Hospitals Should Be Allowed to Fail

Why Healthcare Needs Real Market Discipline

There’s significant alarm among healthcare policy wonks, both amateur and professional, regarding the role of private equity (PE) in dismantling failing hospitals. Yet, being the contrarian I am, I argue that this is necessary and beneficial. Hospitals, like any other business, must face consequences for inefficiency and poor management.

Economist Joseph Schumpeter famously described the “perennial gale of creative destruction,” a healthy market process that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Markets don’t just reward successful firms; they also prune inefficient ones. For every Apple, there’s a Kodak; for every Netflix, a Blockbuster. Hospitals, however, have largely avoided market pressures, becoming inefficient, costly, and unresponsive to patient needs.

We have all either worked at or heard of these “zombie hospitals.” Bloated with administrators who contribute little to patient care, they feature slow and inefficient operating rooms, inadequate imaging and therapy capabilities, and pervasive attitudes of “that’s not my job.” Patient care quality suffers, patient experience deteriorates, and financial losses mount. Yet these institutions repeatedly turn to policymakers, hat in hand, seeking bailouts rather than improving operations.

Consider a large inner-city hospital receiving Disproportionate Share Hospital (DSH) payments, 340B drug program revenues, site-specific Medicare and Medicaid payments, state-directed Medicaid funds, and still requiring direct taxpayer support from county general funds. Independent physicians receive none of these subsidies and must instead tighten operations to stay afloat. In contrast, hospitals insulated by taxpayer support face minimal accountability, perpetuating inefficiency.

Certainly, legitimate concerns exist regarding isolated rural safety-net hospitals. In remote areas, essential services like trauma or obstetric care may rely on a single facility. This situation fundamentally differs from urban hospitals merely labeled “safety-net.” Policy mechanisms already address isolated rural facilities effectively through state-directed payments and critical access hospital (CAH) designations. Funding these isolated hospitals could be viewed similarly to maintaining fire stations: a public necessity in genuinely underserved areas. However, hospitals dismantled by PE typically don't fit this rural isolation scenario.

Consider the 2019 closure of Hahnemann Hospital in Philadelphia. Hahnemann was financially unsustainable, operationally inefficient, and organizationally ossified. In any other industry, it would have closed long before it did. Upon closure, patients experienced minimal disruption. Nearby hospitals effectively absorbed the patient load, and broader national data confirms similar patterns: hospital closures don’t have negative impact on patient outcomes due to effective absorption by neighboring institutions. This ultimately rewards efficient hospitals and reinforces accountability.

Private equity is a symptom rather than the disease itself. Government subsidies to large hospital corporations have created incentives prioritizing revenue extraction over efficiency and patient care. When hospitals fail due to ossification and poor management, PE often steps in to sell assets, a rational response to inevitable long-term unsustainability. Hospital sellers fully understand these implications and have no one to blame but themselves.

Government intervention banning PE acquisitions would be misguided and harmful, akin to the failed ban on physician hospital ownership. The government has no legitimate role dictating who may buy or sell hospitals. Instead, policymakers should reduce revenue streams fueling hospital consolidation, and removing accountability from hospital leadership, such as site-specific payments and the 340B program. Allowing hospitals to fail encourages competition, innovation, and efficiency. New, leaner hospitals, ideally led by physicians, will emerge, delivering better care at lower costs to communities.

Both profit and loss are fundamental in a functioning market. Profits reward quality and efficiency, while losses and eventual failure discipline those unable to deliver. Embracing market discipline is essential for lasting improvements in healthcare. Despite discomfort around private equity involvement, its role in hospital failures may be exactly the catalyst needed to revitalize American healthcare.