Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
What does a “private equity firm” do? You may not know or care. Yet one of these specialized companies might possibly own your favorite restaurant—or your hospital.
Private equity (PE) firms are investment companies that buy private businesses with a goal to increase their value and sell them for a profit. They focus on private companies because they can make significant changes without the regulatory scrutiny and public pressure that come with publicly traded companies. A common strategy for PE firms, making short-term investments intended to achieve quick profits, sometimes results in negative consequences for the acquired companies, their employees, and their customers.
The recent Red Lobster bankruptcy is one example. In 2014 a PE firm, Golden Gate Capital, purchased Red Lobster and 500 properties it owned for $2.1 billion. To help finance the purchase, Golden Gate Capital sold the properties for $1.5 billion to American Realty Capital and leased them back. The rents needed to make the leaseback agreement viable to the purchaser significantly increased Red Lobster’s operational costs and eventually contributed to its bankruptcy. While Golden Gate Capital quickly recouped a significant portion of its investment, Red Lobster was left financially strained.
An academic report that researched companies bought out and indebted by private equity found that they go bankrupt ten times more often than companies not purchased by these firms. You can safely assume that the “investing” PE firms were enriched by each bankruptcy.
Why might this matter to you? It could potentially affect your health, as PE firms are acquiring more for-profit hospitals. The subsequent staff cuts and other efficiency measures may increase health risks as well as profits, according to a Harvard Medical School researcher who looked at 2009-2019 data from 51 acquired hospitals and 259 hospitals that were not owned by PE firms. The PE-acquired hospitals saw a rise in infections, a 27% increase in patient falls, and a 38% increase in infections from IVs.
PE firms now own at least 460 U.S. hospitals—30% of the country’s for-profit hospitals. The impact for patients is not reassuring. For example, Lifepoint Health, owned by Apollo Global Management, ranks near the bottom in a variety of measures of health and outcomes, compared to its peers. It has been cited for cutting staff, reducing essential healthcare services, and selling off real estate for quick profits.
PE firms have also purchased roughly 6,000 physician practices as well as numerous nursing homes. A study of 1,700 nursing homes sold to PE firms between 2004 and 2019 found that after a nursing home’s purchase by a PE firm, residents’ short-term mortality rate jumped by 10 percent. Another study conducted by the National Bureau of Economic Research highlighted that PE-owned nursing homes saw a 1.7% higher mortality rate among Medicare patients over a 12-year period, resulting in approximately 20,150 additional deaths.
The primary impact on mortality from PE ownership comes from cost-cutting measures that reduce staffing levels and compromise the quality of care. These facilities often show higher staff turnover and lower compliance with care standards, including higher rates of antipsychotic drug use. These, not surprisingly, lead to adverse outcomes for residents.
The trends observed in nursing homes suggest that assisted living facilities under PE ownership could also potentially provide substandard conditions. The firms’ financial strategies like leveraging buyouts and prioritizing short-term profitability often come at the expense of quality care.
Before you commit to a care facility for yourself or a loved one, it would be a good idea to research the actual ownership. If it is owned by a PE firm, the company’s financial wellbeing may be a higher priority than the wellbeing of those who rely on the facility for their care.
Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our videos.
Read more articles by Rick Kahler
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
