Private equity and hospitals

Experts and research look at effects of health care investing.


For more than a month leading up to the 2019 closure of Hahnemann University Hospital in Philadelphia, nurses and physicians were running out of clean cups and towels and had to specially request central lines from a locked office.

Image by Getty Images
Image by Getty Images

When the 500-bed facility closed its doors in September 2019 after its owners filed for bankruptcy, the city lost a safety-net and teaching hospital and 570 medical residents had to scramble to find other placements.

The hospital's owners, however, emerged from the shutdown relatively unscathed, according to an analysis of the closure published in the May Journal of Hospital Medicine. American Academic Health System (AAHS)—an affiliate of the private equity firm Paladin Healthcare Capital, led by investment banker Joel Freedman—had purchased Hahnemann from Tenet Healthcare Corp. in partnership with Harrison Street Real Estate Capital in early 2018. Since the hospital building had been purchased separately from the business and was exempt from the bankruptcy filing, the valuable downtown property could still be put up for sale.

“Paladin wasn't solely responsible for Hahnemann's closure, as the hospital had suffered financial problems for years prior to the purchase,” said the author of the analysis, hospitalist Kevin D’Mello, MD, FACP, who worked at Hahnemann until its closure and is now employed by Cooper University Hospital in Camden, N.J. “But the way it was shut down was devastating—the owners swooped in on its deathbed, did nothing to revive it, and kept the part they thought would be profitable: the real estate.” (According to multiple news reports, in early 2020, Philadelphia city officials said Mr. Freedman refused reasonable offers to rent or buy the Hahnemann building for use as a COVID-19 hospital, a charge Mr. Freedman denied.)

The Hahnemann experience shows one potential unhappy ending of the story of a private equity firm buying a hospital. Investors have traditionally seen hospitals and physician groups as good bets for shareholders because they are relatively recession-resistant and offer significant growth potential within each market, said Peter Kongstvedt, MD, FACP, a health care industry consultant and senior health policy faculty member at George Mason University in Fairfax, Va.

Private equity's stake in health care increased rapidly in recent years, reaching a record of 855 deals valued at $100 billion in 2018, according to a March 2020 study published by the Institute for New Economic Thinking, a nonprofit think tank based in New York City.

“The PE [private equity] business model is to take underperforming businesses and turn them around in a few years to sell at profit, and with Hahnemann's, the most profitable strategy was closing the hospital down to potentially profit from the real estate,” said Martin Gaynor, PhD, professor of economics and public policy at Carnegie Mellon University in Pittsburgh and former director of the Bureau of Economics at the U.S. Federal Trade Commission. “It should prompt us to think carefully about the appropriate role for PE in health care—whether there is an appropriate role at all.”

Changes in outcomes

A recent study provided data for these considerations by comparing 204 hospitals that were acquired by private equity firms from 2005 to 2017 to 532 similar hospitals that were not. “The evidence was clear that private equity firms were increasingly acquiring hospitals over the last decade, and there had yet to be rigorous evaluations of changes in clinical or economic outcomes associated with those acquisitions,” said Zirui Song, MD, PhD, the study's senior author and an assistant professor of health care policy and medicine at Harvard Medical School and Massachusetts General Hospital in Boston.

The study, published by JAMA Internal Medicine on Aug. 24, found clear results on the economic outcomes, at least. The private equity-acquired hospitals showed a greater than $2 million mean increase in annual net income and an increase of $407 in total charges per inpatient day, as well as increases in ED and total charge-to-cost ratios and case-mix index. The share of discharges attributable to Medicare patients dropped in these facilities.

“It appears that these findings could be consistent with financial motivations to acquire hospitals in the first place,” said Dr. Song. “Private equity firms would likely acquire hospitals that offer an opportunity for increased net income, through mechanisms such as increased charges, lower underlying costs, treating sicker patients or billing in ways that reflect higher levels of sickness, and admitting patients more likely to be privately insured.”

The current hospital reimbursement model also provides financial incentives to improve the efficiency and quality of care, he noted. His study found mixed results on how private equity acquisition affected several hospital quality measures.

Overall, quality scores for myocardial infarction and pneumonia increased in the private equity hospitals versus controls and didn't change for heart failure. In a separate analysis that compared hospitals owned by Hospital Corporation of America (HCA) versus controls, the authors found that heart failure quality scores improved as well. When non-HCA private equity hospitals were compared to controls, heart failure scores decreased after acquisition and the other measures were unchanged.

“The subgroup analyses illustrated that not all private equity acquisitions are alike,” said Dr. Song. “Private equity firms can have different management strategies, and hospitals that are acquired by private equity firms can differ. Differences in teaching status, geography, clinical focus, previous management, or opportunities for quality improvements might help explain why not all outcomes after private equity acquisition change in the same way across acquisitions.”

Some common characteristics of private equity-owned hospitals were identified in another recent study he and colleagues published in Annals of Internal Medicine on Sept. 29. It compared 130 hospitals that were under private equity control in 2018 to 688 matched controls and found that the private equity hospitals were more likely to be in rural and low-income areas and had fewer discharges per year. They also had lower patient experience scores and fewer full-time-equivalent employees per occupied bed.

The latter findings “raise concern” about private equity ownership, the study's discussion section said. Of course, from this single cross-sectional study, it's impossible to know if the observed differences reveal causal patterns, Dr. Song said. But he did note some potential interpretations for the findings.

“For example, acquiring hospitals in more rural regions may be a strategy for consolidating market power where fewer competing hospitals are located,” Dr. Song said.

This is one of experts' concerns about private equity investment in health care, explained Dr. Kongstvedt. “From a strategic perspective, investors see that consolidation is very effective in health care because demand is localized,” he said. “If you have enough market concentration, you can almost dictate prices.”

A Perspective Dr. Song co-wrote in the Feb. 28, 2019, JAMA described this possible consequence. “Even though consolidation may create economies of scale and layoffs and other cost-cutting measures may reduce operating costs, increased market power over price negotiations with insurers and boosting volume for ancillary revenue streams may increase spending,” it said.

Such concerns led Congress to ask the Medicare Payment Advisory Commission (MedPAC) to examine the role of private equity in health care, particularly as it affects Medicare. MedPAC staff presented their plan for studying the topic at the commission's September meeting. To develop a report that is to be presented to Congress next June, they'll interview state and federal officials, representatives of private equity, and outside experts to try to determine the effects of private equity ownership of hospitals, nursing homes, and physician practices on health care costs, beneficiaries, and clinicians.

The last of those has been particularly unexplored. Clinicians may not even know that they are employed by private equity, the experts said. One of the main challenges Dr. Song and his colleagues encountered in their research was identifying the hospitals that are owned by private equity firms.

“The process can be complicated,” he said. “With persistence, one could probably figure out whether a hospital was acquired using public information,” but he knows of no “systematic ways in which individual patients and perhaps even providers are informed about private equity acquisitions.” (Physician staffing companies, including some of the largest employers of hospitalists, have also been a focus of such investment, which is another way hospitalists in particular may find themselves working for private equity.)

Pandemic effects

No one wants to end up unexpectedly unemployed, as the physicians at Hahnemann were, and experts worry that the pandemic could put additional hospitals in similar financial straits. In some cases, recent dropoffs in revenue could push more facilities to sell to private equity, Dr. Song said.

Private equity firms have also recognized the challenges of hospital ownership, though, and shifted their investing focus from hospitals to physician practices and health technology, said Eileen Appelbaum, PhD, co-director of the Center for Economic Policy and Research in Washington, D.C. The debt burden on hospital systems has made it impossible for their private equity owners to cash out via public offerings or normal sales, leading many to sell to other private equity investors, she explained.

“By 2019, that left just three major PE firms with substantial hospital holdings,” Dr. Appelbaum said. Earlier in 2020, before the pandemic, two of those firms “took the unusual step of selling their hospitals to the top management doctors in each system,” she said. The structure of at least one of the deals would leave the private equity firm as the hospital's biggest creditor if it were to go bankrupt, she noted.

The current financial crisis should deepen concerns about private equity firms' use of debt to invest in health care, Dr. Appelbaum said. The typical debt leveraged in a private equity health care buyout in 2018 rose to seven times EBITDA (earnings before interest, taxes, depreciation, and amortization), she said. This was the high point of debt before the 2008 banking crisis, after which a disproportionate percentage of private equity-owned companies (compared to publicly owned) went bankrupt.

Thus, physicians may find their jobs at risk in a post-pandemic world, noted Dr. Appelbaum. She added that bankruptcies mostly hurt employees, patients, investors, and creditors, while private equity firms emerge relatively undamaged because they typically invest less than 1% to 2% of the total purchase price, with investors in private equity funds putting up most of the equity in the acquisition and with high amounts of debt leveraged on the practice or facility used to finance most of the purchase.

“The pandemic experience highlights the basic incompatibility of asking health care providers to risk their lives during a crisis while working for companies that are motivated to make money in any way that's legally acceptable,” said Dr. D’Mello, formerly of Hahnemann. “If they are to co-exist in same field, we need to have regulations to protect the public good that health care provides.”