Private Equity Acquisitions Improved Hospital Financial Performance

Hospitals saw higher operating margins, decreases in costs per adjusted discharges, and increased inpatient utilization following private equity acquisitions, according to a Health Affairs study sent to journalists.

Private equity firms have been acquiring physician practices, hospitals, and laboratory facilities at high rates in recent years. These acquisitions have received mixed reviews from the industry on whether they benefit health systems.

Private equity advocates claim that the acquisitions provide hospitals with management expertise and funding to improve patient care. Meanwhile, critics have said the acquisitions burden hospitals with debt and discourage long-term investments that boost population health.

To understand how private equity acquisitions impact hospital operations and financial performance, researchers analyzed hospital data from the CMS Healthcare Cost Report Information System (HCRIS) for 176 hospitals that private equity firms acquired between 2005 and 2014. The team matched those hospitals to control hospitals that were not acquired. 

To compare pre-acquisition performance to post-acquisition performance, researchers looked at data from the three years before and after the private equity acquisition for each hospital.

Private equity acquisition was associated with a $432 reduction in cost per adjusted discharge, the study found. Hospitals that private equity firms acquired also saw a 1.78 percentage point increase in operating margins.

The study included stratified analyses focused specifically on the financial performances and operational outcomes of the 2006 acquisition of the Hospital Corporation of American (HCA).

In 2006, a private investor group finalized its acquisition of HCA in a transaction valued at around $33 billion. Out of the 176 hospitals in the study, 134 were HCA members.

Private equity acquisition of HCA hospitals was associated with a $559 reduction in cost per adjusted discharge. HCA hospitals did not see any change in operating margin following the acquisition, but non-HCA hospitals saw a 3.27 percentage point increase, according to the stratified analysis.

The total bed count for all hospitals decreased by 2.79 percent, or around 4.43 beds, following private equity acquisition. The ratio of outpatient to inpatient visits decreased as well, falling 4.58 percent, indicating that inpatient utilization increased.

Researchers said that a decrease in bed count coupled with an increase in inpatient stays suggests that hospitals experienced higher patient throughput—the movement of patients from arrival to discharge.

The deceased ratio of outpatient to inpatient visits opposes the shift toward outpatient care that hospitals have seen in recent years. According to the study, private equity acquisition may lead to increased inpatient care due to more aggressive price negotiation with commercial payers for these services than outpatient services.

Private equity acquisition also impacted staffing, researchers found. Total personnel full-time equivalents (FTEs) decreased by 5.05 percent, amounting to 36.97 FTEs. Total nursing FTEs fell by 4.38 percent or 10.52 FTEs.

Total personnel FTEs per occupied bed also declined following private equity acquisition.

“This is notable because healthcare is a distinctly labor-intensive industry, and labor accounts for the greatest share of hospital expenses (up to 50 percent by some estimates),” the study stated. “A strategic reduction in total personnel and nursing FTEs might indicate how private equity firms control hospital expenditures and enhance their financial position.”

However, total costs per adjusted discharge did not decrease further after adjusting for FTE declines, suggesting that hospitals cut costs in other areas after being acquired by private equity firms, researchers said.

The study revealed that while private equity acquisitions may improve hospital finances, more research is needed to determine how these deals impact patient care.

“Ultimately, although the improved financial performance is noted across the board, our findings are not evidence that gains in efficiency are translated to improved patient outcomes or clinical experiences in either the short or the long term,” the study concluded.