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November 10, 2021
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David Burda
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Economics Outcomes System Dynamics
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What Private Equity Firms Do to Hospitals

In a column I wrote last year, I called private-equity firms “healthcare’s house flippers”  because what they do—maximize the value of an acquired hospital or medical practice to turn a quick profit—is a lot like what house flippers do—maximize the value of an acquired house to turn a quick profit.

We know from watching home-improvement shows what house flippers do to a newly acquired house to make it more attractive to potential buyers—repair any structural problems, knock down a few walls to open up the first-floor floor plan, remodel the kitchen, expand the master bathroom, landscape the front yard and add a fresh coat of paint to pretty much everything.  

We don’t know because it’s not on television what private-equity firms do to a newly acquired hospital to make it more attractive to potential buyers. But now we do, thanks to a new study in Health Affairs. You can download the study here

Five researchers from Duke and Rice universities compared service-line changes—think rooms and features in a house—made by private-equity acquired hospitals compared with those made by peer hospitals that weren’t acquired by private-equity firms. 

The study pool consisted of 4,781 hospitals of which 228 were acquired by private equity firms over the 10-year study period from Jan. 1, 2006, through Dec. 31, 2015. They compared service lines and service-line changes between the two groups from 2004, or two years before any PE acquisition, through 2018, or up to three years after any PE acquisition. The researchers included 30 service lines—17 profitable and 13 unprofitable—in their analysis. 

In total, for both  acquired and non-acquired hospitals, the five profitable service lines that grew the most over the study period were: 

  • Robotic surgery 
  • Digital mammography
  • Freestanding or satellite emergency rooms
  • Adult cardiac surgery
  • Adult interventional cardiac catherization 

Only one profitable service line shrank in numbers, and that was birthing rooms and/or labor and delivery departments. Only one unprofitable service line—adult day-care programs—declined.

But here are the interesting parts. Using some fancy math and modeling, the researchers found that PE-acquired hospitals were:

  • More likely to offer six of the most profitable service lines
  • Less likely to offer seven of the most unprofitable service lines
  • Quicker to adopt profitable service lines after acquisition than their non-acquired peer hospitals   

“The results presented in this study show a relationship between private equity acquisition and systematic changes in the central activity of hospitals: providing care,” the researchers said.

In short, the hospitals’ new PE owners changed what their newly acquired hospitals can do for patients. Patients may benefit from those changes, but they’re not the reason why the PE firms made them.

“Private equity-acquired hospitals adopt technology in response to a profit incentive and pivot toward service lines and contractual arrangements that are rewarded by payers,” the researchers said.

In short, and as we like to say at 4sight Health, you get the care that you pay for. 

Like patients, new homeowners may benefit from a structurally sound foundation, an open floor plan, a bigger kitchen and a more spacious master bath. But that’s not why a house flipper made those changes to a newly acquired house. The flipper made them to make the house more valuable to a buyer and up the flipper’s profit from the sale. 

The analogy holds. 

If you’d like to read more about private equity in healthcare, check out these other blog posts on 4sighthealth.com:

Thanks for reading.

About the Authors

David Burda

Dave is 4sight Health’s biggest news junkie, resident journalist and healthcare historian. He began covering healthcare in 1983 and hasn’t stopped since. Dave writes his own column, “Burda on Health,” for us, contributes weekly blog posts, and manages our weekly e-newsletter and weekly podcast, 4sight Friday and 4sight Roundup.

Dave believes that healthcare is a business like any other business, and customers—patients—are king. If you do what’s right for patients, good business results will follow.

Dave’s personal experiences with the healthcare system both as a patient and family caregiver have shaped his point of view. It’s also been shaped by covering the industry for 35 years as a reporter and editor. He worked at Modern Healthcare for 25 years, the last 11 as editor.

Prior to Modern Healthcare, he did stints at the American Medical Record Association (now AHIMA) and the American Hospital Association. After Modern Healthcare, he wrote a monthly column for Twin Cities Business explaining healthcare trends to a business audience, and he developed and executed content marketing plans for leading healthcare corporations as the editorial director for healthcare strategies at MSP Communications.

When he’s not reading and writing about healthcare, Dave spends his time riding the trails of DuPage County, IL, on his bike, tending his vegetable garden and daydreaming about being a lobster fisherman in Maine. He lives in Wheaton, IL, with his lovely wife of 35 years and his three children, none of whom want to be journalists or lobster fishermen.

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