Are PE firms guilty of ‘asset stripping’ hospitals?
A new study published in The Journal of the American Medical Association examines what happens to the total value of assets held by hospitals after they are acquired by PE firms, finding that it typically drops. Does this suggest PE firms are guilty of ‘asset stripping’ hospitals to enrich shareholders at the expense of hospitals’ long term interest?
The study examines 156 US hospitals that were acquired by PE firms between 2010 and 2019, and compares each to 10 hospitals not acquired by PE (meaning there were a total of 1,560 hospitals in the control group).
Looking at total capital assets held by each hospital — by summing the land, buildings, equipment, and health information technology assets that it owns — the researchers found that, on average, the value of assets held decreased by 15% two years after being bought by a PE firm. This compared to an average increase of 9% for hospitals not acquired by PE.
“Private equity acquisitions appear to have depleted, rather than augmented, hospital assets,” the researchers said.
Whilst this is of course noteworthy, the fact that total assets decreased after being bought by PE isn’t by itself sufficient to support the notion that PE firms are acting nefariously, or against hospitals’ or patients’ interest.
Whilst the study doesn’t specify what type of assets are generally being sold, it is hinted that a primary culprit is sale-and-leasebacks of real estate and land — “firms have sometimes sold acquired hospitals’ land and buildings, repaying investors with proceeds and burdening hospitals with rent payments for facilities they once owned”.
The researchers note that it is possible that “funds from asset drawdowns might be redeployed to enhance care or efficiency”. But they are sceptical that this is in fact what is happening — “previous studies suggest such effects may not occur”.
Last year we reported on a study that examined whether PE ownership improves care, finding that there isn’t much evidence that it does (although the evidence is far from conclusive).
But, putting aside the question of whether PE owners have a track record of improving quality of care, the investment model of PE is (at least purportedly) focused on generating returns by increasing the operational efficiency and profitability of acquired businesses. Even if they are focused on profitability over a time horizon of only a few years, it wouldn’t make much sense for them to not invest any of the cash generated from sale-and-leasebacks back into the business.
As is so often the case, the devil will be in the detail. More detailed analysis of exactly what assets PE firms are selling off and exactly what they do with the proceeds would be required to understand what is really going on.
We would welcome your thoughts on this story. Email your views to Martin De Benito Gellner or call 0207 183 3779.
