REPORT Health and Social ProgramsPrivate EquityUSWall Street

Financialization in Health Care: The Transformation of US Hospital Systems

CEPR Working Paper 2022-1


This paper examines the process of financialization as it has emerged in the healthcare sector, with particular attention to hospital systems. The concept captures two types of changes in capitalist activity that have occurred in recent decades. First, financial strategies and tactics, as opposed to healthcare operations, now play an increasingly important role in generating revenue for nonprofit hospitals. Second, the financial sector has come to play a much larger role in healthcare. Financial intermediaries and investors view healthcare organizations as vehicles for extracting wealth. This research calls into question common assumptions that healthcare systems are immune from financialization, based on the idea that the overwhelming majority are tax-exempt, highly regulated, nonprofit institutions that provide charity care. In this paper, we show how and why this assumption no longer holds.

We argue in Part I that financialization in healthcare emerged in response to changes in financial, healthcare, and anti-trust regulation. The seeds of change took root in the 1960s and ‘70s, developed in the 1980s and ‘90s, and accelerated in the 2000s. All three intersected to deregulate and reregulate healthcare and financial markets in ways that favor financial strategies and speculation in healthcare.

On the one hand, nonprofit hospital systems faced uncertainty in government reimbursement rules as well as rates that did not keep up with cost inflation and sought non-operating income, as detailed in Part II. The government facilitated financial strategies by allowing nonprofits to establish for-profit tax- exempt subsidiaries. They also pursued merger and acquisition (M&A) activities, sometimes designed to create anti-competitive conditions. In some cases, for-profit goals appear to dominate healthcare decision-making – calling into question the distinction between nonprofit and for-profit entities.

On the other hand, financial actors began to create investor-owned hospitals in the 1960s, when Medicare and Medicaid began reimbursing for-profit entities for the first time – and at higher rates than nonprofit systems. Three phases of the financial sector’s penetration into healthcare are examined in Part III. First, from the 1960s-mid-1990s, investor owned chains grew rapidly through M&A activity by targeting community hospitals in small towns and rural areas, particularly in the south and west, where there was little or no competition. Second, from the mid-1990s on, largely unregulated private equity firms took over many for-profit chains, building on their strategies but using additional financial engineering tactics that often left hospital systems in financial distress. Third, from 2010 on, investors and private equity firms have been instrumental in dismantling local healthcare systems by acquiring the most lucrative or high ‘value-added’ services, such as radiology, anesthesiology, and other specialties. At a time when healthcare providers argue that local coordination and integration are more important than ever, financial actors are cherry-picking pieces of local systems and rolling them up into national corporations with little local accountability.

In sum, healthcare financialization has occurred along two parallel tracks: from ‘the inside out’ – as nonprofit hospitals increasingly adopt non-healthcare-related financial strategies to survive; and from ‘the outside in’ – as financial actors have moved into healthcare because they view it as a lucrative investment. Nonprofit, for-profit, and private equity owned hospitals have contributed in different ways to the process of financialization in healthcare – in which the logic of financial calculations often overshadows the logic of human care giving.

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