take over a hospital when their fiduciary duty, by law, their bottom line, is their responsibility to their investors.

And so we're going to have this odd mix of incentives where a financial player is coming in with a duty to make money for its investors. And the way to make money for its investors is not by providing the best care at the lowest cost. It's by taking advantage of the system that's been set up and we're just going to create a mess.

A failure of supply chains

Olivia: You already alluded to this, but once the pandemic hit, was it too late? Was the die already cast with all of these trends?

Bethany: I think in many ways it was. The dismal state of healthcare in America meant that we're a country where people have a lot of preexisting conditions and Covid came along and it's a virus that preys disproportionately upon people with preexisting conditions.

And the core problem is that we have a healthcare system that treats people once they're sick, but doesn't prevent people from getting sick in the first place.

And with supply chains, it just never occurred to anybody that there was a limit to efficiency and that at a certain point, somewhere along the curve, too much efficiency means a loss of resiliency. If one thing goes wrong, the whole thing breaks.

It turned out that these global supply chains that we had worked on to make more and more and more and more efficient in the name of increasing profits were awfully fragile when something went wrong.

Olivia: What do you think were the lessons learned?

Bethany: The doctors and nurses, they were already pushed to the limit, particularly the nurses even before the pandemic hit, by hospitals’ increasingly bottom-line-oriented policies, whether they were not-for-profit hospitals or supposedly not for-profit hospitals, which someone said in the book is just a for-profit in disguise.

No, I haven't seen dramatic changes in policies toward nursing to make it a better profession, with better pay and more respect. And I'm not sure our healthcare system has learned anything.

We've been talking about value-based care for a really long time and it's making inroads in some areas, but I don't know. I sometimes think the only way to fix our healthcare system is just to rip it all down and start from scratch because the system is too entrenched.

Olivia: Are we doomed to repeat this for future pandemics? Future pandemics seem inevitable. Do you think this happens again?

Bethany: I think the issue is less a future pandemic. To me, the issue is almost bigger than another pandemic. The pandemic pointed out failures in the way capitalism is operating, and it's a wake up call to look at that and say, what can we do better?

There was this great quote from Lyndon Johnson when he signed Medicare and Medicaid — it's basically everything we can hope to do as a country depends upon the health of our people. And the pandemic was a warning sign that the health of our people is not great.

To me, the pandemic was a wake up call that when we say we care about the least privileged in society, we actually really don't. We're really fast to throw them under the bus as soon as we think we can protect ourselves. Essential workers, shutting schools for the least fortunate children among us.

We haven't really grappled with any of that.