Private equity has succeeded in exploiting economic choke points in much narrower sectors of the economy than experts in monopolies typically study. Health care is an idea area in which to exploit the leverage of providers compared to patients. You can’t haggle over which ambulance comes to fetch you. Similarly, most who get an operation or need ongoing treatments, like dialysis or chemotherapy, will use a facility nearby, which means private equity can create local oligopolies. Not only do private equity owners jack up prices (see Eileen Appelbaum on how private equity negotiates higher fees for outsourced physician practices) but they also lower service levels, as an important new study confirms.
An important study by Atul Gupta, Sabrina T. Howell, Constantine Yannelis, and Abhinav Gupta, published by the Becker Friedman Institute of the University of Chicago, covering approximately 7.4 unique Medicare patients in nursing homes to understand the impact of private equity buys of 1,674 nursing homes from 2000 to 2017. We’ve embedded it below and encourage you to read it and circulate it widely.
The study is very carefully done. It looks at changes in care and health/mortality in nursing homes after private equity acquisitions. That makes it apples to apples, since the acquired homes were already for profit institutions. The authors also adjusted for consolidations within nursing home chains (they compared consolidation within PE deals with consolidation of non-PE owned for profit homes) and changes in patient composition post purchase.
The findings are damning:
A key measure of patient welfare is short-term survival. We find that going to a PE-owned nursing home increases the probability of death during the stay and the following 90 days by 1.7 percentage points, about 10% of the mean. This estimate implies about 20,150 Medicare lives lost due to PE ownership of nursing homes during our sample period. We use the observed age and gender distribution of Medicare decedents to estimate the corresponding implied loss in life-years – 160,000. Using a conventional value of a lifeyear from the literature, this estimate implies a mortality cost of about $21 billion in 2016 dollars. To put this in perspective, this is about twice the total payments made by Medicare to PE facilities during our sample period, about $9 billion.
Later in the paper, the authors underscore the significance of the 1.7% increased odds of dying in the first 90 days: “In the context of the health economics literature, this is a very large effect.”
Why did this happen? The private equity firms cut on patient care, in particular nurse staffing levels. Keep in mind that nursing homes in the US treat both short-term patients as well as long-term residents.
We find that PE ownership leads to a 3% decline in hours per patient-day supplied by the frontline nursing assistants who provide the vast majority of caregiving hours and perform crucial well-being services such as mobility assistance, personal interaction, and cleaning to minimize infection risk and ensure sanitary conditions. Overall staffing declines by 1.4%.
Nurses are the biggest operating cost, typically representing 50% of total non-overhead expenses.
The cut in service ironically hurts older but relatively healthy residents the most, those with “low disease burdens.” The authors argue that sicker residents required levels of care that could not readily be reduced. So the ones that took the hit were the seemingly sounder patients, who wouldn’t have a new ailment or injury attended to as quickly as in a non-PE owned nursing home.
The authors found corroborating evidence of the decay in care standards:
To ensure the effect is not spurious, we study other measures of patient well-being using the same IV approach. We find that going to a PE-owned nursing home increases the probability of taking antipsychotic medications – discouraged in the elderly due to their association with greater mortality – by 50%. Similarly, patient mobility declines and pain intensity increases post-acquisition. Finally, the amount billed per 90-day episode increases by 11%. Taken together, these results suggest that PE ownership decreases nursing home productivity, as measured by our proxies for quality output per dollar spent.
The increased use of anti-psychotics is alarming. Thorazine is often abused in institutional settings to zombify troublesome residents. Thorazine is also used as an alternative to opioids to manage very severe pain. The study notes that CMS found that the PE-owned nursing homes report pain intensity, so the higher thorazine/antipsychotic use could also be an effect of higher injuries or other deficiencies in care generating higher pain levels (note that higher pain is reported in the face of increased antipsychotics use could therefore indicate even more severe underlying increases in pain).
Another indicator is the decline in CMS five-star ratings after PE acquisitions and their lower level overall:
PE targets are slightly larger, have fewer staff hours per resident, and a lower Overall Five Star rating. At the sector level, ratings and staffing have secularly increased over time. For staffing, this reflects more stringent standards from regulators over time. As the PE deals occurred primarily later in the sample, it is therefore remarkable that they have lower measures of quality on average. Panel B shows that demographic measures are similar across the types of facilities, such as patient age and a high-risk indicator. PE-owned facilities bill about 10% more per stay than non-PE facilities.
Finally, the authors present evidence of looting:
A puzzle is why nursing homes are attractive targets given their low and regulated profit margins, often cited at just 1-2%. Using CMS cost reports, we find that there is no effect of buyouts on net income, raising the question of how PE firms create value. There are three types of expenditures that are particularly associated with PE profits and tax strategies: “monitoring fees” charged to portfolio companies, lease payments after real estate is sold to generate cash flows, and interest payments reflecting the importance of leverage in the PE business model (Metrick and Yasuda, 2010; Phalippou et al., 2018). We find that all three types of expenditures increase after buyouts, with interest payments rising by over 300%. These results, along with the decline in nurse availability,suggest a systematic shift in operating costs away from patient care.
Not surprisingly, the article points out that the ability of private equity to degrade care on a systematic basis points to deficiencies in regulation. It also calls for more strict antitrust scrutiny of health care acquisitions.
And this carefully documented paper underscores another sorry fact: private equity does not deserve the benefit of the doubt.00 private equity nursing homes