Do Private Equity Firms Really Save Troubled Hospitals?

Contrary to claims that private equity (PE) firms aim to save troubled hospitals, a new study reported that they’ve tended to buy institutions with lesser debt than their counterparts.

A cohort of 242 acute care hospitals acquired for the first time by PE firms from 2005 to 2018 had lesser debt than a control sample of 870 hospitals, Sneha Kannan, MD, MS, of Massachusetts General Hospital, and Zirui Song, MD, PhD, of Harvard Medical School, Boston, reported in JAMA Internal Medicine.

“Other than that, these hospitals were fairly similar before acquisition,” Kannan told Medscape Medical News. “There was no difference on average in the hospitals that were acquired and those that weren’t in terms of earnings, operating margin, and clinical metrics.”

The report was published the same week as a JAMA study that also cast a skeptical eye on PE firms, which have been accused of stripping assets from healthcare. That study reported that hospitals bought by PE firms appeared to have lost 24% of their assets over 2 years relative to control hospitals.

The data from the studies could be useful to policymakers and regulators as they investigate how PE ownership affects hospitals. Earlier this year, several federal government divisions asked the public for input on the “impact of corporate greed in healthcare.”

“When private equity firms buy out healthcare facilities only to slash staffing and cut quality, patients lose out,” said Lina M. Khan, chair of the Federal Trade Commission, in a statement.

Meanwhile, PE is facing criticism over the aftermath of Cerberus Capital Management’s 2010 purchase of Steward Health Care’s hospitals in Massachusetts. The Dallas-based, for-profit company has since filed for bankruptcy, and it’s closing two acute care hospitals. According to comments prepared by Senator Elizabeth Warren (D-Mass.) for a congressional hearing, Cerberus Capital Management “bought the healthcare system, sold it for parts to Medical Properties Trust, and walked away with hundreds of millions of dollars, leaving the hospitals, their patients, and their doctors out to dry.”

Steffie Woolhandler, MD, MPH, of Hunter College, The City University of New York, and Harvard Medical School, told Medscape Medical News that it’s a challenge to understand the role of PE in hospital ownership because purchases don’t need to be reported publicly. But it’s clear from media reports and other sources that PE firms have stepped up hospital purchases over the last 6-8 years, said Woolhandler, who’s a coauthor of the JAMA study.

The PE industry likes to proclaim that it “infuses capital into hospitals that need it,” Woolhandler said. “The common wisdom is that the hospitals would have been closed anyway.”

In a statement in response to the claims of Sen. Warren, Cerberus Capital Management declared it “saved a failing, insolvent Massachusetts hospital chain.”

In the new study, researchers reported that PE hospitals carried “substantially less debt before acquisition — equity ratio of 0.97 vs 0.43 — meaning that PE hospitals owned about 50 percentage points more of their assets than did control hospitals (adjusted difference, 0.47; 95% CI, 0.33-0.61; P < .001)."

“Financially healthier hospitals may be better able to absorb new debt and cost-cutting such as reductions in staffing,” they wrote.

There was no statistically significant difference in in-hospital mortality and hospital-acquired conditions between the PE-purchased hospitals and the control group, the study reported.

The findings suggested that observers “should be generally wary of the idea that PE only invests in distressed hospitals,” Kannan said.

In an interview, Mary Bugbee, healthcare director of Private Equity Stakeholder Project, told Medscape Medical News that the JAMA Internal Medicine study is an “important contribution” to research into PE’s impact on hospital. However, the study excludes hospitals that were sold by one PE firm to another, including the 2017 sale of Steward Health Care, she said.

“Another limitation is that its data does not go beyond 2018,” said Bugbee, whose organization is a nonprofit watchdog group. “Therefore, the past 6 years of private equity dealmaking are excluded from the analysis, which limits the validity of making broad conclusions from the findings.”

Woolhandler, the coauthor of the JAMA study, said “it’s simply not true that private equity just buys distressed properties. That’s what the JAMA Internal Medicine study is showing, and that’s what our study shows as well.”

When PE comes in, she said, quality deteriorates and both patients and employees suffer. “The community is hurt, and the only people who benefit are the investors. We should not be allowing this. Why are we allowing this financial maneuver that harms a lot of people and only helps the investors?”

Song reported receiving grants from the National Institute on Aging, Arnold Ventures, Agency for Healthcare Research and Quality, National Institute for Health Care Management, and Commonwealth Fund and personal fees from the Research Triangle Institute, Google Ventures, and VBID Health. Kannan, Woolhandler, and Bugbee had no disclosures. Private Equity Stakeholder Project is funded by nonprofit organizations such as foundations.

Randy Dotinga is an independent writer and board member of the Association of Health Care Journalists.