Private equity (PE) is a type of investment fund that buys companies, restructures them, and sells them for a significant profit in a short time. PE firms are increasingly turning their attention to hospitals and medical practices, so we spoke with researcher Jane M. Zhu, MD, MPP, MSHP, to learn what this means for patients.
When we talk about acquiring medical practices, hospitals, or nursing homes, it’s about a change in ownership. PE is a form of private investment that is funded by investors such as pension funds, institutional investors, retirement funds, and university endowments. These investors expect to hold on to a purchase for three to seven years, earn about 20 percent in annual returns, and then sell it for a profit. That underlying financial incentive may create a fundamental tension with the broader goals of health-care systems and facilities.
About 5 to 10 percent of hospitals and medical practices are now owned by PE. The rates may be higher in anesthesia and radiology. Unfortunately, it can be difficult to know if your local practice or hospital is sold to a PE firm, as there is a lack of transparency.
We don’t yet have a lot of data in all areas, but there is some data in the nursing home literature that suggests that when PE buys a nursing home, the quality of care is reduced. The use of sedatives rises, there are fewer nurses per patient, and there is an increase in mortality.
My colleagues and I conducted a study where we looked at 578 practices that were acquired in dermatology, gastroenterology, and ophthalmology, and compared then with similar practices that were not acquired.
When PE bought a practice, the number of new patients increased significantly, as did the number of patient encounters. The share of visits coded at longer than 30 minutes in length increased, too. Several things could explain these changes. The practices could be expanding so they can see more patients for longer. They could be changing the way they code for visits, which is appropriate, or they could be billing for longer visits even when visits are not longer, which is inappropriate.
This could look different in Medicare Advantage, which covers about half of all Medicare enrollees and relies on what’s called a capitated payment system. In this model, health-care providers are paid the same fee no matter how many services they provide. The profit incentive here might be to bill for more complex cases but cut costs. This could reduce waste or it could mean patients get less care.
There are concerns about the financial incentives that are underlying PE, and early evidence shows there’s reason for this concern.
In the 1990s, when PE firms became interested in physician management companies, the incentive was profit extraction. It drove a lot of those management firms into the ground. We see evidence of some of that still. In 2018, a PE firm bought Hahnemann hospital, a large safety net hospital in Philadelphia that provided care to the city’s poorest residents and provided residency training to the city’s doctors. Care declined rapidly at the hospital until it was shuttered in 2021.
But, as with everything, it’s probably not all bad or all good. For the most part, now PE firms are structuring transactions in a way that they may give some equity to the physicians who work there to try to align their incentives and benefit patients.
PE is simply another actor in the American health-care system. They may take some of the profit motives to an extreme, but they’re not the only ones who are doing so. They are taking advantage of market loopholes.
PE is another form of corporate medicine, which is increasing overall, and has structures in place that may incentivize even more profit maximization, potentially at the expense of patients. But we also have to be open to the possibility that there are potential benefits to some PE strategies. They can make capital investments in infrastructure, electronic health records, quality monitoring, and care standardization. But there is also a great potential for negative consequences for patients and providers, which is why we’re studying this area.
