Private Equity Strips and Devalues Successful Hospitals, Studies Show

Private equity firms appeared to target already successful hospitals, and after acquisition, reduce hospital assets for investor profit, according to two research letters.

One study published in JAMA showed that the assets of 156 acquired hospitals decreased by a mean of 15% in the 2 years after acquisition while the assets of 1,560 non-acquired control hospitals increased by 9.2% during that timeframe (P<0.001), reported researchers led by Elizabeth Schrier, MD, of the University of California San Francisco.

“That means that in 2 years after buying a hospital, private equity firms stripped away $28 million worth of assets from each hospital, on average,” Schrier told MedPage Today.

Schrier called this a “widespread phenomenon,” with 61% of private equity-acquired hospitals’ assets dropping compared with just 15% of control hospitals. Of note, during the acquisition year, acquired hospitals had on average $91 million in assets compared with $96 million for controls.

“In some places private equity firms have sold off hospitals’ land and buildings to profit investors, saddling the hospitals with rent payments for facilities they once owned. But no one has looked at whether that kind of asset stripping is common nationally,” Schrier said.

That’s partially because it is difficult to track private equity takeovers, which don’t have to be disclosed.

With this study, Schrier said researchers now know “that asset stripping is a common practice nationwide, and private equity’s claim that they ‘infuse capital’ is absolutely false.”

The second study, published in JAMA Internal Medicine, sought to answer if private equity firms target already distressed hospitals, or if distress occurs after acquisition.

Looking at 242 acute care hospitals that were acquired by private equity compared with 870 matched control hospitals not acquired by private equity, Sneha Kannan, MD, of Massachusetts General Hospital, and Zirui Song, MD, PhD, of Harvard Medical School, both in Boston, found that hospitals were, on average, slightly better off financially before being acquired by private equity firms.

While they had similar earnings and operating margins, private equity-acquired hospitals tended to have less debt before acquisition compared with matched control hospitals (equity ratio 0.97 vs 0.43) and owned more of their assets (adjusted difference 0.47, 95% CI 0.33-0.61, Bonferroni-corrected P<0.001), indicating that private equity targets were already successful businesses.

Kannan told MedPage Today that distressed investing is not private equity’s model in other industries, and this research showed it isn’t in healthcare, either. Instead, private equity uses a leverage buyout model in which “acquisition deals are financed with a significant amount of debt, and that debt is placed on the hospital.”

The hospitals that are acquired tend to have less debt before acquisition, Kannan said, “because if the ultimate acquisition is going to place a lot of debt on the hospital, it sort of follows that those hospitals have less debt to begin with and are able to withstand that financial maneuver.”

Private equity-acquired hospitals also had similar rates of in-hospital mortality and hospital-acquired conditions before acquisition.

Kannan and Song’s study helped contextualize how much of the problem is private equity itself. They concluded that because key metrics were similar before takeovers, “changes in financial or clinical performance after acquisition may thus reflect management — of debt, personnel, and capital — more so than differences in these pre-acquisition characteristics.”

Earlier this year, federal agencies announced they would probe private equity’s role in healthcare, and research has shown that most physicians view private equity involvement in healthcare negatively. Furthermore, a study of Medicare data showed that hospital complications increase after private equity acquisition.

For their study, Schrier and colleagues identified private equity-acquired hospitals and their acquisition years with the Private Equity Stakeholder Project Private Equity Hospital Tracker, which were verified and augmented using a prior study, press reports, and Medicare cost reports.

Using 2006-2021 Medicare cost reports, they assessed hospitals’ total capital assets, including summing land, buildings, equipment, and health information technology, as well as characteristics like year acquired, share of Medicaid inpatient discharges, rurality, teaching status, number of beds, and region.

Hospitals acquired by HCA Healthcare, which prior research suggested are atypical of 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 non-acquired controls, using exact matching on year, region, and bed size category and nearest-neighbor matching on total capital assets during the acquisition year. Hospitals were acquired between 2010 and 2019, most commonly in 2017 and 2018. Acquired hospitals were mostly in the South (55.8%) and had 50 to 149 beds (44.9%).

Kannan and Song pulled data from Medicare cost reports for 2005 to 2018 on hospitals’ total revenue, equity ratio (defined as “the share of total assets owned by a hospital after debt obligations have been paid”), and operating margin, as well as earnings before tax, income, depreciation, and amortization, which private equity firms use to evaluate potential acquisitions. They also looked at quality metrics including patient characteristics, in-hospital mortality, and hospital-acquired adverse events in cases where that data were available.

Both studies had limitations. Schrier and team noted their small sample size; the exclusion of closed hospitals, which could have led to underestimated capital losses; and the lack of longer-term trends in their analysis. In addition, Medicare cost reports may have errors, and many hospitals didn’t report the components of their total capital assets.

Kannan and Song said that their research was limited by hospital-reported metrics and potential unobserved confounding, as well as a lack of clinical outcomes from other payer populations.

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