Evidence On Private Equity Suggests That Containing Costs And Improving Outcomes May Go Hand-In-Hand

By Linda J. Blumberg and Kennah Watts

Prices paid by commercial health insurers have exploded in the past decade. Many attribute accelerating price growth to greater industry consolidation, from hospitals to physician practices to outpatient facilities. Commonly, when policy makers and stakeholders advocate for even narrowly applied provider price limitations, provider groups warn of reductions in care quality and access. This was the case during the debate over the No Surprises Act (NSA), as well as discussions on the public option, capping provider payment rates, and limiting outpatient facility fees. However, evidence is growing of another contributor to higher provider prices and lower quality of care: private equity (PE) in health care.

Quantitative evidence is mounting that compared to other forms of ownership, PE investments in nursing homes, in particular, are associated with higher mortality for lower-risk patients as well as higher costs and lower-quality care for patients with long stays. These concerns, coupled with worries about PE ownership’s implications for cost, have led to expanding research on these investments in health care broadly.

PE ownership in health care has grown substantially in the past 20 years, with cost implications likely attributable to PE’s growth strategy. PE firms’ profits are largely the result of financial engineering to achieve rapid growth and increased enterprise value via multiple arbitrage. PE firms first acquire a small company, or platform firm, and then acquire smaller companies to integrate into a larger platform, much of these financed with debt. As the aggregated business size increases, greater stability and market share increases valuation in multiples. The much larger entity can then be sold at a significant profit. Consequently, most of PE’s profits come from this financial engineering, not from clinical operations.

Federal data limitations make PE ownership of facilities and practices difficult to identify, so the share of recent price increases attributable to PE is hard to decipher. However, the associations and research evidence are compelling enough to warrant greater ownership transparency requirements, both to provide consumers more agency and to facilitate oversight and analysis.

As policy makers continue to debate health care pricing reform, they should be aware of the facts: PE’s involvement in health care gives lie to the claim that higher prices mean better quality of care. As we describe here, beyond increased costs, evidence indicates that PE delivers fewer lower profit services and can lead to worse care, at least in some contexts.

Private Equity’s Growing Presence In Health Care

PE investment in health care has grown as have provider prices paid by commercial insurers, driven in part by substantial consolidation of hospitals and medical practices. While mergers and acquisitions are increasing in the hospital sector at large, in the past two decades PE takeovers have grown at four times the rate of non-PE takeovers. In 2018 alone, PE accounted for 45 percent of all hospital and emergency department mergers and acquisitions, driven almost entirely by two firms, TeamHealth and Envision.

Investors have also increased their shares in health care. Over the past decade, PE health care investments have totaled more than $1 trillion. These investments have increased 20 fold in the past 20 years. According to the American Investment Council, a PE interest group, PE manages about $73 billion in health care investments as of August 2023.

PE acquisition has increased across all types of providers. The number of PE-acquired physician practices in 2021 was more than seven times that in 2012, and between 2003 and 2017 PE purchased 282 acute care hospitals across 36 states. Estimates indicate that 5 percent of nursing home facilities are owned by PE, and 11 percent of hospital admissions are attributable to facilities at least partially owned by PE. More than 25 percent of Medicare hospice beneficiaries receive care from for-profit providers, with more than half of that attributable to PE. Recognizing the current data limitations on ownership, we provide a brief overview of evidence on PE’s effects on health care spending and quality.

Effects Of PE Ownership On Spending

PE investments are associated with increased spending in acquired hospitals and physician practices in a number of ways, including higher prices, greater volume of profitable services without commensurate benefits nor quality, changes in billing to increase frequency of more expensive visits, and network exits that lead to high surprise bills.

Hospital Prices And Spending

A study of hospitals acquired by PE from 2005 to 2017 found that, on average, PE acquisition increased total charges per inpatient day by $407 (7 percent) and increased emergency department charge-to-cost ratios, a measure of hospital price markups, by 16 percent, compared to matched non-acquired hospitals. PE-acquired hospitals also experienced significantly larger increases in total income than their unacquired counterparts. Another study found that hospitals acquired by PE between 2003 and 2017 had higher charge-to-cost ratios than comparison hospitals, and this differential grew over time, another indicator of rising payment rates. The charge-to-cost ratio in acquired hospitals more than doubled over the study period, while the ratio for the unacquired hospitals grew by slightly more than 50 percent. Another study found that hospitals were able to negotiate higher payment rates from insurers following PE acquisition, which led to an 11 percent increase in spending compared to hospitals not acquired by PE. This increase includes estimated effects of higher prices for PE-owned hospitals spilling over to other local hospitals negotiating higher prices as well.

Physician Prices And Spending

Studies of PE-acquired physician practices focus on the high-cost specialties most likely to be acquired: dermatology, anesthesiology, gastroenterology, ophthalmology, urology, and radiology. Studies have found that prices charged and allowed for PE-acquired practices increased significantly compared to practices that were not acquired. Additionally, as practice volume increased, PE-acquired practices shifted toward longer visit charge codes without any increase in patient risk measures. In one study, anesthesiology practices with PE-backed management companies increased prices substantially compared to practices without them. Another found that neonatology practices managed by PE companies were associated with substantial increases in common neonatal intensive care unit days (70 percent higher) and physician spending (54 percent higher). PE-associated price increases ranged from 3 percent to 26 percent compared to non-PE practices, with variation across studies and specialties. One study indicated that the price differences also increased with time. Increased volume in PE practices, another spending indicator, ranged from 5 percent to 16 percent compared to non-PE practices.

Surprise Billing For Physician Care

As highlighted by Erin Fuse Brown and colleagues, PE invested heavily in lobbying efforts to prevent the NSA, legislation that has been instrumental in decreasing surprise medical bills since its passage in 2020. PE had also invested heavily in the purchase of practices most likely to benefit from out-of-network billing: emergency department, anesthesiology, and radiology. Therefore, the NSA, which limits the out-of-network payments for many of these providers, has substantial implications for PE profit margins. While PE investments continue in other medical areas––nursing homes, hospices, hospitals, outpatient physician practices––PE has aggressively pursued strategies to increase payments for hospital-based out-of-network physician practices despite NSA curbs. In the second quarter of 2023, four PE-backed organizations accounted for two-thirds of independent dispute resolution cases lodged under the NSA. This evidence suggests that PE-practice owners may be using the independent dispute resolution process to skirt Congress’ intent for the NSA, leading to higher overall commercial market spending.

Effects Of PE Ownership On Quality And Outcomes

The PE investment time horizon of three to seven years prompts concerns that quality and outcomes are unlikely to be priorities for PE-owned providers. Much of the research on this topic has focused on PE investments in nursing homes, but some analyses include investments in hospitals and physician practice specialties. Again, lack of ownership transparency and other data challenges often limit research on US health care entities. Additionally, data limitations also mean that studies commonly focus on a small number of conditions and outcome or process measures.

Hospital Quality, Outcomes, And Patient Satisfaction

Quality of care is notoriously difficult to measure, particularly for non-Medicare patients for whom data are most meager. Still, some studies have measured care quality and outcome differences between PE-acquired and comparison hospitals.

One notable study found that following acquisition, PE-acquired hospitals were associated with significantly worse outcomes for Medicare patients, including: significant increases in falls, central line-associated bloodstream infections (despite lower volume of central line placements), and surgical site infections. Additionally, the patients in the PE hospitals were, on average, younger, in better health, and less likely to be dually eligible for Medicare and Medicaid, compared to patients in non-PE hospitals. Anecdotal comparisons have also supported findings of lower quality in PE-acquired hospitals. Two studies found modest improvements in patient outcomes in PE-acquired hospitals for a limited number of conditions among the publicly insured population, but only for hospitals owned by the Hospital Corporation of America (HCA); no statistically significant improvements were identified for other PE-owned hospitals. Others have found reductions in consumer satisfaction under PE acquisition as well as decreased staffing per bed. Shifts to more profitable services—interventional cardiac catheterization, hemodialysis, labor and delivery—under PE acquisition were also noted.

Thus, evidence is mixed for an association between PE acquisition and hospital quality and outcomes. In general, studied conditions and populations are limited, although modest positive effects are only shown for hospitals acquired by the HCA. This, alongside significant PE-associated quality concerns, emphasizes the need for more broadly representative data and analysis.

Access To Physicians

Data on comparative quality and outcomes in PE-acquired physician practices are difficult to obtain. Analyses are limited to specialties where data are available and PE acquisition is most common, and they focus on access to care rather than direct quality measures. Available evidence indicates that, compared to non-PE-owned practices, some PE-acquired specialties’ practices are more likely to use physician extenders, such as physician assistants and nurse practitioners, to decrease the number of patient visits with physicians. The effect of this shift on quality, if any, is not currently known. One study found that PE-owned practices were less likely to offer appointments to prospective Medicaid patients than were non-PE practices, and that the PE-owned practices increased their Medicare patient volume. While such differences suggest possible quality concerns, these measures are not explicit outcome measures and are not definitive differentials in quality between PE-acquired and other practices.

Discussion

There is ample evidence that PE acquisition of nursing homes has led to reduced quality of care and growing evidence of lower quality and higher costs for PE-acquired hospitals. Evidence on physician practices is more mixed, with limited data and research. These findings underscore the importance of greater transparency on PE ownership and greater ability to track costs and outcomes differentials by ownership type. Contrary to popular misconception, it is clear that higher prices of PE-acquired providers are not associated with higher quality of care––in fact, the opposite may be true in substantial numbers of situations.

PE investments tend to target practices and facilities with higher operating margins and prices, even prior to acquisition. Given that PE investors expect 20 percent to 30 percent returns in a short time horizon, effective cost-containment policies would very likely make the health industry less attractive to these investors. Such cost-containment approaches include limiting provider prices, increasing oversight to provider billing coding behavior, and expanded transparency of acquisitions and their impacts on market consolidation. Reforms of the commercial insurance market would have the largest cost-containment effects and may lead to quality improvements for commercial insurance and public coverage enrollees.

Authors’ Note

The authors are grateful for funding from Arnold Ventures. They are also appreciative of comments from Tyler Braun, Jack Hadley, and Kevin Lucia, and for guidance from Dr. Braun on the financial engineering practices of private equity firms.

This post is part of the ongoing Health Affairs Forefront series, Provider Prices in the Commercial Sector, supported by Arnold Ventures.

Linda J. Blumberg and Kennah Watts, “Evidence On Private Equity Suggests That Containing Costs And Improving Outcomes May Go Hand-In-Hand,” Health Affairs Forefront, April 23, 2024, https://www.healthaffairs.org/content/forefront/evidence-private-equity-suggests-containing-costs-and-improving-outcomes-may-go-hand. Copyright © 2024 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.