Study explores impact of private equity acquisitions on hospitals
Private investment in hospitals has increased dramatically in the 21st century and accelerated in the years leading up to the COVID-19 pandemic. Now, a new study of short-term acute care hospitals acquired by private equity firms shows that they not only have higher profit margins and profit margins, but they are also slower to grow their staff.
In one study published in Health Affairs, a multi-institutional team of investigators led by Dr Anaeze C. Offodile II, a non-resident researcher at the Center for Health and Biosciences at the Baker Institute for Public Policy at Rice University, Gilbert Omenn Fellow of the National Academy of Medicine and an assistant professor of plastic and reconstructive surgery at the University of Texas MD Anderson Cancer Center, examined private participation in acute care hospitals and combed through proprietary databases to identify private equity transactions involving such hospitals between 2003 and 2017.
“Hospital spending represents one-third of healthcare spending in the United States, and there have been numerous reports of private investment in hospitals. But we know so little about how the acquisition of private equity influences the finances and operations of hospitals, ”said Marcelo Cerullo, a surgical resident at Duke University Medical Center and the second author of the article.
The researchers compared hospitals acquired by private equity to hospitals not involved in private equity transactions using information from Medicare cost reports and Regional health resource files. The study looked at the differences between private equity hospitals and non-private private equity hospitals in 2003 (before acquisitions) and 2017 (after closing private equity deals).
During that time, private equity firms acquired 282 unique hospitals (some more than once) through debt buyouts in 36 different states. The study estimates that of all patients discharged in 2017, around 11% came from a hospital that had at one point been acquired by private capital. In 2003, hospitals that were subsequently acquired by private equity investors had higher expense-to-cost ratios, higher profit margins, and comparable staffing ratios. However, after the acquisition in 2017, the private equity-acquired hospitals had developed higher profit margins, even higher profit margins, and experienced slower growth rates in staffing ratios. Notably, hospitals acquired by private capital had lower costs overall for each patient referred.
“Our main findings highlight the overall solvency of facilities acquired by private equity, with strong core financial performance,” said Offodile. “Our results challenge the dominant discourse of institutions in financial difficulty seeking to inject external private capital. After the acquisition, these hospitals appeared to continue to increase their profits by limiting the growth in cost per patient, in part by limiting staff growth. “
Hospitals acquired by private equity firms between 2003 and 2017 had operating margins 5.6 percentage points higher than those of non-private hospitals at the start of the period; this gap widened to 8.6 percentage points in 2017.
The authors also reviewed industry-specific press releases and reports for private equity transactions. Private equity firms have often touted large capital investments that would maintain employment and commitments to the hospital’s core mission. “We found a mixed record of investors holding specific promises after the acquisition,” Cerullo said. “Often, private equity firms would announce the dollar amount attached to renovations, new facilities or give a time frame to stay open or maintain increases.”
The study forms a basis for future investigations into how private equity acquisitions alter hospital operations and clinical quality, the authors said.
“We need to conduct more detailed analyzes before making specific policy recommendations regarding hospitals acquired through private equity,” said the co-author. Vivian Ho, professor of economics at Rice and professor of medicine at Baylor College of Medicine. “For-profit hospitals have been operating for several decades, but we need to determine whether the additional presence of private equity induces additional efforts to maximize profits at the expense of patient well-being.”
Other authors on the paper are Mohini Bindal, a former research assistant at the Baker Institute who is now a student at Baylor College of Medicine, and Alejandro Rauh-Hain, assistant professor of gynecological oncology and reproductive medicine at MD Anderson. .