From the news staff
November 23, 2022
How private equity firms are buying hospitals and what impact this is having on patients and staff.
I’m sure you’re all getting ready for Thanksgiving and getting ready to talk to this uncle who loves a lively debate – so we’ll give you something to talk about. Today we look at a growing behind-the-scenes trend in the healthcare industry. You may have noticed some changes at a local healthcare facility such as a hospital, nursing home, or specialty clinic. Maybe it was a name change, a consolidation with other locations, or maybe there were signs of extreme cost cutting. If so, there’s a good chance the local facility was bought by a private equity firm. Now, before you shut me down for hearing me use the words of a “finance brother,” just keep calm — there’s good reason to pay attention to these private equity firms buying hospitals and nursing homes. Partly because it’s a trend that’s growing VERY FAST.
“Alongside technology investments, the healthcare industry is now the number one target for private equity firms, at least in the US,” said Eileen O’Grady, research and campaigns manager at the Private Equity Stakeholder Project.
“The best estimates we have are that the actual capital invested in healthcare businesses in 2021 was over $200 billion. It’s still a small player in healthcare, but its growth rate is much, much greater,” said Rosemary Batt, a professor of human resources studies and international comparative work at Cornell University.
Data suggests that annual acquisitions by healthcare private equity firms increased twenty-fold from 2000 to 2018. Last year, private equity spent around $206 billion on over 1,400 acquisitions. That’s according to PitchBook Data, a company that tracks mergers and acquisitions. Let’s start here and define what private equity is. A private equity firm pools money from a number of large investors, think pensions, university endowments and other institutional and highly accredited investors.
Unlike other types of companies that may invest in growing companies or trade primarily in public markets, private equity uses this pool of money to buy entire private companies with the aim of maximizing profits and then quickly sell the company – usually around 3- 7 years later. Healthcare has become an attractive target for private equity for a number of reasons. The US healthcare system itself is huge – it accounts for about 20% of our GDP and is growing steadily.
A major turning point was the passage of the Affordable Care Act in 2010. With more Americans covered by insurance and insurance expanding to cover more services. There was a sea of new ways to make some money, and healthcare acquisitions proliferated.
The US also has an aging population that demands more healthcare services.
“And so this is a cash cow. We know they know they’re getting paid. So we know the ‘what’ and the ‘why’, but the real concern here is the ‘how’. How are these private equity firms maximizing profits in such a short period of time, and what about the facilities they are buying? Close hospitals or emergency rooms. They can sell the assets like hospitals, land and buildings,” Batt said.
“Private equity is basically for for-profit healthcare on steroids, because private equity firms are looking to double or triple their investment in any type of company they own over a really short time horizon, which is just inevitably contradictory to the goals of many health care providers stands. Reducing these types of healthcare costs can be a matter of life and death. It can close facilities that are vital lifelines in rural areas, or lead to a slump in the quality of care. The troubling patterns of private equity in nursing homes are well known. documented. There is a long list of examples where once thriving nursing homes have fallen into extreme disrepair. Labor shortages worsened and there was a lethal level of patient neglect.
In 2019, a team of researchers from the University of Pennsylvania examined over a hundred purchases made in nursing homes. The data shows that deaths of residents in homes acquired by private equity firms have increased by an average of 10% (where patients have increased by 11%). However, there is still much debate here about cause and correlation. Private equity firms tend to target smaller operations that may already have struggled.
The American Health Care Association, the largest lobbying group for long-term care homes, also pushed back on the narrative that private-equity ownership was the cause, saying, “The issue has become a distraction from the real problem affecting all long-term care facilities.” [need help with] chronic underfunding of the state.”
But the correlation was strong enough to catch President Joe Biden’s attention.
“And as Wall Street firms take on more nursing homes, the quality in those homes has gone down and costs have gone up. This ends under my supervision,” Biden said.
In early 2022, the White House announced plans for minimum nursing home staffing requirements and increased oversight of underperforming centers. However, those plans were later scrapped from the Build Back Better Act after care home lobbyists said they could not meet these staffing needs without further financial support. We want to make it clear: There is no reason for any owner to deliberately ruin his practice! But the problem critics have with private equity owners is that once they’ve reaped profits, they have no incentive to keep the company afloat.
For example, they are not legally liable for any debt they incur to purchase a hospital in the first place. This is ultimately the responsibility of the hospital itself! And since the company usually sells its purchase soon, there isn’t much incentive to ensure that its purchase is successful over the long term. Remember the keyword when discussing the private equity business model: extraction. And that is the focus of some reforms.
“There’s a law introduced by Elizabeth Warren called the Stop Wall Street Looting Act that basically limits the ability of private equity firms to extract assets from companies, erm, hold them liable if companies have problems or go under. ‘ said O’Grady.
“You know, private equity as an asset class is not going away. And we talked about the worst actors. We have to recognize that there are people who want to do good and use private capital to make improvements. However, we have to be vigilant, like the lack of regulation,” Batt said.