Private Inequity: Better Healthcare Through Business Law

Private equity (PE) and its signature strategy, the leveraged buyout (LBO), have grown to reach nearly all corners of the economy. Under conventional corporate law theory, this expansion should be welcome. Shareholder primacy—the field’s cornerstone—claims shareholders will steer firms toward socially beneficial projects because they are the first to capture gains or absorb losses. Profits should therefore signal that firms are improving social welfare—and in many sectors, that promise may be true. But healthcare tells a different story.

PE has been the single-largest source of healthcare acquisitions for over a decade and is particularly invested in hospitals. Yet, its profits have brought not a welfare gain but a measurable decline in the quality of care. Among other findings, a growing body of medical research reports that PE-backed hospitals exceed the mortality rate of non-PE hospitals by as much as 15%. Things are no better for the hospitals themselves. Despite representing only around 10% of hospitals, those owned by PE account for almost a quarter of hospital bankruptcies.

This disconnect between financial success and social harm raises a deeper question than whether PE sometimes ‘gets it wrong’. Rather, it invites corporate law to consider whether, in certain contexts, the very mechanisms that generate shareholder value may systematically erode social value. I argue that the hospital market—particularly in rural and low-income communities—is one such context. 

My article’s first insight is that underserved hospital markets combine two features that warp the incentives of for-profit firms: market power and fixed, low reimbursement rates. Hospitals in these areas face limited competition for patients, and demand for care is highly inelastic. At the same time, most patients in these communities are insured by Medicare and Medicaid, which pay hospitals the same low rate, almost irrespective of the quality of care provided. Unable to upcharge patients, but undaunted by the threat of losing them if quality declines, for-profit hospitals theoretically maximize profits by spending just what is necessary to keep the proverbial lights on and extracting the rest.

PE firms are uniquely well positioned to exploit this dynamic through a financial strategy known as the ‘leveraged payout’. Beyond simply cutting overhead, PE owners can reap greater profits by using operational savings to service debt on their subsidiary hospitals—and paying themselves the proceeds of these loans. Naturally, the costs of funding debt rather than care are a decline in medical quality and an increased risk of distress, which helps explain the medical and financial findings of existing authors.

This account leads to the article’s second contribution: explaining why other actors that might constrain these strategies—namely, lenders, patients, and the state—apparently fail to do so. Here, the answer again lies in incentives and market constraints. Lenders anticipate earning a risk-adjusted return from financing leveraged payouts through higher interest rates and security in borrower collateral. Patients in underserved markets seldom have realistic alternative providers. And the state confronts the reality that meaningful enforcement may shutter a community’s only hospital, such that doing nothing is often the utilitarian choice.

These dynamics suggest the problem is not merely one of ‘bad actors’,” but of structural incentives. This conclusion is reinforced by the article’s third inquiry: why incumbent for-profit hospitals, despite sharing PE’s profit motive, appear not to engage in similar extractive strategies. The answer, it argues, lies in PE’s superior access to credit and shorter investment horizon. Small, independent hospitals (and even larger publicly traded providers) generally lack either the means or the motive to pursue leveraged payouts at the cost of jeopardizing core medical operations. PE, with lender relationships honed over dozens or hundreds of deals and no intention of running its hospitals indefinitely, does. Hence, while non-PE for-profits may engage in other pernicious tactics, they have less reason to incur the leveraged payouts that predictably harm hospitals and patients.

This article’s theoretical contribution is to reframe debates over financialization in healthcare. Prior work has tended to analyze this problem at the macro level, overlooking how specific market structures generate distinct incentives. By disaggregating underserved communities, the article shows that PE’s most troubling outcomes are neither anomalies nor products of a unique moral failing on PE’s part, but predictable externalities of firms operating without effective public or private monitoring in concentrated, fixed-rate settings.

The practical implications follow directly. If the problem lies in incentives, rather than ownership alone, then blunt solutions—such as banning PE from healthcare—risk funneling extractive strategies into new entity types. And given the paucity of providers in underserved areas, restricting PE investment could exacerbate the crisis of care.

Instead, this article proposes targeted interventions designed to curb the most harmful financial practices—particularly leveraged payouts—while leaving PE free to pursue an operational profit. Drawing on tax, finance, and bankruptcy law, its proposals aim to realign investor incentives with social welfare, without drying up capital or overburdening public resources. Moreover, because the perverse incentives of underserved care are not unique to PE, these reforms would apply across ownership structures, limiting opportunities for regulatory arbitrage.

The failure of PE-backed hospitals has captured national attention. The challenge now is not simply to identify investor misconduct, but to understand what motivates it—and to craft policies that address root causes rather than symptoms.

The author’s paper, forthcoming in the Iowa Law Review, is available here.

Dolan Bortner is a Teaching Fellow and Lecturer in Law in the Corporate Governance & Practice LLM Program at Stanford Law School.