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Private equity acquisition in health care – a blunderbuss

August 25, 2020

Topics: Quote of the Day

By Joseph D. Bruch, B.A.; Suhas Gondi, B.A.; Zirui Song, M.D., Ph.D.
JAMA Internal Medicine, August 24, 2020

From the Introduction

Private equity investment in health care has markedly increased in recent years. The total disclosed value of private equity deals in health care reached $78.9 billion in 2019, up from $23.1 billion in 2015. Private equity firms use capital from institutional investors and individuals to acquire assets, such as hospitals and physician practices. After acquisition, private equity fund managers use the control offered by their newly purchased ownership stake to increase the value of the asset before selling it generally for a profit, typically in 3 to 7 years. Common strategies to enhance the value of acquired businesses include cutting costs and increasing efficiency.

From the Discussion

Private equity has a substantial and growing presence in the US health care system, especially in the hospital sector. Although private equity firms may seek to create efficiencies in the delivery of care, their financial incentives, especially the pressure to sell acquired assets for a profit on a short time horizon, might conflict with parts of the mission and priorities of health care clinicians. Anecdotal reports suggest that private equity–owned health care organizations may be more likely to operate in ways that maximize margin in the near term. Payers may be appropriately concerned about the potential for increased health care spending that may be lower value. Most worrisome are suggestions of risk to patient safety and health equity.

In this initial analysis of 204 hospitals acquired by private equity from 2005 to 2017, we found that relative to 532 control hospitals, private equity acquisition was associated with increases in annual net income, hospital charges, charge to cost ratios, and case mix index among hospitals. The proportion of patients discharged from hospitals acquired by private equity who were covered by Medicare decreased relative to control hospitals, whereas the proportion covered by Medicaid was unchanged, suggesting an increase in the share of discharges for patients who were privately insured or uninsured relative to controls. Patients who are privately insured typically garner higher reimbursements for hospitals than patients with Medicare or Medicaid.

Although the total hospital charge is the amount the hospital bills for care, it is typically not what insurers or patients pay the hospital (negotiated payment rates are less than the charge). Nevertheless, the charge represents the “asking price,” and is often the billed amount for patients paying out of pocket, including uninsured or out-of-network patients. Higher charges are also associated with greater payment among insured, in-network patients. The higher charge to cost ratio we observed may indicate that hospitals acquired by private equity firms began charging more for services, cutting operating costs, or both after the acquisition.

Increased charges following private equity acquisition provides insight into the strategic decisions made by fund managers or hospital leadership in response to new incentives hospitals face after an acquisition. Higher markups are associated with greater profitability. The increase in yearly case mix index suggests that hospitals saw reportedly sicker patients on average after acquisition. This could be due to selection effects if the composition of patients changed. However, it may also suggest that hospitals are engaging in more complete or aggressive coding. Upcoding can lead to higher diagnosis-related group payments for inpatient admissions and is another possible mechanism to increase net income.

In our main analysis, we observed greater improvements in process quality measures among private equity–acquired hospitals relative to controls, which may reflect better care for patients. However, it could also be consistent with better adherence to compliance standards or efforts to maximize opportunities for quality bonuses under pay-for-performance contracts.


As private equity increasingly influences health care delivery in the US, this study offers an initial national assessment of changes in hospital-level economic and quality measures associated with private equity acquisition. Although further research is needed, our findings suggest that policy makers should consider monitoring or thoughtful oversight of changes in care delivery and billing practices in hospitals acquired by private equity firms to ensure proper stewardship of societal resources and the prioritization of patient interests.



By Don McCanne, M.D.

These private equity investments in health care are designed to increase the value of the assets acquired and then to sell them for a large profit in just a few years. That is, they are designed to make money for the investors – a high profit in a short time span. These equity firms imply that their motivations are altruistic, that they are increasing value, quality, efficiency that makes their products worth the prices that must be paid to net high profits for the investors. So are they really serving the interests of the patients and providers, or are they just simply squeezing funds out of these deals for their own interests?

It appears that they are operating in ways that maximize margin in the near term. That means charging higher prices for the services. It means providing additional services that are of lower value which may actually increase risk to patient safety and health equity. This study showed that “private equity acquisition was associated with increases in annual net income, hospital charges, charge to cost ratios, and case mix index among hospitals.” The hospitals acquired by private equity had a decrease in Medicare patients with an increase in privately insured patients which provided higher reimbursements than did Medicare, suggesting that selective marketing efforts were successful in increasing margins. Increases in hospital charges resulted in higher out-of-pocket costs for the uninsured and for those who were receiving care out-of-network. Even in-network insured patients produced higher net incomes since negotiating leverage was greater for the private equity hospitals. After acquisition, “private equity firms began charging more for services, cutting operating costs, or both.” After acquisition, the private equity hospitals reportedly saw sicker patients warranting higher charges, but this likely represented more aggressive coding – upcoding just as we see with the private Medicare Advantage plans that result in increases in net income. These private equity-acquired hospitals also supposedly showed greater improvements in process quality measures when, in fact, this actually likely represented gaming in an effort to maximize opportunities for quality bonuses under pay-for-performance contracts.

The medical-industrial complex is more than ripe for equity investors. As if the greed in the system was not already excessive, bringing in the equity investors to squeeze more out of our overpriced and underperforming system is exactly what we should not be doing.

We really do need the single payer model of an improved Medicare for All, but if the stalling by our political leaders in both major parties continues, the economic structure of our health care delivery system will be damaged as with a blunderbuss to the degree that it may be hard to distinguish it from the economic structure of a war zone in need of a Marshall Plan. Really. Private equity acquisition is only one small example of the damage being done throughout the health care economic infrastructure – damage that will be very difficult to repair.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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