Private Equity in Public-Provider Markets: Cost Efficiency vs. Cream-Skimming *

80 Pages Posted: 14 Apr 2024

See all articles by Cameron Ellis

Cameron Ellis

University of Iowa - Department of Finance

Meghan Esson

University of Iowa

Date Written: April 12, 2024

Abstract

We examine the cost-cutting strategies employed by private equity (PE) firms in markets where public and non-profit firms also provide services. We use the ambulance industry as a laboratory as price and choice regulation limits other avenues of increasing profitability. We exploit the staggered acquisition of the two largest national private ambulance companies and detailed operations and cost data from all Arizona ambulance operators in a staggered difference-indifferences design to discern whether PE firms enhance profits through operational efficiencies or by selectively serving lower-cost consumers (cream-skimming). We find a 40% increase in profit among PE firms, driven entirely by cream-skimming from fire departments and non-profits. We identify the specific mechanism of cream-skimming-firing the paramedics required to operate high-cost runs, which are then shifted to fire departments. This cream-skimming behavior leads to a 7% increase nationally in fatalities from traffic accidents in areas serviced by PE-owned ambulances. We highlight the complex implications of PE investment in public services, where cost-cutting measures to increase profitability may compromise public health outcomes and public provider balance sheets.

Keywords: G34, H51, I11, L33 Private Equity, Public Goods, Cream-Skimming, Emergency Medical Services

JEL Classification: G34, H51, I11, L33

Suggested Citation

Ellis, Cameron and Esson, Meghan, Private Equity in Public-Provider Markets: Cost Efficiency vs. Cream-Skimming * (April 12, 2024). Available at SSRN: https://ssrn.com/abstract=4792828 or http://dx.doi.org/10.2139/ssrn.4792828

Cameron Ellis (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Meghan Esson

University of Iowa ( email )

Iowa City, IA 52242-1000
United States

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