Demand for health care is rising: In the U.S., health-care spending grew 4.6% to $3.8 trillion in 2019, amounting to 17.7% of gross domestic product, according to the Centers for Medicare & Medicaid Services.
In an attempt to ride the wave of this growth, private equity investment in health care has grown, to $120.1 billion in 874 deals in 2019 and $95.6 billion in 938 transactions in 2020, from $58.2 billion in 2007, according to PitchBook Data Inc.
At the end of the first quarter, private equity firms had invested $20.2 billion in 182 deals.
However, academic studies are starting to show that certain investments in the private equity health-care universe, including investments in hospitals, nursing homes and behavioral health companies, have been detrimental to patient well-being, according to testimony at a March 25 House Ways and Means Subcommittee on Oversight on private equity’s expanded role in the U.S. health-care system.
“Research on private equity has found that in sectors where product quality is transparent, markets are competitive, and there is no government subsidy, private equity has positive effects on productivity and product quality,” Sabrina T. Howell, assistant professor of finance at New York University Stern School of Business, testified. “However, health care has none of these features.”
Patients cannot accurately assess health-care provider quality, they typically do not pay for services directly and government agencies act as both payers and regulators, Ms. Howell said.
Last year, the $9.6 billion Rhode Island Employees’ Retirement System, Providence, which is also an investor in Green Equity Investors V, said it will stop investing with Leonard Green & Partners.
In a August letter to Leonard Green managing partner Jonathan Sokoloff, state Treasurer Seth Magaziner said officials were disappointed in the firm’s investment in Prospect Medical Holdings, in which it holds a controlling interest through the fund.
“Green Equity has extracted value from Prospect Medical hospitals, including St. Joseph’s Hospital and Our Lady of Fatima Hospital in Rhode Island, at the expense of patients and employees,” Mr. Magaziner wrote.
Prospect Medical’s issues under private equity ownership may not be an outlier. Another recent academic study revealed that private equity-backed hospitals have lower patient experience scores, and fewer full-time employees per patient than non-private equity hospitals.
The academic study, reported in the February edition of Annals of Internal Medicine, found that hospitals backed by private equity are more likely to be rural and/or located in lower-income neighborhoods.