By Karen Davenport and Kennah Watts
Private equity investors who purchase health care facilities, such as hospitals and health systems, frequently deploy financial and management tactics that prioritize short-term profit over long-term investments in patient care, institutional financial stability, and community needs. In a recently published issue brief, Hollowed Out: How Private Equity Destabilized Safety-Net Hospitals in Pennsylvania, Connecticut, and Rhode Island, we examine the “private equity playbook”—a set of extractive financial strategies including debt loading, sale-leasebacks, and dividend recapitalization that can hollow out a facility’s assets to the point of collapse. In particular, this case study examines how the private equity firm Leonard Green & Partners (LGP) and Prospect Medical Holdings (Prospect) hollowed out various safety-net various hospitals:
- Pennsylvania’s Crozer-Keystone Health System (Crozer);
- Connecticut’s Eastern Connecticut Hospital Network (ECHN)—which included Rockville General and Manchester Memorial—and Waterbury hospital; and
- Rhode Island’s CharterCARE System.
Here we present an excerpt of the brief that focuses on outpatient profit-maximization strategies. This section highlights how Prospect, like many other hospitals, responded to the payment incentives related to ambulatory services delivered in hospital outpatient departments (HOPDs) by maximizing outpatient facility fee revenue at several of their hospitals.
To read more about the specific playbook Prospect employed across these states and how the states responded to Prospect’s financialization tactics, see the full brief.
The Outpatient Pivot
Private-equity companies’ profit-maximization strategies often target a health care entity’s primary source of revenue. When private-equity investors own health care providers who rely on public payers’ regulated payment rates, such as nursing homes, they tend to focus on asset extraction and debt loading1. Though these strategies can theoretically be used regardless of owner, these practices have historically, if not exclusively, been deployed by private equity investors. In other parts of the health care system, private equity companies acquire provider practices that serve a higher share of privately insured patients, such as dermatology and anesthesiology practices, and employ strategies to build market power and negotiate higher rates2––strategies that are widely used in the provider market, by both nonprofit and for-profit owners.
Hospitals can exist at the intersection of these two approaches. Inpatient care revenue is closely tied to public payment rates, as nearly two-thirds of hospital discharges are covered by Medicare and Medicaid, and nearly all hospitals (94 percent) have at least half of their inpatient days covered by public payers3. Outpatient care, on the other hand, offers more opportunity to maximize profit through negotiated payment rates. The recent growth in outpatient utilization4, particularly for profitable services5, has made outpatient services a rich revenue stream for many types of hospitals. In hospitals, where provider and facility revenue depends on both inpatient and outpatient care, private equity investors may simultaneously seek to maximize revenue from outpatient rates while extracting assets from inpatient facilities.
Background on Outpatient Facility Fee Billing
When a patient receives care at a HOPD, the service can incur two separate bills: a professional fee, which seeks payment for the treating clinician’s time and labor, and a facility fee, which is ostensibly intended to cover the facility’s overhead costs. In contrast, when a patient receives care at an independent physician’s office, the physician issues a single bill that covers both their professional time and an overhead charge; this single bill is often significantly lower than the sum of the two bills for care in an HOPD6. Patients may face these costs both directly and indirectly, through higher out-of-pocket spending and/or higher premiums as insurers pass down their increased costs7.
In recent decades, facility fee payments for outpatient services at hospitals and hospital-affiliated clinics have increased in frequency and amount8. This increase is primarily attributable to vertical integration: as hospitals acquire physician practices and other provider groups, the hospital can convert these providers to HOPDs, which, for billing purposes, enables the hospital to charge facility fees for their services9. To be clear, hospitals and health systems can own physician practices without converting them to HOPDs, but under Medicare rules, these facilities should not be billing facility fees unless the system converts them to HOPDs. As hospitals and health systems expand their footprint, they also gain greater negotiating power to charge higher prices to commercial payers across services10.
Because outpatient facility fee increases have consistently outpaced professional fee increases, hospitals’ incentive to purchase physician practices has grown over time11. The potential for higher rates then creates further incentives for consolidation and integration in a self-reinforcing cycle12. Similar to other hospitals, private equity-owned hospitals act on these incentives and maximize revenue from outpatient facility fees.
The Role of Outpatient Facility Fees in the Prospect Saga
Given the potential for significant revenue from outpatient facility fees, private equity investors have a strong incentive to maximize HOPD services. So, while Prospect focused on extracting hospital assets through debt loading, sale-leasebacks, and other extractive strategies, it also advanced revenue-rich business lines related to outpatient care.
In Pennsylvania, for example, Crozer’s outpatient facilities experienced significant revenue growth even while the larger system incurred unsustainable losses. When Prospect filed for bankruptcy in January 2025, the main hospital in the Crozer system, Crozer-Chester, had five outpatient facilities in Media, Havertown, Broomall, and Glen Mills, Pennsylvania. These properties were quite profitable—with all-payer operating margins ranging from 23 percent to 57 percent in 2021—as the inpatient facilities within the Crozer system struggled financially13. Although some providers claim to need outpatient facility fees to offset the higher costs of inpatient facilities14, in the Crozer case, the inpatient hospitals shuttered despite the profits pulled from the outpatient facilities.
As Prospect moved through bankruptcy court, these outpatient facilities attracted potential buyers, including ChristianaCare, Main Line Health, and Penn Health. In 2025, ChristianaCare ultimately won a “highly competitive” bankruptcy auction for the five outpatient facilities, paying $50.3 million15. ChristianaCare has also announced plans to add additional outpatient services in Glen Mills and Havertown16.
This bid from ChristianaCare came after the organization had previously attempted to purchase the entire Crozer system––in fact, ChristianaCare had even signed a letter of intent to purchase the hospitals––but the deal dissolved because ChristianaCare claimed the “economic landscape [had] significantly changed.”17 The outlook for the outpatient facilities was clear and promising though: Prospect was able to sell these HOPDs separately from other Crozer properties based on the potential buyers’ plans to expand their service areas and because of the profitability of HOPDs’ outpatient facility fee billing. As a hospital system, ChristianaCare can integrate these facilities as HOPDs and continue to charge facility fees18.
Similarly, some of Prospect’s Connecticut hospitals generated large and rapidly growing facility fee revenue. By 2023, Connecticut’s Waterbury, Manchester Memorial, and Rockville General hospitals were experiencing significant financial distress19. However, the hospitals’ outpatient clinics provided one bright spot in their dismal bottom lines. According to facility fee revenue reports collected by the state’s Office of Health Strategy (OHS), the three hospitals reported facility fee charges of $9 million, $13.7 million, and $785,000, respectively, for on-campus outpatient care in 2022. As of 2024, Waterbury Hospital’s facility fee revenue had grown to nearly $15 million, even though the volume of visits with facility fee charges had declined by 42 percent20. During the same time period, Manchester Memorial also experienced a modest increase in facility fee revenues21. These hospitals reaped revenue from facility fees even as the state implemented a new prohibition on facility fees for evaluation and management services, as this relatively narrow ban still allowed facility fee billing for many outpatient services.
When reviewing the bankruptcy sale of Prospect’s Connecticut hospitals, Connecticut regulators sought to minimize the financial incentives related to facility fee billing and to protect rational pricing for outpatient services. When OHS approved UConn’s purchase of Waterbury Hospital, and Hartford Health System’s purchase of ECHN, the agency required the new owners to refrain from converting existing outpatient, non-hospital physician offices––or any newly-acquired offices––to HOPD status for three years. OHS noted that this condition was designed to protect patients from facility fee charges and ensure that prices were not simply increased as the result of hospital ownership, at least in the near term.
The growth in outpatient and facility fee revenue in Pennsylvania and Connecticut indicate how private equity investors adopt industry-wide revenue maximization strategies in addition to tactics more typical to private equity––asset stripping, dividend recapitalization, and other private equity-specific tactics. While Prospect utilized debt loading and sale-leasebacks to hollow out the financial core of these safety-net hospitals, they simultaneously advanced revenue-rich outpatient business lines that remained shielded from the operational decay affecting inpatient services. As seen in Pennsylvania, these profitable outpatient centers may be more attractive to prospective buyers as a stand-alone investment, rather than as part of the financially fragile hospitals or health systems that private equity investors use as sources of financial extraction. When this happens, patients can lose access to critical hospital services and face higher charges for outpatient care. State regulators must be aware of these sophisticated, multifaceted tactics––as well as private equity’s growing investment in other outpatient settings–– to protect patient care.
Read the full issue brief here.
This work was made possible with support from Arnold Ventures and West Health.
