Over the past two decades, private equity firms have increasingly advanced into the healthcare space, buying up hospitals and healthcare groups at a rapid pace. In 2000, the value of private equity deals in the healthcare industry was around $5 billion — by 2018, those deals were worth more than $100 billion [1]. Research has shown that these acquisitions often have a negative impact on hospitals, including raising the charge-to-cost ratio and lowering staff-to-patient ratios.
Private equity firms acquire a wide range of companies using loans to finance the deal. The goal of these acquisitions is to increase the company’s profitability so that the private equity firm can sell the company at a profit [2]. Investors in these private equity firms expect that their investments will be risky and illiquid in the short term but expect outsize returns ranging from 20% to 30% in the long term. When it comes to buying out companies in the healthcare industry, private equity firms tend to prefer larger providers that have a stable reimbursement environment or that are ripe for consolidation. Ultimately, the end goal of a private equity buyout is to increase profitability by cutting costs, ostensibly while maintaining the same quality of care.
However, studies of private equity buyouts of healthcare groups have shown that cost-cutting often takes a back seat to price increases. A 2021 study by Offodile et al. examined several dozen private equity deals that occurred between 2013 and 2017 and impacted nearly 300 hospitals across 36 states [3]. This included the $6.1 billion acquisition of TeamHealth by Blackstone Group [4] and the $33 billion acquisition of HCA by Bain Capital and KKR [5]. The hospitals in the HCA acquisition, which made up more than half of all hospitals acquired in the period studied, were more likely to discharge patients than non-private equity hospitals. HCA hospitals also made nearly $1,000 more per discharge than non-private equity hospitals.
Private equity-run hospitals were able to achieve higher charge-to-cost ratios by billing more for services, as well as adding on additional services. Oftentimes, private equity firms intentionally keep their hospitals out-of-network with most insurers. This allows them to avoid negotiating rates with insurers and has led to “surprise bills” for patients [6]. At the same time, a study by Bruch et al. found that private equity-run hospitals had fewer full-time employees per bed compared to non-private equity hospitals. This likely allowed private equity firms to cut costs while raising prices, diminishing the patient experience but increasing profits [7].
During the Covid-19 pandemic, many existing issues facing private equity-run hospitals were exacerbated. The pandemic led to a reduction in the number of hospital beds, as well as a decrease in elective surgeries, both of which negatively affected revenue at hospitals. Because private equity is mainly focused on generating profit, the firms forced hospitals to take hard cost-cutting measures, including salary holdbacks for physicians and furloughs [8]. The pandemic also imperiled many non-private equity hospitals that did not take these harsh measures. Distressed companies are often a target for private equity firms, suggesting that buyouts of hospitals and healthcare groups are only likely to increase in the coming years.
References
[1] Appelbaum, Eileen, and Rosemary Batt. “Private Equity Buyouts in Healthcare: Who Wins, Who Loses?” Institute for New Economic Thinking Working Paper Series, 2020, pp. 1–115., doi:10.36687/inetwp118.
[2] Robbins, Catherine J., et al. “Private Equity Investment in Health Care Services.” Health Affairs, vol. 27, no. 5, 2008, pp. 1389–1398., doi:10.1377/hlthaff.27.5.1389.
[3] Offodile II, Anaeze C., et al. “Private Equity Investments in Health Care: An Overview of Hospital and Health System Leveraged Buyouts, 2003–17.” Health Affairs, vol. 40, no. 5, 2021, pp. 719–726., doi:10.1377/hlthaff.2020.01535.
[4] TeamHealth Holdings, Inc. “TeamHealth to Be Acquired by Blackstone.” TeamHealth to Be Acquired by Blackstone, 29 June 2018, www.prnewswire.com/news-releases/teamhealth-to-be-acquired-by-blackstone-300353863.html.
[5] Dowd, Kevin. “This Day in Buyout History: KKR, Bain Capital Complete the Biggest LBO Ever.” PitchBook, Pitchbook Data, 17 Nov. 2017, pitchbook.com/news/articles/this-day-in-buyout-history-kkr-bain-capital-complete-the-biggest-lbo-ever.
[6] Gustafsson, Lovisa, et al. “The Role of Private Equity in Driving up Health Care Prices.” Harvard Business Review, Harvard Business School Publishing, 19 Oct. 2019, hbr.org/2019/10/the-role-of-private-equity-in-driving-up-health-care-prices.
[7] Bruch, Joseph, et al. “Characteristics of Private Equity–Owned Hospitals in 2018.” Annals of Internal Medicine, vol. 174, no. 2, 2021, pp. 277–279., doi:10.7326/m20-1361.
[8] Lexa, Frank J., and Frank James Lexa. “Private Equity–Backed Hospital Investments and the Impact of the Coronavirus Disease 2019 (Covid-19) Epidemic.” Journal of the American College of Radiology, vol. 17, no. 8, 2020, pp. 1049–1052., doi:10.1016/j.jacr.2020.05.023.