Private equity interest in hospitals grows

Todd Shryock

Todd Shryock, contributing author

Acquired hospitals showed better operating margins than similar non-acquired hospitals

The journal Health Affairs looked at private equity backed hospital acquisitions from 2003-2017 and what effects it has had on the financial and operational aspects compared to those not acquired.

In 2000, the valuation of private equity deals in the health care sector were less than $5 billion, but by 2018, that had increased to more than $100 billion. Acquisitions ranged from physician practices to mobile application companies. This increased interest by private equity was likely fueled by a perception that health care is recession-proof, a projected increase in demand because of an aging population, or the operational inefficiencies of health care organizations, according to the authors.

In 2017, private-equity acquired hospitals accounted for almost 7.5% of all non-government acute care hospitals and 11% of all patient discharges. Private equity targeted hospitals predominately in the Mid-Atlantic and Southern United States between 2003-2017, with the hospitals more likely to be for-profit and in urban areas.

During this same period, private equity-backed hospitals had better operating margins than nonacquired hospitals on average, and the magnitude of difference in the margins rose 3 percentage points.

In this period, operating expenses per adjusted discharge from private equity–acquired hospitals declined relative to those of nonacquired hospitals. Facilities that were acquired by private equity during the study period had higher charge-to-cost ratios in 2003 relative to nonacquired hospitals, and this differential widened in 2017. Hospitals with higher charge-to-cost ratios can induce higher payments from patients and insurers.

Registered nursing staff ratios were comparable between acquired and nonacquired hospitals in 2003. While in both types of hospitals registered nursing staff ratios increased moderately, all-personnel staffing ratios decreased in acquired hospitals and increased in nonaquired ones.

Previous research demonstrated that private equity acquisition was associated with moderate increases in income and charge-to-cost ratios, these findings suggest how investors may affect operational decisions. The Health Affairs analysis of detailed financial measures suggests that private equity investors acquired larger hospitals with healthier operating margins. Post-acquisition, these hospitals appeared to continue to boost profits by restraining growth in cost per patient, in part by limiting staffing growth.

Despite the massive shocks to credit markets worldwide in 2008 (which occurred after the majority of private equity hospital acquisitions), private equity–backed deals in health care have continued to rise and amounted to $79 billion in 2019, or 18 percent of private equity deals worldwide, even excluding add-ons.