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Is Private Equity Ownership Helping or Hurting Rural Hospitals?

Analysis  |  By Amanda Schiavo  
   February 09, 2023

The Private Equity Stakeholder Project took a deep dive into private equity’s influence in rural healthcare.

Rural healthcare providers are at a financial disadvantage when compared to their larger counterparts.

Rural hospitals tend to close at a higher rate than organizations in more populated areas—indeed, over 100 rural hospitals have closed in the last 10 years, and 30% of all rural hospitals in the country are at risk of closing in the near future, according to data from the Center for Healthcare Quality and Payment Reform. So, these healthcare providers would welcome any economic boost: enter private equity.

Private equity firms own at least 130 rural hospitals, according to a survey by the Private Equity Stakeholder Project (PESP). Ideally, investments into rural health organizations by private equity groups would bring an influx of capital that could be used to improve patient care and extend the services rural providers offer—but this isn’t always the case. The PESP researchers suggest that private equity investors are only adding more stress to an already struggling segment of the industry.

"Healthcare systems in America's rural communities are experiencing an escalating crisis," Eileen O’Grady, PESP Healthcare Director, said in the report. "Rural hospitals are closing at a dangerous rate. Chronic staffing shortages plague providers and the health of people living in rural areas is, by most measures, significantly worse than in non-rural areas. Despite these challenges, private equity appears to still find opportunities to profit off this struggling industry, thereby adding to the strife."

The research found that the tactics utilized by private equity firms to turn a profit—typically in a tight four to seven-year period—can do more harm than the good the initial investment was intended for. Some of these tactics include finding ways to dramatically increase cash flow, which may mean cutting an already short staff, according to the PESP research.

Private equity firms may also engage in sale-leaseback transactions, which the PSEP report says is common among private-equity-owned hospitals. In a sale-leaseback transaction, companies sell their real estate to a third party and lease it back. This offers organizations a quick way to monetize real estate and generate cash, but this can end up leaving hospitals with fewer assets and greater monthly payments.

Rural healthcare providers need more than just proper investments to keep their doors open and the quality of care high. PSEP has several suggestions to help rural hospitals thrive under private equity leadership. The first is to place limits on sale-leaseback transactions.

PSEP also suggests increasing regulatory oversight when hospital ownership changes hands through government policy recommendations. One such example is a state-level requirement that hospitals must provide regulators with notice before entering into any transaction involving an asset sale, disposition, or change in control in management. PSEP also suggests giving these regulators the authority to approve or deny the transactions following a review period and/or a public hearing.

PSEP also feels that Congress should expand programs that will incentivize clinicians to live and work in rural areas. PSEP believes the federal government and the public should be making direct investments in rural hospitals.

"These hospitals should not have to remain financially self-sufficient, but rather have direct subsidies to support important services for the community," the report says. "Direct public investment must come with guidelines and strict accountability measures, and limit extractive practices from for-profit interests, such as private equity firms, private insurers, physician staffing groups, medical staffing agencies, and vendors. With proper measures in place, public investment in rural health has the potential to preserve and even expand access to healthcare, including lifesaving care."

Amanda Schiavo is the Finance Editor for HealthLeaders.

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