Private equity hospitals better off than non-investment hospitals

A new study suggests that private equity firms aren’t necessarily going after struggling hospitals, but hospitals with more financial stability prior to acquisition.

The study published in JAMA Internal Medicine by researchers from Massachusetts General Hospital and Harvard Medical School analyzed over 200 acute care hospitals acquired by private equity firms for the first time between 2005 and 2018. Researchers then compared Medicare Cost Reports for the hospitals against 870 control hospitals not acquired by private equity firms.

The study showed that private equity-owned hospitals during the period, on average, had similar earnings and operating margins before acquisition compared to the comparable control hospitals. However, the private equity hospitals carried substantially less debt prior to acquisition with an equity ratio of 0.97 versus 0.43.

Researchers said this means that private equity hospitals owned about 50 percentage points more of their assets versus control hospitals.

Additionally, private equity hospitals acquired on or after 2010 had similar rates of in-hospital mortality and hospital-acquired conditions before the acquisition.

The findings suggest that private equity hospitals were better off financially compared to control hospitals despite claims that private equity firms typically invest in struggling hospitals.

Researchers explained that “[f]inancially healthier hospitals may be better able to absorb new debt and cost-cutting such as reductions in staffing,” which can help private equity’s traditional debt-financed or leveraged buyout acquisition model.

They also said that differences in financial or clinical performance after a private equity acquisition is likely a reflection of management, whether of debt, personnel or capital, versus differences in preacquisition characteristics.

“These findings do not support the notion that [private equity] investments generally target struggling hospitals and instead support broader evidence that [private equity] firms target successful entities for acquisition,” the study concluded. “Prior evidence linking [private equity] hospital acquisitions to staffing reductions and worsened patient outcomes, and future research in this domain, should take this finding into account.”

Private equity’s reach in healthcare has been under a microscope lately as evidence builds against the firms’ investment in hospitals. Research has linked private equity investment to higher costs for patients with little to no improvement in clinical quality. Most recently, Steward Health Care, a large hospital system in Massachusetts previously backed by a private equity firm, also filed for bankruptcy, leading to a federal investigation into the system’s financials.