Steward's hospital solutions spark new concerns
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Illustration: Megan Robinson/Axios
The Steward Health debacle may be nearing an end, but critics worry some of the arrangements in place to keep the chain's hospitals and 5,000-person doctors group up and running could trigger another fiasco.
Why it matters: Almost everyone agrees that Steward's management had a big hand driving the system into bankruptcy. But some argue there were also systemic problems related to private equity ownership and risky sale-leasebacks of properties that still loom over the surviving entities.
Where it stands: Most of Steward's hospitals, plus its physician group, have been sold or found new operators.
- But the ownership structure created under Steward's former private equity owner Cerberus has left some hospital operators continuing to pay rent to the real estate investment trust that still owns the land on which the buildings sit.
- Critics describe the rents to Medical Properties Trust as well above market value — a characterization Steward agreed with in bankruptcy court filings.
- The settlement agreement retains a lease structure the trust says will eventually yield 95% of the cash rent Steward would have owed.
- MPT said in a filing that the new operators will be responsible for operating costs, like payroll and benefits, and that the trust will provide them loans of up to $80 million.
The lease arrangement doesn't apply to six of Steward's Massachusetts properties that have been sold.
Yes, but: Critics say the upshot is that 15 hospitals — located in Arizona, Florida, Louisiana, Ohio and Texas — are once again set up to face inflated rent charges and could ultimately fail.
- "This deal is eerily similar to the trap that MPT initially set with Steward," Sen. Elizabeth Warren (D-Mass.) said in a statement to Axios.
- "This is a disastrous deal for [MPT] stakeholders, designed for the purpose of falsely preserving inflated real estate values as [MPT] faces a liquidity crunch," the short-selling firm Viceroy Research wrote in a note on the deal. Viceroy is being sued for defamation by MPT, but recently wrote in a court filing that the Steward saga showed its past assessments were "prescient."
- The bankruptcy court's approval of the deal "has set the stage for another round of [MPT] tenant bankruptcies and the healthcare fallout that entails," the Viceroy note added.
- MPT did not respond to a request for comment about general criticisms of the deal.
Between the lines: Concerns also extend to the new ownership of Steward's physician group, which was acquired by a unit of the private equity firm Kinderhook.
- "We remain deeply concerned that this proposed transaction, if allowed to proceed, would empower yet another private equity firm to prey on Massachusetts patients and providers, sucking taxpayer dollars out of the system for the profit of a few corporate executives and shareholders," members of Massachusetts' congressional delegation wrote to the new owner this week.
- The Kinderhook unit, Rural Healthcare Group, didn't respond to a request for comment.
The intrigue: Steward itself eventually complained about the leases it had signed onto.
- It wrote in a court document that the terms of the lease that included the 15 hospitals "are expensive and burdensome, with significantly above-market rental obligations. The rent and other payment obligations ... are substantial and have crippled the Debtors' operations for years."
- MPT has argued that rent wasn't a major factor in Steward's financial problems, and its ability to find new operators to accept nearly the same lease structure may mean that MPT was charging fair rates all along.
The big picture: "There seems to me to be a larger challenge here. If you look at these assets and how they are being acquired, overvalued in my opinion ... these operators are coming in and they're actually being set up to fail," said Louisiana state Rep. Michael Echols, who's raised concerns about one of the 15 hospitals, located in Louisiana.
- "I do a lot of real estate deals, and none of their valuation margins make sense. I get that you can get some sucker operators in there," he added. "But long term, there's no sustainability."
What we're watching: MPT has deferred rent payments on the 15 hospitals for the rest of 2024, and payments will gradually ramp up to their full amount through the end of 2026.
- "That's kicking the can down the road. Eventually reality has to turn back on again," Echols said. "Eventually you have to solve the underlying problem, which is eventually somebody has to make enough money to pay rent."
