What Happens When Private Equity Buys Into the Hospital Industry?
Private equity investment has surged into the U.S. healthcare sector, one of the most vital and economically significant industries in the country. Hospitals are attracting a large share of that investment, sparking a debate among experts. Some argue that private equity ownership brings fresh capital and sharper management, while others warn of cost-cutting tactics that can burden facilities and weaken care.
Janet Gao, Lapeyre Family Provost’s Distinguished Associate Professor, explores what happens when private equity takes control of a hospital in a forthcoming paper for the Journal of Financial Economics. The results tell a complex story: hospitals trim their workforces, especially administrative roles that account for a large fraction of overhead costs. However, hospitals stay in operation, become more operationally efficient, and are able to retain a stable level of core medical workers in the long run and maintain their healthcare quality.
What inspired you to pursue this research topic?
When I started this project, I saw many news articles and public policy debates regarding the role of private equity in the U.S. healthcare sector. Over the last decade, private equity (PE) firms poured around $200 billion into the U.S. healthcare industry, a large fraction of which is invested in hospitals. Researchers and policymakers express opposing views regarding the growing presence of PE firms in the hospital industry. Proponents claim that they provide hospitals with much-needed managerial expertise and operational reforms, which help turn around struggling hospitals. Opponents voice concerns that PE firms load hospitals with debt, sell assets, lay off workers, and, in some cases, even close hospitals.
This debate is particularly important given the economic significance of the healthcare industry. The sector contributes to nearly 20% of total U.S. Gross Domestic Product (GDP), provides critical healthcare to local communities, and ranks among the top 10 job providers in the United States. In this paper, my co-authors and I seek to shed light on this important debate by examining outcomes for key stakeholders, including investors, employees, and patients at hospitals acquired by PE firms. In light of this current debate, I decided to systematically examine the effects of PE takeover on its target hospitals.
How does your research align with emerging trends in business research?
Consistent with research on the effect of private equity takeover on portfolio companies, we show that PE acquisition leads the acquired hospitals to become more profitable and operationally more efficient. PE acquisitions are followed by large-scale cost-cutting, as well as significant reduction in workforce.
What is one surprising or unexpected finding from your research?
Through our investigation, we realized the cost-cutting implemented by PE acquirers is not conducted blindly across the board, but seems to be targeted towards overhead and administrative workers. While in the first few years of takeover, we observe a reduction in both medical and non-medical workers, the number of medical workers quickly recovers and reverts back to pre-acquisition levels within five to eight years. However, the number of administrative employees does not recover, but permanently goes down. This reveals that PE firms do not seek to chase profitability to sacrifice long-term healthcare quality. Consistently, we do not find a significant change in patients’ mortality rates after the takeover.
What were some of the biggest challenges you faced during your research process?
When investigating topics in the finance-healthcare nexus, there are two major challenges. The first is to understand the terminology and the complicated definitions in the cost reports filed by hospitals and published by the Centers for Medicaid and Medicare Services. The other is to acquire and clean datasets that are related to hospitals’ treatment quality and the trajectory of ownership structure. It took us many months of manual cleaning to comb through the changes in hospitals’ ownership and PE takeover history.
What are the next steps for your research? Any upcoming projects or new directions?
I hope to continue this research agenda regarding the interaction between finance and healthcare. In particular, I seek to understand how financial market fluctuations translate to hospitals’ ability to access external financing, and consequently, hospitals’ ability to provide high-quality healthcare and equitable access to healthcare by local communities. In one of my follow-up projects, I examine the differential resilience of nonprofit and for-profit hospitals to adverse shocks in the capital market, and their different ability to provide high-quality care to their patients. We show that nonprofit hospitals are more resilient to adverse financing shocks, as indicated by the lack of response of their patient death rates to such shocks.