Hospitals invest in private equity, too

Mounting anger over private equity investment in health care has largely ignored the financial support given by hospital system financial officers and their portfolio managers

Outrage over private equity’s negative impact on health care is justified.

Nursing homes taken over by PE firms have higher mortality rates and lower staffing ratios than their non-PE firm owned peers, according to a 2021 study published by the National Bureau of Economic Research. Hospital acquisitions by PE firms lead to worse patient experience scores and lower staffing ratios even though revenue per patient was the same as similarly-situated non-profit hospitals, another study showed.

In both acute care and post-acute care settings, PE-owned firms undermine facility finances by imposing high management fees and selling off real estate to pay down PE firm debt. This particularly pernicious form of financial engineering burdens the acquired institutions with high rental fees for buildings they previously owned.

Turning to physician practices, where most of the action is today, a recent study of PE acquisitions shows increased utilization and costs after takeovers, thus undermining efforts to cut out waste in the system. PE-acquired practices achieve higher revenue not just by attracting new patients, but by increasing the number of visits and procedures for existing patients. The study focused on dermatology, gastroenterology and ophthalmology practices, which are especially prone to conducting unnecessary procedures.

Other studies show PE owners impose sharp price increases after acquiring physician practices. Economists that have looked at the trend in health care offer evidence that PE takeovers decrease competition, raise costs and put patients at risk.

Hospital systems?!

When looking for the villains behind PE acquisitions in health care, most accounts focus on the well-known Wall Street firms like the Carlyle Group and KKR. But the field, ranked by number of deals, is dominated by a host of lesser known players like Shore Capital Partners and Waud Capital Partners of Chicago; the Audax Group and Webster Equity Partners of Boston; and Leonard Green & Co. of Los Angeles (which GoozNews wrote about earlier this year).

Who is supplying capital to these firms? If you are in health care, as many readers of GoozNews are, you may be working for one of the well-endowed hospital systems that are shoveling a growing share of their stored surpluses into so-called alternative investments, which includes private equity. (Ever wonder where the “profits” at non-profit systems go besides into bloated executive salaries? They are used to grow their endowments, whose investment earnings are used for everything from rainy day funds to building fancy new cancer wings.)

I never read about hospital PE investments in any of the many press accounts that have criticized PE involvement in the health care sector (see here, here, and here, for instance). But I suspect it is there, and it’s worth exposing.

There’s a good reason why even the most enterprising reporter can’t ferret out that information. The financiers behind PE firms are not required to disclose their investments, whether they are wealthy individuals or institutional investors like pension funds, universities, and hospital systems. Nor do PE firms have to divulge the names of the firms that they invest in.

A quick review of hospital system financial reports does provide some clues as to the scale of their PE investments, however. They’ve been growing sharply, no doubt because their generous returns have exceeded the stock market in recent years.

I could only find one system in the seven large systems I reviewed that reported the scale of their private equity investments separately. Providence St. Joseph, a Catholic system based in Renton, Washington, with hospitals located in a half dozen western states, reported about $900 million or 8% of its total portfolio was invested in private equity. PE investment constituted 37% of its so-called “alternative” portfolio, which in addition to PE includes investments in hedge funds, real estate and venture capital funds.

Most of the nation’s largest health care systems only report the broader “alternative” category. But if they are investing in private equity at a similar rate as Providence St. Joseph (a reasonable assumption in my opinion), then the hospital sector is investing tens of billions of dollars annually in private equity.

What firms do they invest in? How much do they invest? Are those firms investing in physician practices? Nursing homes? Other hospitals? Staffing firms? Any of the other health care sub-sectors being pursued by PE firms?

Earlier this year, Rep. Pramila Jayapal (D-WA) introduced the Healthcare Ownership Transparency Act. It would require PE firms disclose the identities of their investors, their investment level, each of the firm’s investments and their financial performance, the fees collected by the firm, and its debt. It doesn’t stand a chance of passage in a Republican-held House of Representatives.

But progressives on the Hill might be able to generate some bipartisan support by coming at the issue from the other side. Someone should propose legislation that would require institutions like universities and hospitals disclose their investments in PE firms, and the investments of the PE firms they partially own, as a requirement for maintaining their non-profit status. After all, taxpayers have the right to know whether their foregone tax dollars are being used to undermine the health care system by raising costs and lowering quality.

Good Reads:

Michelle Goldberg, columnist for the New York Times, expresses thoughts that have been rattling around in my head the last few days. Her column, The Massacre in Israel and the Need for a Decent Left, is today’s must-read.

Also in today’s Times, Charles M. Blow asks Do Early R.S.V. Vaccine Trials Have a Henrietta Lacks Story?

In the Boston Review, Amy Kapczynski, Reshma Ramachandran and Christopher Morten review the COVID-19 vaccine development story as part of their essay on How Not To Do Industrial Policy.