Abstract
Private equity firms exacerbate health inequity by driving hospital closures in historically underserved communities. Now nonprofit health systems seem to be adopting private equity practices to do the same. Drawing on a case study of one nonprofit hospital system that has adopted private equity business practices to acquire and close community hospitals, this article argues that nonprofit hospitals’ adoption of private equity acquisition and closure practices sacrifices their missions, prioritizes profit, and works to the detriment of local communities. This article construes this set of practices as a breach of organizational ethics that must be addressed via policy changes, specifically by placing guardrails on closures and promoting responsible health care investments.
Overview of the Problem
Private equity firms invest in operating companies that are not listed on public stock exchanges. Investors acquire such a company using borrowed money and restructure the acquired company to increase its value before reselling.1 Private equity firms have become increasingly involved in the health care sector and now own about 460 hospitals nationwide.2
Supporters of private equity in health care argue that private equity ownership of clinics and hospitals can increase health care quality and efficiency by prioritizing investments in rapidly growing sectors.3 However, a growing body of research shows that private equity in health care has increased costs for patients and worsened health outcomes.4 Furthermore, private equity ownership of health systems has exacerbated health inequities by decreasing access to care through hospital closures in historically underserved communities.5 Academic discourse on private equity’s negative impacts has not yet fully addressed how the business practices of nonprofit hospital systems—which engineer health system mergers and hospital closures to reap profits—parallel those of private equity.
Health system mergers and the growth of private equity in health care share causes and effects. First, both are driven by rising pressure on health systems to increase profit. Second, both are characterized by a power imbalance in which community hospitals and their patients are left at the mercy of wealthy investors. Finally, both often result in critical primary care shortages in historically underserved communities.
Here, we describe a case example of how a nonprofit health system adopted behaviors of private equity companies by acquiring a community hospital and then forcing its closure. We discuss how underregulated free-market economics drive acquisition and closure of community hospitals by incentivizing resource allocation based on profit over community needs. On the basis of our analysis, we call for increased government regulation that promotes responsible health care investments by mandating that nonprofit hospital systems gather feedback from local communities during hospital acquisitions and closures.
Private Equity Strategies Used by Heath Care Systems
America’s first hospitals shared a mission to serve the destitute,6 but in the 1920s, hospitals were forced to begin generating income due to increasing demand for services and professionalization that raised the cost of care.7 Between 1980 and 2009, 18% of hospitals closed as expenditures rose and demand fell,8 while others adapted by shifting services to a wealthier patient population.9 At the same time, community hospitals merged with larger health systems to survive, resulting in major consolidations. For instance, about 85% of New York State’s hospitals were consolidated into larger hospital networks between 2006 and 2019.10
Health system consolidation increases health care costs while decreasing care accessibility and quality.11 As hospitals close, nearby communities suffer from loss of long-time doctors at the hospitals, increased travel distance to care, limitations in accessing emergency services, and fewer health care job opportunities. Furthermore, health care workers may find themselves pushed out of their workplaces and forced to adapt to a volatile health care system.12 Hospital closures also overburden nearby community hospitals. For example, when a major public hospital temporarily closed after Hurricane Sandy, patients needing emergency care were redistributed to the nearby public hospital at rates unexplained by proximity alone.13 Increased volume at nearby, already strained hospitals may lead to “spillover effects” that negatively impact the quality of patient care.14
Private equity firms have driven community hospital closures by buying health systems, restructuring them to generate short-term profits, and then leaving them with untenable debt.15 For instance, a private equity company bought a hospital system (Hospital System A) in 2010, then made over $800 million by selling Hospital System A’s buildings and land. The private equity company resold Hospital System A to its physicians 10 years later, leaving it bankrupt and forcing the planned closure of 2 of Hospital System A’s hospitals.16 A community coalition has responded to the hospital closures with a series of public rallies.17 Likewise, community members have called for the state government to impose stricter regulations on the acquisition and closure of local hospitals.18 The fate of the 2 hospitals is pending.19
Some hospital networks have adopted the rhetoric of private equity companies, endorsing the diversion of essential services from the indigent to the wealthy under the guise of “innovation” and “entrepreneurship.” For instance, in one city where there are no private equity-owned hospitals,2 nonprofit health systems have undergone lucrative mergers in which community hospitals are viewed as assets that can be bought and restructured or closed to increase profits. Nonprofit health systems are fraught with ethical conflict in their mimicry of private equity, as they often present themselves as community benefactors to retain their tax-exempt status despite simultaneously prioritizing profits.20
One Case
These dynamics are exemplified in another case that included a nonprofit hospital system (Hospital System B) and a community hospital it acquired. In 2013, Hospital System B acquired several community hospitals through a merger with a smaller hospital system, thus growing its profit margins through increased negotiating power with insurers and access to new patients.21 In 2023, Hospital System B announced its plan to close one of the community hospitals it had acquired.22 It paired these closure plans with a diversion of resources toward more profitable medical services, establishing a concierge clinic in 2018 and a new cancer center in 2021.23,24
Nonprofit health systems are fraught with ethical conflict when they present as community benefactors looking to retain their tax-exempt status.
After announcing its plans to close one of its community hospitals, Hospital System B faced protests from the local community. Community activists formed a community coalition, which demonstrated through a health equity impact assessment that the community hospital’s closure would have a devastating impact on many residents, limiting their access to care.25 Additionally, community members challenged Hospital System B’s claims that the hospital’s planned closure was due to financial strain, arguing that Hospital System B had deliberately closed the community hospital’s most profitable services to create a picture of financial struggle.26 The local community filed multiple lawsuits against Hospital System B, accusing it of scheming to profit off the sale of the community hospital’s real estate. The hospital closure was recently approved by the State Department of Health, but the community hospital remains open while the most recent lawsuit wends its way through the court system.27
Although Hospital System B’s acquisition of a community hospital and ensuing attempts to close the hospital mirrors the private equity firm’s behavior toward Hospital System A, there are key differences. The private equity firm resold Hospital System A’s assets, leading to its bankruptcy, which in turn drove 2 planned local hospital closures, whereas Hospital System B is directly attempting to close the community hospital. Furthermore, at the time of merger, Hospital System A was a for-profit company in debt, while the community hospital was part of a financially stable nonprofit. For-profit and nonprofit health systems in the United States are regulated and taxed differently and thus have different obligations to serve the public interest.28
Despite these differences, there are uncanny parallels between the business practices of the private equity firm and Hospital System B. Both profited from purchasing a health system and then defunding it and closing services. Additionally, both cases involved pushback from local community members, with calls for increased government regulation of health system mergers and hospital closures.
Overall, the parallels between Hospital System B’s management of the community hospital and the private equity company’s behavior toward Hospital System A demonstrate how nonprofit health systems may emulate private equity as they undergo mergers and hospital closures.
Call to Action
Nonprofit health systems’ imitation of private equity firms is unethical, as it prioritizes profits over patients and local communities. Envisioning the health care system of our near future, we call on nonprofit health systems to reject replacing their social mission with the values of private equity. To hold health systems accountable, we propose several policy actions at the institutional and government level.
Institutional implementation of community-based health care model. Policy reform can create a more equitable distribution of health care resources that improves health outcomes.29 However, policy solutions must be envisioned in partnership between nonprofit health systems and the communities most impacted by the encroachment of private equity culture in health care. Working with communities requires building long-term relationships, breaking down hierarchies, and rejecting profit as the gold standard. To drive this shift from a private equity model to a community-based health care model, nonprofit health systems must be held accountable. A socially accountable health system is led by community members rather than outsiders with a vested interest in profits. Moreover, in this model, hospitals’ success is measured not by the upper limits of their “excess revenue” but by the health of their surrounding communities.
Government regulation of hospital closures. While nonprofit health systems strive to implement a community-based health care model, policy makers must address impending hospital closures. For instance, New York State passed a law in 2021 that requires hospitals to submit a health equity impact assessment and certificate of need before closing services.30 Additionally, New York State enacted Article 45-A in 2023, which requires health systems to notify the public before major mergers or acquisitions, thereby improving transparency.31 Each of these pieces of legislation limit the power of nonprofit health systems and private equity alike to engage in the unethical business practices that resulted in the rapid planned closure of 2 of Hospital System A’s hospitals and the planned closure of a community hospital (vis-a-vis Hospital System B) without substantial community input. Such strong moratoriums on hospital closures are needed to minimize retaliation by health systems and help build community power.
The perverse incentives that led to Hospital System A’s planned hospital closures and Hospital System B’s planned closure of the community hospital are present across the nation. Therefore, policy makers nationwide must set guardrails on profit-driven financial behavior by nonprofit hospital systems and increase transparency requirements regarding hospital closures in surrounding communities. For example, policy makers should require nonprofit hospital systems to conduct health equity impact assessments and gather community input before closing hospitals or services. Additionally, they should financially incentivize health systems to notify and solicit feedback from local communities during major mergers and acquisitions.
Health care workers can join the discussion of hospital closures by advocating for safety-net hospitals. Specialty-specific advocacy groups can help health care workers amplify their collective voices in conversations with policy makers.32 As private equity practices pull nonprofit health systems from their social mission, policy change is needed within nonprofit hospital systems and state governments for community benefit. Furthermore, consideration of federal policy reform is warranted, as our case study delineates the consequences of adverse incentives that impact nonprofit hospital systems nationwide.
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