Richard T. Thakor – Carlson School of Management (Minnesota)

When Private Equity Comes to Town: The Local Economic Consequences of Rising Healthcare Costs

Abstract

We examine the effect of increased healthcare costs on local economic conditions. We use private equity (PE) buyouts of U.S. hospital systems as a shock to the healthcare costs faced by firms in affected areas. Our primary identification strategy consists of the PE acquisition of a large-scale hospital chain, with hospitals dispersed across various communities in the U.S. We supplement this strategy with broader evidence including all PE buyouts of hospitals over a longer sample period. We provide evidence that PE buyouts of hospital systems result in higher healthcare insurance premiums paid by firms, and such rises in premiums lead to higher business bankruptcies, an increase in business loan volume, slower employment and establishment growth, and reduced innovative output. The results are stronger for areas with firms that are plausibly more exposed to the effects of PE hospital buyouts, such as areas where the PE-acquired hospitals have a greater market share and areas with a greater degree of labor intensity. We additionally provide evidence that increases in healthcare costs result in firms being more vulnerable to the financial crisis, suggesting that the negative economic consequences of rising healthcare costs are due to weakened firm balance sheets which cause firms to be more susceptible to negative economic shocks.