Between 2004 and 2016 there were 20,150 excess deaths in American nursing homes, amounting to an estimated 160,000 lost years of life. The cause wasn’t a pandemic, but private equity.
Economists analyzed the mortality of patients in 18,485 nursing homes acquired by private equity companies between 2000 and 2017, versus other forms of for-profit ownership. It found that the likelihood of dying in a nursing home within the first 90 days of being admitted—a measure that’s a proxy for the overall performance of the facility—was 10% higher when the nursing home was owned by private equity.
Whether the nursing homes were independent, or part of a chain, it was older patients in better health who had the highest increased risk of dying, indicating it was the private equity-owned facilities that were responsible for the early death. Patients at those nursing homes more frequently suffered from reduced mobility following admission to the facility, too, and bills went up—with Medicare reimbursements increasing 11% within 90 days. The study was published by the National Bureau of Economic Research (NBER) as a working paper, which means it hasn’t yet been peer-reviewed.
“I was very surprised. I expected more positive results from private equity,” says Constantine Yannelis, a professor of finance at the University of Chicago, and one of the authors of the study. He says his expectations were based on his belief that private equity firms are often very good at optimizing the businesses they own.
No incentive to keep patients alive
The issue with nursing homes, however, isn’t that the businesses weren’t optimized, but that the customer’s and owner’s interests are not the same. “The incentive structure is misaligned,” says Yannelis, noting that there is little incentive for nursing homes to deliver better care for their patients, or even to keep them alive, particularly when they are focused on short-term results.
Although 70% of nursing homes are operated for profit—a higher percentage than in other healthcare sectors—margins aren’t very high, from 1% to 2% per year. In order to make the most of the investments, there are several operations that private equity can perform that don’t take into account the wellbeing of patients, which can include selling real estate after buying the facility.
Perhaps the most significant impact, however, is from cost-cutting measures, which often translate into a reduction of staff, typically the main cost of operation of nursing homes. Overall, the number of employees at nursing homes fell 1.4% after they were acquired by private equity companies and nurses spent 3% less time with patients. Since patient outcomes don’t impact insurance reimbursement rates, it’s essentially possible to get away with providing lower levels of service.
In a statement, the American Investment Council (AIC), which represents private equity investors, said private equity’s involvement in healthcare is improving healthcare across America, and that the industry is committed to its support of affordable, high-quality care.
“This new study is inconsistent with other recent academic research that shows that private equity-backed companies are delivering quality care to nursing home residents—particularly during the COVID-19 pandemic,” AIC said in an emailed statement.
Conflicting results from other studies
The AIC pointed to a 2018 paper published in the International Journal of Health Economics and Management that didn’t find lower performances in private equity-owned facilities, and to a working paper published in November 2020 that found private equity-owned facilities had lower rates of Covid-19 outbreaks.
However, while acknowledging these findings, Yannelis noted that other research published in the Journal of the American Medical Association found the Covid-19 deaths of private equity-owned facilities were in line with the rest of the industry, but that the availability of personal protective equipment was lower. Since the research so far is inconclusive as it shows opposite results, says Yannelis, his team decided not to include it in this paper.
In highlighting the damaging effects of private equity ownership, the study shows the risks of seeking to profit from healthcare and the importance of imposing different regulations. This is especially important as private equity is increasingly getting involved in other areas of healthcare, such as providing staffing for emergency rooms, owning hospitals, or providing emergency transportation to emergency rooms.
Since a majority of nursing home patients are covered by Medicare, for instance, the Centers for Medicare and Medicaid (CMS) could find policy solutions that drive better results. The situation, says Yannelis, could be improved by fixing the incentive structure for private equity, and changing the payment structure of Medicare so that profits are tied to better service to consumers. Further, he says, better scrutiny is required to make sure the facilities deliver according to the required standards.