Home Health Care Study: PE firms acquire hospitals with high operating margins, boosting them further

Study: PE firms acquire hospitals with high operating margins, boosting them further


Hospitals that were acquired by private equity companies had operating margins that were 5.6 percentage points higher than nonacquired hospitals in 2003, and that gap widened to 8.6 percentage points by 2017, according to the study published in Health Affairs. However, it is unclear whether private equity firms’ varied promises, like improved efficiency, have resulted in better support for clinical care.

The study — which aims to describe the hospitals acquired by private equity firms and their finances — compared facilities that had been acquired to those that were never acquired between 2003 and 2017, said Dr. Marcelo Cerullo, a study author and general surgery resident at Duke University Medical Center, in an email.

In total, researchers examined 42 private equity deals, involving 282 hospitals across 36 states. Of the 282 hospitals studied, data for 233 was available from the Healthcare Cost Report Information System and American Hospital Association.

In general, the researchers found that hospitals acquired by private equity firms tended to be better off and larger than average across several measures than those that were not, Cerullo said.

Acquired hospitals were significantly larger than nonacquired hospitals in terms of number of beds and discharges in both 2003 and 2007.

Further, private equity-acquired hospitals had higher operating margins compared with nonacquired hospitals in both 2003 and 2017. In 2003, acquired hospitals had margins of 4.4% versus -1.2% among nonacquired hospitals. That figure rose to 7.4%  for acquired entities but remained at -1.2% for nonacquired facilities in 2017.

Similarly, charge-to-cost ratios — that is, the ratio between a hospital’s expenses and what they charge — increased by 105%  for acquired facilities between 2003 and 2017, compared with an increase of 54.2% for nonacquired hospitals in the same time period. Previous research shows that hospitals with higher charge-to-cost ratios can induce higher payments from patients and insurers.

In addition, private equity-acquired hospitals had overall lower costs, with total operating expenses growing by only 4.39% among acquired hospitals during the study period, versus a 21.1% jump among nonacquired facilities.

But, “it is also too early to say whether the putative operational shifts that had been touted at the time of the deals — including improved ‘efficiency’ or ‘streamlining’ or a ‘renewed access to capital’ — has translated into better support for clinical care or, more importantly, higher-value care,” Cerullo said. “It’s [also] a little early to say whether this is, on net, ‘good’ or ‘bad’ for patients insofar as care access, quality, or satisfaction.”

While a previous study has shown improvement in some quality measures among a subset of private equity-acquired hospitals relative to controls, this study set out to understand what these hospitals look like before examining questions about their operations or patient outcomes, Cerullo said.

Photo: Ta Nu, Getty Images








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