The Steward Health Care saga plays into much broader conversations about hospital business models, the appropriateness of profit-seeking in medical care and the methods by which hospitals ultimately try to make money.

Why it matters: The specific outcome that everyone is trying to avoid is the closure of eight Massachusetts hospitals, and potentially more around the country, which would curtail access to care for thousands, if not millions, of patients.

• That's the same outcome that communities around the country are trying to avoid as hospitals' business model becomes less sustainable.
• But some experts argue that private equity is making the problem worse, not better.

Catch up quick: Steward, a for-profit hospital chain that now operates more than 30 facilities across eight states, filed for bankruptcy in May and is attempting to sell off its assets.

• The system was formerly owned by Cerberus Capital Management, a private equity firm, from 2010 to 2020. During this time, Steward sold the real estate of its Massachusetts hospitals to Medical Properties Trust in a $1.2 billion sale-leaseback agreement, setting up long-term rent payments back to MPT in exchange for cash.
• Cerberus used some of that cash for a "significant" dividend and began to exit in 2020, ultimately generating around $800 million in profit from the deal, according to Bloomberg.

Experts argue these decisions made under Cerberus' ownership directly trace to its recent financial problems, especially its rent and debt obligations.

• But private equity firms own hundreds of hospitals around the country — that's only current ownership, not former — and sale-leasebacks are a common way of quickly generating cash.
• At the same time, plenty of hospitals that aren't owned by private equity are struggling financially, cutting service lines or closing altogether. Others do business in ways that a lot of people don't like, such as suing their patients or charging prices several times the Medicare rate.
• What's clear is that Cerberus' business tactics were legal. What's up for debate is how much of an outlier they are, how inherently bad those practices are or whether policymakers should step in to prevent this from happening again.

The big picture: There are a lot of complaints about private equity's cost-cutting practices within hospitals that overlap with general complaints about hospital staffing levels, pricing practices or investment in quality care.

• "I do see it as a special case, but I also see it as part of a broader trend toward corporatization and financialization in the United States," said Suhas Gondi, a resident physician at Brigham and Women's Hospital.
• "People get really mad at private equity. Private equity is a great villain," he added. "A lot of the regulations I see people propose in response to the growing influence of private equity in the health care system I often think should just be applied to all hospitals."

A good place to start this very complicated discussion is with whether private equity ownership comes with a different set of incentives than other types of hospital ownership, including other forms of for-profits.

• Experts generally say it does, particularly because of private equity's short-term timeline.
• "Once you are owned by PE firms, your objective is purely to make money," said Ge Bai, a professor at Johns Hopkins Bloomberg School of Public Health. "It's all about maximizing profits."
• "There's a lot of ways to make money fast that are at odds with the long-term interests of the organization fiscally," Brigham and Women's Gondi said.

One very common way is to do exactly what Steward did: Sell off the hospitals' real estate, specifically to a real estate investment trust like Medical Properties Trust.

• This sets up a situation in which "hospitals are paying inflated rent on properties they used to own," said Rosemary Batt, a professor at Cornell University's School of Industrial and Labor Relations.
• "The sale-leasebacks in private equity are entirely focused on extracting wealth in the five-year mark when they're trying to give money back to investors," she added.

Yes, but: Sale-leasebacks aren't inherently bad, some experts argue, especially if hospitals need an infusion of cash to turn things around.

• "You can imagine a deal in which you buy the real estate and then the rent is actually a reasonable price," Gondi said. "But a lot of what happens in these acquisitions, the strategies are fundamentally extractive."

The other side: "Many people believe that [Cerberus] bought Steward Health in order to squeeze the last breath out of it," Bai said. "I do not believe that's true."

• Market forces — if working as they should — prevent PE owners from raising prices too high or cutting costs too much, and it's in the firms' interest to create successful businesses they can sell at high prices, she said.
• "Sometimes things go well, sometimes things go badly. In this case, it's a failure," she added.
• Cerberus said in a statement earlier this year that during its ownership, "we supported the revitalization of failing community hospitals into a leading healthcare system."
• Specifically regarding the sale-leaseback, "it is incorrect and unfair to suggest that this transaction was a 'looting' of the company," it added.

The big picture: "Private equity investments help facilitate quality care access for patients across the country — especially in rural communities — and blaming private equity is an ineffective, misguided policymaking strategy," the American Investment Council recently wrote in response to lawmakers' criticism of private equity in health care.

• "Instead of scapegoating private equity firms for trends outside of their control, policymakers should focus on uplifting the industry's strategic investments that are supporting expanded access to innovative, patient-centered care — not over-regulating it."

What we're watching: Steward's lease agreements with MPT may be a key obstacle to finding anyone to buy its properties.

• "There's definitely a constellation of factors, but the real estate play with Steward is, I think, the central component of what went wrong here. It was asset stripped," said Mary Bugbee, health care director at the Private Equity Stakeholder Project.
• "And it's one of the main reasons that these hospitals are not attractive to potential bidders, because they all have to renegotiate these burdensome lease arrangements with Medical Properties Trust."

Between the lines: What's impossible to know, of course, is what would have happened if Cerberus — or any other hospital-owning private equity firm, for that matter — didn't buy up hospitals in the first place.

• "Very rarely are well-run hospitals willing to be sold. They're not interested in the offer to begin with," Bai said. "The seller wants to be sold for a reason; they are vulnerable and they want the cash."
• "It's a misconception to think that Steward Health would have been a well-run hospital without the PE transaction," she added.

Between the lines: Some deals may be inherently riskier than others based on the demographics of a hospital's patients, and hospitals with lower revenue-generating capacity may struggle the most to pay back large debts or rent.

• "I think these arrangements are especially risky for safety net hospitals because they don't have great profit margins, and sometimes they're not profitable at all," Bugbee said.

There's a lot of chatter at both the state and the federal level about how to stop this from happening again.

The intrigue: That chatter itself will likely have a dampening effect on private equity's interest in hospitals, which was already waning.

• "What is not clear, but I suspect, is that Steward has created such an inflammatory environment that the states are going to be very vigilant of any private equity deals in the future," Cornell's Batt said.

Driving the news: There are a lot of ideas for reforming the system being floated right now.

• Massachusetts Sens. Elizabeth Warren and Ed Markey recently introduced legislation titled the "Corporate Crimes Against Health Care Act of 2024," which isn't going anywhere any time soon but would create a new criminal penalty for executives "who loot health care entities" if a patient dies as a result.
• It would also ban payments from federal health programs to entities that sell assets to a REIT. Markey also introduced a separate bill in April.
• The Private Equity Stakeholder Project has recommended that states pass new change-of-ownership regulations for health care facilities, require more financial transparency from hospitals, ban or limit sale-leasebacks for hospital real estate and prevent hospital investors from paying themselves debt-funded dividends from health systems.

The other side: New regulations could backfire in unintended ways.

• An outright ban on PE in health care could "be counterproductive, because that means a lot of struggling hospitals will have no buyers, no chance to reorganize, and that might mean more need from taxpayers to put in money" at potentially higher rates and worse outcomes, Johns Hopkins' Bai said.
• "More restrictions will mean fewer deals," she added. "It might be that fewer deals will mean more hospital failures or more need from local taxpayers or federal taxpayer funding to prop up struggling hospitals."

The bottom line: "As it stands right now, any hospital system in most states could just do this all over again," PESP's Bugbee said.