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Nonprofit Law Prof Blog

Mark Hall on PE Acquisitions of Nonprofit Hospitals

By nonprofitlawprof

PE in healthcare

From Gist Healthcare 

Wow.  Mark Hall, a hard-working country boy from Murfreesboro Tennessee, is extremely busy these days with a very important project.  He is doing a deep deep dive into the consequences of private equity acquisition and ownership of nonprofit hospitals.  His longitudinal study focuses on HCA Healthcare’s 2019 purchase of the Mission Health system based in Asheville, North Carolina.  He is generously reporting the results of his work in draft form as they are completed and those drafts will compose a final report scheduled for release later this year.  So far, he has posted these results:

Here is the summary from his most recent report (the first one linked above):

BACKGROUND AND SUMMARY

HCA Healthcare (formerly Hospital Corporation of America) is the country’s largest investor-owned, for-profit hospital chain. In 2019, it purchased the Asheville-based Mission Health system. As a result, Mission’s flagship facility became the fifth largest for-profit hospital in the country. Prior to HCA’s purchase, Mission had been operated as a nonprofit “charitable” organization ever since its founding in 1885.

When a for-profit owner acquires a nonprofit hospital, we naturally expect profits to increase. Nonprofit hospitals also seek to earn profits – which are referred to as surplus or margin – in order to fund improvements and maintain general financial health. However, an appropriate phrasing for their approach to financial returns is “not-for-profit,” meaning that profiting is not their primary goal. The same obviously cannot be said for an avowedly for-profit, investor-owned company. Thus, we look to see whether in fact Mission Hospital has become more profitable following HCA’s acquisition.

Standard financial reports reveal that indeed it has. Mission’s profits dipped in 2019 — the initial transition year under HCA — and then Mission incurred substantial losses during the first year (2020) of the COVID-19 pandemic. Since then, however, its financial performance has rebounded impressively, with profits over $100 million a year – which is several times greater than prior to HCA’s acquisition.

To understand better what accounts for this striking improvement in profitability, this report examines financial data on Mission Hospital compared with a set of eleven similar (or “peer”) hospitals in NC and bordering states. In summary, this analysis finds that:

• Prior to HCA’s acquisition, Mission’s patient-care (“operating”) profit margin was relatively steady at 2-to-4 percent of revenues — similar to the average among peer hospitals. Following HCA’s acquisition, after an initial transition year (2019) and the disruption from COVID (2020), Mission’s profits rebounded quite handsomely, jumping to the top of the range among peer comparison hospitals, and is several times higher than prior to the acquisition.

• Although HCA increased Mission’s list-price markups (over costs) to the top of the peer hospital range, that increase was not the primary driver of substantially improved profits, because most patients do not pay list prices. Instead, HCA sharply reduced Mission’s patient-care costs, dropping those to the bottom of the peer hospital range.

• That drop in costs was driven substantially by HCA’s reduction in patient-care staffing. Mission’s staffing ratios plummeted from above the peer average to the bottom of the peer hospital range, by cutting the staffing rate from 6.0 full-time equivalent (“FTE”) staff per occupied bed in 2018 to 3.7 in 2021. Over the same time, average staffing at other NC hospitals remained steady at 5.1 FTEs per patient.

• Contrary to the expectations of many Mission Board members prior to the sale, a reduction of purchasing costs and general administrative expenses does not appear to be the primary driver of Mission’s improved profitability under HCA.

Here is the abstract to his Stanford Law Review article on the whole topic: 

Abstract

Private equity has rapidly expanded its presence in the health care sector, expanding its investment targets from hospitals and nursing facilities to physician practices. The incursion of private equity is the latest manifestation of a long trend toward the corporatization and financialization of medicine. Private equity pools investments from large, private investors to buy controlling stakes in companies through leveraged buyouts or similar arrangements that use the companies’ own assets to finance debt. These investors seek to earn handsome profits by rapidly increasing revenues before selling off the investment. Private equity’s incursion into health care is especially concerning. The drive for quick revenue generation threatens to increase costs, lower health care quality, and contribute to physician burnout and moral distress. These harms stem from market consolidation, overutilization and up-coding, constraints on physicians’ clinical autonomy, and compromises in patient care. Policymakers attempting to counter these threats can barely keep up. Like a cloud of locusts, private equity moves so quickly that by the time lawmakers become aware of the problem and researchers study the effects, private equity has moved on to other investment targets. While it remains unclear whether private equity investment is fundamentally more threatening to health policy than other forms of acquisition and financial investment—whether by publicly traded companies, conglomerate health systems, or health insurers—the threat of commercialization is heightened. Even if private equity is not uniquely harmful, it is extremely adept at identifying and exploiting market failures and payment loopholes. The emphasis on short-term returns and exit, heavy reliance on debt, and the insulation from professional and ethical norms make private equity investors more avid to exploit revenue opportunities than institutional repeat-players. Thus, this Article’s central claim is that the influx of private equity into health care poses sufficient risks to warrant an immediate legal and policy response. Public policy should primarily target correcting market failures and closing payment loopholes and only secondarily aimed to curb private equity investment per se.

The good news is that we already have many legal tools under federal and state law with the potential to address the harms of commercialization. These can be used or sharpened to address the particular concerns raised by private equity’s incursion into physician markets. Key tools include antitrust oversight, fraud and abuse enforcement, and state laws regulating the corporate practice of medicine and the terms of physician employment. In some instances, legislative or regulatory action may be needed to adapt existing laws. In others, new laws may be needed to close payment loopholes or correct market distortions. A leading example is the recent No Surprises Act, which curtails surprise out-of-network medical billing.

While the article lays out a roadmap for additional legal and policy actions to protect the health system from the acute risks of private equity, these are patches rather than systemic solutions. If these patches fail to stave off the incessant march toward commercialization of health care, we may see renewed calls to fundamentally rethink the market orientation of the U.S. health system.

darryll k. jones