Anthony T. LoSasso, Ge Bai, and Lawton Robert Burns argue that critics of private equity’s involvement in healthcare ignore that it is often the only financial lifeline available to distressed healthcare providers and can introduce an improvement in outcomes, including quality of care.
This article is part of a series that explores how private equity reduces competition in the United States healthcare sector and the ways in which enforcers can respond. You can read the rest of the series as it is published here.
Private equity’s role in healthcare has become a subject of intense debate, with critics raising alarms about rising costs, potential underinvestment in patient care, and a fixation on short-term profit. Some claim that private equity’s heavy reliance on leverage, brisk pace of acquisitions, and lack of public accountability or transparency make it uniquely ill-suited to providing essential services like hospital care and community-based medical practice. However, others point out that many financially embattled hospitals, clinics, and specialist groups simply would not survive without access to the capital and managerial expertise that private equity can offer.
Two recent empirical analyses highlight the complexity of the picture. The studies show that a majority of private equity investments in healthcare target distressed providers, often in rural or low-income areas where other lenders and investors have already pulled out.
This dynamic raises a fundamental question: should we demonize private equity simply because it seeks returns in a vulnerable sector, or is the real issue the underlying systemic flaws that render so many providers financially precarious? One of these papers by Karamardian et al. discuss the necessary trade-offs between cost, quality, and access—the familiar “iron triangle” in healthcare. Stabilizing providers and preventing closure speaks to access; improving patient outcomes speaks to quality; improving efficiency speaks to cost-management. Private equity hardly introduced these trade-offs.
It is also important to note that “providers” cover a diverse set of players, including not only hospitals, but also skilled nursing facilities, physician practices, ambulatory surgery centers, dental practices, and others. The effects of private equity in one provider sector, even if correlated to poor outcomes, may not generalize to other sectors, though multiple strands of research are ongoing.
To understand these questions more fully, it is useful to place the current wave of healthcare private equity in the broader historical context of leveraged buyouts (LBOs), in which the buyer mostly funds an acquisition with debt. Back in the 1980s, LBO specialists, more or less synonymous with private equity, played a similar “rescuer” role in manufacturing and retail as they do now in healthcare, acquiring failing or undervalued companies, restructuring them, and sometimes reaping large rewards.
Steven Kaplan and Per Strömberg documented in 2009 how many of these transactions led to genuine operational improvements: raising productivity, re-aligning incentives, and providing new capital where it was desperately needed. Today’s healthcare transactions, though distinct in their public-service dimension, echo many of these same themes. The question is not whether a deal is structured with private equity or public equity, but whether it actually stabilizes providers and improves outcomes for patients.
Public vs. private equity: a blurry line
Another befuddling factor when analyzing private equity’s involvement in healthcare is that a closer look at hospital and specialty practice ownership reveals that many large operators toggle between public and private structures over time. Mark Pauly and Lawton Burns recount how healthcare facilities operator HCA Healthcare, for example, has repeatedly switched between public ownership and private equity ownership, all while retaining the same core mission of providing hospital services at scale. In the LBO context, Kaplan and Strömberg note that it was not unusual for manufacturing companies, once they were turned around, to re-enter the public markets through an IPO. Similar “take private, then go public” cycles arise in healthcare as well.
Hence, the line separating “private equity” from “public equity” can be fluid. In practice, this makes it more difficult to discern the time-specific effects of any particular form of ownership. Nevertheless, both forms of ownership can drive cost efficiency or pursue expansions that benefit patient communities. Both can also succumb to short-sighted financial strategies if incentive structures push them that way. Rather than blaming “PE ownership” specifically, Lucy Ma, Shreya Shah and Kevin Schulman suggest focusing on the conditions under which any owner—private, public, or nonprofit—manages costs, invests in needed technologies, and maintains adequate patient access. Thus, a key consideration is that strategy and process outweighs structure and ownership. Unfortunately for the analyst, structures are easier to observe and study; processes and behaviors are not. Indeed, an earlier study of hospital ownership conversions by Lawton Burns et al. highlighted the critical role of changes to a hospital’s strategy content and process.
Why private equity steps in
A key insight from the latest research is that the majority of healthcare deals drawing private equity interest involve providers already on the brink of closure or bankruptcy, in some cases on a serial basis. Ma, Shah and Schulman find that many hospitals or practice networks acquired by private equity had posted consistently negative operating margins, suffered from outdated facilities, and faced impending cash crises before being acquired. The capital structures that distressed hospitals bring to the table often deter traditional bank financing or large public companies looking for cleaner deals. Despite widespread suspicion of leveraged buyouts, private equity ends up being one of the few willing funders in such high-risk scenarios.
This mirrors patterns from the classic LBO era of the 1980s and early 1990s, as explored by Kaplan and Jeremy Stein. They note that LBOs often targeted smaller or distressed industrial firms that lacked the creditworthiness or clarity of large-cap, investment-grade companies. Private equity stepped in with specialized financial engineering. It was not purely altruistic, of course. The combination of discounted purchase prices, tax advantages of high leverage, and the possibility of a turnaround created a solid incentive structure for buyout specialists.
In the healthcare context, Karamardian et al. emphasize that many of the newly acquired entities are rural hospitals or urban safety-net facilities where no other investor would realistically tread. If these hospitals had more robust insurance mixes, bigger patient volumes, or better profitability metrics, they would likely attract less controversial types of capital. Yet the lack of suitors for these failing providers underscores that, for better or worse, private equity’s willingness to invest is often the only thing keeping such operations afloat.
Indeed, it is often because of the financial difficulties of the acquired entity, rather than the avarice of private equity, that Bruch, Zeltzer and Song find that hospitals acquired by private equity are associated with increases in net income and inpatient charges, though also a more diverse case mix index and improvement in some measures of quality, after acquisition. Low hospital margins (the ratio of profit to revenue) have been associated with hospital closure in other work.
The role of private equity
Time and again, empirical studies demonstrate that many distressed providers require a substantial capital infusion before they can right the ship. Ma, Shah and Schulman find that in a significant subset of private equity deals, new owners provide immediate funds to address urgent facility needs ranging from structural repairs to technology overhauls. Rural hospitals often operate with antiquated infrastructure or severely understaffed departments. Upgrading these core elements is not optional; it is a prerequisite to sustaining patient care.
From an LBO perspective, these funding injections may resemble the 1980s “turnaround” model, where buyout sponsors poured money into outdated factories, retooled production lines, and introduced more efficient supply-chain management. The biggest difference is that healthcare comes with a broader societal mission. On the one hand, this means private equity owners may see a stable or growing demand for services, even in turbulent economic times. On the other hand, local communities depend on these facilities for vital services like emergency medicine, obstetric care, or routine diagnostics, making the stakes of ownership decisions much higher for patients and policymakers alike.
Critics worry that private equity owners slash costs indiscriminately, reducing patient services, or aggressively negotiate billing arrangements that inflate costs. While these outcomes can occur, the larger empirical record offers a more complicated story. Ma, Shah and Schulman document a variety of investments—from electronic health record upgrades to building new outpatient centers—that can improve both care quality and the bottom line. Rather than simply cutting staff, private equity owners sometimes expand specialized service lines (such as cancer treatment or advanced imaging) if they see a viable return and a competitive opportunity, which is impossible in saturated markets. This is consistent with the notion that improving access to care is good for business.
These operational improvements reflect principles familiar in the LBO literature. Kaplan and Stein, as well as Kaplan and Strömberg, describe three levers of value creation in leveraged buyouts: financial engineering, governance engineering, and operational engineering. First, the infusion of debt (“financial engineering”) can instill discipline by forcing management to pay down principal and interest, thereby minimizing wasteful spending. Second, “governance engineering” typically grants private equity owners majority board control, fosters more direct oversight, and ties management compensation to performance metrics. Finally, “operational engineering” involves bringing in sector-specific experts or deploying new strategic plans to enhance efficiency and growth. In the banking sector, Emily Johnston-Ross, Song Ma, and Manju Puri found that private equity invested in underperforming and riskier banks led to better bank performance and positive spillovers for the local economy. In healthcare deals, this operational overhaul might include optimizing patient flow, merging small clinics into a more efficient network, streamlining supply-chain costs, and other efficiency-improving activities. Critics of “the financialization of healthcare” conveniently overlook such positive contributions.
Although the mechanics are similar, healthcare’s distinct mission of patient care generates heightened scrutiny. Karamardian et al. find that some deals do raise legitimate concerns about billing practices—particularly in specialties like emergency medicine, where out-of-network charges were more common prior to the 2020 No Surprises Act, which limits surprise medical bills. Yet, these patterns may be less about private equity per se and more about broader market dynamics and policy failures. After all, not-for-profit hospital systems can also exploit weak competition and policy loopholes to charge higher prices, engage in anticompetitive contracting practices, and capture the regulatory process to strengthen their dominant market position, such as to maintain certificate-of-need laws that prevent new entrants.
Let healthcare providers provide healthcare, regardless of ownership structure
Pauly and Burns argued that private equity, when deployed responsibly, can liberate physicians and nursing teams from administrative quagmires by bringing in expert management, standardized processes, and economies of scale in the form of centralizing back-office and administrative functions. In an ideal scenario, clinicians focus on clinical work, while the private equity owner ensures that the back-office operations run smoothly. Whether it is called a management services organization (MSO) or an integrated chain, the key is aligning incentives so that quality of care does not suffer in pursuit of cost reductions.
Of course, the success of such arrangements depends on whether the new owners impose unrealistic debt loads or slash critical personnel just to meet short-term targets. The LBO literature warns that high leverage can produce dramatic returns in the best cases, but also magnify risks during market downturns or unexpected shocks. Healthcare, arguably more than any sector, faces constant uncertainties: changing reimbursement formulas, pandemic surges, and demographic shifts. Those complexities require private equity to manage risk carefully rather than simply chase quick flips.
From rising prices to service line shutdowns, many hallmark grievances about U.S. healthcare transcend ownership type. Karamardian et al. argue that market consolidation, insufficient competition, and opaque pricing create fertile ground for any well-funded actor to exploit. If a hospital is the only game in town, it can raise fees or cut less profitable service lines, regardless of whether it is owned by a private equity fund or governed by a nonprofit board. In turn, patients bear higher costs or reduced care options.
This dynamic is familiar from the LBO era, though in a different sectoral context. Large industrial or retail buyouts sometimes exploited local market power, but as soon as other competitors emerged, the capacity to extract monopoly-like profits disappeared. The organic entry of private equity into healthcare should not be a cause for concern regarding market concentration. More broadly, the organic entry of any form of capital, without erecting regulatory barriers to restrict competition, poses no such risk. In fact, these entries serve as an effective means to counter natural monopolies or monopolies protected by regulations, ultimately benefiting consumers.
In healthcare, robust competition is hard to foster primarily due to regulatory hurdles like certificate-of-need requirements, licensing restrictions, and complex insurance billing frameworks. If critics want to prevent price gouging and maintain essential health services, imposing restrictions on private equity alone will be counterproductive. Policymakers should focus on how to broaden access to capital for all providers, encourage more entrants into the market where feasible, and ensure that reimbursements align with delivering high-value care, not just maximizing billable services.
Conclusion
If the LBO era taught us anything, it is that “leveraged” or “private” ownership, by itself, does not determine whether an acquisition will succeed or fail, benefit stakeholders, or lead to corporate meltdowns. Kaplan and Strömberg show that LBOs can lead to genuine improvements and stronger governance but are also prone to cyclical booms and busts driven by credit markets. In healthcare, the stakes are higher: the targets are hospitals, clinics, and specialized facilities that communities depend on. Recent work highlights that many of these entities are already in dire straits when private equity arrives.
Private equity can rescue failing providers by supplying capital, operational know-how, and better management incentives, much as it did with distressed factories in earlier decades. The crucial caveat is ensuring that the owners’ debt levels, billing practices, and cost controls do not compromise patient care or access. In practice, the real threat to American healthcare costs and quality stems from broader systemic dysfunctions: limited competition in many local markets, reimbursement methods that prioritize volume over value, and tangled regulatory regimes that discourage fresh entrants or innovative payment models.
Instead of condemning all private equity deals as inherently suspect, policymakers should aim to fix these structural distortions that any owner could exploit. Reforms that encourage genuine competition, require transparent pricing, and align financial incentives with health outcomes would accomplish far more than a blanket prohibition on private equity’s involvement. In an era of ongoing consolidation, private equity-backed firms can supply some of the needed competition. Indeed, scaring away private equity might leave many distressed providers to fail outright, harming the very communities that critics claim to protect.
Authors’ Disclosures: The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
