Over the last two decades, investments made by Private Equity (PE) firms in the healthcare sector have expanded dramatically from less than $5 billion in 2000 to more than $100 billion in 2018. PE-owned firms staff more than one-third of emergency rooms, own large hospital and nursing home groups, and are the biggest and most active buyers of physician practices. 

With the increase in PE ownership of healthcare assets, a debate has arisen about whether this evolution is good or bad for patients. Many regulators and patients' groups have expressed concerns about PE's expanding healthcare power, while private sector analysts have often painted a positive picture of this development. The pandemic put nursing homes, in particular, under the spotlight, enhancing the need to assess how PE ownership affects healthcare operations such as nursing homes and the ensuing care of patients. Fortunately, a new working paper from Atul Gupta (Penn), Sabrina T. Howell (NYU), Constantine Yannelis (Chicago), and Abhinav Gupta (NYU) provides a unique view into what happens when PE firms buy nursing homes. 

Nursing homes, of course, provide both short-term housing — usually after surgery — and long-term residential services to elderly patients. Two factors make the U.S. nursing home market unique. First, government payers (Medicaid and Medicare) account for 75% of nursing home revenue. Second, about 70% of nursing homes are for-profit, which is a much larger share than other health care subsectors. Because both payers set fixed amounts for each day of residence and for specific care procedures — which work on a "take it or leave it" model for the nursing homes, the usual market factors do not affect pricing or home selection. That said, the authors note that payments "are adjusted for patient complexity, so there is an incentive to overstate their severity—a practice known as up-coding," which is one of the few ways nursing homes have to drive up revenue.