How does private equity investment impact hospitals?

In the last 20 years, private equity investment in the U.S. healthcare sector has increased twentyfold. Private equity firms have drawn considerable policy interest and scrutiny. One example is the much-publicized bankruptcy of Hahnemann University Hospital in Philadelphia, less than 18 months after it was acquired by private equity firm Paladin Healthcare.

However, there has been little systematic examination of the scope, impact on access and spending, and unintended consequences of private equity in healthcare. I recently co-authored a piece in Health Affairs, which provides an overview of private equity acquisitions of acute care hospitals from 2003-2017. A total of 42 acquisitions occurred during this time period involving 282 unique hospitals predominantly located in the Mid-Atlantic and Southern U.S. Bain Capital, Cerberus Capital Management, and GTCR LLC were identified as the most frequent private equity firms involved in these acquisitions.

We compared acquired and non-acquired hospitals’ characteristics before and after acquisition looking at hospital operations and financial metrics. Most notably:

• Acquired hospitals were significantly larger than nonacquired hospitals in terms of number of beds and discharges in both 2003 and 2017.
• Total operating expenses were similar in both groups in 2003, although by 2017 they grew more in nonacquired hospitals than acquired hospitals.
• Only 13% of hospitals in the sample were noted to be financially distressed at the time of private equity acquisition.

These differentials plus others mentioned in the article make it possible to conclude that private equity acquired hospitals had higher operating margins than nonacquired hospitals in both 2003 and 2017. We also reviewed public announcements of operational strategies, including commitments to maintain salary levels of existing employees, expected capital infusions, and plans to maintain the mission of charity care or faith-based hospitals.

Our main findings highlight the overall solvency of private equity-acquired facilities with strong baseline financial performance. Although isolated examples of distressed hospitals were identified, our results challenge the prevailing narrative of financial distressed institutions seeking infusion of outside private equity capital.

Our analysis of detailed financial measures suggests that private equity investors acquired larger hospitals with healthier operating margins. After acquisition, these hospitals boosted profits by restraining growth in cost per patient, in part by limiting staffing growth.

Despite the massive shocks to credit markets worldwide in 2008, private equity backed deals in healthcare have continued to rise. Now, global investment firms suggest that available profit pools will continue to grow at 5% per year despite the COVID-19 pandemic. Private equity firms may address the inefficiencies in care delivery via the operational engineering they use to increase efficiency and turn a profit.

However, the use of leverage buyouts, limited federal regulatory oversight, and a short-term orientation distinguish private equity from other for-profit forms of ownership.

As a result, the social contract of healthcare — the expectation of safe, effective, and equitable services — may be at risk. Will private equity firms make long-term investments in infrastructure, personnel, and quality improvement initiatives when their typical investment horizon is five to seven years? Such theories necessitate further research into the effect of private equity investment on the quality of healthcare.

-By Mohini Bindal, M.S., M.D. candidate, class of 2024, Baylor College of Medicine