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Investor-Owned Hospitals: Part of the Solution or Part of the Problem?

By August 31, 2020March 1st, 2023One Comment

Last week, private equity-backed StoneBridge Healthcare made an unsolicited offer to buy Erlanger Medical Center in Chattanooga, Tennessee for $475 million. Hospital officials denied the city’s safety net provider was for sale but that’s likely not the end of this story.

Investor ownership of hospitals is a significant trend in U.S. healthcare. According to the American Hospital Association, 1296 (21.1%) of the nation’s 6146 community hospitals are owned by private investors. Over the last 20 years, the number of investor-owned hospitals has almost doubled (+64.9%) while the total number of hospitals has remained flat (+4.1%).

Investor-owned hospitals operate in every state except Connecticut, Hawaii, Minnesota, New York and Vermont. Most are part of publicly-traded multi-hospital chains like HCA, Tenet and Community Health Systems; others are owned private equity funds as part of their investment portfolio. They are governed by boards elected by their shareholders. They pay local, state and federal taxes. And in Washington, they’re influential: the Federation of American Hospitals spent half of its $15.4 million budget last year lobbying on behalf of its members.

A study by Harvard-Mass General researchers published last week compared the financial and clinical performance of 204 hospitals acquired by private equity between 2005 to 2017 to 532 matched hospitals in comparable markets that were not acquired. Their key findings:

  • Three years after their acquisition, private equity-owned hospitals generated $2.3 million per year more income than non-acquired hospitals in the control group.

  • Total charges per inpatient day were $407 higher, on average.

  • The gap between charges and costs increased (.61% in emergency services, .31% in total charges)

  • Acquired hospitals reported a 0.02% increase in their case mix index and a decrease of 0.96% in share of Medicare discharges which the authors attributed to coding changes

  • Medicaid’s share of discharges and total hospital discharges did not change differentially.

To industry watchers, these results are no surprise: investor-owned hospitals generate more income for their owners than hospitals with the same payer mix. That’s why institutional investors in private equity funds—pension funds, wealthy individuals, and even some major not-for-profit multi-hospital chains—see hospitals like Erlanger as fertile ground for their shareholders. The value proposition is straightforward: it’s financial performance. These owner-operators lower operating costs and generate higher revenues. They impose strict expense controls, restrictions on capital investments and “revenue enhancements” to maximize their reimbursement by payers. And they abide by industry standards for patient safety and adhere to regulatory requirements to avoid penalties and reputational damage. It’s a business.

StoneBridge Healthcare believes its combination of capital from its investors and operational expertise from its Tenet alumni is a formula for Erlanger’s long-term sustainability.


All signals point to a larger role for private investment in hospital care. Pre-Covid, operating losses for one in four not-for-profits threatened their solvency. Per the American Hospital Association, Covid relief funds earmarked for hospitals ($175 billion) fall short of estimated 2020 losses of $323 billion by year’s end. For most hospitals, bad debt is increasing. Cash on hand is shrinking. Access to capital from lenders is harder to access. That means conditions for increased private equity deals for hospitals could not be better. Consider:

  • The Federal Reserve’s revised monetary policy announced last week assures long-term market stability for investors.

  • Corporate profits are strong so institutional investors have money to invest in PE funds that might purchase hospitals.

  • The IPO market is healthy and inviting (again) providing private equity investors the potential for an IPO exit strategy.

  • Valuations of hospitals have tempered somewhat as non-conventional competitors are siphoning care from hospitals and core operating margins have shrunk.

  • Consolidation among hospitals in local markets has reduced competition and contributed to unnecessary health spending escalation (insurers and large employers are beating this drum loudly).

  • Repayment of the $100 billion Accelerated and Advance Payment Program funds due this month appears problematic for most hospitals that received the funds

  • And the public seems indifferent to hospital ownership status: they care more about their out of pocket obligations and the accessibility of local services.

Investor-owned hospital ownership has its detractors and their major beef is legitimate: investors expect a return. Profits matter more than community benefit and ESG (environmental, social and government) responsibility because shareholders expect no less. Some appear to balance their profits and purpose better than others. Most provide services that are comparable in safety and efficacy. And all deny their lean staffing and business practices compromise patient care in any way. That’s the business.

In an 1980 editorial, New England Journal of Medicine Editor Arnold Relman warned “this new medical-industrial complex may be more efficient than its nonprofit competition, but it creates the problems of overuse and fragmentation of services, overemphasis on technology, and “cream-skimming,” and it may also exercise undue influence on national health policy.”

He saw the emergence of HCA (200 hospitals), AMI (115 hospitals), Humana (87 hospitals), NME (47 hospitals), Charter (41 hospitals) and Republic (24 hospitals) as existential threats to healthcare because their focus is profit, nor patient care. He argued investor-owned hospitals would inalterably shift the locus of healthcare from local communities to corporate boards. Ironically, of the six, only HCA still runs hospitals. Shareholders of the others sold their companies to other investors.

For industry watchers, the key takeaways are clear:

Investor ownership in the U.S. delivery system is likely to play a bigger role in the future.

Last year alone, investors bet $79 billion on hospitals, medical practices and other providers. More than 80 hospitals will change hands this year: if history is a guide, 30-35 will be acquired by private investors at EBITDA multiples ranging from 1 to 11.
Hospital acquisitions by private investors can be a mixed bag for communities.

Chains like HCA, Universal, LifePoint, Community Health and others and private equity owners like KKR, Goldman, Warburg Pincus, Blackstone, Apollo and others pay close attention to market dynamics and compete aggressively. They are large employers and influential in their communities. But for their leaders, shareholders come first. Their corporate boards call the shots. If advantageous to suspend an unprofitable clinical program, raise prices or exit a market altogether, they will.
The benefits and risks associated with investor owned hospitals will be a prominent focus in the industry.

Elected officials and community leaders will scrutinize the investor-owned hospitals to gauge the trade-off between taxes paid and community benefit. They’ll review promises made and kept and, in extreme circumstances, assess pursue changes through negotiations or litigation.
The profitability and business practices of not-for-profit hospital systems will also get more attention.

Executive compensation in not-for-profit systems, operating margins and pricing strategies, direct investments in hedge and private equity funds and operating cost comparisons will be popular targets of scrutiny.
The role for hospitals in the future of the U.S. health system will be revisited. 

Whether public, not for profit or investor owned, hospitals today are the hub of the U.S. health system accounting for 34% of total spending ($1.3 trillion). But tomorrow, they might become spokes in integrated systems run by insurers or tech companies or a public utility in some communities? Regrettably, there’s no consensus about the role hospitals will play in the future.
I was born at Erlanger, raised in Chattanooga and worked in Central Sterile Supply and the Emergency Room while in high school. Erlanger is important to the community. Determining whether a deal with StoneBridge Healthcare is the right course of action for the organization and the community is certain to be a tough deliberation for its Board.

It’s a story familiar to health industry watchers and investors. It’s sure to be a story followed closely in Chattanooga. 



Bruch et al “Changes in Hospital Income, Use, and Quality Associated with Private Equity Acquisition” JAMA Internal Medicine.  August 24, 2020;

Christopher Cheney “3 Strategic Differences Between Nonprofit and For-Profit Hospitals” Health Leaders September 03, 2019;

Relman AS  “The new medical-industrial complex” New England Journal of Medicine;

“COVID-19 Hospital & Health System Survey” Guidehouse May 2020

“StoneBridge Healthcare Makes Bid to Purchase Erlanger Health System” August 26, 2020

“Get Ready for a Crazy Wave of IPOs. Here Are the Ones to Watch” Barrons August 28, 2020

“Initial public offerings are back in Silicon Valley” The Economist August 22, 2020;

Mallory Hackett “M&A activity expected to surge as independent health systems look for partners” Healthcare Finance News August 27, 2020;

“How Size Influences Hospital Valuation” VMG Healthcare;

“Current Trends in Hospital Transactions: 2019:” Healthcare Appraisers October 9, 2019


Survey: Half Likely to be Vaccinated

According to a Jarrard Phillips Cate & Hancock survey of 1101 adults released last week:

  • 53% say they are highly likely to get vaccinated, while 17% were somewhat likely, 21% not likely and 10% who are unsure.

  • 44% of women were extremely or very likely to get vaccinated compared to men,

  • 86% agreed that doctors, nurses and hospitals should actively educate the general public about COVID-19 and encourage people to take specific actions to protect public health.

Note: JPCH will cost a webinar Sep 3, 2020 at 11:30 AM CDT to discuss these results.
“The Opportunity of Trust: Answering the Challenge of Vaccinations, Safety and Funding”

CDC Guideline Change Sparks Controversy

Last Monday, the CDC changed its guidelines on COVID-19 testing discouraging those without (asymptomatic) Covid-19 virus symptoms from testing. Previously, the CDC recommended testing for all close contacts of people infected with SARS-CoV-2, even if they didn’t have symptoms. Now, close contacts (within 6 feet, more than 15 minutes) “do not necessarily need a test unless you are a vulnerable individual” or if state and local health authorities recommend it The change has upset many state and local public health officials since 40% of infections are asymptomatic, and asymptomatic people transmit infection.

CDC Testing Overview

White House Announces Covid Test Deal with Abbott Labs

Last week, the Trump administration announced a $750 million deal to buy 150 million rapid Covid-19 tests from Abbott Laboratories. In tandem, the Food and Drug Administration on Wednesday granted emergency-use authorization to the company for a $5 rapid-response Covid-19 antigen test that is roughly the size of a credit card. The test could be administered in a doctor’s or school nurse’s office and uses technology similar to home pregnancy tests. It returns results in about 15 minutes.

Rebecca Ballhaus “U.S. Announces Deal With Abbott Laboratories for 150 Million Rapid Covid-19 Tests” Wall Street Journal August 28, 2020;

Survey: Majority of Nursing Homes Operating at a Loss

According to a survey of 463 nursing homes by the American Health Care Association and National Center for Assisted Living (AHCA/NCAL) conducted XX

  • 55% are operating at a loss

  • 34% have a total margin of less than 3% vs. 10% that operate with a margin of 3% or more

  • 60% of funding for nursing homes comes from Medicaid, which covers 70%- 80% of the actual cost of care

  • 72% of respondents said they won’t be able to sustain operations for another year at the current rate of increased costs and revenue loss and 40% said they can continue for less than six months.

“Nursing Homes Incurring Significant Costs and Financial Hardship in Response to COVID-19” AHCA August 2020;


Study: Missed Diagnoses Prevalent in Telehealth

According to the Doctors Company analysis, “Of the telemedicine claims we have seen, the most common allegation has been missed diagnosis: cancer (25%), stroke (20%), missed infections (20%) and orthopedic concerns (10%).”

“The Risks and Benefits of Telehealth in the Future of Healthcare” The Doctors Company;–the-risks-and-benefits-of-telehealth-in-the-future-of-healthcare/

Kaufman Hall: Hospital Financial Performance Improved in July

Per Kaufman Hall’s July report, Hospital operating margins and earnings improved between June and July:

  • In the seven months spanning January to July, hospital operating margins were down 28% in 2020 compared with the same period in 2019 factoring in grants received under the CARES Act, without which margins would be down 96% in that time.

  • Discharges were down 7% compared with July 2019 but up 6% compared with June 2020.

  • Emergency department volumes were down 17% in July year-over-year, the fifth straight month of double-digit year-over-year declines in emergency department visits for hospitals nationwide

  • Total expenses were up 1.4% year-over-year and total labor expenses were up 1% in that time. Total non-labor expense increased 2.3% year-over-year. Within that, purchased services saw the biggest year-over-year expense uptick in July at 6%. Drugs were up 4.8% in that time and supplies were up 3.2%.

  • 26.5% of hospital systems had used more than 50% of their reserves and another 41.1% of hospital systems had expended between 21% and 50% of their reserves.

Kaufman Hall National Hospital Flash Report July 2020

OIG report: Medicare Advantage Plans Non-Compliant with Order Monitoring by Providers

The OIG surveyed 180 MA plans. The report issued last week found that identifiers for ordering clinicians were absent from 71% of records for durable medical equipment, prosthetics, orthotics, and supplies, 62% of records for lab services, and 58% of records for imaging services. Encounter data for home health services was missing a provider identifier 17% of the time, though the authors noted that they may have overestimated the prevalence of identifiers on home health records. Four in 10 insurers said that collecting identifiers for ordering clinicians is important for preventing fraud.

Note: the integrity of Medicare Advantage encounter data has been closely watched by the OIG since 2018.
“CMS’s Encounter Data Lack Essential Information That Medicare Advantage Organizations Have the Ability to Collect” August 24, 2020;

Amazon Enters the Healthcare Wearables Market with Halo

This week Amazon announced its entry into the healthcare wearables market with Halo, its wristband-mounted personal health data tracker screenless device that tracks body temperature, body fat percentage, and wearer emotions. Halo users can link collected data to their electronic health record through a collaboration with Cerner. San Diego-based Sharp HealthCare will be the first health system partner to participate. Halo will sell for $100 and requires a $4 per month subscription to access “algorithms that can generate your personalized 3D body model, BFP, and body model slider, a visual of how your body could change as you gain or lose body fat.”

CDC Study: Obesity Increasing in Every Population, Especially among Adult Males

The CDC researchers analyzed data from the National Health and Nutrition Examination Survey (NHANES), a cross-sectional survey of 92,759 civilian non institutionalized US population, from 1999 to 2018. Highlights:

  • Among children younger than 6 years, there were no significant trends from 1999 through 2018 in high weight for length for birth to 24 months or obesity for those 2 through 5 years.

  • For children 6 through 11 years, obesity increased overall from 15.8% to 19.3%.

  • Among adolescents 12 through 19 years, obesity increased from 16.0% to 20.9% and severe obesity from 5.3% to 7.6%

  • Among men, obesity increased overall from 27.5% to 43.0% and severe obesity increased from 3.1% to 6.9%.Similarly, obesity and severe obesity increased in all subgroups except non-Hispanic Black men, who did not show a significant increase in obesity after 2005-2006.

  • Among women overall, obesity increased from 33.4% to 41.9%and severe obesity from 6.2% to 11.5% as it did among non-Hispanic White and non-Hispanic Black women. Among Mexican American women, obesity increased while severe obesity increased only after 2009-2010.

Ogden et al “Trends in Obesity Prevalence by Race and Hispanic Origin—1999-2000 to 2017-2018” JAMA August 28, 2020;

Study: Televisit Scheduling vs. Direct Scheduling Might Widen Access Gap

In this cross-sectional study of 62,080 patients and 134,225 completed visits at 17 primary care practices between March 2018 and March 2019, early adopters of direct scheduling were more often young, White, and commercially insured. Compared with visits scheduled by speaking with clinic staff in person or by telephone, directly scheduled visits were more likely to be with one’s own primary care physician.

Ganguli et al “Patient and Visit Characteristics Associated With Use of Direct Scheduling in Primary Care Practices” JAMA Network Open. August 27, 2020;

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