For better or worse, why are hospitals such a goldmine for private equity investors?

January 02, 2024
by John R. Fischer, Senior Reporter
Critics have long argued that private equity ownership leads to higher prices for patients, more debt for hospitals, and lower quality care. Now, different branches of the U.S. government are looking into these claims through separate investigations.

Earlier this month, President Joe Biden and Vice President Kamala Harris announced a cross-government public inquiry to assess care quality in hospitals and other healthcare organizations acquired by corporations, including private equity firms. The decision was prompted by a review of hospital merger studies linking consolidation to price increases that often exceed 20%, and specifically linking private equity firms to rising costs.

Meanwhile, the Senate Budget Committee has launched its own bipartisan investigation into the impact of private equity ownership on hospital finances, operations, and care quality following events at Ottumwa Regional Health Center, an Iowa hospital acquired by a private equity firm in 2010.

In October 2022, a nurse practitioner fatally overdosed there, and an investigation later found that he sexually assaulted nine female patients while they were sedated. Additionally, the hospital has experienced staffing reductions, been stripped of real estate and other assets, and left in debt, according to Senator Chuck Grassley (R.-Iowa), who launched the investigation with committee chair Senator Sheldon Whitehouse (D-RI). Grassley wrote to the hospital and private equity firms Apollo Global Management, Medical Properties Trust, and Lifepoint Health, all of which have ownership interest in Ottumwa, asking about questionable financial transactions that may have contributed to these events.

He also requested information on the control that private equity firms wield from Leonard Green & Partners and Prospect Medical Holdings, which have similar investment structures to the other three, but all failed to answer his questions completely and fully, prompting additional oversight and for the committee to expand its investigation to include companies that own or have owned hospitals in California, Pennsylvania, Rhode Island, and other states.

Higher costs for patients yes, but lower quality care and less financial stability for hospitals?
Announcing its investigation, the White House cited several studies alluding to the potential harms posed by private equity in healthcare. One, out of Columbia University Mailman School of Public Health and published in BMJ, found that costs for payers and patients increased as much as 32%. And although proponents say private equity investments provide direct downstream benefits to patients, the study did not find evidence to support that.

Rachel Werner, executive director of the Leonard Davis Institute of Health Economics and a professor at the University of Pennsylvania, who was not involved in the study or either investigation, acknowledges growing evidence that private equity ownership leads to consolidated markets, causing loss of competition and increased pricing. But she questions statements, like the ones made by Grassley and Whitehouse, that private equity ownership leaves hospitals in debt and has a negative financial impact on operations, saying that empirical evidence is mixed and that there is no concrete proof to validate claims that these providers are less financially stable or more likely to close.

“In most cases, private equity investment actually improves hospitals’ financial performance, at least in the short run. There's also research showing that hospitals are seeing increasing operating margins stemming from both cutting operating costs and increasing revenue after investments are made by private equity firms,” she told HCB News.

According to Werner, there is evidence to suggest that reductions in staff and services, particularly in less profitable areas such as obstetrics, and switching from outpatient to more lucrative in-patient settings, is how private equity firms improve financial performance. But this does not mean that quality of care is adversely affected, she says.

While some studies indicate that loss of competition does affect quality, there is very limited solid evidence on these effects, either good or bad, according to Werner. The Columbia study found effects on quality to be mixed to harmful, but the impact on health outcomes and operator costs to be inconclusive.

In another study referenced in the Biden-Harris investigation, conducted by the American Antitrust Institute alongside UC Berkeley and UCLA, private equity investments in healthcare rose by over $75 billion between 2010 and 2020, from $41.5 billion to $119.9 billion. For hospitals, certain process-of-care quality measures used in CMS incentive programs improved under private-equity ownership versus non-acquired hospitals, and these providers had higher profits. The authors here also said that higher cost-to-charge ratios are a common proxy for hospital pricing.

But cost-to-charge ratio increases in certain hospitals were not associated with improved quality measures, and those under private equity ownership tended to have lower staff-to-patient ratios and patient satisfaction, though this was cross-sectional. Additionally, due to the lack of available quality measures and hospital-level health outcome measures, as well as conclusive evidence, the authors said that their study may not comprehensively determine the impact of private equity and indicates that such assessments are complex and likely to vary depending on specific factors. There also is no systematic evidence available on the effects of private equity investments in outpatient services.

Seeking greater transparency
In his letters to Apollo Global, MPT, and Lifepoint Health as well as Leonard Green & Partners and Prospect Medical Holdings, Grassley sought to understand the nature of mergers and acquisitions carried out by these companies, as well as the financial stability of Ottumwa and how related-party transactions contributed to an environment that was unable to identify the assaults by the nurse practitioner from the beginning.

Because they failed to answer his questions fully, the Senate Budget Committee is now demanding documentation on these transactions and more detailed answers about the operational practices of private equity firms in hospitals.

In the Biden-Harris inquiry, the Federal Trade Commission and the Departments of Justice and Health and Human Services are seeking information from patients about their hospital experiences to compare the care quality before and after private equity acquisitions, in order to develop future regulations and enforceable laws for reducing anticompetitive practices.

Additionally, the Centers for Medicare & Medicaid Services, for the first time, has posted ownership data on federal qualified health centers and rural health clinics on, allowing the public to view firm performance history to see how consolidation has affected patients, costs, and outcomes.

“I think that regulation is one way to address the concern about private equity investment in hospitals,” said Werner. "But I think there are other ways to address the concerns that many people have about private equity, which are politically more feasible and currently not being done. Creating greater transparency is one of those ways."

But transparency should not solely focus on how private equity-owned hospitals operate and the quality of care, prices, and patient outcomes they produce, she says. It should also account for why healthcare is a hotspot for these investment firms in the first place. In other words, given that these profit-driven businesses have been making increasingly substantial investments in healthcare over the last decade, critics, healthcare stakeholders, and the public should ask what financial opportunities and value are driving private equity firms to capitalize on the hospital industry.