Would you put your mother in a nursing home owned by a private equity firm? It is a question that we are faced with more and more. Over the past two decades, private equity firms have acquired nearly 2,000 nursing homes. And we know that those companies face enormous pressure to extract profits quickly and substantially from the companies they acquire. Could that be affecting the quality of care provided by your nursing homes?
The question is also important from an investment point of view. Investors are increasingly attracted to the spectacular returns that private equity promises, especially at a time when future returns from public equity appear modest. But if private equity firms are cutting corners in pursuit of their biggest profits, they could face substantial legal risks that could wipe out some or all of their biggest profits. The occasion to ask these questions is a new study that the National Bureau of Economic Research began circulating earlier this week. Entitled “Does Private Equity Investment in Health Care Benefit Patients? Evidence From Nursing Homes, ”its 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 in finance at NYU. These researchers examined the nursing home industry in the US during the period from 2005 to 2017. They specifically examined the quality of care in 18,485 individual nursing homes, of which 1,674 were purchased by private equity firms in sometime during that period. The 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 ownership led to an 11% increase in the amount billed per Medicare patient, it also led to a 10% increase in the short-term mortality of Medicare patients. Given the size of the researchers’ sample, this increase in the death rate implies that “about 20,150 lives in Medicare [were] lost due to PE ownership of nursing homes during our sample period. “What caused the deterioration in the quality of care? In an interview, Professor Yannelis pointed out several revealing statistics. One is that, on average, after After a private equity firm acquired a nursing home, there was a decrease in the number of hours spent by healthcare personnel per patient, and there was a corresponding increase in the likelihood that a patient would be administered antipsychotic medications. These are provocative findings, to say the least, and not surprisingly not everyone agrees with them. A spokesperson for the American Investment Council, a private equity trade association, said in an email that “the private equity industry is investing in health care facilities across the United States and improving care in local communities This new study is incompatible e with other recent academic research … The industry is committed to supporting companies that provide high-quality, affordable healthcare. ” Professor Yannelis responded by noting that he and his fellow researchers took into account the other academic studies to which the AIC was referring. Those other studies, he said, suffer from several limitations, such as focusing on a short sample period, a small number of private equity deals, or a lack of patient-level data. However, he added that because the results he and his fellow researchers achieved are based on averages across a large number of such agreements, individual results certainly vary. The quality of care has not deteriorated in all private equity-acquired nursing homes. I specifically asked Professor Yannelis the same question that I started this column with: would you put your own mother in a privately owned nursing home? His answer is that he would have a lot of homework to do before making a decision, but that he would have a “high presumption against putting my mother in a privately owned facility.” He also cautioned that we should not try to generalize these results from privately owned nursing homes to private equity in general. He noted that studies of some other industries have found that private equity has done a “great job.” One reason that does not appear to be the case in the nursing home industry is that it is very difficult for a consumer to access the data necessary to make an informed decision about the quality of care. Another reason is that the payment structures for nursing home care are so complicated, and the government is taking over a large share, complicating the incentive structures under which nursing homes operate. Keep in mind that it is not the profit motive per se that causes the apparent deterioration in care after a private equity firm acquires a nursing home. Professor Yannelis notes that historically, about 70% of nursing homes have been operated by for-profit companies. What is different about private equity ownership is the intense need to produce quick and substantial profits. The bottom line? Private equity is not the homogeneous asset class that individual investors sometimes assume. In some industries and in some hands, it can lead to great results, both for companies that private equity firms have acquired and for investors in those companies. In others, quite the opposite. At the very least, we have to do our homework. And the same conclusion applies when deciding which nursing home to place a family member in. Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.