In recent months, the bankruptcies of Steward Health Care (May 6, 2024) and Prospect Medical Holdings (Jan. 11, 2025) have drawn heightened attention to private equity ownership of hospitals. It’s understandable. Today, about 460 community hospitals, or 8% of U.S. hospitals, are owned by private equity funds. But that number is increasing as most independent community hospitals face shrinking margins and higher costs.
When private equity funds acquire community hospitals, concerns about the loss of local control, adequate staffing, patient care safety and cost increases intensify. These concerns are well-founded: Academic studies have shown direct correlations between private equity ownership and higher prices for consumers, decreased quality, increased errors and lower employee satisfaction.
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Private equity ownership has proven profitable for investors, even when the outcomes for the hospital and the community are negative. That’s the essence of the arguments against private equity acquisition of hospitals.
Growth in private equity investment in hospitals is significant: about 40-60 hospitals per year. In most situations, managers are pushed by the private equity sponsor to lower operating costs, increase revenue and deploy capital strategically. Most use sale-leaseback deals for hard assets (i.e. buildings, parking decks) to generate operating capital and re-organize clinical operations to improve efficiency in patient care management.
Staffing productivity, headcount and procurement are immediate cost reduction targets. And to fulfill commitments codified in asset purchase agreements, the private equity owner typically invests up to 20% of needed funds and borrows the rest on the hospital’s behalf, adding the interest expense to the finances.
As part of the deal, the hospital usually pays the private equity owner a management fee (1%-2% of hospital revenue) and 20% of the value created upon a change of ownership (exit). Thus, from day one, the focus is on value optimization and a successful exit within five to seven years. And almost from day one, disagreements about purchases, staffing and patient care activities spark discord between the "owners" and legacy hospital personnel and board members. Some are settled quickly, while others become lawsuits, and all find their way to chat rooms where private equity is often demonized.
In response, defenders of private equity hospital ownership make four arguments:
-- Hospital competition is essential to protect consumers. Most U.S. hospital markets are consolidated, often offering only one or two choices for care, which leads to higher prices for consumers and fewer options. Private equity is a funding vehicle that allows communities to retain hospital services that might otherwise be inaccessible and helps drive the competition that is needed.
-- Private equity ownership is often the only alternative to hospital closure in many communities. Many organizations lack access to adequate capital to remain competitive. Taxpayers are unwilling to pay higher taxes, and government funding is limited. While local philanthropy is helpful, it is usually insufficient.
-- The hospital’s governing board is accountable for the private equity fund’s performance. Private equity-acquired hospitals are not "forced" to sell. It is the fiduciary responsibility of board members to protect the institution against malfeasance by the private equity owner and to pursue remedies specified in the asset purchase agreement when necessary. Private equity-acquired hospitals are accountable to communities based on obligations specified in the purchase agreement. Thus, the interests of the community are protected.
-- Private equity plays a significant role in funding hospital innovations. The vast majority of clinical, financial and administrative management innovations originate with and are accessible through private equity-sponsored deals and networks. Most of these are funded by voluntary investments from hospital systems through collectives that test and scale innovations. By aligning with a private equity sponsor, a hospital may gain access to innovations not otherwise possible for an organization of its size.
Private equity ownership has enabled some hospitals to stay afloat instead of shutting down. But such ownership also attracts harsh criticism when the owners appear to put their profits ahead of patients and the communities they serve.
The reality is this:
Increased attention to hospital ownership, including private equity involvement, is likely as regulators, consumers and employers assess hospital price transparency, executive compensation and the effects of hospital consolidation on consumer prices.
Congress is also interested in regulatory changes to protect against healthcare’s bad actors, including private equity funds that take advantage of communities to benefit themselves.
But hospital ownership is no longer the differentiator it once was. Today, what matters most to consumers is whether a needed service is accessible and affordable, and what their out-of-pocket responsibility will be. Ownership by a specific fund is relevant only when a community believes the private equity-backed operator is guilty of price gouging and unscrupulous profiteering at their expense.
Thus, private equity ownership of hospitals, though deserving regulatory changes to level the field in certain areas, is not the real issue. It’s how to define the role of hospitals in the future state of healthcare and how to fund the services that are necessary and affordable to their communities.
That’s the discussion the industry needs to have. Private equity ownership is only a small part.
Paul Keckley is managing editor of The Keckley Report.