Steady private equity (PE) activity in rural healthcare warrants heavier scrutiny and regulatory reform, argues a new report from the Private Equity Stakeholder Project.
PESP, a nonprofit that advocates for more disclosure about private equity deals, examined rural hospital ownership, buyouts of non-hospital rural healthcare companies and policies that incentivize these trends. Additionally, the report proposes policy recommendations to ensure providers are protected from profiteering.
The problems of rural healthcare—poorer access to care and worse outcomes—make it “clear that there is a critical need for investment in rural healthcare,” the report said. “Private equity appears to see opportunity to profit.”
PE firms have created dedicated rural investment funds and bought up rural healthcare companies. This investment carries “unique risk.” By prioritizing high returns and profits, PE firms may sacrifice staffing or reduce access to less profitable services that may still be greatly needed by patients.
The report used various data sources from the Centers for Medicare and Medicaid Services to the Sheps Center for Health Services Research and Pitchbook.
You can hear more from Mary Bugbee, one of the authors of the report, on our podcast Podnosis
PESP found that PE firms own at least 130 rural hospitals, with the highest concentration being in the south. Texas had the most, with 17 hospitals, followed by Kentucky and North Carolina. A few firms own the lion’s share of rural hospitals: Apollo Global Management (71), GoldenTree Asset Management and Davidson Kempner (17) and Equity Group Investments (15).
Six rural hospitals closed in 2021 and 2022; three of them were PE-owned. The report did not include hospitals operated by hospital management companies that are PE-owned.
“Generally speaking, rural healthcare providers are in greater need for capital and so they’re more willing to accept private equity ownership,” PESP’s research director Eileen O’Grady told Fierce Healthcare. That position also makes them cheaper to buy, so PE firms take on less risk. Opportunity for consolidation is another attractive feature of rural hospitals, O’Grady noted, though PE investment is found everywhere.
The report included numerous case studies highlighting conflicts of interest and profiteering that drives PE decisions in healthcare. Apollo owns LifePoint Health and ScionHealth, two of the largest health systems serving rural communities. LifePoint cut operating costs and charity care notably in 2020 despite making $1.14 billion in EBITDA and $304 million in net income that year. LifePoint’s Wilson Medical Center faced scrutiny in 2022 when regulators found enough deficiencies and threatened to terminate its Medicare contract. Separately, the North Carolina Department of Justice investigated it over concerns about decreased available inpatient beds and allegations of chronic understaffing.
Other rural health services
Other areas besides hospital ownership PESP looked at were emergency care and transport, medical staffing companies, behavioral health providers and hospital management and consulting.
Emergency medicine is attractive to third-party physician staffing groups. Envision Healthcare, owned by PE giant KKR, is one of the largest physician staffing firms in the U.S. with a big rural footprint. Envision has been shown in past studies to have played a prominent role in America’s surprise medical billing problem. In 2020, Envision spent $57 million to lobby against legislation that would protect patients from surprise billing, the PESP report noted.
Air ambulances fill a critical gap in rural healthcare delivery. Being a lightly regulated and highly profitable sector, PE ownership dominates it. Two firms, American Securities and KKR, controlled nearly two-thirds of the national market as of 2017. A separate 2021 study found that PE-owned air ambulances receive higher payments. They were also substantially less likely to be in-network, making surprise bills more likely and more expensive.
Rural health staffing issues have been amplified by the pandemic. Travel nursing has become especially lucrative, the report noted, creating a cycle where permanent nursing staff are incentivized to leave and hospitals already stretched thin need to rely on expensive travel contracts to fill labor gaps. Per PESP, 2021 was a record year for PE acquisitions in medical staffing, with two of the largest companies being PE-owned.
Also in 2021, the number of behavioral health acquisitions jumped more than 35%; most involved PE firms. In the first half of 2022, PE firms were behind 30 of 41 of these deals. Past PESP reports on PE in behavioral health have tracked cost-cutting tactics that reduce staff and create harmful outcomes for patients. The industry’s growing interest in this space “merits scrutiny,” the report concluded.
Hospital management and consulting companies are a newer avenue for PE. “They're able to profit off of these facilities without taking on really any risk,” O’Grady noted.
One example is QHR Health, which markets its services to community and rural hospitals and was acquired by a PE firm in 2021. QRH had a 30-year relationship with a local hospital in Colorado, which cut ties with the company in 2020. So QHR constructed an ambulatory surgery center that will be a direct competitor to an ambulatory care center the hospital is opening as well. This decision to compete in the same market despite QHR’s financial advantage as a large, national company backed by PE deserves scrutiny, PESP argues.
The lack of sufficient public funding in rural healthcare creates a demand for capital, which PE takes advantage of, the report noted. Those on the brink of closing may be more likely to take offers from buyers they otherwise would not have considered. And these deals may be less scrutinized by regulators if it means keeping a community hospital open. Additionally, firms take advantage of outsourcing to score lucrative contracts with their portfolio companies, profiting indirectly without ownership.
Rural providers might also be attractive to investors because of Medicare payment models. More than half of all rural hospitals owned by PE today benefit from a rural payment designation that gives them a financial advantage. The Biden administration’s new rural emergency hospital (REH) designation has the potential to keep more hospitals open, but it’s unclear if it will incentivize other hospitals to reduce their services and convert to REH to increase their revenues.
There is concern about PE investment in healthcare at the Federal Trade Commission and Department of Justice, something O’Grady has also heard in informal conversations with the former agency. PESP plans to share the latest report with the agency with the aim of informing policy, she added.
PE ownership “is incredibly opaque. It’s like a black box,” O’Grady said. Its impact is also difficult to track qualitatively. Even if the financial status of a hospital is great, “what does that actually mean for patients?”
PESP proposes increased oversight over changes in rural healthcare ownership, limits on sale-leaseback transactions and fees for services not provided, increased accountability for participation in certain CMS payment programs and increased public investment in rural health. Additionally, PESP recommends that Congress pass the Travel Nursing Agency Transparency Study Act to investigate potential anti-competitive practices.
Public investment in rural health should limit “extractive practices from for-profit interests” and has the potential to “preserve and even expand access to healthcare,” the report concluded.