Will Private Equity Buy Your Hospital?

Advertisers are masters at knowing how certain words and phrases will affect us.  Consider some of the seemingly innocent words and phrases below and how they have an emotional impact.

IRS

Big Tech

Police officers

Corporate profits

Millennials

Congress

The Nursing Profession.

Over time we have been conditioned to experience emotional responses to various phrases and labels.  For instance, there is nothing intrinsically evil in businesses earning money since this is an expected and desirable outcome.  Yet, ask us to react to the term corporate profits and I suspect that most of our reactions would trend negatively.  It’s unlikely that a political candidate would proclaim in an ad or a speech that he or she wants to be a Champion of Corporate Profits!

Private Equity certainly merits inclusion in the above list.  Most folks have an unfavorable opinion of PE even if they don’t fully understand this business model.  And some of the actions committed by PE justify suspicion and outrage, but I don’t support demonizing the industry writ large.  Bad actors are not tantamount to a bad profession.  Similarly, I have argued on this blog that the pharmaceutical industry, which is routinely demonized, is a critical source of cures and treatments that we all so desperately need. Haven’t we seen in the past few years the consequences of demonizing our opponents and adversaries?

Recently, the hospital Summa Health in Akron, Ohio announced that it will be purchased by a private equity firm. While this was big news for northeast Ohio, it is not a unique development.  Nearly 400 hospitals in the U.S. are owned by PE. Beyond health care, a few minutes on your search engine will reveal how may familiar businesses across the country have partnered with PE.

Under new management!

So, is the Summa Health purchase good news?  We’ll have to watch closely.  We know that PE's focus on generating profit could collide with the medical profession’s mission to provide health care to the community.  But companies are sold to PE for a reason. In general, these are companies that are at risk and need additional capital to survive or simply aim to grow.  PE provides the funds and often the managerial expertise to accomplish these goals.  They can improve efficiencies throughout the organization, introduce higher level technology and innovation, provide economy of scale, apply best practices in management, and yes, increase profits.

Just because investors make money doesn't make the project evil.

If PE is so shortsighted and pursues short-term profits at the expense of caregivers and their patients, then the venture will fail.  Every hospital is being strictly scrutinized with quality metrics that are made public. If corners are cut, the news will soon get out.  I think that when PE and the hospital’s interests are aligned, as they should be, that success is much more likely.  If PE puts profits over patients and medical professionals, then medical quality and the hospital's reputation will decline and medical professionals will run for the exits. The hospital’s value will tank.  Such actions and outcomes would banish PE from the healthcare universe and could also invite governmental regulation and oversight, which would discourage investors. 

Realize that PE will have to make changes and some of these may be disruptive and painful.  Some jobs will likely be lost.  But hospitals or businesses are not selling to PE to maintain the status quo. They do so because they need help and there is no available remedy internally.   

Those who distrust PE and oppose their purchase of hospitals, nursing homes, physician practices and other healthcare facilities, need to propose how they would bring financial strength and vitality to players in healthcare who can't make it on their own.  My guess is that there is no obvious alternative solution that created market space for PE to exploit.