Bargaining with Private Equity: Implications for Hospital Prices and Patient Welfare

Abstract

I use proprietary insurance claims data covering over 60% of individuals with private health insurance in the United States to study the impact of private equity (PE) hospital buyouts on hospital price negotiations, health spending, and patient welfare. I structurally estimate a model featuring PE buyouts, hospital–insurer bargaining, and patient choices. I find that PE buyouts lead to an 11% increase in total spending of the privately insured in affected markets, mostly driven by an increase in bargained prices at PE-backed hospitals and price spillovers to local rivals. Specifically, PE investors' superior bargaining skills account for 43% of the price and spending increases, while financial engineering and bankruptcy threats contribute 40%, changes in patient demand contribute 10%, and less focus on social objectives contributes 8%. Operational efficiency gains reduce spending, but only by 1%. A counterfactual ban on PE hospital buyouts would increase patient surplus by an amount equivalent to 10.7% of health expenses. If antitrust regulators who conduct merger review ignore PE-backed acquirers' unique features, they risk greatly underestimating the impact of hospital mergers.