Private Equity in Healthcare: The Risks
The involvement of private equity (PE) firms in the healthcare sector has shifted from a niche financial trend to a dominant force reshaping how medical care is delivered in the United States. While investors argue they bring efficiency and capital to struggling facilities, a growing body of evidence suggests that this ownership model often leads to higher costs for patients and insurers. As scrutiny from lawmakers and regulators intensifies, understanding the risks associated with PE-owned hospitals and practices is essential for patients and policy advocates alike.
The Private Equity Playbook in Medicine
To understand the risks, it is helpful to understand the business model. Unlike traditional non-profit hospitals or physician-owned practices, private equity firms operate on a short-term timeline. Their goal is typically to acquire a healthcare asset, increase its financial value, and sell it for a profit within three to seven years.
This approach often utilizes a “leveraged buyout” strategy. The firm uses a small amount of its own money and a large amount of borrowed money (debt) to buy the hospital. Crucially, this debt is often placed on the hospital’s books, not the private equity firm’s. The hospital must then generate enough revenue to service this new debt while generating profit for the investors.
Aggressive Cost-Cutting Measures
To boost earnings before interest, taxes, depreciation, and amortization (EBITDA), firms often implement aggressive cost-cutting strategies immediately after acquisition. Common tactics include:
- Staffing Reductions: Replacing high-cost physicians with nurse practitioners or physician assistants, or reducing the nurse-to-patient ratio.
- Outsourcing: Selling off laboratory or janitorial services to third-party vendors to reduce overhead.
- Inventory Management: Reducing the stock of medical supplies to free up cash flow.
The Impact on Patient Costs
The snippet provided highlights that PE ownership leads to higher costs. Recent academic research and market analysis support this claim with concrete data.
A study published in the Journal of the American Medical Association (JAMA) analyzed changes in costs at hospitals acquired by private equity firms. The findings showed that after acquisition, the hospitals’ net income increased, but so did the charges to patients and insurance companies.
Price Increases in Specific Specialties
Private equity has heavily targeted specific high-revenue specialties. The impact on pricing in these areas is distinct:
- Anesthesiology: A study in JAMA Internal Medicine found that prices for anesthesia services increased by over 26% at facilities acquired by private equity firms compared to independent facilities.
- Emergency Medicine: Firms like Envision Healthcare (backed by KKR) and TeamHealth (backed by Blackstone) have faced historical scrutiny regarding surprise billing practices. While the “No Surprises Act” has curbed some of this, the underlying pressure to maximize billing per patient encounter remains.
- Dermatology and Ophthalmology: These fields have seen massive “roll-up” strategies, where a firm buys many small practices to gain market leverage. This consolidation allows the new conglomerate to negotiate higher reimbursement rates from insurance providers, which eventually trickles down to patients in the form of higher premiums and copays.
The Case of Steward Health Care
The most prominent example of the risks associated with private equity in healthcare is the collapse of Steward Health Care. This case study serves as a warning for the industry.
Steward Health Care grew into a massive system under the ownership of Cerberus Capital Management. In 2016, Cerberus executed a sale-leaseback transaction. They sold the real estate of the hospitals to a trust called Medical Properties Trust for $1.25 billion. This generated immediate cash for the investors but burdened the hospitals with millions of dollars in annual rent payments for buildings they used to own.
Cerberus eventually exited its investment, reportedly making a significant profit. However, the hospital system was left financially fragile. Saddled with rent and debt, Steward Health Care struggled to pay vendors and maintain facilities. In May 2024, Steward filed for Chapter 11 bankruptcy, putting roughly 30 hospitals across multiple states at risk of closure and leaving communities uncertain about their access to care.
Quality of Care and Asset Stripping
Beyond costs, there are serious concerns regarding the quality of care. When the priority shifts to debt service and short-term returns, clinical decisions may be influenced by financial metrics.
The Sale-Leaseback Trap
The strategy used with Steward Health Care is known as “asset stripping.” By selling the hospital’s land and buildings, the PE firm extracts immediate value. However, this converts a fixed asset into a perpetual monthly liability (rent). If patient volume drops or reimbursement rates fall, the hospital has no safety net.
Staffing Concerns
Nurses and doctors at PE-owned facilities frequently report feeling pressure to see more patients in less time. The British Medical Journal (BMJ) published a review suggesting that private equity ownership is associated with harmful impacts on costs to patients and costs to payers, though the impact on health outcomes remains a subject of intense debate. In nursing homes, however, data is clearer. A working paper from the National Bureau of Economic Research found that PE ownership of nursing homes increased the short-term mortality probability for patients by roughly 10%.
Regulatory Scrutiny and Government Response
The rising costs and high-profile failures have triggered a response from Washington. The scrutiny is coming from both antitrust regulators and legislators.
The Federal Trade Commission (FTC)
Under Chair Lina Khan, the FTC has taken an aggressive stance against private equity “roll-ups.” In 2023 and 2024, the FTC and the Department of Justice (DOJ) signaled they would scrutinize serial acquisitions that may not trigger reporting thresholds individually but collectively harm competition.
Senate Investigations
The Senate Committee on Health, Education, Labor, and Pensions (HELP), led by Senator Bernie Sanders, launched an investigation into the role of private equity in hospitals. The committee specifically examined the Steward Health Care bankruptcy, subpoenaing its CEO to testify about how financial mismanagement led to a public health crisis.
State-Level Oversight
States are not waiting for federal action. States like Oregon, California, and Massachusetts have implemented or are considering Health Care Market Oversight programs. These laws require companies to provide advance notice of material change transactions (like mergers or buyouts) so state boards can review the potential impact on cost and access before the deal closes.
Frequently Asked Questions
Why do private equity firms want to buy hospitals? Healthcare is seen as a recession-resilient industry. People always need medical care. PE firms believe they can apply business efficiencies, economies of scale, and better contract negotiations to increase the profit margins of these facilities.
Does private equity ownership always lead to bankruptcy? No. Many PE-owned healthcare entities operate successfully and remain solvent. However, the leveraged buyout model introduces a higher level of financial risk compared to traditional non-profit or physician-owned models.
How can I tell if my hospital is owned by private equity? It is often difficult to tell because the hospital name usually stays the same. You can search the hospital’s corporate leadership page or look for news articles regarding its acquisition. If the facility is part of a large chain like LifePoint Health or ScionHealth, it is backed by private equity (specifically Apollo Global Management in these cases).
What is the “No Surprises Act” and does it help? The No Surprises Act, effective as of 2022, protects patients from receiving surprise bills when they receive emergency care from an out-of-network provider at an in-network facility. This curbed a specific revenue tactic used by some PE-backed physician staffing firms, but it does not prevent the facilities from negotiating higher overall rates with insurance companies.