A recent article in the Washington Post reported on a hospital system, Steward Healthcare, that was started by a private equity firm, Cerberus, in 2010. It was based in Dallas and owned 30 hospitals across the country. It recently filed for bankruptcy, leaving patients to suffer and some to even die.
This is only the tip of an iceberg. Private equity funds have increasingly purchased healthcare organizations. According to the Lown Institute At least 386 hospitals are now owned by private equity firms, comprising 30% of for-profit hospitals in the U.S. In this post I will discuss effects of private equity ownership of hospitals on the quality and cost of care.
Private equity firms are businesses that seek large investors by having a very large minimum investment, so investors usually include both wealthy individuals and large institutional investors like pension funds, insurance companies, endowments, and sovereign wealth funds. Typical large private equity firms are Cerberus, Bain Capital, Apollo Global Management, TPG, KKR and Blackstone. Private equity firms are different from venture capitalists, who provide a cash infusion to small startups and hope they blossom into the next Facebook. Nor are they stock traders making split-second decisions to buy or sell shares in public companies. Rather, private equity funds aim to take control of a business for a relatively short time, restructure it and resell the company at a profit. Investors in private equity firms expect to make a much larger profit than typically provided by the stock market.
Private equity firms claim they are good for healthcare systems because they provide needed capital for investment in better quality care. Let’s look at the data and see if this is true. Remember that the purpose of a private equity fund is to make a large return for its investors. Its purpose is not to improve healthcare delivery.
Cost
A recent review of 55 studies of cost and quality of care in hospitals and nursing homes owned by private equity firms in the British Medical Journal found that costs to patients and insurers were increased in those institutions owned by private equity firms compared to non-equity owned institutions.
Quality of Care
The review in BMJ also found that effects on quality of care in private equity owned institutions was mixed to harmful. A recent study reported in the Journal of the American Medical Association reported higher complication rates in private equity owned hospitals. Here is a quote from the key points in the JAMA article:
“Private equity acquisition was associated with a 25.4% increase in hospital-acquired conditions, which was driven by falls and central line–associated bloodstream infections. Medicare beneficiaries at private equity hospitals were modestly younger, less likely to have dual eligibility for Medicare and Medicaid, and transferred more to other acute care hospitals relative to controls.“
Financial Engineering
Private equity firms use some money from investors and borrow the rest to purchase hospital systems. That’s why they are known as leveraged buyouts. They then saddle the hospital systems with the debt. In other words, they have very little “skin in the game.” They do well whether the hospital does or not.
Short Term Goals
Private equity firms make most of their profits when they sell the hospital or hospital system, and they look to exit within 5-8 years. Thus they look for ways to cut costs quickly like reducing staff or selling the hospital real estate.
Moral Hazard
Private equity firms can make a big profit and pay big dividends to investors even if the hospital goes bankrupt or struggles to survive and is unable to provide the services they did before. See this report about how this happened to one hospital system: Shell game. This is different from most investments where the success of the investor depends on how well the target company does.
Financialization of Hospitals
Financialization is a pattern in which profits come primarily through financial channels rather than through trade and commodity production. In healthcare that means that profits come from buying and selling hospitals rather than from the provision of medical care. This has happened for non-profit hospitals as well as for profit hospitals. For non-profits financialization has occurred by purchasing smaller hospitals, creating large medical systems that dominate the market. The acceleration of the acquisition and selling of for-profit hospitals by private equity firms started in the mid 1990’s and continues to accelerate.
Nursing Homes
In 2022 private equity firms owned 5% of nursing homes. As the purchasing trend accelerates, that number is almost certainly higher now. Studies show that private equity ownership results in an 11% increase in mortality, a 6% decrease in mobility, an 8% increase in bedsores and a 10% increase in pain. (Owner Incentives and Performance in Healthcare: Private Equity Investment in Nursing Homes)
Bottom Line
The preponderance of evidence shows that Private equity ownership of healthcare institutions results in lower quality and higher cost healthcare. It is only the worst aspect of financialization of healthcare that has occurred in the US. There are things the US could to about this if the political will were there. Here is a list of solutions from the Lown Institute:
- Joint Liability. Currently PE firms can put all of their debt on the balance sheet of the firm they acquire, letting them off the hook for this debt and making it harder for the acquired company to succeed. “Requiring private equity firms to share in the responsibility of the debt…would prevent them from making huge profits while they are saddling hospitals and nursing homes with debts that ultimately impact worker pay and cut off care to patients,” write Stewart and Baker.
- Regulate mergers. Private equity acquisitions often go under the radar because the acquisitions are small enough to not be reported to authorities. But the U.S. Federal Trade Commission could be more aggressive in evaluating mergers and buyouts by PE, as they have done recently in Texas, where a PE firm has been buying up numerous anesthesia practices.
- Transparency of PE ownership. It can be hard to know when hospitals are bought by a PE firm. The Department of Health and Human Services could require disclosure of PE ownership for hospitals as they have done for nursing homes.
- Remove tax loopholes. The carried interest loophole allows PE management fees to be taxed at as capital gains, which is a lower rate than corporate income. Closing this loophole would remove a big incentive that makes PE buyouts so attractive for firms.
If it becomes less lucrative for private equity firms to purchase and sell healthcare institutions then they will concentrate their investments elsewhere. That would be good for all of us.