Private-equity-acquired hospitals quickly buy into profitable service lines, for better or for worse

Hospitals recently acquired by private equity firms tend to adopt profitable new services and technologies more quickly than their unacquired counterparts, according to a new analysis in Health Affairs.

Across a sample of roughly 5,000 hospitals reviewed from 2004 to 2018, researchers also found that the private-equity-acquired hospitals were, to a lesser extent, more likely to avoid or ditch services with “unreliable” revenue streams or competition from other nonprofit hospitals.

The exceptions to these top-level findings generally fell in line with broader shifts in care delivery, the researchers noted.

For instance, private-equity-acquired hospitals are more likely to offer psychiatric emergency services—a service line that was previously considered to be unprofitable but was later “buoyed” by Affordable Care Act expansions. Those hospitals were also less likely to support inpatient orthopedic surgery, reflecting a shift away from acute inpatient care with “volatile” profitability in favor of joint ventures with ambulatory surgical centers or other outpatient facilities.

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The collective findings suggest private-equity-acquired hospitals more strongly adapt their operations in response to a profit incentive and, as such, adapt more quickly to prevailing industry trends, the researchers wrote.

That behavior could potentially backfire for the early movers if novel, initially profitable services later reveal themselves to be less effective and, ultimately, more expensive, they warned.

“Many hospitals—not just private equity-acquired hospitals—have adopted profitable services such as robotic surgery, digital mammography and freestanding or satellite emergency departments,” the researchers wrote in Health Affairs. “However, this trend may belie an ‘acceleration’ of service adoption by private equity–acquired hospitals ahead of profit-seeking changes in service lines exhibited by all hospitals, irrespective of the value these services may provide for patients.”

These profit-seeking behaviors should also be on the radar of policymakers as they secure patients’ continued access to care, they wrote.

“The cessation of crucial, but less profitable, services at one facility may force other facilities in the same service area to expand these service lines. Therefore, regulation that mitigates this ‘spillover’ must address population-level metrics of health, not just outcomes specific to acquired hospitals.”

The analysis, conducted by researchers from Duke University and the University of Texas MD Anderson Cancer Center, used data from the Centers for Medicare & Medicaid Services, the American Hospital Association and proprietary market intelligence platforms Pitchbook, CB Insights and Zephyr.

With these, researchers identified 228 hospitals acquired by private equity between 2006 and 2015 and determined their probability of supporting 11 “profitable” and 7 “unprofitable” services lines four years pre- and post-acquisition compared to a sample of 4,781 unacquired comparator hospitals.

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Private-equity-acquired hospitals were significantly more likely to support profitable services including robotic surgery, digital mammography, adult interventional cardiac catheterization, hemodialysis, free-standing or satellite emergency departments and birthing rooms/labor and delivery when compared to unacquired hospitals.

The only profitable service the acquired hospitals were less likely to provide was inpatient orthopedic surgery. Neonatal intensive care units, cardiac rehabilitation, fertility clinics and extracorporeal shock wave lithotripsy were also statistically similar to unacquired hospitals.

Among the unprofitable services, private-equity-acquired hospitals were more likely to offer psychiatric emergency services and less likely to support outpatient psychiatric care. Support for other unprofitable services including burn treatment centers, HIV/AIDS treatment, adult day care programs, inpatient detox programs and psychiatric partial hospitals were all similar between the hospitals.

Private equity has increasingly set its sights on hospitals over the past couple of decades—and particularly those with more beds, higher operating margins and greater patient charge-to-cost ratios, according to a May study.

Those hospitals generally see a boost to their operating margins compared to their unacquired counterparts, potentially raising concerns over whether the investments may be influencing operational decisions.