Private equity in healthcare has faced substantial criticism, recently fueled by the bankruptcy of Steward Health, a hospital chain once owned by a private equity firm. In response, several states have passed—or are considering—laws to restrict private equity’s involvement in healthcare. But a new study published in the Journal of Financial Economics offers a more nuanced picture.
Three finance professors conducted the most comprehensive and rigorous analysis of private equity’s effects in healthcare to date, examining more than a thousand hospital acquisitions over a 19-year span. Their analysis, which includes seven figures, thirteen tables, six appendices, and nearly 25,000 words, revealed three main findings.
First, there is no evidence that private equity-acquired hospitals are more likely to close than other hospitals, contradicting the popular belief that private equity buys hospitals, strips their assets, and then shuts them down.
Second, private equity-acquired hospitals reduced administrative staff by 20%—and by one-third in nonprofit hospitals—to control spending. These cuts persisted even eight years after acquisition. In contrast, the number of nurses, pharmacists, and physicians declined temporarily but soon returned to pre-acquisition levels. While administrative staff experienced a 7% wage decline, clinician wages were unaffected. These findings are unique to private equity and are not observed in acquisitions by other types of for-profit entities.
Third, neither patient mortality nor readmission rates changed after private equity acquisition, suggesting that quality remained consistent. Additionally, there is no evidence that the age, wealth, or clinical complexity of patients changed in acquired hospitals.
The authors also examined commercial prices for seven common inpatient procedures. Prices remained stable for all except colonoscopy, which rose by nearly 30%. Interestingly, among these procedures, only colonoscopy is required by the Affordable Care Act to have zero patient cost-sharing, giving hospitals little incentive to keep prices modest.
These results make sense considering the private equity business model. As I wrote before, private equity firms make money by buying struggling hospitals, improving their profitability, and then selling them at higher prices. Cutting costs by eliminating administrative redundancies and raising revenue by exploiting policy loopholes are both key tactics to enhance target hospitals’ operational efficiency, financial standing, and marketability. Reducing care quality, by contrast, would undermine these goals.
Importantly, hospitals acquired by non-private-equity entities did not show similar improvements. Nonprofit targets, which face no investor scrutiny and typically carry high administrative redundancies, achieved the greatest efficiency gains from private equity acquisition.
As Professors LoSasso, Burns, and I wrote in ProMarket, “In an era of ongoing consolidation, private equity-backed firms can supply some of the needed competition. Indeed, scaring away private equity might leave many distressed providers to fail outright, harming the very communities that critics claim to protect.”
The Commonwealth Fund reported that private equity investors have invested $1 trillion in U.S. healthcare over the past decade. This benefits taxpayers, who gain from better care access and lower tax burdens when target entities are successfully turned around, but bear no financial risk if investments fail.
The Trump Administration’s recent inclusion of private equity in retirement investment options will likely attract even more private equity dollars to healthcare. The market-driven entry of private equity—or any form of private capital—should be welcomed. The real threats to American patients are regulatory barriers that restrict competition, stifle innovation, and enable entrenched monopolies.
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