Private equity in healthcare is increasing, but a new paper exploring its role in nursing homes shows a negative impact on quality of care.
A working paper from researchers at the University of Pennsylvania and New York University is raising questions about the benefits of private equity in healthcare.

The paper recently published in SSRN examined the effects of private equity buyouts in a large section of healthcare: nursing homes. The study used data from CMS and Pitchbook Inc., a leading market intelligence firm, to analyze 119 deals involving 1,667 nursing homes since 2004.

Researchers found that private equity buyouts resulted in significantly lower quality of care, as measured by CMS-generated Five Star ratings and hospital readmission rates, as well as nurse staffing numbers.

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On average, overall Five Star ratings declined by 7.7 percent of the mean rating, researchers reported. Nursing homes also experienced a 0.5 percentage point increase in risk-adjusted 30-day rehospitalization rates following private equity buyouts.

Additionally, nurse staffing per patient day declined after private equity buyouts. Specifically, the total nursing staff hours decreased by 1.4 percent, and staff hours per patient day fell by 2.4 percent after the buyout.

The decrease in nurse staffing was driven largely by cuts to frontline caregivers, including certified nursing assistants and licensed practical nurses, which represented the majority of nursing staff in the care facilities. These declines were not reflective of increasing patient volumes either, researchers explained.

However, nursing homes were more efficient after a private equity buyout, the paper showed.

After buyouts, nursing homes saw slight increases in bed utilization, which was achieved through higher patient volume on the extensive and intensive margins, researchers stated. In other words, these nursing homes both admitted more patients and increased the average length of stay.

Researchers estimated that patient volume rose by 8 percent without any changes in bed capacity. This increase added nearly $770,000 (in 2017 dollars) to the average nursing home owned by a private equity firm each year.

But is the added efficiency and revenue worth having private equity in healthcare?

Private equity firms aim to increase productivity and lower costs in order to sell whatever company was bought for a profit. In many ways, healthcare is lacking both productivity and lower costs, making private equity in healthcare one way to stem the tide of rising healthcare costs.

However, many industry leaders have criticized private equity in healthcare. They have argued that the firms are more focused on maximizing profit, rather than improving patient outcomes. Concerns about private equity in healthcare have even prompted Congress and the American Medical Association to launch studies on the impact the firms are having on healthcare.

Analyzing the impact private equity buyouts has had on nursing homes is a good place to start investigating the role the firms have in healthcare, researchers contended in the working paper.

Nursing homes are a large sector in healthcare, with $166 billing in spending in 2017. The sector is also slated to grow by about 50 percent to $240 billion by 2025.

The sector is also dominated by public spending, with public payers representing 85 percent of all insurer payouts. This means that misaligned incentives and the capture of government subsidiaries are major concerns in this sector.

Nursing homes are also primarily privately owned facilities, researchers reasoned. With about 70 percent of nursing homes for-profit owned, the study was able to separately identify the effects of private equity from the effects of other types of private ownership.

“In the nursing home setting, it appears that high-powered profit maximizing incentives can lead firms to renege on implicit contracts to provide high quality care, creating value for the firms at the expense of patients,” researchers stated in the working paper.

In the conclusion, they call for future work pertaining to the welfare consequences of private equity investments in healthcare, as well as how government programs can be modified to align the interests of private equity-owned firms with those of taxpayers and consumers.