Leveraged to the Hilt? The Effect of Leveraged Buyouts on Hospital Quality, Cost, and Prices

Leveraged buyout (LBO) is a specific yet increasingly common approach used by private equity firms to finance the acquisition of large healthcare chains. Its use of high debt and focus on short-term results introduces concerns of potential reductions in product quality, weaker price competition, and predatory entry and exit. However, empirical assessments of healthcare LBOs are sparse. To better understand the impacts of LBOs in healthcare markets, we study the effects of LBO acquisitions on hospital quality, costs, and prices.

Our identification strategy relies on the LBO acquisition of a large national hospital chain in 2006. In this transaction, the entire hospital chain was acquired by a consortium of private equity firms. Because this LBO only involves an ownership transaction and did not change the structure of local hospital markets, it provides a unique opportunity to study effects specific to LBOs and separate from the effects of monopolistic power and economies of scale often confounding the effects of other LBO acquisitions. We study the effects of this transaction specifically in Florida, where we have data on short-term general hospitals from 2001 through 2010. The data are collected by Florida’s Agency of Healthcare Administration and include detailed information on utilization and revenues by payers and service lines. We then merged Florida hospital reports with the state inpatient discharge dataset obtained from the Healthcare Cost Utilization Project. We focus our analysis on short-term general hospitals, and the analytic sample includes 242 unique hospitals (2,420 hospital-years), 41 unique LBO hospitals (164 post-LBO hospital-years), and approximately 29 million discharges. We estimate effects of LBOs with a difference-in-differences (DD) estimator and including hospital fixed effects. Because our analytical sample includes data 6 and 4 years before and after the acquisition, we are able to compare and address whether the time trends are parallel between the LBO and non-LBO hospitals. Due to concerned that LBO hospitals may cherry-pick healthier and more profitable patients, we also pursue an instrumental variables approach, with patients’ differential distance as our instrument, to account for differential patient selection to LBO and non-LBO hospitals.

Main outcomes of interest include mortality, readmission, length of stay, charges, and estimated prices of five clinical conditions and procedures: acute myocardial infraction, chronic obstructive pulmonary disease, heart failure, and the coronary artery bypass grafting. We hypothesize that LBO acquisitions generate small and negative effects on mortality and readmission, significantly shorter length of stay, and discernible higher charges and prices. Our preliminary results generally support these initial hypotheses, with mixed effects on mortality, a statistically significant reduction in length of stay, and higher hospital charges and prices in selected services. These results are robust and increase in magnitude when we limit to the sample of patients admitted through emergency rooms.

Overall, we find that even without changes in market structure, LBOs may lead to significantly shorter length of stay and higher charges and prices in selective services. The results signal the importance of including the underlying financing mechanisms in the policy discussions surrounding healthcare mergers and acquisitions.