Private Equity and the Practice of Medicine

When private equity runs the business of healthcare, patients may suffer.

Illustration of a bedridden patient having chunks of the bed removed


Is private equity monetizing medicine at patients’ expense? According to associate professor of health care policy and medicine Zirui Song and other Harvard researchers, patients in hospitals owned by private equity firms suffered significantly more hospital-acquired adverse events than those being cared for in similar hospitals with no such investor participation. Song, director of research at Harvard Medical School’s Center for Primary Care, analyzed more than 4.8 million Medicare claims tied to hospital stays between 2009 and 2019. Patients in the hospitals acquired by private equity firms experienced 25.4 percent more hospital-acquired conditions. Underlying that alarming overall difference was a 37.7 percent increase in central-line associated bloodstream infections and a 27.3 percent increase in falls, compared to peer hospitals with no private equity involvement.

Investors have taken a $1-trillion stake during the past decade in everything from nursing homes to physicians’ practices and hospitals.

Those adverse events matter when one considers how private equity has expanded in healthcare in recent years, with investors taking a $1-trillion stake during the past decade in everything from nursing homes and rehabilitation facilities to physicians’ practices and hospitals. According to the nonprofit Private Equity Stakeholder Project, approximately 460 U.S. hospitals are currently owned by private equity firms, representing eight percent of all private hospitals and 22 percent of all proprietary for-profit hospitals.

The recent study, published in the Journal of the American Medical Association, builds on another conducted in 2020, in which Song and his colleagues found private equity investment more financially favorable for hospitals in the three years after acquisition. But the earlier work, he says, gave little insight into patient outcomes. “We wanted to study more clinically meaningful, granular measures of quality of care being delivered on the ground in the hospitals,” Song says, “and the changes in those more clinically nuanced measures attributable to private equity acquisition.”

The latest findings have led the researchers to wonder whether financially motivated cost-cutting practices explain the spike in patient complications. In follow-up work now under review, he and a team of researchers are examining changes in staffing levels and hospital expenses in relation to patient outcomes after private equity investors take over hospitals. Says Song, “We hypothesize that the primary mechanism behind these increases in patient adverse events is reductions in staffing and other expenses.”

A 2021 joint report by the American Antitrust Institute and the Petris Center at the University of California, Berkeley, notes estimated annual private equity deals in healthcare increased in value from $41.5 billion in 2010 to $119.9 billion in 2019. Investors commit their funds in expectation of earning significant returns. The problem, many critics complain, is the fundamental financial strategy at the heart of most private equity deals, healthcare-related or otherwise, known as the leveraged buyout. In leveraged deals, the cost of an acquisition is largely funded with money borrowed against the target company’s assets and anticipated cash flows. It’s a high-risk, high-reward approach: a heavy debt load can strain a company’s resources.

“This debt is not trivial. For the millions of dollars an acquisition costs, if a majority is borrowed money or debt-financed, the acquired entity’s own infrastructure, its buildings and machines and land are used as the collateral for that debt,” says Song. “And the acquired entity faces an additional pressure to generate increased cash flow and revenues after acquisition to begin paying down interest on the debt.”

One need look no further than Massachusetts and the Steward Health Care System. In 2010, the private equity firm Cerberus Capital Management bought a chain of Catholic hospitals, rebranding it as Steward. In 2016, Steward sold its medical properties to another entity, Medical Properties Trust, in part to help pay down debt and repay Cerberus. Today, Steward is struggling. In a February letter, Massachusetts Governor Maura Healey demanded the company disclose its financial documents, suggesting that it “seems” Steward and its CEO “chose to maximize profits and… corporate gains at the expense of patients, workers, and the state and federal healthcare system.” The entire Steward system is thought to be on the verge of financial failure.

But many, including Song, agree the infusions of cash and managerial expertise a private equity firm can bring to a struggling hospital or physicians’ chain can be helpful. According to the Sheps Center at the University of North Carolina, since 2010, 148 rural hospitals have either closed completely or no longer offer in-patient services. Private equity, says Song, could “in theory help to keep those hospitals open and maintain access for the community, especially for a rural community without other options.” The key, however, is that “investing in a hospital need not necessitate cutting expenses, reducing the staff, and potentially having patients get hurt,” he adds. “The first step doesn’t necessarily mean the second has to happen.”

Many policymakers and clinicians believe that for the patients’ sake, private equity takeovers need better oversight and transparency. Song and his colleagues think states could better enforce existing regulations designed to prevent commercial exploitation of physicians, though most states have broad exceptions to these “corporate practice of medicine” laws. States might also grant their attorneys general more authority to block private equity healthcare deals they deem harmful to patients or to competition. Federal policymakers and legal scholars have put forth similar views. Critics also suggest lowering the threshold for mandatory reporting of private equity deals to the Securities and Exchange Commission, established by the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Currently, that ceiling, which changes yearly, stands at $119.5 million. Song notes, “Most private equity acquisitions, especially of physician practices, are well below that threshold, so they never get reported.”

In a recent policy paper, Song and Eckstein professor of applied economics David M. Cutler, a healthcare economist, outline possible reforms involving private equity investment in healthcare, including increased state monitoring of private equity deals, making firms wait longer to recoup money from private investment as capital gains, and requiring private equity investors to set aside money in an escrow account to be used in the event of failure.

“In healthcare, the corporatization train has left the station, and is accelerating rapidly on lightly regulated tracks,” they write. “What remains needed is thoughtful policy that builds some guardrails, applies the brakes where appropriate, and avoids derailment when patients could suffer.”

Read more articles by Colleen Walsh

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