Research shows that private equity is dismantling and devaluing successful hospitals

Private equity firms are targeting already successful hospitals and, after taking them over, reducing their assets to turn a profit for investors, two research letters show.

One of the studies published in CAVITY showed that the assets of the 156 acquired hospitals decreased by an average of 15% in the 2 years following the acquisition, while the assets of the 1,560 non-acquired control hospitals increased by 9.2% in the same period (P<0.001), said researchers led by Dr. Elizabeth Schrier of the University of California, San Francisco.

“That means that in the two years after purchasing a hospital, private equity firms stripped each hospital of an average of $28 million in assets,” Schrier said. MedPage today.

Schrier called this a “common phenomenon” in which assets fell for 61% of hospitals acquired by private equity, compared with just 15% of control hospitals. Notably, in the year of acquisition, acquired hospitals had an average of $91 million in assets, compared with $96 million for control hospitals.

“In some places, private equity firms have sold hospital land and buildings to for-profit investors, charging the hospitals rent for the facilities they once owned. But no one has looked at whether this type of asset stripping is widespread across the country,” Schrier said.

This is partly because it is difficult to track acquisitions by private equity funds because they do not have to be disclosed.

Schrier said that thanks to the study, researchers now know “that asset stripping is a common practice across the country and that the claim by private investors that they are ‘injecting capital’ is completely false.”

The second study, published in JAMA Internal medicineThe question was whether private equity firms take on hospitals that are already in trouble, or whether problems arise after the acquisition.

In an analysis of 242 acute care hospitals acquired by private equity firms and comparing them with 870 control hospitals that were not acquired by private equity firms, Dr. Sneha Kannan of Massachusetts General Hospital and Dr. Zirui Song of Harvard Medical School, both in Boston, found that hospitals were in slightly better financial shape, on average, before they were acquired by private equity firms.

Although the earnings and operating margins of hospitals acquired by private equity funds were similar, they tended to have less debt than control hospitals before the acquisition (equity ratio 0.97 vs. 0.43) and had a larger share of assets (adjusted difference 0.47, 95% CI 0.33–0.61, Bonferroni-adjusted) P<0.001), indicating that the targets of private capital investments are already successful enterprises.

Kannan said MedPage today that distressed investing is not the private equity model in other industries, and this research shows it is not the model in healthcare either. Instead, private equity uses a leveraged buyout model, in which “acquisitions are financed with a significant amount of debt, and that debt is placed in the hospital.”

Hospitals that are acquired tend to have less debt before the acquisition, Kannan said, “because if the eventual acquisition is going to put a lot of debt on the hospital, then in some ways it follows that those hospitals have less debt to begin with and are able to withstand that financial maneuver.”

Hospitals acquired by private equity firms also had similar rates of hospital mortality and hospital-acquired illness prior to acquisition.

Kannan and Song’s study helped contextualize the extent to which the problem lies with private capital itself. They concluded that because key metrics were similar before the acquisitions, “changes in financial or clinical performance after the acquisition may therefore reflect management—debt, personnel, and capital—more than differences in these characteristics before the acquisition.”

Earlier this year, federal agencies announced they would examine the role of private capital in health care, and research found that most physicians have a negative view of private capital involvement in health care. In addition, a study of Medicare data found that hospital complications increase after private capital takes over.

For their study, Schrier and colleagues identified private equity-acquired hospitals and the years of acquisition using the Private Equity Stakeholder Project Private Equity Hospital Tracker, then cross-checked and supplemented it with prior research, news reports, and Medicare cost reports.

Using Medicare cost reports for 2006–2021, we estimated the total value of hospital capital assets, including land, buildings, equipment, and health information technology, as well as characteristics such as year of acquisition, share of Medicaid inpatient discharges, rurality, educational status, number of beds, and region.

Hospitals acquired by HCA Healthcare, whose acquisitions were suggested by prior research to be atypical for private equity acquisitions, were excluded, as were hospitals with assets outside the 95th and 5th percentiles and those acquired after 2019.

They matched acquired hospitals to 10 nonacquired controls using exact matching by year, region, and bed size category and nearest neighbor matching by total capital assets in the year of acquisition. Hospitals were acquired between 2010 and 2019, most frequently in 2017 and 2018. Acquired hospitals were mostly located in the South (55.8%) and had between 50 and 149 beds (44.9%).

Kannan and Song pulled data from Medicare cost reports from 2005 to 2018 on hospitals’ total revenues, equity ratio (defined as “the share of total assets owned by the hospital after paying debt obligations”), and operating margins, as well as pretax earnings, income, depreciation, and amortization, which private equity firms use to evaluate potential acquisitions. They also looked at quality metrics, including patient characteristics, hospital mortality, and hospital-acquired adverse events, where such data were available.

Both studies had limitations. Schrier and colleagues noted small sample sizes; the exclusion of closed hospitals, which could have led to an underestimation of capital losses; and the lack of long-term trends in their analysis. In addition, Medicare cost reports can contain errors, and many hospitals did not report components of their total capital assets.

Kannan and Song stated that their study was limited by hospital-reported rates and potential unobserved confounders, as well as the lack of clinical outcomes from other payer populations.