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Private equity-acquired hospitals rake in higher profit margins, slower to expand staff

por John R. Fischer, Senior Reporter | May 11, 2021
Business Affairs
Private equity-acquired hospitals accumulate higher markups and profit margins but are slower to expand staff
Short-term acute care hospitals acquired by private equity firms have higher markups and profit margins but are slower to expand their staffs.

That’s what a multi-institutional team of researchers found after evaluating such transactions between 2003 and 2017 for a study. "Our results challenge the prevailing narrative of financially distressed institutions seeking infusion of outside private equity capital. Post-acquisition, these hospitals appeared to continue to boost profits by restraining growth in cost per patient, in part by limiting staffing growth,” said lead author Dr. Anaeze Offodile II, a nonresident scholar in the Center for Health and Biosciences at Rice University's Baker Institute for Public Policy, in a statement.

Using Medicare cost reports and Area Health Resource Files, Offodile and her colleagues compared private equity-acquired hospitals to non-private equity hospitals in 2003 (before the acquisitions) and 2017 (after the acquisitions). Private equity firms purchased 282 unique hospitals (some more than once) during this period. Those acquired in 2003 had higher charge-to-cost ratios, higher profit margins and comparable staffing ratios than non-private ones. By 2017, they developed higher markups, even higher profit margins and were slower to expand staff.

Operating margins for private equity-acquired hospitals were 5.6% higher than non-private hospitals in 2003 and widened to 8.6% in 2017. Private equity-acquired hospitals overall had lower costs per patient discharged.

"We need to conduct more detailed analyses before making specific policy recommendations involving private equity-acquired hospitals," said co-author Vivian Ho, a professor of economics at Rice and professor of medicine at Baylor College of Medicine. "For-profit hospitals have operated for several decades, but we need to determine whether the added presence of private equity induces additional efforts to maximize profits at the cost of harming patient welfare."

The findings were published in Health Affairs.

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