Private equity is buying up nursing homes and killing Americans in the process
NEIL TRACEY: Last March, coming out of one of the deadliest stretches of the COVID-19 pandemic, the House Ways and Means Committee held a hearing on the role of private equity ownership in the nursing home market. During the course of this hearing, Representative Bill Pascrell (D-NJ)asked a seemingly simple question:
“How many grandmothers and grandfathers died because profits were prized above lives, with our taxpayer dollars funding this?”
The answer is far, however, from simple, and reflects a systemic issue plaguing our elder care system.
According to a recent report by the National Bureau of Economic Research, 20,000 nursing home residents died in the ten years prior to the pandemic as a direct consequence of private equity ownership. This sobering figure, in addition to another recent report published by the American Antitrust Institute, has highlighted how private equity’s business model is incompatible with the nursing home industry.
Private equity uses its immense, largely unregulated capital to “roll up” smaller nursing home practices, suppressing competition and raising prices in the process. All told, PE has killed untold Americans in the name of profits.
This crisis has emerged because the market for nursing homes is particularly susceptible to private equity’s drive for consolidation. This susceptibility is due to three main reasons.
First, nursing homes have a high rate of for-profit ownership compared to other similar industries. For example, the for-profit rate of nursing homes is around 70% while only 20% of hospitals are for-profit. This means that private sector actors are able to run nursing homes with the goal of maximizing profits. It is these for-profit nursing homes that PE has focused on over the course of the last twenty years. Interestingly, there has even been a more recent push for private equity to enter into the non-profit Medicare and Medicaid Services.
The second reason for consolidation is that the nursing home market traditionally has a large number of independent facilities. Private equity can “roll up” these independent facilities, purchasing them individually, without raising any red flags with antitrust enforcement agencies. Enforcers typically only review mergers and acquisitions for competition concerns above a set deal size. When private equity buys an independent nursing home, these individual transactions appear harmless to enforcers — the deal is so small they likely won’t even review it.
Lastly, the nursing home market is geographically constrained. Consumers are unlikely to send their family to another state, or even county, as they want to be able to visit them. For private equity, this means that it is easy to dominate a local market by buying up businesses in a relatively small geographic area.
As a result, private equity investment in the nursing home market has led to consolidation. From 2010 to 2019, the estimated annual deal value for buy-outs within the nursing home industry has risen from $41.5 billion to $119.9 billion. All told, there has been approximately $750 billion worth of buy-outs of nursing homes over the past decade. It is worth noting that the vast majority of these private equity takeovers are debt leverage. In fact, the average takeover is leverage 9:1, or at a ratio of 9 dollars of debt to every 1 dollar of real equity. Leveraged buyouts typically leave the target company with the debt used for the buyout. This increases the financial burden on already struggling nursing homes and can lead to cost-cutting measures. The debt from these leverage buyouts exacerbates existing pressure for these nursing homes to cut costs and increase profit margins, irrespective of patient outcomes.
Private equity’s business model is incompatible with a nursing home industry focused on patient outcomes. PE also has shorter time horizons than for-profit nursing homes do. PE typically seeks to recoup investment after 4-7 years. This means that PE owners put pressure on nursing home managers to cut costs and increase revenue. It also means that PE seeks to extract wealth from the business in order to earn back any equity that they invested. In order to do this, private equity charges “management fees” to the nursing homes they purchase. In addition, private equity firms also sell off assets that nursing home companies own. Often, this is real estate that is converted from nursing home beds to apartments or office space. This capital extraction drives already cash-strapped nursing homes to cut costs even further.
As a result of these factors, private equity ownership reduces the quality of care for patients. Patients, in turn, are unable to switch nursing homes because of decreased competition in local markets. Decreased quality of care is most clearly seen in decreased staffing hours of nurses per patient. In addition, nursing homes owned by private equity firms lover-prescribe medication to their patients, most notably antipsychotic medication. Overprescription of medicine often leads to worse patient outcomes. Looking specifically at Medicare patients, private equity increases the short-term mortality rate by 10%.
Private equity ownership raises costs to medicare and consumers. PE firms more efficiently “game” the Medicare insurance markets. As such, private equity hospitals increase taxpayer Medicare spending per patient by 11%. Additionally, PE reduces competition and thus raises costs for patients. It should be no surprise that, as competition has decreased, costs have far outstripped inflation. The cost for a single room in a nursing home has risen from $65,185 in 2005 to $102,200 in 2019. That means that, after accounting for inflation, the price of a room has risen by roughly 20%. These increased costs are also passed onto other healthcare providers, from drug providers to staffing agencies, to bedpan manufacturers, to insurance agencies. The result is that nursing home consolidation is an “anti-maverick” force in the healthcare industry at large, leading to consolidation in connected markets as only larger firms can stomach the higher prices.
PE’s impact during the pandemic is yet to be fully grasped. Preliminary studies have found that over 40% of COVID-19 cases came from nursing homes. Recent research has shown that private equity-owned nursing homes are faring much worse during the pandemic, with alarmingly high numbers of cases among residents and staff. Still, the full toll that private equity has taken will likely not ever be fully understood.
What happens next? In order to enable a more rigorous enforcement regime, lawmakers should revisit the Hart-Scott-Rodino (HSR) thresholds for merger disclosure. The HSR thresholds determine which mergers and acquisitions must be put up before regulatory agencies for review. Lowering the HSR thresholds for the healthcare sector would help both state and federal antitrust enforcers do their job.
Whether they change the HSR thresholds or not, there is no doubt that antitrust enforcers and lawmakers must act swiftly to keep private equity out of the healthcare market. Quite literally, lives are at stake.
Neil is a Junior in the College majoring in Government with minors in Philosophy and Economics. Originally from Arlington, MA, he enjoys running, grilling and considers himself a coffee connoisseur.