CME: Private Equity in Healthcare
- FibonacciMD
- 3 days ago
- 11 min read
Updated: 3 days ago
Discover how private equity impacts healthcare quality and costs. This free CME covers LBOs, staffing shifts, and the facts behind hospital bankruptcies.
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Private Equity in Healthcare
What Are the Facts?
Over the past few decades, private equity (PE) firms in the U.S. have acquired hundreds of hospitals, thousands of physician practices, and numerous nursing homes, ambulatory surgery centers, and fertility clinics.[1] What distinguishes PE from other for-profit healthcare owners is that PE firms generally aim to turn a profit by selling off assets within five to ten years. Typical strategies to achieve this include decreasing staff, eliminating less profitable services, increasing prices, and attempting to increase patient volume.[1]
About 8.5% of all private hospitals are thought to be owned by private equity.[2] Hospital-based medical practices are also purchased by PE firms, with one source reporting that by 2020, 40% of all emergency department physicians were working for PE-acquired firms.[3] Estimates suggest that PE invested between $200 billion and $1 trillion in the U.S. healthcare industry over the last decade.[4,5]
A literature review of hospital waste-related costs in the U.S. healthcare system estimated wasteful overspending of $760 billion to $935 billion.[6] The question is: Does PE entering the healthcare system reduce these over-expenditures using their management expertise, or are they predatory, taking profits and leaving behind a trail of increased debt or even bankruptcies?
How Does Private Equity Make Money?
Leveraged Buyouts (LBOs)
To make the purchase, PE firms frequently use the acquired entity’s assets as collateral to obtain large loans, a process known as a leveraged buyout (LBO). A PE firm typically assumes only part of the responsibility for the loan and, for example, taking responsibility for just 25% of the loan, leaving the healthcare entity responsible for the remaining 75%. This increased debt load raises the risk of bankruptcy for the acquired entity while allowing the private equity firm to minimize its own financial risk.[1] The use of leveraged buyouts for business acquisitions has been found to increase the ten-year bankruptcy rate of target firms by tenfold compared to controls (20% compared to 2%).[7]
Sale-Leaseback Transactions
In addition, the hospital or healthcare entity’s land and buildings are commonly sold to a REIT (real estate investment trust), in a sale-leaseback transaction, providing the PE firm with immediate cash. The healthcare facility must then lease back its land and buildings, which increases its debt burden due to rental costs.[8] The PE firm is not required to reinvest all the proceeds from the property sale to benefit the healthcare entity and may take a portion as profit. These transactions effectively turn part of the acquisition into a profitable real estate deal. One study found that, over a two-year period, assets owned by PE-acquired hospitals decreased by 24% compared to control hospitals.[9] Another, more recent study reported that 25% of hospitals that participated in REIT sale-leaseback transactions closed or declared bankruptcy compared to 4% of control hospitals. Additionally, there was a 31% decrease in the fixed assets of hospitals involved in REIT transactions compared to the control group.[10]
Management Fees
PE firms may also charge management fees to the acquired healthcare entity.[11]
Related-Party Transactions
In some cases, “related-party transactions” can increase PE profits. After acquisition, the healthcare entity may be required to purchase services from another company owned by the PE firm regardless of cost or quality. One example would be the mandated use of a PE-owned debt collection company.[3]
Increased Charges
PE-acquired hospitals have been found to raise charges more than control hospitals. In a study of over 500 physician practices purchased by private equity firms from 2016 to 2020, charges increased by an average of 20%.[12] Another systematic review found a consistent pattern of increased costs to patients and insurers following PE acquisition of healthcare entities.[13]
Selling the Entity or Walking Away
If the PE firm can make the healthcare entity profitable, it can potentially sell it at a profit. If bankruptcy occurs, the PE firm may walk away with substantial earnings already extracted, leaving vendors, other debtors, the REIT, and the community the entity previously served, to deal with the fallout.
Surprise Billing
Previously, one major attraction of owning in-hospital physician groups was the ability to engage in balance-billing. For example, PE-owned anesthesia or emergency medicine groups would go out-of-network with commercial insurers, even if the hospital they worked at was in-network. This allowed the groups to charge patients any amount they chose and then balance-bill the patients for the difference between their charges and the insurer’s reimbursement. This practice, commonly known as “surprise billing”, provoked widespread patient anger and in 2022, the No Surprises Act was enacted by Congress, which prohibited such billing practices. Following the law’s passage, several large PE-owned emergency department physician staffing firms filed for bankruptcy, claiming the legislation had negatively affected their revenue.[14,15,16,17,18]
Does Private Equity Improve or Worsen Healthcare?
A study compared PE-acquired hospitals to hospitals acquired by other entities (typically another medical center), as well as a group of non-acquired hospitals used as controls. The researchers found that over an eight-year period the PE-acquired hospitals were more likely to succeed financially than both the non-PE-acquired hospitals and the controls.[4]
The same study also reported that the number of core workers (doctors, nurses, and pharmacists) in the PE-acquired hospitals decreased by 15% compared to controls in the first four years after acquisition. However, in the following four years, core staffing in PE-acquired hospitals increased and ended up only being 5% lower than the control hospitals. By contrast, non-PE-acquired hospitals had a 24% drop in core personnel in the first four years, which became a 25% drop in comparison to the control group over the subsequent four years.[4]
Compared to control hospitals, PE-acquired hospitals reduced administrative positions by 14%-16% over eight years, while no reduction occurred in non-PE-acquired hospitals.[4] Over the eight-year period, total employment decreased by 8% at PE-acquired hospitals versus a 4%-5% decrease in non-PE acquired hospitals.[4]
According to this study, it appears that regardless of which type of entity purchases a hospital, core staffing will decrease. However, in a PE-acquired hospital, administrative staff are reduced to a much greater degree, resulting in a lesser overall drop in core personnel compared to non-PE-acquired hospitals.[4]
The authors did not find any differences in 30-day mortality for myocardial infarction or hospital-acquired pneumonia between PE-acquired hospitals and non-PE-acquired hospitals, though heart failure mortality rates were slightly higher in non-PE-acquired hospitals. There was a small increase in the 30-day pneumonia readmission rate in PE-acquired hospitals. No changes were observed in the percentage of Medicaid patients at either PE- or non-PE-acquired hospitals, suggesting that the hospitals did not increasingly cater to wealthier patients after acquisition.[4]
A different study looking at REIT-acquired hospitals found no significant differences in the 30-day mortality rate or 30-day hospital readmission rate for patients with acute myocardial infarction, congestive heart failure, or pneumonia compared to non-REIT-acquired hospitals.[10]
Another analysis reported that PE-acquired hospitals performed significantly better on pneumonia and acute myocardial infarction quality measures than control hospitals.[19]
However, these relatively positive findings from the above studies contrast with other published studies.
A study of Medicare data revealed that PE acquisition was associated with a 25% increase in hospital-acquired conditions, such as increased falls and central intravenous line infections. Post PE acquisition, there was a 27% increase in patient falls and central line-associated infections rose 38% (despite 16% fewer central lines being placed), compared to the incidence before the PE firm took over. There were no significant differences found in the rates of pressure ulcers, surgical infections, deep vein thromboses, or catheter associated urinary tract infections pre- and post-PE acquisition.[20]
A review of nursing home data between 2000 and 2017, reported that, depending on which statistical method was used, there was a 2% to 11% increase in short-term mortality in PE-owned nursing homes despite accepting lower risk patients. The authors documented multiple changes in clinical and operational factors that may help explain the increased mortality, such as declines in measures of patient well-being, nurse staffing, and compliance with care standards in PE-owned nursing homes. They also reported that there was a 77% increase in facility building lease payments and a 224% increase in interest payments after PE acquisition.[21]
A recent study of differences in staffing and mortality in emergency departments (EDs) and intensive care units (ICUs) between PE-owned facilities and controls, reported that ED salary expenditures decreased 18.2% and ICU salary expenditures decreased 15.9% in PE-owned hospitals. ED patient deaths increased by 13.4% after PE acquisition. By contrast, the non-PE-owned hospitals studied experienced decreased ED mortality. ICU mortality did not increase, but patient transfers to other institutions rose by 4.2% from PE-owned EDs and 10.6% from PE-owned ICUs. These results suggest that fewer services may have been offered at PE-acquired hospitals, requiring more transfers of sicker patients. The authors suggested that decreased ICU staffing may have been a contributor to increased ED holding times, which have been associated with worsened healthcare outcomes.[22,23]
Actual Cases of Private Equity Acquisition that Led to Bankruptcy
Theoretically, private equity can supply needed cash and possibly better management to a troubled hospital or other healthcare entity. However, there have been instances where the PE firm enriched itself while increasing the debt of the acquired institution to the point of bankruptcy. Not all PE acquisitions end in bankruptcy, but two illustrative examples in which this occurred are highlighted below.
Steward Healthcare
Steward Healthcare serves as a cautionary tale. As described in a report by the Private Equity Stakeholders Project, Steward Health Care is a multi-state hospital system that was owned by PE firm Cerberus Capital Management from 2010 to 2020. Steward was formed in 2010 when Cerberus purchased Caritas Christi, a nonprofit six-hospital Catholic healthcare system in Massachusetts.[11] Massachusetts regulators imposed conditions on the transaction including a five-year monitoring period for Steward following the transaction. In 2016, after its monitoring period ended, Steward, which had purchased more hospitals by then, sold the real estate of five of its Massachusetts hospitals and mortgaged four more hospitals to Medical Properties Trust (MPT), a REIT. This transaction generated $1.2 billion, $484 million of which was paid to Cerberus Capital’s funds as dividends.[11] The hospitals either no longer owned their real estate or had new mortgages and were then required to pay millions of dollars in lease or mortgage payments. When Cerberus acquired the initial six-hospital chain in 2010, Steward was $475 million in debt; by the end of 2014, total liabilities exceeded $1.4 billion.[11]
In 2017, with financing assistance from MPT, Steward rapidly expanded to a 37-hospital system operating in ten states and became the largest for-profit private hospital operator in the U.S.[11] More sale-leaseback deals followed.[10] Many Steward hospitals were financially struggling as Cerberus began to make its exit in 2020.[11] In 2023, as Steward reportedly missed rent payments, faced increased complaints of patient care issues and unpaid vendor bills, it took on $600 million in new debt to refinance existing obligations.[11] Between 2018 and 2024, Steward closed six hospitals, resulting in the layoffs of at least 2,650 workers and reduced community access to care. Steward also reportedly cut unprofitable service lines at some of their hospitals, such as obstetrics, behavioral health, and cancer care.[11]
In May 2024, Steward Health Care filed for Chapter 11 bankruptcy, reporting over $9 billion in liabilities. Of this, $6.6 billion were long-term lease liabilities owed to MPT, $290 million were unpaid wages to employees, and nearly $1 billion were unpaid debts to vendors and suppliers.[11] Before the bankruptcy filing, the healthcare system was sold to a new set of owners who allegedly paid themselves a final $111 million dividend.[11] Cerberus reportedly made $800 million in total in the decade it owned Steward.[11]
In the year since Steward’s bankruptcy filing, five more former Steward hospitals in Massachusetts, Florida, and Ohio have closed and laid off approximately 2,400 workers.[24]
Prospect Medical Holdings
Prospect Medical Holdings (PMH), a 16-hospital PE-owned chain, declared bankruptcy in 2025. It was owned by the PE firm Leonard Green & Partners (LGP).[25] In 2022, in Connecticut, Yale New Haven Health agreed to take over three Prospect Hospitals for $435 million.[26] It was reported in the news, based on court filings, that after further investigation, “Yale New Haven Health sued to get out of buying the hospitals, citing “severe” neglect of facilities that included failure to maintain basic cybersecurity standards, missed payments to vendors and numerous regulatory violations.”[25,27] An arbitration agreement following Prospect’s bankruptcy and counter-suit against Yale, cost Yale $45 million to negate the deal.[28] A U.S. Senate Budget Committee investigation officially reported that one of its key findings was: “Despite gross financial and operational mismanagement of its hospitals, LGP took home $424 million of the $645 million that PMH paid out in dividends and preferred stock redemption during LGP’s majority ownership,—in addition to over $13 million in fees—that left PMH in severe financial distress. In order to pay out these distributions, PMH was forced to take on hundreds of millions of dollars in debt, eventually leading to PMH running out of cash and defaulting on its loans.”[29]
What Can Be Done to Prevent Private Equity Excesses?
While a struggling healthcare system may benefit from new management and a cash infusion, the structure of PE acquisitions can allow firms to extract excessive profits while dramatically increasing the system’s debt, sometimes pushing it toward bankruptcy.
The Private Equity Stakeholder Project has suggested some legislative changes to prevent excessive private equity profiteering in the future.[11]
Create a robust set of change-of-ownership regulations for healthcare facilities that give states authority to approve or deny transactions based on multiple factors, including cost and market share, long-term access to quality healthcare for the community, and preservation of jobs and collective bargaining rights.
Require full financial transparency of licensed hospital operators and their investors, including private equity firms, real estate investment trusts (REITs), and other shareholders.
Require that acute care hospital operators offer a minimum set of clinical services.
Give states authority to put hospitals in receivership in the event of mismanagement by their owners.
Bar hospital investors from paying themselves debt-funded dividends from healthcare systems (also called dividend recapitalizations) or dividends from real estate sales. Investors should be able to prove that any dividends paid to the PE firm can be funded without impacting the short- or long-term financial viability of the hospital/healthcare system.
Ban or place limits on sale-leasebacks and similar types of real estate transactions involving hospital property, for all types of hospitals.
Establish joint and several liability for corporate owners and investors of hospital systems for both operations and real estate, so that if a hospital is sued, the controlling corporate entities could also be held liable. (In joint and several liability, parties can be held individually to pay the amount of the total judgment if another defendant is unable to.)
Place limits on management fees.
Summary
Private equity firms have developed strategies to generate substantial income from healthcare entities using leveraged buyouts, sale-leaseback deals for land and property, and management fees. This has encouraged heavy PE investment in this sector. These financial strategies can produce significant returns regardless of whether the healthcare entity succeeds or fails, sometimes leaving hospitals over-leveraged and vulnerable to bankruptcy.
Interestingly, one study found that both PE- and non-PE-acquired hospitals reduced core clinical staffing compared to controls, which may have potential negative effects on both clinical outcomes and on patient satisfaction. However, four-to-eight years post-acquisition, core staff levels in PE-acquired hospitals had improved, while reductions persisted in non-PE-acquired hospitals. Administrative positions were reduced only in PE-acquired facilities.
Evidence on the impact of PE ownership on healthcare quality is mixed, but some research has found worsened health outcomes in PE-acquired healthcare entities. It may be likely that some PE firms prioritize improving quality and turning the investment around while others extract massive profits, decrease staffing, and cut essential community services while driving the entity towards bankruptcy.
PE ownership of healthcare entities such as nursing homes and physician practices has been associated with increased charges to patients, insurance companies, and Medicare.
When PE acquires a hospital or other healthcare entity, stakeholder priorities shift, and the needs of the PE firm may outweigh the needs of the local community. Real-world cases presented in this article highlight the potential risks when financial extraction by the owners may threaten the long-term viability of a hospital system.
It is likely that PE investments in healthcare will continue given how profitable ownership has proved to be. It is incumbent on legislators and regulators to ensure that the potential excesses that have occurred in the past are limited by better oversight, regulation, and legislation.
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