Romney’s Private Equity Magic Trick–equity manager’s gain, taxpayers’ losses

by Linda Beale

Romney’s Private Equity Magic Trick–equity manager’s gain, taxpayers’ losses (Reich Video)

Mitt Romney claims that his business experience at Bain Capital is a superb qualification for the presidency.  He implies that this experience will carry over to his economic policies, with the suggestion that he will become a “job creator-in-chief” like all those one-percenters purportedly are in the private sector.
In reality, private equity experience is a recipe for disaster in the White House.  Think about what private equity firms do.  They take an ongoing business–usually one that is making decent profits and paying its workers decently–and they make it into one that can pay outsized “rent” profits to the private equity firm.  Usually, though not always, this means cutting costs and adding debt.

The debt is an elixir for private equity firms.  Because interest is deductible, it actually increases profits by lowering the company’s federal income taxes; yet because it isn’t required to be used by the firm to actually improve the products or services offered, it is often used instead to pay dividends to the private equity firms, paying off whatever actual investment the private equity firm made in the company.

Cutting costs is the way for private equity firms to extract even more gravy from their target company.  Cost cutting is most often directed at

  • firing workers and making fewer workers do the same work that more workers used to do (that’s called a “productivity” gain, garnered, of course, by the private equity firm and not by the everyday workers), and/or
  • outsourcing jobs to other countries so that labor can be paid less than a going wage in this country (that’s often coupled with step one, since workers are no longer needed in this country–sometimes the US workers are even required to train their cheaper foreign counterparts before they are let go, and of course those “effiencicy” gains are garnered by the private equity firm and not by the remaining workers), and/or
  • cutting wages and benefits for the remaining workers (and shipping those extra “savings” out as dividends to the equity firm investors), and/or
  • innovating better administrative systems (this can be a good deal–for example, putting money  that the company didn’t have until the new “investors” came in into digital record systems or improved communications systems, but it can also be a bad deal, if the firm uses its new technology to game the federal system on taxes, or Medicare reimbursements, or federal contracting or similar items)
    • Consider the fact that Bain and other private equity firms purchased a for-profit hospital.  One of the “improvements was to redesign the coding system for patient services to increase the reimbursements from Medicare and thus hike up the hospital system’s profits, which are garnered by the private equity firm.  Julie Creswell and Reed Adelson, A Giant Hospital Chain is Blazing a Profit Trail, New York Times (Aug. 15, 2012), at A1 (noting that Medicare reimbursements for the highest classifications surged to $949,000 in 2010 from $48,000 in 2006 at one hospital, in a story about Bain Capital and other equity firms’  profit improvements at HCA, where nurses and doctors express concerns about profit-making that is driving decisions that shortchange patients through understaffing and/or shortchange the government, as in the new coding system that caused the Medicare reimbursements to skyrocket); see also Steve Denning,HCA: The unsustainable private equity bubble in US health care, Forbes (Aug. 15, 2012).
    • As one commenter on the NY Times article noted, “To be more profitable as a healthcare facility requires … having more sick people to treat, or hav[ing] higher charges.  Both are inhumane.”  Munz, New York, NY.  And as one former HCA employee commented, “patient safety and medication safety came in a distant 2nd to conformity and [the] draconian measures to make care more efficient.”

These kinds of activities go hand in hand with the increasing consolidation into mega-business enterprises (regrettably aided by the tax code’s “tax-free reorganization” provisions, that were also made much more flexible during the Bush years in order to facilitate such consolidations).  Big businesses reap the productivity gains of their workers for the few managers and significant shareholders at the top, and either buy  or compete with local and family-owned small enterprises to put those smaller and shallower-pocketed (and less well-connected) business out of the way, thus separating more and more businesses from the communities in which they are located.  All in all, not good for America, and not the kind of skills one wants in the presidency, where we need someone who can see the relationship between the stability of small businesses, viable communities, and stable workers.

For a clear and understandable demonstration of the way private equity firms make their money and who wins (and who loses) from those methods, see Robert Reich’s video chat on the subject:

cross posted with ataxingmatter