Advertisement

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

  • Sean Shenghsiu HuangEmail author
  • John R. Bowblis
Research article

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.

Keywords

Private equity Acquisition Nursing home Quality Instrumental variables Organizational structures Differential distance 

JEL Classification

G34 I11 L22 

References

  1. Abt Associates. (2004). National nursing home quality measures: User’s manual. Version 1.2. Rockville: Abt Associates.Google Scholar
  2. Acharya, V. V., Gottschalg, O. F., Hahn, M., & Kehoe, C. (2013). Corporate governance and value creation: Evidence from private equity. Review of Financial Studies, 26(2), 368–402.CrossRefGoogle Scholar
  3. Andrade, G., & Kaplan, S. (1998). How costly is financial (not economic distress)? Evidence from highly leveraged transactions that became distressed. Journal of Finance, 53(5), 1443–1494.CrossRefGoogle Scholar
  4. Basu, A., Coe, N. B., & Chapman, C. G. (2018). 2SLS versus 2SRI: Appropriate methods for rare outcomes and/or exposures. Health Economics., 27, 937–955.CrossRefGoogle Scholar
  5. Bergstrom, C., Grubb, M., & Jonsson, S. (2007). The operating impact of buyouts in Sweden: A study of value creation. Journal of Private Equity, 11(1), 22–39.CrossRefGoogle Scholar
  6. Bowblis, J. R., & Brunt, C. S. (2014). Medicare skilled nursing facility reimbursement and upcoding. Health Economics, 23(7), 821–840.CrossRefGoogle Scholar
  7. Bowblis, J. R., Brunt, C. S., & Grabowski, D. C. (2016). Competitive spillovers and regulatory exploitation by skilled nursing facilities. Forum for Health Economics and Policy, 19(1), 45–70.CrossRefGoogle Scholar
  8. Bowblis, J. R., & McHone, H. (2013). An instrumental variables approach to post-acute care nursing home quality: Is there a dime’s worth of evidence that continuing care retirement communities provide higher quality. Journal of Health Economics, 32(5), 980–996.CrossRefGoogle Scholar
  9. Cadign, R. O., Stevenson, D. G., Caudry, D. J., & Grabowski, D. C. (2015). Private investment purchase and nursing home financial health. Health Services Research, 50(1), 180–196.CrossRefGoogle Scholar
  10. Centers for Disease Control and Prevention. (2016). Long-term care providers and services users in the United States: Data from the national study of long-term care providers, 2013–2014. Vital and Health Studies, 3, 38.Google Scholar
  11. Centers for Medicare and Medicaid Services. (2015). Nursing home data compendium. Washington, DC: Centers for Medicare and Medicaid Services.Google Scholar
  12. Chapman, C. G., & Brooks, J. M. (2016). Treatment effect estimation using nonlinear two-stage instrumental variable estimators: Another cautionary note. Health Services Research, 51(6), 2375–2394.CrossRefGoogle Scholar
  13. Chou, S. Y. (2002). Asymmetric information, ownership and quality of care: An empirical analysis of nursing homes. Journal of Health Economics, 21(2), 293–311.CrossRefGoogle Scholar
  14. Cornelli, F., & Karakas, O. (2008). Private equity and corporate governance: Do LBOs have more effective boards? AFA 2009 San Francisco Meetings Paper. Google Scholar
  15. Cumming, D., Siegel, D., & Wright, M. (2007). Private equity, leveraged buyouts and governance. Journal of Corporate Finance, 13(4), 439–460.CrossRefGoogle Scholar
  16. Dafny, L., Duggan, M., & Ramanarayanan, S. (2012). Paying a premium on your premium? Consolidation in the US health insurance industry. American Economic Review, 102(2), 1161–1185.CrossRefGoogle Scholar
  17. Davis, S. J., Haltiwanger, J., Handley, K., Jarmin, R., Lerner, J., & Miranda, J. (2014). Private equity, jobs, and productivity. American Economic Review, 104(12), 3956–3990.CrossRefGoogle Scholar
  18. Demiroglu, C., & James, C. (2008). Lender control and the role of private equity group reputation in buyout financing. Federal Reserve Bank of Chicago Proceedings # 1081.Google Scholar
  19. Duhigg, C. (2007). At many homes, more profit and less nursing. The New York Times. Retrieved October 17, 2018 from http://www.nytimes.com/2007/09/23/business/23nursing.html.
  20. Gadbois, A. E., Tyler, D. A., & Mor, V. (2017). Selecting a skilled nursing facility for postacute care: Individual and family perspective. Journal of the American Geriatrics Society, 65, 2459–2465.CrossRefGoogle Scholar
  21. GAO. (2010). Nursing homes: Complexity of private investment purchases demonstrates need for CMS to improve the usability and completeness of ownership data. Washington, DC: GAO.Google Scholar
  22. GAO. (2011). Nursing homes: Private investment homes sometimes differed from others in deficiencies, staffing, and financial performance. Washington, DC: GAO.Google Scholar
  23. Gompers, P., Kaplan, S. N., & Mukharlyamov, V. (2016). What do private equity firms say they do? Journal of Financial Economics, 121(3), 449–476.CrossRefGoogle Scholar
  24. Grabowski, D. C., Banaszak-Holl, J., Stephenson, D., Intrator, O., Zheng, Q., & Hirth, R. A. (2016). Corporate churning in the nursing home sector over the past two decades is related to increased deficiency citations. Health Affairs, 35(5), 907–914.CrossRefGoogle Scholar
  25. Grabowski, D., Fend, Z., Hirth, R. A., Rahman, M., & Mor, V. (2013). Effect of nursing home ownership on quality of post-acute care: An instrumental variables approach. Journal of Health Economics, 32(1), 12–21.CrossRefGoogle Scholar
  26. Grabowski, D. C., & Hirth, R. A. (2003). Competitive spillovers across nonprofit and for-profit nursing homes. Journal of Health Economics, 22, 1–22.CrossRefGoogle Scholar
  27. GRBJ (Slowik, E.). (2007). Investors seeking profits in area nursing facilities. Retrieved October 17, 2018 from http://www.grbj.com/articles/print/68191.
  28. Harrington, C., Olney, B., Carrillo, H., & Kang, T. (2012). Nurse staffing and deficiencies in the largest for-profit nursing home chains and chains owned by private-equity companies. Health Services Research, 47(1), 106–128.CrossRefGoogle Scholar
  29. Harris, R., Siegel, D., & Wright, M. (2005). Assessing the impact of management buyouts on economic efficiency: Plant-level evidence from the United Kingdom. The Review of Economics and Statistics, 87(1), 148–153.CrossRefGoogle Scholar
  30. Hastings, J. S., & Gilbert, R. J. (2005). Market power, vertical integration and the whole-sale price of gasoline. Journal of Industrial Economics, 53(4), 469–492.CrossRefGoogle Scholar
  31. Hirth, R. A. (1999). Consumer information and competition between nonprofit and for-profit nursing homes. Journal of Health Economics, 18, 219–240.CrossRefGoogle Scholar
  32. Houser, A. (2007). Nursing homes fact sheet. Washington, DC: AARP.Google Scholar
  33. Huang, S. S., & Bowblis, J. R. (2018). The principal-agent problem and owner-managers: An instrumental variables application to nursing home quality. Health Economics, 27(11), 1653–1669.  https://doi.org/10.1002/hec.3792.CrossRefPubMedGoogle Scholar
  34. Irish Independent. (2007). Property sale nets e630 m for the Irish billionaire-backed Barchester Healthcare.Google Scholar
  35. Ivashina, V., & Kovner, A. (2011). The private equity advantage: Leveraged buyout firms and relationship banking. Review of Financial Studies, 24(7), 2462–2498.CrossRefGoogle Scholar
  36. Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329.Google Scholar
  37. Jensen, M. (1989). Eclipse of the public corporation. Harvard Business Review, 67(5), 61–74.Google Scholar
  38. Kaplan, S. (1989). The effects of management buyouts on operating performance and value. Journal of Financial Economics, 24(2), 217–254.CrossRefGoogle Scholar
  39. Kaplan, S., & Stromberg, P. (2009). Leveraged buyouts and private equity. Journal of Economic Perspectives, 23(1), 121–146.CrossRefGoogle Scholar
  40. Kirchgaessner, S. (2010). Private equity swoops on nursing homes. Financial Times. Retrieved June 24, 2017 from https://www.ft.com/content/ed74c384-e21e-11df-9233-00144feabdc0?mhq5j=e3.
  41. Lichtenberg, F., & Siegel, D. (1990). The effects of leveraged buyouts on productivity and related aspects of firm behavior. Journal of Financial Economics, 27(1), 165–194.CrossRefGoogle Scholar
  42. Lu, S. F. (2016). The role of donations in quality disclosure: Evidence from nonprofit nursing homes. American Journal of Health Economics, 2(4), 431–462.CrossRefGoogle Scholar
  43. MedPac. (2016). Skilled nursing facilities services: Assessing payment adequacy and updating payments. Report to the Congress: Medicare Payment Policy.Google Scholar
  44. Pradhan, R., Weech-Maldonado, R., Harman, J. S., Laberage, A., & Hyer, K. (2013). Private equity ownership and nursing home financial performance. Health Care Management Review, 38(3), 224–233.CrossRefGoogle Scholar
  45. Rahman, M., Norton, E. C., & Grabowski, D. C. (2016). Do hospital-owned skilled nursing facilities provide better post-acute care quality. Journal of Health Economics, 50, 36–46.CrossRefGoogle Scholar
  46. Rucinski, T. (2018). HCR ManorCare files for bankruptcy with $7.1 billion in debt. Reuters. Retrieved April 14, 2018 from https://www.reuters.com/article/us-hcrmanorcare-bankruptcy-quality-care/hcr-manorcare-files-for-bankruptcy-with-7-1-billion-in-debt-idUSKBN1GH2BU.
  47. Service Employees International Union. (2009). Buyout debt threatens another financial and job meltdown. Retrieved June 24, 2017 from http://old.seiu.org/2009/02/buyout-debt-threatens-another-financial-and-jobs-meltdown.php.
  48. Shugarman, L. R., & Brown, J. A. (2006). Nursing home selection: How do consumers choose? Volume I: Findings from focus group of consumers and information intermediaries. Washington, DC: U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation Office of Disability, Aging, and Long-Term Care Policy.Google Scholar
  49. Smith, A. (1990). Capital ownership structure and performance: The case of management buyouts. Journal of Financial Economics, 27(1), 143–164.CrossRefGoogle Scholar
  50. Staiger, D., & Stock, J. (1997). Instrumental variables regression with weak instruments. Econometrica, 65(3), 557–586.CrossRefGoogle Scholar
  51. Stevenson, D. G., & Grabowski, D. C. (2008). Private equity investment and nursing home care: Is it a big deal? Health Affairs, 27(5), 1399–1408.CrossRefGoogle Scholar
  52. Stock, J., & Yogo, M. (2005). Testing of weak instruments in linear IV regression. Identification and inference for econometric models: Essays in honor of Thomas Rothenberg (pp. 80–108). New York: Cambridge University Press.Google Scholar
  53. Sunday Business Post. (2015). Brosnan, Magnier and McManus Cash Out of US Firm. September 27th.Google Scholar
  54. Terza, J., Basu, A., & Rathouz, P. (2008). Two-stage residual inclusion estimation: Addressing endogeneity in health econometric modeling. Journal of Health Economics, 27(3), 531–543.CrossRefGoogle Scholar
  55. The Deal. (2006). Sun shines on harborside.Google Scholar
  56. The Deal. (2007). Senators eye PE-owned nursing homes.Google Scholar
  57. The Economist. (2010). Wall street goes long on grannies. Retrieved June 24, 2017 from http://www.economist.com/node/17581666.
  58. Wong, G. (2007). Private equity and the job cut myth. CNNMoney. Retrieved June 24, 2017 from http://money.cnn.com/2007/05/02/markets/pe_jobs/index.htm.

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Georgetown UniversityWashingtonUSA
  2. 2.Miami UniversityOxfordUSA

Personalised recommendations