Mar 6, 2024 - Business

Hospital debacle puts focus on private equity

Illustration of a hospital bed rolling down a downward pointing arrow.

Illustration: Gabriella Turrisi/Axios

When Cerberus Capital Management bought an unprofitable Massachusetts hospital chain in 2010, many viewed the deal as a financial lifeline. Now some believe it was actually a noose.

Why it matters: The company, which Cerberus sold four years ago, is in severe distress and may close facilities, threatening care for thousands of patients, most of whom live in lower-income areas.

  • It also comes as the Biden administration launched an investigation into private equity acquisitions of health care providers.
  • Just yesterday, the Federal Trade Commission held a virtual workshop during which such deals were heavily criticized.

Backstory: Cerberus rebranded the hospitals as Steward Health, and went on an acquisition spree that eventually made Steward the country's largest private for-profit hospital chain.

  • In 2014, it closed one of the Mass. hospitals it had acquired, despite having pledged not to do so for at least 10 years after the acquisition, as part of the state regulatory approval process.
  • In 2016 it signed a $1.25 billion sale-leaseback agreement for its Mass. properties with a publicly traded firm called Medical Properties Trust. As part of that deal, Cerberus took out a big dividend and MPT got a small equity stake in Steward.
  • Cerberus began to exit in 2020, agreeing to sell control in Steward to the hospitals' physicians in exchange for an interest-paying note. The physicians soon borrowed $335 million from MPT to buy back the note.
  • According to Bloomberg, Cerberus generated around $800 million in profit via its Steward investment.

Fast forward: Steward is in deep trouble, arguably in part due to liabilities assumed while Cerberus was still in charge. For example, it's stopped paying vendors and owes at least $50 million in back-rent to MPT.

  • State officials are livid, particularly after Steward refused to provide financial information as required by law. They now want Steward to leave the state and find other operators for the hospitals, for fear that the alternative is shutdowns (it's already slated one Mass. rehab hospital for closure, although claims no more Mass. shutdowns are anticipated).
  • The state's congressional delegation demanded answers from Cerberus in a letter sent last month.
  • Cerberus, which threatened to shut a small Pennsylvania hospital early in the pandemic, submitted a multi-page response that hasn't yet been made public. When asked about the dire Mass. situation, it said via email: "Cerberus has had no involvement with Steward in more than four years and has no comment on that."

Zoom out: There is no allegation that Cerberus broke any laws while in control of Steward. Instead, it's being accused of acting naively at best, unethically at worst. And certainly of hand-waving in its replies.

Look ahead: Sen. Ed Markey (D-Mass.) has scheduled a federal hearing in Boston for April 3.

The bottom line: There are a lot of politicians concerned about private equity's role in health care. Expect them to use Steward as their poster company.

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