Why Private Equity Hospital Ownership May Worsen Patient Outcomes

Private equity hospital acquisitions cause worse patient outcomes, according to what its authors say is the first-ever analysis of in-hospital adverse events related to private equity ownership.

Originally published in the January 10th edition of Transacted.

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Using Medicare claims data, researchers affiliated with Harvard Medical School and the University of Chicago compared the change in incidence of inpatient adverse events at 51 private equity-owned hospitals to a matched control group of 259 hospitals from 2010 to 2017.

The Findings

The study focused on hospital-acquired conditions that are considered preventable, including falls, infections, and blood clots, among others — many of which, the authors note, can raise the risk of mortality.

Based on a difference in differences approach, private equity-acquired hospitals were associated with a 25.4 percent increase in hospital-acquired conditions. This finding was driven by a 27.3 percent increase in falls and a 37.7 percent increase in central line infections, a dangerous bloodstream infection, despite placing 16.2 percent fewer central lines.

The data also showed a doubling in surgical site infections post-acquisition, even as private equity-backed facilities performed 8 percent fewer surgeries than before. 

Potential Underlying Causes

The paper's authors posited that possible drivers of the substandard outcomes may be due to decreased staffing levels, worse provider techniques, and poorer clinician experience.

Along with their conclusions, they cite previous studies that have shown hospital-acquired adverse events tend to be sensitive to staffing levels, particularly among nurses. 

At the same time, previous research on the topic points to staffing reductions as a key value driver in private equity's hospital deals, also concentrated among nurses.

Of note, the study's findings seemingly contradict previous research in the space: A 2022 paper led by researchers at Duke found that private equity ownership actually had a more than 1 percent positive impact on patient mortality rate, though saw no differences across other outcomes measurements.

The current paper's authors say that may be due to selection of healthier or lower-risk patients, which they also saw within the private equity-owned group.

The researchers also call out their decision to focus on in-hospital events, which they believe provide a better assessment of patient experience. These events are more common than mortality, allowing analysis of more minute differences in quality of care that wouldn’t be captured by changes in mortality or readmissions.

Private Equity in the Hospital

“The private equity industry plays an essential role in providing local hospitals with the capital they need to improve patient care, expand access, and drive innovation,” said American Investment Council chief executive Drew Maloney in a statement to media outlets. “This research doesn’t reflect private equity’s full record of strengthening health care across the country.”

Whether or not that’s true, investors have become increasingly wary of the growing scrutiny directed toward private equity’s involvement in healthcare delivery.

That scrutiny includes a “cross-government public inquiry” to be coordinated by the Department of Justice, the Federal Trade Commission, and the Department of Health and Human Services, announced by the Biden Administration. Characterized as an effort to reign in “corporate greed,” a key area of focus is private equity’s role in healthcare.

A separate bipartisan congressional investigation is also specifically examining quality of care at private equity-backed hospitals. Apollo’s investment in LifePoint Health and Leonard Green’s involvement in Prospect Medical Holdings (PMH) have emerged as early targets.

Both firms are fielding criticisms over staffing levels, hospital shutdowns, sale-leasebacks, and dividend recapitalizations. Senator Chuck Grassley has been quick to note dozens of instances in which the hospitals in question had been deemed by regulators to have placed patients in “immediate jeopardy,” a designation defined by HHS as having caused, or is likely to cause, “serious injury, harm, impairment or death.”

Is There More to the Story?

Leonard Green’s 2010 acquisition of PMH provides an interesting case study that touches on an area of weakness in last month’s findings. Acknowledged by the paper’s authors, there was no easy way to control for the selection bias inherent in private equity ownership. Sponsors had a reason for acquiring each specific hospital, which may have contributed to the divergence in patient outcomes.

PMH’s thesis focused on a roll-up of struggling safety net hospitals (obligated to provide care regardless of patients’ ability to pay), and Leonard Green oversaw its growth from a five-hospital system in Southern California to a footprint that spanned Pennsylvania, Rhode Island, Connecticut, Texas, and New Jersey.

With a system-wide 80 percent of revenue from Medicare and Medicaid reimbursements, PMH’s hospitals would have comprised a not insignificant portion of last month’s findings.

The issue, however, is that the acquisition of a distressed system will naturally predispose the sponsor to exposure to hospitals with worsening metrics across both financial and patient outcomes.

Unequivocal success would be a complete turnaround in hospital performance. However, a successful outcome in this scenario might also be the delay or prevention of a hospital closure, even if that facility’s outcomes actually worsen.

Leonard Green and PMH acquired systems out of or nearing bankruptcy on multiple occasions, and it was far from the only instance of distressed system acquisitions.

Immediately preceding LifePoint’s sale to Apollo, the system reported a quarterly loss of $5.3 million on declining revenue, and had begun selling off hospitals to ease its debt burden.

Cerberus Capital Management, another firm actively pursuing hospital deals in the study’s measured time period, has a reputation for discount purchases of distressed assets — its hospital deals fit the theme.

Although, even if such a thesis accounts for a portion of private equity’s in-hospital failings, it can’t explain away other criticisms:

PMH has been hit with repeated allegations of Medicare fraud, anecdotes of corroded surgical tools, and reports of feces left on facility walls. It’s also reportedly left staffers without critical supplies: “Say we need 4x4 sponges, dressing for a patient, IV fluids,” said a veteran nurse at one of PMH’s hospitals, “we might not have it on the shelf because it’s on ‘credit hold’ because they haven’t paid their creditors.”

Private equity hospital and health system ownership by firm

Beyond the scrutiny, many sponsors simply don’t see upside in what has become an increasingly challenged industry.

Per Private Equity Stakeholder Project data, financial sponsors are currently backing around 40 U.S.-based health systems. Notably absent from the list are most middle market healthcare sector specialists — firms like Linden, Arsenal, Frazier, Water Street, Varsity, and WindRose, among others.

An investor at one such firm, who spoke on condition of anonymity, said his team no longer considers health system or hospital deals. He notes that they’re also now avoiding most new provider-focused roll-ups.

Perhaps the only financial backer currently attempting to enter the space is General Catalyst, who recently announced plans to acquire its own health system as a testing ground for new products and offerings it invests in. It’s a bold bet that the firm’s partners will hope doesn’t land themselves in front of a congressional committee down the line.

Sam Hillier

Sam Hillier is a reporter at Transacted covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.