As hospitals across the country face the massive demands of the new coronavirus, some are already depleted because of the shenanigans of Wall Street firms — such as private equity firms — that have bought up hospitals in order to make a profit from them and have undermined their financial stability. This could happen to any hospital in the country — and a recent example is Easton Hospital in rural Pennsylvania. It could be yours.
Easton is a small hospital that has met the needs of its community for over a century. It is now financially frail because it was bought in 2017 by private equity firm Cerberus under the umbrella of its national for-profit chain, Steward Health Care. To finance some of the cost of buying Easton, Cerberus sold Easton’s real estate — which it had owned since 1890 — and pocketed the money. Easton, meanwhile, was saddled with paying inflated rent on property it had owned for more than 127 years.
By early 2020, the hospital was in danger of failing when the coronavirus pandemic hit. Did the private equity firm provide an infusion of cash to the hospital from its massive reserves? No, instead it threatened to close Easton Hospital at midnight on Friday, March 27 — in the midst of the pandemic — if it did not get government subsidies. That was the same day that President Trump signed the CARES Act into law, which provides a government fund to help struggling hospitals deal with the pandemic. Its goal is not to bail out hospitals that have been run into the ground by Wall Street firms who are making a profit on the backs of sick people. But for Cerberus-owned Steward, it was an opportunity to cash in on taxpayer subsidies.
Cerberus threatened Pennsylvania Gov. Tom Wolf into seeking a federal bailout — taxpayer funds — for the hospital. In a letter to the governor, Steward wrote: “If the Commonwealth has no interest in assuming all operating expenses and liabilities of Easton Hospital, Steward Health Care will proceed immediately on planning to close the facility.” The threat paid off. Before the ink had dried on the CARES Act, Wolf got a commitment of federal funds that enabled the state to guarantee $8 million to Steward for April and a likely $24 million through the month of June.
Easton is struggling by design. A large number of hospitals owned by private equity-sponsored companies are in financial straits like those facing Easton. Their owners may also be poised to line up for taxpayer bailouts designed more to subsidize its private equity business model than anything coronavirus-related. Easton Hospital is the first but likely not the last hospital that private-equity owners will use to profit from pandemic relief funds.
Let’s step back a bit to see how private equity’s business model financially weakened Easton Hospital, and how this could happen to a hospital in your community.
As we detail in our recent study of private equity in health care, hospitals were an early target for private equity’s entry into health care. Private equity firm Forstmann Little & Co. was an early player. In 1996 Forstmann acquired a small hospital chain, Community Health Systems (CHS), and used it as a “platform” to buy other hospitals and expand. Forstmann and its investors put up very little money as CHS gobbled up other hospitals, loading CHS with debt to acquire them. Forstmann cashed out in the mid-2000s, but CHS would continue to grow using the Forstmann model of financing hospital acquisitions with a small equity down payment and lots of debt. Many of these hospitals were located in small towns, suburbs or rural areas.
The hospital system’s largest buyout came in 2014, when CHS bought Health Management Associates to form the largest for-profit chain in the country by number of hospitals, with more than 200 hospitals and 30,000 beds. Its share price hit a high of $65 a share in July 2015. The success did not last long. CHS’s long-term debt increased dramatically with the acquisition of HMA, and its debt-to-equity ratio tripled compared to 2000. The hospital chain was soon unable to meet its debt obligations and began selling off hospitals and paying down debt to avoid default.
In the space of little more than two years, from 2017 to 2019, CHS sold off 53 hospitals. These hospitals continued to struggle under their new ownership. By February 2020, only 11 had positive operating margins; four had been closed; 38 had operating losses, and of these, six declared bankruptcy. Eight of the CHS hospitals — including Easton — were sold to Steward Health Care, now the largest privately held hospital system in the United States.
Steward’s buyout strategy, as we saw in its acquisition of the Easton hospital, includes sale-leaseback deals in which it sells off valuable hospital real estate to make payments to the private equity firm and its investors. In September 2016 Steward sold all of its acute-care hospital properties to Medical Properties Trust for $1.2 billion. This has been a winning strategy for Cerberus-owned Steward and its investors. For the hospitals, not so much.
Hundreds of hospitals that have had a brush with private equity ownership are struggling. Easton Hospital is the first private equity bailout, but surely not the last. With private equity deeply invested in health care, your local hospital could be next.
Rosemary Batt is the Alice Hanson Cook professor of women and work at the School of Industrial and Labor Relations at Cornell University. Eileen Appelbaum is co-director of the Center for Economic and Policy Research and senior fellow at the Center for Women and Work at Rutgers University. They are authors of “Private Equity Buyouts in Healthcare: Who Wins, Who Loses? Working Paper No. 118 Institute for New Economic Thinking,” March 15, 2020.