I’m sure you’re all prepping for Thanksgiving and getting ready to talk to that uncle that loves a spirited debate — so let’s give you something to talk about. Today we’re looking at a growing trend happening behind-the-scenes in the health care industry. You may have noticed some changes in a local health care facility like a hospital, a nursing home, or some specialty clinic. Maybe it was a change of name, consolidating with other locations, or maybe there were signs of extreme cost cutting. If so, there’s a good chance that the local facility was bought by a private equity firm. Now, before you tune me out because you heard me use the words of a "finance-bro" just sit tight – there’s a good reason to pay attention to these private equity firms buying hospitals and nursing homes. Partly because, it’s a trend that’s growing VERY FAST.
"So, now alongside tech investing, the health care industry is the top target for private equity firms, at least in the U.S," said Eileen O'Grady, a research and campaign manager with the Private Equity Stakeholder Project.
"The best estimates we have is that the actual capital invested in health care deals in 2021 was over $200 billion. It's still a small player in health care, but it's its rate of growth is much, much greater," said Rosemary Batt, a professor in human recourse studies and international comparative labor at Cornell University.
Data suggests private equity firms’ annual acquisitions in health care have seen a twentyfold increase from 2000 to 2018. Last year, private equity spent about $206 billion, on over 1400 acquisitions. That’s according to PitchBook Data, a firm that tracks mergers and acquisitions. Let’s start here and define what private equity is. A private equity firm pools money from a bunch of big investors, think pensions, university endowments and other institutional and highly accredited investors.
Unlike other kinds of firms which might be investing in growing companies or mostly trading in public markets, private equity uses this pool of money to buy entire private companies with the goal of maximizing profits and then selling the company quickly — usually about 3-7 years later. Health care has become an attractive target for private equity for a few reasons. U.S. health care itself is huge – it makes up about 20% of our GDP, and it’s been growing steadily.
A big turning point was the passing of the Affordable Care Act in 2010. With more Americans covered by insurance and insurance expanding to cover more services. There was a sea of new opportunities to make some money and health care acquisitions surged.
The U.S. also has an aging population, which demands more health care services.
"And so this is a cash cow. We know they know they're going to be paid. So we know the 'what,' and the 'why,' but the real concern here is 'how.' How do these private equity firms maximize profits in such a short amount of time and what does that look like for the facilities they’re buying? They extract wealth by cutting costs, often in health care, staffing, supplies, services. They maybe they close hospitals or close emergency rooms. They may sell off the assets like hospitals, property and buildings," said Batt.
"Private equity is basically for profit health care on steroids, because private equity firms are looking to double or triple their investment in whatever kind of company they own over a really short time horizon that just necessarily is at odds with the goals of many health care providers. Cutting those kinds of costs in health care can have life-or-death stakes. It can close facilities that are crucial lifelines in rural areas or lead quality of care to plummet. The troubling patterns of private equity in nursing homes is well-documented. There’s a long list of examples where once-thriving nursing homes fell into extreme disrepair. Worker shortages get exacerbated and there were deadly levels of patient neglect.
In 2019, a team of researchers at the University of Pennsylvania looked at over a hundred acquisitions in nursing homes. The data shows that deaths of residents in private-equity firm-acquired homes jumped an average of 10% (with patients rising 11%). There’s still lots of debate over cause and correlation here, though. Private equity firms tend to target smaller operations that perhaps were already struggling.
The American Health care Association, the largest nursing-home lobbying group also pushed back on the narrative that private equity ownership is the cause saying "the issue has become a distraction from the real issue that all long term care facilities [need help with] chronic government underfunding."
But the correlation was strong enough to get President Joe Biden’s attention.
"And as Wall Street firms take over more nursing homes, quality in those homes has gone down and costs have gone up. That ends on my watch," said Biden.
In early 2022, the White House announced plans for minimum staffing requirements at nursing homes and more oversight of poor-performing centers. But these plans were later dropped from the Build Back Better Act, after the lobbyists for nursing homes said they would not be able to afford these staffing requirements without more financial aid. We wanna be clear: there’s no reason for any owner to purposefully run their practice into the ground! But the problem critics take with private equity ownership, is that there’s no incentive for them to keep the business afloat after reaping profits.
For example, they’re not legally liable for any debt they take on to buy a hospital in the first place. That ends up being the responsibility of the hospital itself! And since the firm is usually selling their purchase off soon, there’s not much incentive to make sure their purchase is set up to thrive long-term. Remember the key word when it comes to private equity’s business model: extraction. And that’s the focus of some reforms.
"There is legislation that was introduced by Elizabeth Warren called the Stop Wall Street Looting Act that would basically place limits on private equity firms ability to extract wealth out of companies, um, make them liable for when companies are struggling or when they go under," said O'Grady.
"You know, private equity as an asset class is not going away. And we have been talking about the worst actors. We have to recognize there are people who want to do good and want to use private capital to make improvements. However, we need to be vigilant about how the lack of regulation," said Batt.