Would you take your mother to a nursing home owned by a private equity firm?
This question faces a growing number of us. Private equity firms have acquired nearly 2,000 nursing homes over the past two decades. And we know that these companies are under tremendous pressure to quickly and substantially profit from the businesses they acquire. Could this affect the quality of care in their nursing homes?
The question is also important from an investment point of view. Investors are increasingly drawn to the spectacular returns that private equity promises, especially at a time when future returns from public equity appear modest. However, when private equity firms cut corners in pursuit of higher profits, they can face significant legal risks that can eliminate some or all of their higher profits.
The opportunity to ask these questions is in a new study that the National Bureau of Economic Research circulated earlier this week. Title “Does Private Equity Investing in Healthcare Benefit Patients? Evidence from nursing homesThe authors are Atul Gupta, Professor of Health Management at the Wharton School of the University of Pennsylvania; Sabrina Howell, professor of finance at New York University; Constantine Yannelis, professor of finance at the University of Chicago; and Abhinav Gupta, a Ph.D. Candidate for Finance at NYU.
These researchers surveyed the nursing home industry in the United States from 2005 to 2017. They specifically looked at the quality of care in 18,485 individual nursing homes, of which 1,674 were acquired by private equity firms at some point during that period. Researchers had access to a wealth of data on the quality of care in these nursing homes and used a series of complex econometric tests to focus on the specific effects of private equity ownership.
The most explosive of their findings was that while such possession increased the bill per Medicare patient by 11%, it also increased the short-term mortality of Medicare patients by 10%. Given the size of the sample of researchers, this increased death rate implies that “about 20,150 Medicare are alive [were] lost due to PE ownership of nursing homes during our sampling period. “
What has led to a deterioration in the quality of care? In an interview, Professor Yannelis pointed out several meaningful statistics. For one, there was one on average after a private equity firm bought a nursing home decline in the number of hours of health workers per patient. There was also a corresponding one increase in the likelihood that a patient would receive antipsychotics.
These are provocative results to say the least, and it comes as no surprise that not everyone agrees with them. A spokesman for the American Investment Council, a private equity trading association, said in an email, “The private equity industry is investing in healthcare facilities across America and improving care in local communities. This new study is at odds with other current academic research. The industry is committed to supporting companies that provide affordable, high quality healthcare. “
Professor Yannelis responded by stating that he and his colleagues were considering the other academic studies to which the AIC related. He said these other studies suffer from various limitations, such as a focus on a short sample period, a small number of private equity deals, or a lack of patient-level data. However, he added that the individual results will undoubtedly vary as the results that he and his colleagues have obtained are based on averages from a large number of such stores. The quality of care has not deteriorated in any of the nursing homes acquired by private equity.
I specifically asked Professor Yannelis the same question that I started this column with: Would he move his own mother into a private equity-owned nursing home? His answer is that he would have to do a lot of homework before he could make up his mind, but that he would have “a high speculation about getting my mother into a private equity establishment”.
He also cautioned that we should not try to translate these findings about private equity-owned nursing homes across to private equity. He pointed out that studies in a few other industries have shown that private equity “did a great job”.
One reason this doesn’t seem to be the case in the nursing home industry is because it is so difficult for a consumer to get access to the data necessary to make an informed decision about the quality of care. Another reason is that the payment structures for home care are so complicated that the government is picking up a large portion – which complicates the incentive structures under which nursing homes operate.
Carefully note that it is not the profit motive in and of itself that causes the apparent deterioration in care after a private equity firm acquires a nursing home. Professor Yannelis points out that in the past around 70% of nursing homes were run by nonprofit companies. What is different about private equity ownership is the intense need to make quick and substantial profits.
The final result? Private equity is hardly the homogeneous asset class that individual investors sometimes assume. In some industries and in some hands, this can produce great results – both for the companies that have acquired private equity firms and for the investors in those companies. In others just the opposite. At least we have to do our homework.
The same conclusion applies to deciding which nursing home to place a relative in.