Private Equity Strips and Devalues Successful Hospitals, Studies Reveal
Recent investigations into private equity (PE) firms’ acquisition strategies reveal significant trends in how these firms affect the assets and financial health of hospitals. Two prominent studies have illuminated these effects, offering a detailed look at the practices and outcomes associated with PE acquisitions in the healthcare sector.
Asset Reduction Post-Acquisition
A pivotal study published in JAMA has provided striking evidence of the financial maneuvers employed by private equity firms in the healthcare sector. Researchers led by Elizabeth Schrier, MD, from the University of California, San Francisco, analyzed data from 156 hospitals acquired by private equity firms. The study revealed that, on average, these hospitals experienced a 15% decrease in assets within two years of acquisition. This contrasts sharply with the 9.2% increase in assets observed in 1,560 non-acquired control hospitals over the same period.
Schrier’s research suggests that private equity firms systematically reduce hospital assets to maximize investor profits. This asset reduction translates to an average loss of $28 million per hospital. Schrier described this trend as a “widespread phenomenon,” with 61% of private equity-acquired hospitals showing asset declines, compared to only 15% of control hospitals.
The practice of asset stripping is particularly notable. In some cases, private equity firms have sold off hospital properties and then leased them back to the hospitals. This maneuver converts owned assets into rental expenses, potentially benefiting investors while imposing additional financial burdens on the hospitals. This form of financial engineering is a significant concern because it affects the long-term stability and operational capacity of the healthcare facilities.
Financial Health Before Acquisition
Another crucial study published in JAMA Internal Medicine explored whether private equity firms target distressed hospitals or if distress develops post-acquisition. Researchers Sneha Kannan, MD, from Massachusetts General Hospital, and Zirui Song, MD, PhD, from Harvard Medical School, compared 242 hospitals acquired by private equity with 870 matched control hospitals.
Their findings suggest that private equity firms typically target financially healthy hospitals. The study noted that hospitals acquired by private equity had, on average, less debt and owned more of their assets before acquisition. This indicates that private equity prefers hospitals that are already financially stable and operationally sound.
Kannan and Song’s study emphasized that private equity’s approach involves using a leverage buyout model, where acquisitions are financed with significant amounts of debt placed on the acquired hospitals. This model aligns with private equity’s broader strategy of leveraging high levels of debt to finance acquisitions. The research found that private equity-acquired hospitals had less debt before the acquisition, which allows them to absorb additional debt and financial pressures from the acquisition process.
Furthermore, the study revealed that private equity-acquired hospitals had similar rates of in-hospital mortality and hospital-acquired conditions before acquisition, suggesting that the pre-acquisition financial and operational health of these hospitals was comparable to their peers. Thus, any subsequent changes in financial or clinical performance are more likely related to management practices and financial strategies rather than inherent deficiencies in the hospitals.
Challenges and Limitations in Research
Both studies acknowledge several limitations that could impact their findings. Schrier’s research faced challenges such as a relatively small sample size and the exclusion of closed hospitals, which may have led to an underestimation of capital losses. Additionally, inconsistencies in Medicare cost reports and incomplete reporting of capital asset components could affect the accuracy of the data.
Similarly, Kannan and Song’s study faced limitations related to hospital-reported metrics and potential unobserved confounding factors. The lack of comprehensive clinical outcome data from other payer populations also posed a challenge to fully understanding the impact of private equity on hospital performance.
Regulatory and Industry Reactions
These findings have spurred increased scrutiny from federal agencies, which have announced investigations into the role of private equity in healthcare. This heightened scrutiny reflects broader concerns about the impact of private equity on the quality of healthcare services and the financial stability of healthcare institutions.
Previous research has indicated that physicians generally view private equity involvement in healthcare negatively, and studies of Medicare data have shown that hospital complications often increase following private equity acquisitions. The investigations into private equity’s role are part of a broader effort to assess and regulate the influence of financial firms on healthcare delivery.
Research Funding and Conflicts of Interest
Both studies were supported by grants from various institutions, including the National Heart, Lung, and Blood Institute and Arnold Ventures. The funding sources reflect a diverse base of support for understanding the implications of private equity in healthcare.
It is worth noting that some authors disclosed affiliations and viewpoints critical of for-profit healthcare models, though no direct conflicts of interest were reported by Schrier. Kannan and Song’s study was also supported by multiple grants and funding sources, ensuring a broad foundation for their research.
In conclusion, these studies provide valuable insights into the financial strategies employed by private equity firms in the healthcare sector. They highlight significant practices such as asset stripping and the preference for financially healthy hospitals, as well as the broader implications for hospital operations and patient care. The findings underscore the need for ongoing scrutiny and regulatory oversight to ensure that private equity’s involvement in healthcare aligns with the best interests of patients, healthcare facilities, and the broader healthcare system.
