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Private equity ownership and nursing home quality: an instrumental variables approach

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Abstract

Since the 2000s, private equity (PE) firms have been actively acquiring nursing homes (NH). This has sparked concerns that with stronger profit motive and aggressive use of debt financing, PE ownership may tradeoff quality for higher profits. To empirically address this policy concern, we construct a panel dataset of all for-profit NHs in Ohio from 2005 to 2010 and link it with detailed resident-level data. We compare the quality of care provided to long-stay residents at PE NHs and other for-profit (non-PE) NHs. To account for unobservable resident selection, we use differential distance to the nearest PE NH relative to the nearest non-PE NH in an instrumental variables approach with and without NH fixed effects. In contrast to concerns of the public regarding quality deterioration associated with PE ownership, we find that PE ownership does not lead to lower quality for long-stay NH residents, at least in the medium term.

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Notes

  1. Approximately, four in five NH residents have at least one limitation in activities of daily living and about two-thirds have moderate or severe cognitive impairment (CMS 2015).

  2. Jensen (1989) provides a detailed theoretical discussion for why PE ownership could be beneficial, arguing that PE ownership can enhance efficiency and productivity through mitigating conflicts of interest between owners and managers. Kaplan and Stromberg (2009) also provide a nice summary of the beneficial effects through financial, governance, and operational engineering.

  3. For examples, please see Bowblis and McHone (2013), Bowblis et al. (2016), Grabowski et al. (2013), Huang and Bowblis (2018), and Rahman et al. (2016).

  4. We utilize this approach because the decision to purchase or sell an entire chain is not likely subject to the performance of any individual facility. There is also better information available on transactions involving whole chains than individual facilities.

  5. For examples, see Kaplan (1989), Smith (1990), Lichtenberg and Siegel (1990), Harris et al. (2005), Bergstrom et al. (2007); and Cumming et al. (2007).

  6. Studies show that chief executives and top management teams at the PE-owned companies have larger equity stacks (Kaplan 1989), and these companies have a smaller and more efficient governance board that meets more frequently (Cornelli and Karakas 2008).

  7. PE firms are likely to relocate capital and labor to improve productivity (Davis et al. 2014). For example, PE firms may reallocate resources from inefficient to more efficient factories. It is these operational changes that create a negative image of PE firms, as these restructuring decisions cause closure of plants and stores, leading to lay-offs (Wong 2007; SEIU 2009).

  8. There are over 1.4 million people living in NHs (CDC 2016), over 35% of Americans at the age of 65 are expected to use a NH at least once in their lifetimes (Houser 2007), and Medicaid is the largest payer for NH services, spending over $51 billion per year (MedPac 2016) and providing a steady source of cash flow.

  9. For example, 42% of PE investments are sold within 5 years and 72% are sold within 10 years, either through a sale to a strategic buyer, a sale to another PE firm, or through listing the company on a public stock exchange through an initial public offering (i.e., IPO) (Kaplan and Stromberg 2009).

  10. This period of time that is both before and during the study period. We use 2000–2004 as a look-back period to identify major PE transactions of NHs prior to our study period. This enables us to identify NHs owned by PE firms but the transaction occurred before the study period (2005–2010).

  11. We also cross-check our data with a report on PE ownership in NHs from the Government Accountability Office (2010) to account for any chains that may operate various brand names.

  12. More details on these individual transactions are available in “Appendix A”.

  13. Some quality measures related to medication use are currently reported on the NHC website but were not publicly reported during the study period.

  14. Assessments must also have non-missing data for control variables. Our measures are consistent with the aggregate measures reported on the NHC website.

  15. https://www.cms.gov/Medicare/CMS-Forms/CMS-Forms/Downloads/CMS672.pdf.

  16. There is an ongoing debate about whether 2SRI or two-staged least squares (2SLS) is more appropriate in various estimation contexts (Basu et al. 2018; Chapman and Brooks 2016). We compared our results using 2SRI with 2SLS and found similar results.

  17. http://depts.washington.edu/uwruca/ruca-uses.php.

  18. Because our identification of PE ownership relies on chain transactions, all PE NHs in our sample by design are chain-affiliated.

  19. PE NHs are more likely to locate at non-urban settings: 19.6% in micropolitan areas, 15.4% in small rural towns, and 2.7% in isolated small rural towns.

  20. The NHs that were always part of a PE firm were part of PE to PE transactions (i.e. Tandem and Trilogy).

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Authors and Affiliations

  1. Georgetown University, 3700 Reservoir Rd., NW, St. Mary’s Hall, Washington, DC, 20057, USA

    Sean Shenghsiu Huang

  2. Miami University, Oxford, OH, USA

    John R. Bowblis

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  1. Sean Shenghsiu Huang
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  2. John R. Bowblis
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Correspondence to Sean Shenghsiu Huang.

Additional information

We thank David Grabowski, seminar participants at the 2017 AcademyHealth Annual Research Meetings, 2017 iHEA World Congress, University of Hong Kong, and Georgetown University for their helpful comments and suggestions. We thank Ali Celentano for excellent research assistance. We also acknowledge the Ohio Long-Term Care Project and the state of Ohio for access to the data.

Appendix A: information of PE acquisitions

Appendix A: information of PE acquisitions

HCR Manor Care

Through a $6.3 billion buyout ($5.5 billion borrowed), the private-equity firm, Carlyle group, acquired Manor Care in 2007 (The Deal 2007), and the transaction was completed in December 2007. At the time of transaction, Manor Care was a publicly traded company that employed more than 60,000 workers.

Harborside/Sun

In 1998, Harborside was purchased by a private-equity firm, Investcorp. Harborside was later sold to Sun, a public traded nursing home chain in 2006 for $625 million, which included $350 million in cash and $275 million in debt (The Deal 2006).

Laurel Health Care

In February 2006, Formation Capital Health Care bought Ohio-based Laurel Health Care for “nearly $200 million,” as reported in July 2006 in The Senior Care Investor newsletter. Laurel Health Care had 26 facilities and 2736 beds. Four months later, Formation sold Laurel Health Care along with five other senior housing groups, totaling 186 facilities and 21,000 beds, to GE Healthcare Financial Services for $1.4 billion, according to a GE news release (GRBJ 2007).

Tandem Health Care

Behrman Capital, a private equity firm, sold Tandem Health Care to other private equity firms (JER Partners and Formation Capital) in July 2006. The deal was valued at $620 million.

http://www.behrmancap.com/behrman-capital-sells-tandem-health-care-to-jer-partners-and-formation-capital-in-620-million-transaction/.

Trilogy Health Services

A Swiss private-equity firm, Lydian Capital, paid $350 millions to purchase Trilogy Health Services in 2007 from a Chicago-based private-equity frim, Frontenac. At the time of the transaction, Trilogy employed more than 5100 workers at 44 long-term care facilities in Ohio, Kentucky, Michigan, and Indiana (Irish Independent 2007). In 2015, Lydian sold Trilogy to Griffin American Healthcare for $1.12 billion (Sunday Business Post 2015).

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Huang, S.S., Bowblis, J.R. Private equity ownership and nursing home quality: an instrumental variables approach. Int J Health Econ Manag. 19, 273–299 (2019). https://doi.org/10.1007/s10754-018-9254-z

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