Labor costs, surging interest rates and increased scrutiny are cooling private equity firms' appetite to acquire financially struggling hospitals, Bloomberg reported Sept. 12.
Private equity owns about 400 of approximately 5,100 hospitals in the U.S. and firms often promote their ability to turn ailing hospitals around, returning them to profitability by increasing efficiencies and cutting costs.
Some pages of firms' turnaround playbooks are now under greater scrutiny for adding debt to already strapped hospitals, such as selling hospital property and then leasing it back. And with labor making up more than half of hospitals' cost structure, cuts only go so far before affecting patient care.
"Private equity is looking at some of these hospitals now saying, 'I don't know what my exit is. There's too many unknown variables,'" Jim Clayton, head of the private equity advisory practice at BDO USA, told Bloomberg. "And the one thing private equity guys don't like is unknown variables. They thought that they could pretty them up and sell them to a larger health system. But the larger systems aren't buying them. Because they don't want the headache either."
Hospitals at risk of closure may find themselves with weaker lifelines in private equity due to firms' decreased interest, but Bloomberg points to instances that show PE involvement has not always been much of a lifeline to begin with.
When Prospect Medical Holdings bought cash-strapped Delaware County Memorial Hospital in Drexel Hill, Pa., it pledged to return it to profitability and ensure its long-term sustainability. Seven years later, the hospital is closed, Prospect is in debt and a community group is suing. Near Chicago, Pipeline Health System closed the 230-bed Westlake Hospital in Melrose Park, Ill., in 2019 months after agreeing to keep it open for at least two years.
In July, researchers with UChicago Medicine analyzed 55 academic research studies on private equity in healthcare across the dimensions of healthcare quality, cost to payers and patients, cost to healthcare operators, and health outcomes.
They found PE investment was most closely associated with up to a 32 percent increase in costs for payers and patients. PE ownership was also associated with mixed to harmful effects on healthcare quality, while the impact on health outcomes and operator costs was inconclusive. The authors did not identify any consistently beneficial impacts of private equity ownership.