Rose Peters is a veterinarian whose specialty is animal neurology.
Rose PETERS: I saw alligators and tigers and anteaters and birds of all kinds.
Stephen DUBNER: What did you need to do with an alligator? Have you ever performed brain surgery on an alligator?
PETERS: I have not on an alligator. I bet their brains are very small and hard to get to. But the alligator that I had was, gosh, I think a 12-foot, huge alligator that had some general weakness. And so they were trying to decide if it had a nerve or a muscle disease. I think we decided his nerves and muscles were okay.
DUBNER: He was just lazy, you think?
PETERS: Or just feeling unwell for some other reason, I think more likely. Large reptiles, especially when they physically don’t feel well, can look and feel very weak and blah and lethargic. But he wasn’t so weak and lethargic that they didn’t still have him strapped from head to toe to a big table, and everybody stayed about ten feet away, just in case.
Odds are that you don’t have a pet alligator. But: a pet dog or cat or guinea pig? Probably. Even before the pandemic, pet ownership had been rising fast in the U.S., and now sits at a record high: 70 percent of households have at least one pet. Also at a record high is the share of household income we spend on pets: in 2021, that added up to $123 billion. The pet boom has not gone unnoticed by investors, especially the people who run private-equity firms. If you read the financial news, you know that private equity has been buying big chunks of many industries over the past few decades — financial services, education, food and beverage — and many segments of the healthcare industry, from hospitals and nursing homes to dialysis clinics. Even car washes and pawn shops have become private-equity targets. So it probably shouldn’t be surprising that they’ve come for our pets. In fact, your local vet may already be owned by a private-equity firm and you wouldn’t even know. Today on Freakonomics Radio: when outside money rushes into a world of small, hand-built businesses, what happens to the ailing patients and their anxious owners?
Josh LERNER: I think the answer is, sadly, that it depends.
We’ll hear some cautionary tales.
Eileen APPELBAUM: It’s not like they care about pets. They don’t care about pets.
Elena PRAGER: We would expect that prices would go up and service quality would go down.
We’ll hear from an insider who defends the practice.
Greg HARTMANN: It’s an opportunity to create a larger business that ultimately protects, preserves, and enhances these small businesses that we’ve partnered with.
Also, what’s happening in the trenches:
PETERS: Some just left vet med all together and said, “I’m burned out, and I can get paid more working at, like, Target than I am in your hospital.”
How much do you know about the people taking care of your pet? Let’s find out, right now.
* * *
It’s a familiar story: a successful small business attracts the attention of a bigger firm that buys them out and rolls them up with other small companies into a conglomerate. This sort of consolidation holds the promise of many good things: more efficiency, more resources and reach, a nice payday for the founders — and, if everything goes just right, a better deal for customers, too. How often does that promise actually come true? And how would this kind of acquisition affect your beloved dog, or cat — or who knows, maybe you do have a pet alligator? They are legal in over 20 states. To answer these questions, let’s start from the inside:
HARTMANN: Sure. My name is Greg Hartmann. I’m C.E.O. of National Veterinary Associates, otherwise known as N.V.A.
DUBNER: Do you have pets yourself?
HARTMANN: I do. I do. I have four very active pre-teenage children. And with that, I have four pets. We have two dogs and two guinea pigs.
DUBNER: Do guinea pigs go to the vet often?
HARTMANN: We’re a bit new to guinea-pig ownership. But they do. They do have a need to visit a veterinarian.
DUBNER: Okay. And N.V.A., just give us a sense of what it is — how many facilities, what kind of facilities?
HARTMANN: N.V.A. is a community of veterinary hospitals and pet resorts, as we call them — they’re boarding and daycare sites. About 1,500 locations in the U.S., Canada, Australia, New Zealand, and we have a single site over in Singapore.
DUBNER: Are they branded N.V.A. or no?
HARTMANN: No. No. All of our sites are locally branded. I think it’s a super interesting part of the veterinary profession, which is it’s very much a local business, very much a small business.
DUBNER: And what’s your market share in the U.S.?
HARTMANN: Well, to give you some perspective, in the U.S., there’s about 27,000 veterinary hospitals, and N.V.A. owns about 1,100 sites. So, we’re relatively small, but the space is still very highly fragmented.
Okay, let’s pull back a minute. When Hartmann says that N.V.A. veterinary hospitals aren’t branded N.V.A., that means that if N.V.A. buys your local vet practice, it probably keeps the same name, the same signage, maybe even the same vets as before. Or maybe not the same vets — we’ll get into that later. And when Hartmann says that N.V.A. is “relatively small” — well, maybe small relative to the entire pet-care market, but they are the second-biggest consolidator in the U.S. And they recently acquired two other consolidators: Sage Veterinary Centers and Ethos Veterinary Health. The biggest pet-care consolidator in the United States is Mars, the privately held American company best known for making M&Ms and Skittles. Mars also owns pet-food companies, an online pet pharmacy, a kitty-litter company — and about 2,500 pet-care facilities, including BluePearl and V.C.A., or what used to be called Veterinary Centers of America.
So, when Greg Hartmann of N.V.A. says that “the space is still highly fragmented” — well, it is becoming less so every day. Roughly 25 percent of general veterinary practices in the U.S. are owned by corporate consolidators, and that’s up from around 5 percent just 10 years ago. When it comes to specialty veterinary practices — emergency care, surgery, cancer, things like that — corporate ownership is around 75 percent. Why are they so attractive to private-equity firms? Well, specialty practices yield higher revenues and they’re growing much faster than general vet care. Here again is Greg Hartmann from National Veterinary Associates.
HARTMANN: So we’ve seen a good bit of growth just organically through more pets. We’ve also seen a change of pet-parent behavior, where this long-term, multi-decade trend of the humanization of pets has accelerated. And I think a lot of us think that that’s because more of us as pet parents are spending more time with our dogs and cats, and recognizing more of their needs and getting them to the vet more frequently.
In other words, it’s a perfect pet storm. More people owning pets; more people treating pets like part of the family; and a stay-at-home pandemic that accelerated both those trends.
HARTMANN: Pet ownership had been increasing 1 to 1.5 percent per year, roughly. Over the course of the pandemic, we think that bumped up to three or four times that pace.
All this adds up to more incentive for the consolidators to consolidate. So, who are these consolidators, and who owns them? Greg Hartmann has been with N.V.A. since 2008.
HARTMANN: We’ve had four private-investment firms that have invested in N.V.A. over the years.
N.V.A. was bought most recently by a firm called J.A.B. Investors, which is largely owned by the Reimann family, the second-richest family in Germany. J.A.B. is a massive conglomerate that goes back nearly 200 years; they started in chemical and industrial manufacturing. In the 20th century, Albert Reimann Sr. and Albert Reimann Jr. were — to quote The New York Times — “enthusiastic Hitler supporters and anti-Semites, who condoned the abuse of forced laborers, not only in their … company … but also in their own home.” The Reimann family’s dark history was revealed only a few years ago. Today, they own part or all of many brands you may be familiar with: Peet’s Coffee and Keurig coffee, Dr. Pepper and Snapple, Krispy Kreme and Panera Bread, Max Factor and CoverGirl — and: National Veterinary Associates. When J.A.B. buys a company or a brand, they tend to hold onto them longer than some private-equity firms; they practice what some people call “buy-and-build” investing, versus what you might call “squeeze-and-sell.” That more aggressive approach is what led Senator Elizabeth Warren to co-sponsor the Stop Wall Street Looting Act. It argues that private-equity firms buy up companies, “strip them of their assets … extract exorbitant fees,” and “ away from workers, communities, and investors if the bets go bad.” Does this mean the buy-and-build firms are better for society? Well, it’s complicated. So, let’s pull back even further. What, exactly, are we talking about when we talk about private equity? To answer that question, we will need a couple of economists who specialize in that area. First, Eileen Appelbaum:
APPELBAUM: I’m currently the co-director at the Center for Economic and Policy Research.
She’s also co-author of a book called Private Equity at Work: When Wall Street Manages Main Street. And our second economist:
LERNER: I’m Josh Lerner, and I’m a professor at Harvard Business School.
Okay, so let’s get a sense of the size and trajectory of the private-equity industry.
LERNER: When you look back 20 years ago, there was a sense that the amount of money that was in the industry — which was in the hundreds of millions of dollars — was really about as far as it could go, that there really wasn’t room to absorb more. Today, we’re in the several trillions of private-equity dollars.
DUBNER: Can you give me some summary statistics, however it’s best to express it — my amateur mind wants to reach for something like: what share of G.D.P. is produced today by firms that are private-equity-owned versus 20 or 30 years ago?
LERNER: Well, it’s hard to pin down an absolute number here, and there’s a variety of reasons. One is that some companies get held for 18 months. In other cases, they get held for a decade or more. One thumbnail number that I like, which gives a sense of the magnitude, is that if you looked at the beginning of 2021 at U.S. pension funds, which are the major pool of long-run capital in this country, you would see that for every dollar of private equity that was there, there were around $8 of public equity. If you look at that same ratio two decades ago, it would be more on the order of one to $20.
Okay, so the share of investment dollars coming from private equity has grown a lot relative to the money coming from public equity, or what you and I would typically call “the stock markets.” So is this growth of private equity necessarily a problem?
APPELBAUM: No, no. The problem is not specifically private equity. The problem is leveraged buyouts.
* * *
The economist Eileen Appelbaum has studied the private-equity industry extensively, and she is not its biggest fan. Still: there are distinctions to be made.
APPELBAUM: So what you need to realize is that there are 4,000 private-equity firms in the world, most of them focused on the U.S. There are 30 really big ones. And those are the ones that we are concerned about, because those are the ones that engage in leveraged buyouts. They buy really big companies, they use lots of debt, and then they have to be able to both pay back that debt and get outsized returns — 20 percent returns is what they go for — for their investors.
And the economist Josh Lerner again.
LERNER: One of the cases that really draws out a lot of these issues is the Toys ‘R Us case.
APPELBAUM: Toys ‘R Us was a profitable company when K.K.R. and Vornado and Bain bought it.
K.K.R. is one of the biggest private-equity firms in the world; they helped invent the leveraged buyout. Bain is a smaller private-equity firm, but still huge. Vornado is a massive real-estate firm. These companies teamed up to buy out Toys ‘R Us in 2005.
APPELBAUM: It was still profitable, not as profitable as it had been in earlier years, but it was not a distressed company. And they did exactly what I’ve just told you.
Meaning: the buyout partners loaded up Toys ‘R Us with debt, sold off a lot of their real estate to pay off that debt, and left the stores with expensive leases.
APPELBAUM: At the point at which Toys ‘R Us declared bankruptcy, it was because the accelerating rents ate so deeply into the profit that it could not really satisfy customers. They always want to say, “Oh, Amazon, that’s the reason Toys ‘R Us went under.” No, the reason that Toys ‘R Us went under is that all of these resources were taken out of the company to enrich its three private equity owners.
Appelbaum told us about a paper by Brian Ayash, a finance professor at CalPoly, which analyzed the target firms in leveraged buyouts.
APPELBAUM: He found, over the period of time that he was examining, 20 percent of them went bankrupt, compared with only 2 percent of similar, publicly traded companies.
DUBNER: When those bankruptcies happen, is that necessarily bad news for the P.E. firm?
APPELBAUM: The way they look at it — they have a portfolio. And it’s just like if you have a little portfolio of stocks, and some of them go up and some of them go down — well, that’s how it is in the world. So, it’s not a problem for them the way it might be for a family that owned one business.
DUBNER: Plus which, they’ve extracted their management fee all along, correct?
APPELBAUM: Oh, they’ve collected the management fee all along. That’s not the only fee they collect, even as the company is spiraling into bankruptcy. So, there are three kinds of things that they get money from. They collect a two percent management fee on all of the money committed, whether it’s invested yet or not. The second thing is that because they own these companies and they have a lot to say about who’s on the board, and they have the ability to have the C.E.O. of the company fired, they are able to persuade the company that what it wants to do is take on even more debt, and use that money to pay dividends to the private-equity firm and the investors in the funds. And then the third thing, which is in some ways even more egregious, is that they charge the companies a fee for monitoring them. So even as you are spiraling into bankruptcy, you have to pay those fees.
DUBNER: So that’s like setting the fire, being paid to put out the fire, and collecting the insurance on the fire all at the same time.
APPELBAUM: Absolutely. Absolutely. But when they sell anything at a profit, they get 20 percent of the profit. And that profit is taxed at a very low rate, unlike your income and mine.
What Appelbaum is referring to here is a special tax provision called the carried-interest loophole. Josh Lerner again.
LERNER: Through really a quirk in the tax code, the way in which those profits share that’s gone to the people who have managed the funds has been taxed, has been treating it as a capital gain rather than as a salary. The numbers vary from year to year, but roughly the private-equity partners have been able to pay essentially half the tax rate that those of us who rely on ordinary income have to pay. And that unsurprisingly, rubs Elizabeth Warren the wrong way, especially given the fact that many of these people are indeed highly compensated.
APPELBAUM: There’s nobody who can defend the carried-interest loophole with a straight face.
DUBNER: Well, if I have my recent political history right, it seems like the then-Democratic Arizona senator Kyrsten Sinema can defend it, apparently.
APPELBAUM: Money talks. I don’t think you could defend it on any other basis. She gets a tremendous amount of funding for her campaigns from private equity. You know, there’s a very well-known finance professor at Oxford University, and when you ask him, what does private equity do, he will tell you private equity is a factory for turning out billionaires.
Okay, so unless you are a private-equity billionaire — it’s possible! a lot of people listen to this show! — or unless you’re a politician who gets campaign money from private-equity firms, does this mean you should be rooting against the private-equity industry? Josh Lerner says no, that private capital can serve as a special sort of lubricant for a dynamic economy.
LERNER: One thing to emphasize is that private capital has traditionally been change capital. It’s not simply buying companies and keeping them the way they were, but effectuating transformations — sometimes for better and sometimes for worse — in those firms. And there’s a sense that in many cases it’s difficult to make these kinds of transformations in the context of a publicly traded company, that the pressures around quarterly earnings and particularly in a situation where you need to, “Get weak to get strong,” where there’s a process of costly investment or trimming that may really depress the earnings for an interim period of time, there is the argument that this is very difficult to do in a publicly traded company and that taking the business private is much more conducive for these kinds of transformations.
DUBNER: Let’s imagine I want to hold a debate. And the question under debate is: “The rise of private equity in the U.S. is generally good for the U.S. economy” — “economy” meaning everything from the firms and shareholders down to employees and customers. Which side of that debate would you prefer to take?
LERNER: Well, I feel like when we released our last working paper, we got criticized both from some of the private-equity giants and, on the other hand, by a number of the activists campaigning against the industry, both of whom were dissatisfied with our results. So, I guess that puts me squarely in the middle.
The working paper Lerner is talking about was first published in 2019, with a later revision. It was a massive research project, co-authored with five other economists. It’s called “The Economic Effects of Private-Equity Buyouts.” So, what are the effects?
LERNER: I think the answer is, sadly, that it depends. We’ve seen a whole series of industry studies, some of which have highlighted the very positive aspects of private-equity ownership. For instance, there was one study that was done of fast-food restaurants, some of which were owned by private-equity groups and some of which were owned by franchisees. And it found that when you looked at things like inspection ratings or cases of food poisoning and so forth, that the private-equity backed firms were far more effective in terms of less people getting sick.
DUBNER: And what would be the mechanisms by which that happens at a fast-food restaurant?
LERNER: Well, it’s hard to say definitively, but presumably a lot of it has to do with process and systemization, that many of these private-equity groups operate out of playbooks, where they come in and say, “These are the steps we’re going to be following.” As opposed to what you can imagine, at least, for some smaller franchisees, where they’re perhaps being managed a little bit more informally without the same degree of blocking and tackling.
DUBNER: Okay, so the food-safety issue in fast-food restaurants goes on the plus side if you’re making an argument about the societal value of private equity.
DUBNER: On the flip side, I’m guessing you’re familiar with a study that we’ve discussed on this show, a paper co-authored by Ryan McDevitt, which found that private-equity investment and consolidation in the dialysis industry led to negative outcomes for patients.
LERNER: Exactly. Or I mean, a better example might be the paper that looked at private equity and for-profit education, where the suggestion was that the private-equity groups did maximize profits, but the main way that they seem to have done so is by admitting more people, raising tuition, cutting back on the quality of the education being provided, in a way that may have generated returns for them, but clearly was not beneficial to the students involved.
DUBNER: So what you just described is a textbook example for people who critique and fear private equity. How legitimate is that fear — and I realize it’s a large and heterogeneous field, but how large should that fear be overall?
LERNER: It’s a great question, and it’s a tough question, right? Because when you look at the dozens of studies that have been done about private equity in particular industries, you just come with a series of papers that would be ones that you could trot out with pride at the American Investment Council and say, “See here, this is really a wonderful industry.” On the other hand, you have a bunch which Elizabeth Warren would be delighted to point to. It’s part of what makes this a challenging area to evaluate.
Consider, for instance, nursing homes. They have been a big target of private-equity firms for long enough that researchers have lots of data to work with.
LERNER: There are actually two-nursing home papers, one of which basically says quality of care suffers and so forth.
That’s a paper by the economist Atul Gupta and three co-authors. It found the patient-mortality rate was around 10 percent higher at facilities owned by private equity. President Biden referenced this paper in his State of Union address last year.
Joe BIDEN: As Wall Street firms take over more nursing homes, quality in those homes has gone down, and costs have gone up. That ends on my watch.
The other paper, by the economist Ashvin Gandhi and two co-authors, offered a different perspective.
LERNER: Ashvin’s paper basically argues that the private-equity backed nursing homes during COVID were much more responsive and willing to buy P.P.E. and apply good practices.
After Biden’s State of the Union address, evidence from this paper was offered as a rebuttal by the American Investment Council, which Lerner mentioned earlier. They’re the lobbying group for the private-equity industry.
LERNER: So as usual, it’s a bit of a muddle in terms of the conclusions that you can draw.
DUBNER: In other words, going back to your earlier answer, it depends.
LERNER: Yeah, that’s a terrible answer, I realize.
DUBNER: If I have it right, your own research found that employment tends to rise when a private-equity firm buys a firm that was privately owned. But that employment falls when a private equity firm buys a firm that was publicly owned. Is that right so far?
DUBNER: Does that suggest, then, that publicly traded companies are inherently flabby, and that private-equity firms are doing a great job of making them leaner?
LERNER: Well, on the plus side of the ledger for private equity, when you try to look at various measures of how much stuff is being produced for the inputs that are there, whether you look at these public companies that get taken private, or you look at companies that were privately held that simply got sold to private-equity groups, you see productivity increases in both arenas. The mechanisms may be quite different, right? In one case, it may be a matter of just trimming the fat. And as a result, we see job cuts. In the other case, it may be more providing capital, as well as potentially management assistance and, as a result, catalyzing growth through that process.
DUBNER: Could one mechanism be that publicly owned firms are more concerned with the negative media attention they might get when they fire a bunch of people and that privately-owned firms may be able to fire people without drawing much attention?
LERNER: Yeah, I certainly think so. That for better or worse, there may be more sanctions associated with doing something from a publicly traded company that’s getting intensely scrutinized.
Intense scrutiny is not as big a problem for private-equity firms. Eileen Appelbaum again:
APPELBAUM: They are unregulated, or very lightly regulated. They are playing with other people’s money.
* * *
Even within the finance industry, private equity has serious critics. The hedge-fund manager Cliff Asness, for example, has accused private-equity firms of “volatility laundering” and of hiding behind their opaque structure to deliver subpar returns.
LERNER: The private-equity business has changed over the years.
And that, again, is the economist Josh Lerner, who teaches at the Harvard Business School.
LERNER: When you look at a lot of deals in the 1980s and 1990s, they involved what you might call financial engineering — one would buy a company, you’d put a bunch of debt on it, you’d cut a few costs, and then ultimately sell it off. That strategy became a lot less sustainable, largely because my colleagues, myself probably did too good a job of teaching people how to do financial analysis and figure out what a good company was and so forth — those skills really became commoditized. So groups, as a result, had to figure out other ways to create value and generate returns. One of those ways was by building up operating teams that could engage with the portfolio companies and try to make them run their businesses more efficiently, which in some cases, worked beautifully, in other cases seems to have been somewhat more problematic. But the other side of it was looking for new kinds of strategies. And one of those strategies is this notion of buy-and-builds.
Buy-and-build, you will remember, is the strategy practiced by J.A.B., the German conglomerate which now owns National Veterinary Associates. That’s where we began today’s story.
LERNER: If you go around and target family-owned businesses in the veterinary services or the like, you’re probably going to be able to buy them at much lower prices and then presumably take a bunch of these things, put them together, and create something that you either can take public or else be able to sell at an attractive multiple to somebody else. That’s at least the theory. And as the business has become more competitive, and as the financial engineering model has faded in importance, we’ve seen many more of these kinds of transactions.
DUBNER: So I don’t know how typical this view is, but when I think about “the economy,” I think about two major groups: the big, national brands that are run a certain way and that permeate the culture in a certain way. And then there are the local businesses, the mom-and-pops, right, and those seem to operate in a categorically different style than the big, national firms. But with the rise in private equity, it seems as though the border between the local and the national is eroding. Is that an overstatement?
LERNER: Well, there’s been a huge dispersion in performance, or what we as economists like to call productivity, in the economy. And it’s true that the larger, national firms have been far more productive than many of the local ones, even within the same industry. And that disparity has intensified, probably largely due to the arrival of information technology and logistics, right? When you think about the difference between Walmart and the local toy store — it was probably different in terms of efficiency 20 years ago, but it’s even more dramatic now, simply because Walmart is just such a fine-tuned machine which has squeezed every element of cost out of the system.
DUBNER: What then are the ramifications of the consolidation — the big, national corporate firm versus the smaller firm? Let’s start with price. Walmart is famous for price-cutting, and the local toy store can’t keep up. So how does that play out thousands of times over, across the country?
LERNER: That kind of disparity plays out in many different sectors in the economy. And that’s created this pressure for consolidation, particularly in businesses that have traditionally had mom-and-pop flavor to it. When you think about the veterinary-care example, most of these vet cares have somebody to manage the finances of the business, to handle the taxes. Presumably, once 10 of these things have been mashed together, there’s going to be a single person sitting at corporate headquarters doing that role for all the individual practices. Similarly, a lot of the cost of running a vet practice is going to be in terms of purchases — medicines and the like, which clearly the customer is going to pay for. But if you can get considerable savings from purchasing these things in bulk, that may translate into either more profits or some of those savings may be passed on to the customer.
So that sounds like potentially good news for pet owners, as private equity firms buy up local vet practices across the country: increased productivity, economies of scale, maybe some price savings. So should pet owners welcome this increased efficiency?
APPELBAUM: It’s not about efficiency. It’s not about economies of scale. It’s all about monopoly power.
That, again, is the economist Eileen Appelbaum.
APPELBAUM: This buy-and-build strategy is very common. It’s not like they care about pets. They don’t care about pets. What they see is a fragmented market, lots of people love their pets and are going to do everything they can to get them the best care — and they see an opportunity here. So they buy a slightly largish pet-care company. They try to find one that’s really good. And then they go out and look at who are its competitors, and they buy up the competitors. They want to monopolize. So that when you need a procedure for your pet, you have to take it to a place that they own.
DUBNER: I want to run a few pet-care industry statistics past you and then ask you to assess where we are and where you think we’re headed. So, about 25 percent of general veterinarians now are owned by corporations. Doesn’t sound that high, but that’s up from 5 or 6 percent just a decade ago.
DUBNER: And furthermore, in contrast to general vets, 75 percent of specialty-vet practices are owned and operated by the corporates.
APPELBAUM: Well, when you say corporate, let me just back up for a minute and tell you that the vast majority of states in the U.S. have laws against the corporate practice of medicine. And so there are real problems here. When you have a situation where healthcare is being provided by a company whose first responsibility is to maximize profit, you’re going to see profit prioritized over the treatment of the doctors or the vets and the treatment of the patients. And it is illegal in most states, but private equity at least has figured out a way around it.
DUBNER: How do they do that?
APPELBAUM: They set up a sham company that is run by a doctor. And they say to the doctors, “Your practice is owned by this.” But here’s the thing. That sham company has absolutely no assets. All of the assets of the doctors’ practices — the technology, the building, the accounts receivable, the chairs in the waiting room and so on — all of these are owned by a management-services company that is owned by private equity.
DUBNER: So does that make it quasi-legal.
APPELBAUM: No, it makes it quasi-illegal. And in fact, there is a case now out in California that is challenging private-equity ownership of doctors’ practices in hospitals. It’s being brought by the emergency-room doctors. They feel they’re being forced to not use their best judgment when they treat people. They’re under enormous pressure to stabilize the poor patients and get them out of there, whether that’s the right thing to do or not, and they are just fighting back. Let’s see what happens.
DUBNER: Very important question. Do you, Eileen, have pets?
DUBNER: Does anyone you know, and love, have a pet?
APPELBAUM: Everybody I know, and love, has a pet.
DUBNER: Do you have any advice for them as the pet industry begins its private equity roll-up?
APPELBAUM: It’s really hard, because they may not be a big part of the total industry, but in certain geographic areas, they’re going to be the dominant provider. And if you happen to live in one of those areas, you don’t really have a choice. You just need to keep an eye on what’s happening. Stay with your dog or your cat while they’re treating it. Don’t let them tell you you have to sit in the waiting room. But also, the other piece of it is that by having this large footprint, they can really charge much higher prices for the procedures they perform on your pets because you don’t have a choice. All of the pet stores in your vicinity are charging that because they’re all owned by this company, as it turns out, even if they have different names.
HARTMANN: We just don’t view veterinary medicine as a space where we can win by cutting costs.
That, again, is Greg Hartmann, the C.E.O. of National Veterinary Associates, or N.V.A. Over the past decade, N.V.A. has used private-equity funding to grow from around 100 pet hospitals to more than 1,000.
HARTMANN: The best companies are the ones that have found ways to invest in their teams, invest in their hospitals, invest in their medical capability and their technology in ways that have enabled them to absorb more of the growth and latent demand that exists in the markets.
DUBNER: So if you’re not cutting costs, one solution to being profitable or being more profitable is, of course, to raise prices for customers. And one concern in a lot of sectors where private equity has come on strong is that these firms acquire a lot of market power, and then have the opportunity to raise prices in an almost monopolistic fashion. So what can you tell us about prices for customers when N.V.A. starts to become more prominent in a local market?
HARTMANN: You have to remember that the veterinarian marketplace is highly, highly fragmented. And so any one of our hospitals in a local market is typically in competition with anywhere from a few to a half-dozen or more other local hospitals, where most of them are still independent. And so the price competition in any local marketplace is very well established and really can be quite intense. We certainly don’t view price increases as a way of enabling or justifying the investment in a hospital.
That may be the case for N.V.A. But when we spoke with a vet who worked at an independent practice that was bought out by a different private-equity firm, here’s what she said:
PETERS: We saw three price increases in the span of a year and a half. And when I talk to some of my other colleagues who work at other — either branches of the same company or other similar corporate companies — they’re experiencing the same thing.
At the beginning of this episode, we asked what we thought was a pretty simple question: how will the rise of private equity in pet care affect you and your pet? As it turns out: the answers aren’t so simple. In fact, we have a lot we haven’t gotten to yet. So we’re going to continue this conversation next week. We’ll hear a lot more from that veterinarian, and we’ll hear why N.V.A. has been forced to divest some of its recent acquisitions. We’ll also hear about the economist Josh Lerner’s pets.
LERNER: We’ve got a large portfolio of cats, chickens, donkeys.
And what level of care they receive:
LERNER: They have the Mayo Clinic executive level of care where they’re like, you’ve got a bump on your whisker, let’s make sure it’s okay.
That’s next time. Until then, take care of yourself and, if you can, someone else too … and maybe even their pet.
* * *
Freakonomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Ryan Kelley and mixed by Greg Rippin, with help from Jeremy Johnston. Our staff also includes Zack Lapinski, Morgan Levey, Katherine Moncure, Alina Kulman, Rebecca Lee Douglas, Julie Kanfer, Eleanor Osborne, Jasmin Klinger, Daria Klenert, Emma Tyrrell, Lyric Bowditch, and Elsa Hernandez. The Freakonomics Radio Network’s executive team is Neal Carruth, Gabriel Roth, and Stephen Dubner. Our theme song is “Mr. Fortune,” by the Hitchhikers; all the other music was composed by Luis Guerra.
- Eileen Appelbaum, co-director at the Center for Economic and Policy Research.
- Greg Hartmann, C.E.O. of National Veterinary Associates.
- Josh Lerner, professor of investment banking at Harvard Business School.
- Rose Peters, professor of veterinary clinical medicine at the University of Illinois.
- “Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes,” by Atul Gupta, Sabrina T. Howell, Constantine Yannelis, and Abhinav Gupta (NBER Working Paper, 2021).
- “Leveraged Buyouts and Financial Distress,” by Brian Ayash and Mahdi Rastad (Finance Research Letters, 2021).
- “Have Private Equity Owned Nursing Homes Fared Worse Under COVID-19?” by Ashvin Gandhi, YoungJun Song, and Prabhava Upadrashta (SSRN, 2020).
- “When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education,” by Charlie Eaton, Sabrina T. Howell, and Constantine Yannelis (The Review of Financial Studies, 2020).
- “The Economic Effects of Private Equity Buyouts,” by Steven J. Davis, John Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner, and Javier Miranda (SSRN, 2019).
- “How Acquisitions Affect Firm Behavior and Performance: Evidence from the Dialysis Industry,” by Paul J. Eliason, Benjamin Heebsh, Ryan C. McDevitt, and James W. Roberts (The Quarterly Journal of Economics, 2019).
- Private Equity at Work: When Wall Street Manages Main Street, by Eileen Appelbaum and Rosemary Batt (2014).
- “The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry,” by Shai Bernstein and Albert Sheen (SSRN, 2013).
- “Is Dialysis a Test Case of Medicare for All?” by Freakonomics Radio (2021).
- Off Leash, limited-run Freakonomics Radio Network series.