Virtually Nobody Believes in Completely-Unfettered Free Markets: the Issue is When to Intervene

There are lots of reasons why private equity investment in healthcare, child care, nursing homes or veterinary medicine is not much different than private equity in any other industry. PE normally looks for investment opportunities in industries and firms that are fragmented, mismanaged in some way, with room to grow and often featuring steady cash flow. 

The question is whether the financial structure and investment horizon of private equity ownership are well suited to organizations whose primary outputs include public goods such as health, safety, education, or care for vulnerable populations.

This seems to be another instance where we might encounter the idea of free markets needing a bit of management.

In such firms and industries, the concern is that firms may reduce staff, lower safety standards, or limit care to boost profit. 

Also, prices often rise for patients, students, or tenants after a buyout.

In other cases, the concern is a loss of local focus, as decisions move from local leaders to distant corporate offices.

Nursing homes and low-income clinics often face high risks of neglect because heavy debt loads push cash flow to debt service rather than customer care. 

So hospitals and nursing homes see debates over staffing levels and patient outcomes.

In housing markets rent increases and tenant displacement are issues. In education or child care, issues often include firms prioritizing fees over learning tools.

One study spanning eight countries, but 85 percent focused on the United States. Of the 55 cases, nursing homes were the most commonly studied healthcare setting. The analysis included:

• Nursing homes (17)

• Hospitals (9)

• dermatology (9)

• ophthalmology (7)

• multiple specialties or general physician groups (5)

• urology (4)

• gastroenterology (3)

• orthopedics (3)

• surgical centers (2)

• Fertility (2)

• obstetrics and gynecology (2)

• Anesthesia (1)

• hospice care (1)

• oral or maxillofacial surgery (1)

• Otolaryngology (1)

• plastics (1). 

As you might expect, given PE outcomes in other industries, “PE ownership was most consistently associated with increases in costs to patients or payers,” the study found.

“Additionally, PE ownership was associated with mixed to harmful impacts on quality,” the report says. In some instances, PE ownership was associated with reduced nurse staffing levels or a shift towards lower nursing skill mix.

“Health outcomes showed both beneficial and harmful results, as did costs to operators, but the volume of studies for these outcomes was too low for conclusive interpretation,” the authors conclude.

source: Burch et al 

“No consistently beneficial impacts of PE ownership were identified,” the study suggests. 

That is not to argue for barring PE involvement, but many observers might agree some limits might be desirable.

Private equity typically seeks to create value over a relatively short investment horizon (often three to seven years). 

The concern might be whether some of these financial tools create incentives that conflict with long-term service quality in some industries perceived to have social value with a public character. 

The PE playbook is fairly clear: restructure a business to create higher marketplace value. 

PE practice	Potential business benefit	Possible social concern
Reduce labor costs	Higher margins	Lower staffing ratios
Replace senior staff	Lower payroll	Loss of experience
Centralize purchasing	Lower costs	Lower flexibility or quality
Increase debt	Higher investor returns	Less financial resilience
Sale-leaseback of real estate	Unlock capital	Higher fixed operating costs
Roll-up acquisitions	Economies of scale	Reduced local competition
Aggressive billing	Higher revenue	Higher costs for patients or insurers
Short holding period	Faster capital recycling	Less investment in long-term quality

The key issue is that many quality investments—training, staffing, preventive maintenance, or workforce retention—generate returns over many years, while PE investors often realize returns much sooner.

Among all sectors, nursing homes have been studied most extensively, and there is some evidence of less-desirable outcomes. 

Multiple peer-reviewed studies have found associations between PE ownership and:

• higher hospitalization rates

• higher emergency department use

• increased deficiencies cited by regulators

• reduced staffing levels or changes in staffing mix

• higher mortality in some studies.

At the same time, some studies found little change in certain clinical processes, and a minority found no measurable decline in quality. Overall, recent systematic reviews conclude that the balance of evidence points toward mixed but generally less favorable quality outcomes after PE acquisition. (BMJ)

This does not mean every PE-owned nursing home performs poorly. Rather, ownership structure appears to influence average outcomes across large samples.

Evidence remains mixed across specialties, but systematic reviews generally find that PE ownership is often associated with higher costs, while quality effects vary by sector and study.