During the years before the Covid-19 pandemic, health systems and hospital acquisitions by private equity (PE) firms increased significantly. This increase triggered discussions on how the growing influence of private equity in the U.S. healthcare sector would impact costs, quality, and accessibility.

We however may consider tailoring recommendations and concentrating on certain strategies before labeling PE’s impact on healthcare as “good” or “bad”. That is what a recent study about hospital acquisitions by private equity companies published by Harvard Business Review suggests.


Private Equity Hospital Acquisitions: Is It Good or Bad?

Supporters of PE defend its proven ability to generate value for companies and investors across different industries. They argue that PE enhances operations, fosters innovation, and provides capital for infrastructure improvements, such as IT systems and new facilities, leveraging economies of scale and implementing effective management practices.

On the other hand, opponents raise concerns about the negative aspects of PE’s focus on maximizing profits. Drawbacks could include surprise billing for patients, less nursing staff, and avoidance of low-margin services primarily utilized by vulnerable populations. Opponents also question the potential drawbacks of PE funds’ comparatively short life cycles of seven to ten years. This may have implications for the entities they acquire and, hence, impact the communities and patients they serve.


Empirical Evidence

Harvard Business Review published a study analysing 42 leveraged buyouts of hospitals by PE firms between 2003 and 2017.

Evidence shows that the prevailing viewpoints of these hospital acquisitions as either entirely positive or negative fail to capture reality. Before labeling PE’s impact on healthcare as solely “good” or “bad”, the study suggests policy discussions about the topic to:

– Tailor recommendations to each provider community, such as nursing homes, physician practices and hospitals. The issues raised by PE acquisitions, including potential benefits, risks, and motivating factors, will probably differ significantly across them; and

– Concentrate on strategies aimed at aligning economic incentives, penalties, and oversight. These strategies may include antitrust regulation, public disclosure requirements, and monitoring of fraud and abuse in claims coding practices. By doing so, the capital resources and management expertise of PE can be directed towards maximizing benefits for patients, such as expanding access to care, improving care quality, and enhancing the overall patient experience.


PE’s Influence on Hospital Finances and Operations

Private equity’s impact on the hospital industry has become significant. The latest publicly available data reveal that 11% of inpatient admissions in 2017 occurred at facilities that had experienced PE ownership at some point.

The analysis of the 42 leveraged buyouts of hospitals by PE firms pointed to several distinct patterns. Firstly, acquired hospitals were primarily concentrated in the southern United States, slightly larger in size and had higher margins. In addition, they were situated in more populous areas compared to their non-acquired counterparts.

Moreover, contrary to headlines highlighting bankruptcies in PE-acquired hospitals, the data do not support a narrative of financial instability following the hospitals’ acquisition by PE firms. In fact, a separate study indicated that hospitals actually improved their financial performance after being acquired by PE firms. This improvement stemmed from a combination of reducing operating costs, including overall and nurse staffing reductions, and implementing other efficiency measures that complemented the gains achieved through staffing changes alone.

Revenue-wise, PE-acquired hospitals implemented various changes. They shifted their focus from outpatient care to more profitable inpatient care services. These hospitals also made operational adjustments, such as a quicker adoption of profitable and technologically advanced service lines like cardiac catheterization, advanced imaging, and robotic surgery. There was no significant evidence of reductions in the least profitable service lines.


Crucial Questions Remain Open

In spite of all the academic research on PE in healthcare, crucial questions remain open. One of them is if the standard PE roll-up strategy leads to significant changes in healthcare costs and quality. The lack of regulatory oversight on the effects of hospital mergers across different healthcare markets, coupled with limited existing research, magnifies the importance of addressing these questions.

Furthermore, it remains uncertain if PE acquisitions of hospitals drive vertical integration by acquiring private physician practices to increase patient referrals and maximize profits. Lastly, it is yet to be determined whether PE acquisitions contribute to avoidable or premature hospital closures.


The Impact on Clinical Outcomes

Numerous studies have indicated that the acquisition of hospitals by PE firms does not result in worse clinical outcomes for Medicare patients admitted with acute non-surgical conditions like pneumonia and strokes. This finding holds true at both individual patient and population levels, as well as across various quality measures, including 30-day mortality, hospital readmission rates, and extended length of stay.

The research uncovered no evidence suggesting that PE-acquired hospitals engage in practices such as upcoding or selectively admitting healthier patients in order to artificially improve outcomes without genuinely enhancing quality.


Implications for Policy

Based on the research findings, the following informing principles are proposed:


1. Examination of loopholes:

Regulatory scrutiny should primarily focus on identifying and addressing loopholes in payment policies that allow for profit maximization at the expense of patient welfare. Thus, the focus should be on identifying payment loopholes and perverse incentives that may adversely affect care affordability and quality. It is crucial to address underlying issues rather than solely targeting specific entities or investor classes, as similar behaviors could be exhibited by non-PE-owned firms.

2. Prioritization of community needs:

The prioritization of community needs should take precedence in the operation of all hospitals. Every hospital holds a “social contract” with its community, which entails delivering high-quality, equitable, and timely care. This commitment should be upheld above the goal of maximizing stakeholder returns for a private equity (PE) fund. To ensure the provision of adequate care to their served communities, PE-acquired hospitals must maintain manageable debt obligations. This requirement would safeguard their ability to meet the healthcare needs of the community. The research also points to the need for policies that enhance transparency and public reporting of deal terms during the process of a hospital acquisition or disposition by a PE fund.

3. Protection of physician autonomy:

The protection of physician autonomy is of utmost importance. The research recommends updating ethical guidance, employment laws, and regulatory oversight to better safeguard physician autonomy, mitigate conflicts of interest, and prioritize the delivery of care that is of exceptional quality and centers around the needs and well-being of patients.

4. Strengthening antitrust policy:

The traditional focus of protecting patients from harm remains essential. However, it is necessary to update the approach and definition of harm to encompass two critical aspects. The first are the disparities in access to care. The second are the anti-competitive effects on non-acquired hospitals and their responses in the market following a PE acquisition.


In Brief

In brief, the research findings present a complex and varied landscape of effects. When considering policy reforms, focus on sector-specific evidence and prioritize the principle of ensuring patient protection as the highest priority.

Source: Harvard Business Review (2023)


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