Mark Hulbert: Would you want your parents to live in a nursing home owned by private equity?

Would you put your mother in a nursing home that is owned by a private-equity firm?

It’s a question a growing number of us are facing. Over the last two decades, nearly 2,000 nursing homes have been acquired by private-equity firms. And we know that those firms face enormous pressures to quickly and substantially extract profits from the companies they acquire. Might that be affecting the quality of the care provided by their nursing homes?

The question is also important from an investment point of view. Investors are increasingly drawn to the spectacular returns that private equity promises, especially at a time when the future returns of public equity seem modest. But if private-equity firms are cutting corners in pursuit of their higher profits, they might face substantial legal risks that could eliminate some or all of their higher profits.

The occasion to ask these questions is a new study that the National Bureau of Economic Research began circulating earlier this week. Entitled “Does Private Equity Investment in Healthcare Benefit Patients? Evidence From Nursing Homes,” its authors are Atul Gupta, a professor of health care management at the Wharton School at the University of Pennsylvania; Sabrina Howell, a finance professor at New York University; Constantine Yannelis, a finance professor at the University of Chicago; and Abhinav Gupta, a Ph.D. candidate in finance at NYU.

These researchers examined the nursing home industry in the U.S. over the period from 2005 through 2017. They specifically examined the quality of care in 18,485 individual nursing homes, of which 1,674 were acquired by private-equity firms at some point over that period. The researchers had access to a wealth of data about the quality of care in these nursing homes, and they employed a number of complex econometric tests to focus on the specific effects of private equity ownership.

The most explosive of their findings was that, even though such ownership led to an 11% increase in the amount billed per Medicare patient, it also led to a 10% increase in the short-term mortality of Medicare patients. Given the size of the researchers’ sample, that increased mortality rate implies that “about 20,150 Medicare lives [were] lost due to PE ownership of nursing homes during our sample period.”

What led to the deterioration in the quality of care? In an interview, Professor Yannelis pointed to several telling statistics. One is that, on average after a nursing home was acquired by a private-equity firm, there was a decline in the number of healthcare staff hours spent per patient. There furthermore was a corresponding increase in the probability that a patient would be given antipsychotic medications.

These are provocative findings, to say the least, and not surprisingly not everyone agrees with them. A spokesperson for the American Investment Council, a private equity trade association, said in an email that “the private equity industry is investing in health care facilities across America and improving care in local communities. This new study is inconsistent with other recent academic research… The industry is committed to supporting companies that deliver affordable, high quality health care.”

Professor Yannelis responded by pointing out that he and his fellow researchers took into account the other academic studies to which the AIC referred. He said that those other studies suffer from various limitations, such as focusing on a short sample period, a small number of private equity deals, or a lack of patient-level data. He nevertheless added that because the results he and his fellow researchers reached are based on averages across a large number of such deals, individual results no doubt vary. The quality of care has not deteriorated at all private-equity-acquired nursing homes.

I specifically asked Professor Yannelis the same question with which I began this column: Would he put his own mother in a private-equity-owned nursing home? His response is that he would have to do a lot of homework before deciding, but that he would have a “high presumption against putting my mother into a private-equity-owned facility.”

He also cautioned that we shouldn’t try to generalize these results about private-equity-owned nursing homes to private equity generally. He pointed out that studies of some other industries have found that private equity has done a “great job.”

One reason it doesn’t appear to do so in the nursing home industry is that it is so difficult for a consumer to get access to the data necessary to make an informed decision about quality of care. Another reason is that the payment structures for nursing home care are so complicated, with the government picking up a major chunk—which complicates the incentive structures under which nursing homes operate.

Note carefully that it is not the profit motive per se that causes the apparent deterioration in care after a private-equity firm acquires a nursing home. Professor Yannelis points out that, historically, about 70% of nursing homes have been operated by for-profit companies. What’s different about private-equity ownership is the intense need to produce quick and substantial profits.

The bottom line? Private equity is hardly the homogenous asset class that individual investors sometimes assume it to be. In some industries and in some hands, it can lead to great outcomes—both for the companies that private-equity firms have acquired and for the investors in those firms. In others, just the opposite. At a minimum, we need to do our homework.

And the same conclusion applies when deciding which nursing home in which to put a relative.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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February 25, 2021 at 01:57PM
Mark Hulbert
http://www.marketwatch.com/news/story.asp?guid=%7B21005575-02D4-D4B5-4572-D2B3FBD54318%7D&siteid=rss&rss=1