CLS Blue Sky Blog

Private Equity in the Hospital Industry

Private equity (PE) firms have in recent years been spending more money on purchasing more hospitals than ever before, with such deals accounting for a sizeable chunk of the roughly $340 billion that PE firms have put into the U.S. healthcare industry over the last decade.[1] Hospitals are economically very significant, not only because they are among the 10 largest employers in all U.S. states, but also because they provide important jobs to women and critical healthcare services to local communities.

The role of PE firms in the hospital industry is, however, controversial. Proponents claim that PE firms can improve hospitals in at least two ways. First, the firms could reduce inefficiency and wasteful spending at acquired hospitals by targeting overhead expenditures and administrative complexity. This seems particularly important given that 30 percent of health care spending in the U.S. is considered wasteful (Shrank et al. 2019). In addition, the management and operational expertise of PE firms may supply a hospital with more financing, human capital, and accounting services such as bill and claims processing. Increased efficiency, in turn, may benefit patients and communities by ensuring that acquired hospitals survive. Opponents, on the other hand, contend that PE investors load hospitals with debt, sell assets, implement layoffs to generate profits, and sometimes close hospitals, reducing health care and jobs in a community.

To shed light on this debate, we compare employment, efficiency, and patient outcomes at PE-acquired hospitals with those outcomes at a group of matched (i.e., “similar”) hospitals that have not been acquired. We include in “PE-acquired” hospitals those acquired directly by PE firms and those acquired by PE-backed hospital systems. For comparison, we also examine non-PE, for-profit acquirers, which allows us to draw clearer inferences about the potential role of PE acquirers relative to other types of for-profit acquirers.

We start by investigating employment outcomes. We find that employment declines significantly more at PE-acquired hospitals than at the matched non-acquired hospitals. Job cuts are not limited to PE-acquirers but are also occur at hospitals acquired by non-PE-backed firms. While overall employment declines, the proportion of skilled employees such as nurses, pharmacists, and physicians increases at hospitals taken over by publicly traded PE-backed hospitals. This effect is absent when the acquirer is a PE-backed private hospital rather than a publicly traded one. These findings suggest that PE investors can help hospitals access cheaper capital and better attract skilled employees by taking it public. We also show that the increase in skilled-employee ratio is unique to PE-backed acquirers, because other publicly traded acquirers with no PE involvement are associated with a much smaller increase.

We next examine overhead costs, a key indicator of operating efficiency. We find that overhead costs decline significantly after a hospital is acquired by a PE firm, but not after is purchased by non-PE-backed firm. The reduction in overhead costs is greatest when the acquirer is a publicly traded PE-backed hospital. This result is again consistent with the view that such acquirers benefit from the efficiency focus of PE investors as well as from accountability to public investors.

To see if the cuts in employment and overhead are associated with worse patient outcomes, we examine several dimensions, including death rates, readmission rates after hospitalization, and patient satisfaction scores.

We do not find evidence of any change in death rates due to heart attack or heart failure at PE-acquired hospitals. In comparison, mortality rates due to heart failure are marginally higher at non-PE-acquired hospitals. Patient death rates from pneumonia are higher at all target hospitals, but the increase in the rate is larger for patients at hospitals acquired by non-PE investors. Compared with the control group, readmission rates also stay largely unchanged for PE acquired hospitals, and readmission rates associated with heart failure even decline.

An examination of surveys reveals that patient satisfaction generally declines at an average target hospital after acquisition, but the  decline is concentrated in targets of non-PE acquirers. In fact, we observe no significant decline in any patient satisfaction score at hospitals acquired by publicly traded PE-backed hospitals. This result is in line with our prior observation that these acquirers are associated with an increase in the proportion of skilled employees, who are critical in providing quality health care. Overall, patient outcomes and patient satisfaction surveys do not suggest deteriorating patient outcomes at PE-acquired hospitals, alleviating the concerns that PE firms improve efficiency at the expense of patients.

Overall, our analysis reveals nuanced effects from PE-backed acquirers. While they cut employment and overhead costs, PE-backed acquirers preserve jobs of core healthcare providers, and their efficiency focus does not seem to compromise healthcare quality. Our findings provide an alternative to narratives in the popular press and suggest potentially positive effects of private equity investors on the hospital industry.


[1] See “Private equity firms now control many hospitals, ERs and nursing homes. Is it good for health care?” NBC News, March 2020.

This post comes to us from Janet Gao and Merih Sevilir, who are professors, and Yong Seok Kim, who is a PhD candidate, at Indiana University’s Kelley School of Business. It is based on their recent paper, “Private Equity in the Hospital Industry,” available here.

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