Private Equity and Healthcare, Part 1: Rural Hospitals
Over the past 20 years, private equity investments in the United States healthcare sector have increased twentyfold, reaching above $100 billion. How have these acquisitions changed the business practices of hospitals and other healthcare organizations? This blog is the first in a series the Lown Institute is developing on the effects and implications of private equity acquisitions sweeping the healthcare industry.
Rural hospitals need help, and private equity firms see an opportunity
It is no surprise the rural hospitals are in financial trouble. Low volume, difficulty staffing, and razor-thin margins are typical for hospitals in remote areas — and the COVID-19 pandemic only made the situation more dire. Departments and units that don’t bring in as much revenue have been shut down as hospitals reckon with the balance of safe care and overall stability versus potentially depriving patients in need of specialized care. It’s a no-win situation ensnaring many rural hospitals across the nation.
Thus, when a private equity group comes in and promises to not only buy out the hospital but also to return it to financial stability, it seems like a godsend. Kaiser Health News reported on two small hospitals in Missouri for which private equity acquisitions seemed to be their best option. However, problems became apparent immediately. Despite receiving almost $20 million in COVID relief funds, the private equity firm stopped paying bills and operations slowly declined. Their own employees were left in medical debt after the firm stopped paying premiums for employee health insurance. By the time the private equity firm officially shut down the hospitals, Centers for Medicare and Medicaid inspectors had already determined they had put patients at risk for their health and safety.
These two hospitals are not alone. In Pennsylvania, an institution serving primarily low-income patients of color survived 171 years before private equity acquired it and intentionally ran it into the ground for real-estate gains. Even urban hospitals are not immune. Oversight has proven difficult as well. In Rhode Island, private equity firms have leveraged their power and threatened to close down hospitals if they don’t get their way.
Profits and Patients: Can both be prioritized?
Private equity firms are similar to for-profits in their overarching mission of maximizing profits. How they differentiate themselves is by targeting financially struggling businesses, aiming to turn them into profitable ventures and either return those profits to the original investors or to sell to new ones as they move on to the next target. Mergers, staffing cuts, service changes and billing changes are all strategies used by private equity to maximize profits, no matter the impacts.
Private equity firms claim they are injecting value into important businesses that may otherwise go under and are thus a net positive for healthcare. This is partially true, but misleading. Research examining private equity acquisitions from 2003-2017 found acquired hospitals operating margins and financial performance did improve – but that it was likely due to a combination of decreased staffing and higher charge-to-cost ratios which raise rates for payers and insurers.
In some cases, private equity firms take over the staffing of hospital emergency rooms. Often, patients go into in-network hospitals but are treated by out-of-network providers staffed by the private equity firms. Research from Yale found this strategy drives surprise billing costs, plunging even more Americans in medical debt.
These methods for improving hospital finances are obviously not beneficial to the community nor the patients – but neither is living in a healthcare desert. An estimated 15.5 million Americans reside in medically underserved areas, most of which are rural. From eliminating access to care to economically damaging the local economy, rural hospitals shutting down have deep consequences for communities.
Rural hospitals are stuck in our broken system that incentivizes profits over people, and it’s killing them. On the one hand, private equity acquisition could mean keeping the hospital afloat. On the other hand, the acquisition might just bleed them dry faster and cost their patients even more financially.
Stay tuned for Part 2 of the Lown Institute’s series on the effects and implications of private equity acquisitions sweeping the healthcare industry.