The Consequences of Rising Healthcare Costs and the Role of Private Equity 

By | August 29, 2023

In the U.S., the rise in healthcare costs has been the subject of intense public and regulatory scrutiny. Average health insurance premiums have risen steadily over the past few years, outpacing inflation. However, the negative consequences of this economic rise are not fully understood. In particular, a significant portion of the rise in healthcare costs in the U.S. is directly borne by businesses through employer-sponsored health insurance plans, whereby businesses pay the premiums on the health insurance plans of their employees. Thus, businesses (and their employees) may bear the brunt of rising healthcare costs. 

We explore this issue in our recent working paper, “When Private Equity Comes to Town: The Local Economic Consequences of Rising Healthcare Costs.” Private equity (“PE”) companies have become increasingly active in the healthcare sector by purchasing hospitals. Prior work has documented that PE-owned hospitals can better negotiate higher reimbursements for services with insurance companies due to their superior bargaining position. We hypothesize that this leads to insurers raising health insurance premiums (the cost of an insurance plan) for consumers. Consequently, the acquisition of hospitals by private equity can be used as a laboratory for studying the effects of increased healthcare costs within communities. 

To explore this further, we exploit the large-scale acquisition by private equity of Community Health Systems (“CHS”), a hospital system of 38 hospitals across eighteen states. The fact that the system was spread across multiple states helps to reduce concerns that private equity was targeting the hospital because of local conditions in a particular area. However, we also supplement our analysis using all acquisitions of hospitals by private equity over roughly the past three decades, culminating in 362 hospitals across the U.S. 

Several consistent facts emerge from our analysis. We first confirmed that employer-sponsored health insurance premiums rise after private equity companies acquire hospitals. Next, we find that the affected hospitals’ local economic conditions worsen across several dimensions. First, business bankruptcies increase, and businesses increase the number of loans they borrow. Second, employment and establishment growth in the areas, as well as average wages, are declining. Finally, the firm’s innovative output (patents and trademarks) also falls.  

Why do local economies suffer from this rise in costs? One possibility is that companies’ balance sheets are weakened, so if they face tougher economic conditions, like a demand reduction, they may be less able to weather the impact. To test this possibility, we exploit another setting: the PE acquisition of the HCA Healthcare hospital system in July 2006. This analysis provides us with two benefits. First, it helps to validate our previous results in another setting, and we find consistent results with those mentioned above. Second, the acquisition occurs immediately preceding the financial crisis of 2007-2009, a massive negative shock to the economy.  

This allows us to explore the channels through which the rise in healthcare costs can lead to the effects we document. Previous research has established that areas with high household debt-to-income ratios experienced a larger impact of the financial crisis emanating from the housing sector. If the effects we document are due to the weakening of businesses’ financial conditions, then we predict that the effect of the financial crisis should be further amplified in areas that experienced a rise in healthcare costs. This is precisely what we find—areas with high household debt-to-income ratios that are most impacted by the financial crisis are experiencing even larger adverse effects.  

Overall, our analysis has many implications that are directly relevant to policy. First, it sheds light on how rising healthcare costs impact the economy. Although rising healthcare costs may come with benefits due to expanded therapies, we show that they also have negative spillovers on businesses. Second, higher healthcare costs have further consequences that can weaken firms, making them less resilient to the effects of economic shocks. Finally, our study helps us understand the broader consequences of entering private equity into the healthcare system, a recent and growing concern in public policy discussions. 


Cyrus Aghamolla is an Associate Professor at the University of Minnesota Carlson School of Management.  

Jash Jain is a Ph.D. student in Finance at the University of Minnesota Carlson School of Management.  

Richard T. Thakor is an Assistant Professor at the University of Minnesota Carlson School of Management.  

This post was adapted from their paper, “When Private Equity Comes to Town: The Local Economic Consequences of Rising Healthcare Costs,” available on SSRN. 

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