Private Equity and Hospitals: Have They Finally Gone Too Far?

Private equity has made significant investments in for-profit hospitals over the last 15 years. Perhaps it’s time to stop them.

Emergency department employees at Carney Hospital in Dorchester, Mass., wave goodbye after their final shift on Aug. 31, 2024. The hospital closed as part of Steward Health Care bankruptcy proceedings. (Getty Images)

A long time ago when I was a kid, our local hospital was one of the rocks of our community. While it was not usually a destination of choice, you had confidence that the hospital was there solely for the purpose of taking care of you or your family when something went wrong. The hospital was a distinct entity, separate from the various businesses in town whose primary and necessary objective was to turn a profit.

I would hazard to guess that if some speculator came in who wanted to buy the hospital, leverage it up to the hilt, squeeze every last nickel out of it by skimping on supplies, cancel vital services and risk running it into the ground, well, that speculator would have been run out of town on a rail.

Those days are gone.

Private equity firms are doing just that - and their tentacles in health care are growing. Last year, they owned 460 hospitals, according to the Private Equity Stakeholder Project’s hospital tracker. Now, they own 488 hospitals. That represents:

• 8.5% of all private hospitals

• 22.6% of all for-profit hospitals

• At least 27.7% of private equity-owned hospitals serve rural populations, which generally have a higher percentage of financially vulnerable patients and fewer healthcare options

The growth in PE-owned hospitals raises a myriad of ethical questions. While the bottom line is important to all hospitals, whether non-profit or for-profit, PE-owned hospitals are on a different level in emphasizing profits, and the consequences can be devastating as we are about to find out.

Cerberus and Steward Health Care

Steward Health Care, the nation’s largest for-profit hospital group, filed for bankruptcy in May 2024. The story of Steward is a tragic tale and is seen by many as indisputable proof that when a private equity fund, such as the one managed by PE giant Cerberus Capital Management, purchases hospitals and treats them strictly as financial assets, terrible things can and do happen.

According to Cerberus, they were Mother Teresa, investing to save a struggling healthcare provider, while making a profit for their investors and leaving Steward in fine shape when they exited in 2020.

Shortly before the 2024 bankruptcy, Cerberus slobbered:

Cerberus’ initial investment in Steward in 2010 not only rescued but restored six struggling Massachusetts hospitals on the verge of closing that were critical to their communities. During our nearly 11-year ownership of Steward, we supported the revitalization of failing community hospitals into a leading healthcare system. Cerberus’ long-term investment made it possible for Steward to continue to serve its communities, employ tens of thousands of professionals, and positively impact millions of patients’ lives.

Cerberus also felt the need to mention that an investment from a Cerberus fund was essentially an investment made possible by “millions of teachers, firefighters, law enforcement personnel, and municipal workers as well as other pension funds, universities, and endowments.”

Salt of the earth helps salt of the earth.

However, Cerberus danced around the important fact that they and their investors were not charities.

The teachers and first responders (their pension funds), as well as Cerberus expected a significant return on their investment, and they expected it within five to 10 years. Therefore, it’s reasonable to ask what kind of return the Cerberus fund and its limited partners (the teachers and first responders) could expect from an investment in 37 struggling, indebted hospitals in Massachusetts, and later Arizona, Arkansas, Florida, Louisiana, Massachusetts, Ohio, Pennsylvania and Texas.

Struggling hospitals don’t jump out as a good private equity investment. They required significant time, money and a lot of risk. So, if you’re wondering why PE firms would buy so many hospitals, think of McDonald’s.

In the 2016 film “The Founder,” Ray Kroc is struggling to turn a profit on the 13 McDonald’s franchises he has granted. A young man named Harry Sonneborn immediately diagnoses Kroc’s problem and reveals the magic formula that makes him a billionaire:

“You’re not in the burger business. You’re in the real estate business.”

The same is true for Cerberus. Hospitals are an annoyance to get what they really want, which is to use the hospital’s real estate to suck out their investment and profits.

Many of the hospitals purchased by private equity have owned both the buildings and land with low levels of debt, some with none at all. Getting at that unencumbered real estate is where private equity hits pay-dirt using an age-old real estate strategy called “Sale and Leaseback.”

Working hand in hand with private equity firms are real estate investment trusts (REITs), which have $185 billion in healthcare holdings. Private equity managers like Cerberus sell a hospital group’s land and buildings to the REITs and turn a huge profit.

Meanwhile, the REIT portfolios the property, earning a steady stream of lease income from the target hospital and because they are a REIT, the income is tax free. The hospitals no longer own their real estate and are now on the hook for millions of dollars in lease payments to the REIT for years to come.

This is exactly what Cerberus did.

When Cerberus purchased Caritas Christi Health Care System (which would become Steward Health Care) in 2010 for $246 million, Massachusetts regulators imposed a five-year monitoring period for Steward. Cerberus would have to wait five years before selling Steward’s properties and leasing them back from the buyer.

In 2016, after its monitoring period was over, Steward sold the real estate of its Massachusetts hospitals to a REIT, Medical Properties Trust (MPT).

According to the Boston Globe:

Medical Properties Trust would pay Steward a staggering sum — nearly $1.3 billion — for its nine hospital campuses in Massachusetts, roughly nine times what Steward had paid less than a decade earlier. The majority of the proceeds went to dividends and to return Cerberus’s original investment, not patient care or physical improvements. Cerberus took $719 million.

Evil.

Cerberus exited their investment in Steward in 2020, selling to a physicians group. The REIT MPT provided a $335 million loan financing to the buying group along with a $400 million cash infusion. Steward death spiraled under the weight of debt service and lease payments until the 2024 bankruptcy. Interestingly, another major private equity firm Apollo now owns the eight Massachusetts hospitals once owned by Steward Health Care.

Some of the horrific low-lights on the way to financial ruin were documented by the Private Equity Stakeholder Project’s special report, “The Pillaging of Steward Health Care”:

In the months leading up to the bankruptcy, multiple stories appeared in media outlets highlighting Steward’s many issues, including unpaid vendors, supply shortages and stockouts, understaffing, repossessed medical equipment, service cuts, and hospital closures.

Some examples:

• A hospital in Florida was infested with thousands of bats and their accompanying bat guano, including on the floor that housed the intensive care unit.

• In Massachusetts, a woman who gave birth died after the embolization coil needed to stop a bleed following childbirth was unavailable. The hospital’s supply of embolization coils had been repossessed by the company that owned them because Steward had not paid its bill.

• In West Monroe, LA, health inspectors cited Steward’s Glenwood Regional Medical Center for putting patients in immediate jeopardy three times since December 2023. In March 2024, the hospital closed its inpatient rehabilitation unit. Federal inspectors found that the hospital ran out of multiple supplies including biopsy needles, catheters, and central lines. Various radiology and imaging equipment were in need of repair, and special beds that help prevent bedsores were repossessed. One doctor quoted in the federal inspection report described the conditions at Glenwood Regional in December 2023 as “third-world medicine.”

Steward Health Care is a horrifying and probably worst-case scenario, but it can happen again. As noted above, many private equity-owned hospitals are located in rural areas and the only game in town. Hospitals don’t make widgets; they provide life-saving health care and should not be treated as just another financial asset to be bought and sold.

In May of last year, Senator Elizabeth Warren issued a furious statement:

Steward Health Care’s bankruptcy is a direct consequence of Wall Street private equity vultures looting our health care system. …The next step should be a serious reexamination of whether we should allow private equity in health care. Steward is just the latest example of private equity endangering communities, and I will be introducing new legislation in the Senate to hold corporate actors accountable when they loot our hospitals to boost their profits.

U.S. Sen. Ed Markey introduced the Health Over Wealth Act last summer that would, among other things, close tax loopholes for REITs.

It’s made no movement. Don’t expect that to change anytime soon.