NYU Stern report calls for private equity reforms to safeguard quality of care

Private equity’s influence over healthcare companies’ quality of care warrants new reforms for the firm's investing practices, a new report says.

The report, published by NYU Stern’s Center for Business & Human Rights, aimed to document the problems observed in recent years stemming from PE ownership in healthcare, including hospital closures, reduced staffing and compromised healthcare services. 

Though PE provides capital and strategic expertise, the report acknowledged, reforms are crucial and should not be eliminated from healthcare.  

The firms have emerged over the last two decades as substantial investors in healthcare, putting up over $1 trillion in debt-financed healthcare deals in the last decade. The rub is that PE owners are allowed to extract value from companies while burdening the underlying institutions with new obligations, the report said. 

Between 2023 and mid-2024, there were 26 large healthcare-related PE bankruptcies. Including smaller businesses, 34 PE portfolio companies in healthcare filed for bankruptcy in 2023.

In general, PE saddles companies with high debt-to-cash flow ratios, at 7.1 on average. This is well over the 4.0 threshold that financial regulators consider to be high, per the report. For comparison, public healthcare companies average a 3.0 debt-to-cash flow ratio. 

Additionally, a common PE approach is sale-leasebacks, which requires companies to sell buildings they own and then pay rent on those properties. This makes healthcare companies, already vulnerable to downturns, even more unstable and often leads to reductions in staff. 

“In the healthcare sector, slashing staff can be fatal. It can be a killer, simple as that,” the report’s author, Michael Goldhaber, a senior research scholar leading the values-based investing program at NYU’s Stern Center, told Fierce Healthcare.

The report evaluated many cases of PE investment across subsectors, focusing on the impact in quality of care. “The more we dug, the more we were astounded by how often and on what scale private equity acquisitions in the sector have gone terribly wrong,” Goldhaber added. “We think private equity has earned the attention it’s drawn.” 

The report made several recommendations to PE investors on responsible practices: 

1. Make full and ongoing public disclosures of companies’ finances, including their debt obligations, owners, employees, patient outcomes, customer satisfaction and other quality metrics 
2. Refrain from sale-leaseback transactions or debt-funded dividends, which leave companies vulnerable to cyclical dips in revenue 
3. Maintain a maximum ratio of debt-to-cash flow that is appropriate to a given subsector, based on consultation with experts
4. Refrain from cutting essential health services, closing facilities, reducing staff or reducing wages except in extreme circumstances with regulator permission 

If PE firms can’t make a healthcare business work under these conditions, Goldhaber said, then they simply don’t belong in the sector and should step aside for other investors.

Case studies analyzed in the report include the now-infamous Steward Healthcare case, which led to a bankruptcy, mass layoffs, the shuttering of a dozen hospitals and over a dozen patient deaths attributed to inadequate care.

Other cases involved hospital consolidation in rural and underserved communities; bankruptcies in the elder care industry; the influence PE has over surprise billing; assault, child abuse and substandard care in residential facilities for foster youth; mass facility closures for autism care; and substandard care in prisons. Some cases were also included in a recent Senate report (PDF) on the topic.

The report also outlined several recommendations for the federal and state governments: 

1. State legislatures should empower state health regulators to block or condition the acquisition of any healthcare business in their state 
2. States should leverage deal reviews to impose specific conditions, like demanding patient-centered conditions 
3. All legislators should discourage new sale-leaseback transactions or debt-funded dividends by making companies that engage in these practices ineligible for government healthcare funding 
4. All legislators should make a controlling entity liable when its portfolio firm commits fraud against a government healthcare program 
5. Congress should require PE firms to report financial data for their funds, loans and portfolio companies to the Securities & Exchange Commission. Failure to do so should result in losing access to 401(k) retirement accounts

Several states have taken steps to strengthen PE oversight, per the report, including Oregon, New Mexico, Massachusetts and California. 

“We think those are great. We’d like to see them even stronger,” Goldhaber said, adding he is a proponent of close oversight. 

PE was never really private, and especially not now, Goldhaber noted. It has historically been dependent on public pension funds. Because of a recent Trump executive order, PE is now also being granted access to the trillions sitting in 401(k) accounts. These are the retirement funds of people who will be depending on the healthcare facilities that PE is investing in, Goldhaber noted. 

“Now you have potentially 90 million Americans whose money can be put into these private equity firms,” Goldhaber said. “It’s a new pot of money that underscores how very public private equity is in practice, and why it’s important for there to be public disclosure and public knowledge.”