(Bloomberg) — A string of health care bankruptcies has sparked a wave of public anger among financial dealmakers in the industry, prompting lawmakers in statehouses across the country to draft tough new restrictions.
The so-called crackdown is pointless.
California Governor Gavin Newsom vetoed legislation that would have allowed the state to block private equity deals for most health care facilities. Efforts to strengthen oversight of financial companies or completely ban certain health care investments also failed in Pennsylvania, Connecticut, Oregon, Washington and Minnesota.
In Massachusetts, political condemnation of private equity and real estate firms reached a fever pitch after a bankruptcy filing in May by Steward Health Care, one of the state’s largest hospital operators. A bill that would have increased scrutiny of such investors remains in legislative limbo with just days to go before the end of the session.
The failure of these efforts, including in Democratic-dominated states, all but neutralizes the short-term risk of stricter regulations on health care financial dealmakers.
With federal action already a long way off, future debate is likely to focus on a less radical search for ways to rein in potentially risky practices, including expanded disclosure requirements that could at least give lawmakers more warning when companies are in trouble to sit. Other states, including Indiana, have enacted laws that require special notice of certain health care transactions but do not grant outright blocking powers.
“I don’t think eliminating private equity completely is practical or feasible,” Massachusetts Gov. Maura Healey said in an interview. “I think there is a role for private equity in healthcare – but the question becomes: what is that role? How do you define that role? I think the legislature is right to look at the guardrails we need here.”
Critics of the Massachusetts and California bills — which advanced the furthest among state legislative efforts — say they wrongly blamed private equity and real estate companies for bigger health care problems.
“American businesses, in healthcare and other economic sectors, need more investment from all sources. Private equity and private credit can provide the necessary capital,” Drew Maloney, CEO of private equity lobbyist American Investment Council, wrote in a September letter to federal lawmakers.
But financial firms often lean on cost-cutting to improve profits, which can lead to workforce reductions and negative health outcomes, says Zirui Song, a professor of health care policy and medicine at Harvard Medical School.
According to the Private Equity Stakeholder Project, an advocacy group, private equity-backed companies were responsible for about a fifth of bankruptcies in the healthcare industry last year. Without more guardrails, crises like Steward’s collapse will continue to happen, said Mary Bugbee, director of health care at PESP.
“I think our best bet is still making policy at the state level, even though that didn’t happen this time in Massachusetts and California,” Bugbee said. “But we will probably have to see worse things than Steward – which was terrible.”
Steward Fallout
The fallout from Steward’s financial disruption led to widespread outrage, with former nurses testifying to horrors such as having to stuff dead newborns into cardboard boxes because the company failed to pay the vendor who supplied the proper funeral boxes.
The hospital chain has filed for bankruptcy with $9.15 billion in reported debt, the most of any other company so far this year, including Spirit Airlines Inc. and battery maker Northvolt AB, according to data compiled by Bloomberg.
But the story of how Steward became as big as it was and how it eventually collapsed is complicated. The saga underscores why it is so difficult for lawmakers to assign blame for corporate failure and enact legislation that is both broad enough to make a difference and narrow enough not to cause unintended consequences, such as cutting off access to some form of financial assistance when companies face challenges.
Singling out financial dealmakers for stricter scrutiny also risks sending startups in industries that rely on venture capital funding, such as life sciences and climate tech, the message that they should locate in states with friendlier regulations.
Steward traces its roots to six financially troubled hospitals in Massachusetts that were previously owned by the Archdiocese of Boston. Dr. Ralph de la Torre was brought in to run the chain in 2008 and by 2010 he had helped negotiate a sale to private equity firm Cerberus Capital Management, which provided a cash injection. In 2016, Steward agreed to sell and lease back his properties, including hospitals in Massachusetts, to real estate investment trust Medical Properties Trust Inc. in a $1.25 billion deal. In 2020, Cerberus sold its stake in Steward to a management group led by de la Torre.
Cerberus earned a profit of approximately $800 million from its investment. The company also says it has “rescued and restored critical community hospitals in Massachusetts.”
The sale-leaseback agreement with MPT gave Steward the resources to accelerate his plan to gobble up more hospitals across the country. Lawmakers also say the transaction saddled Steward with exorbitant rents and added to its financial problems. In Massachusetts, the House version of the health care bill would specifically ban hospitals from leasing their main campuses from REITs, while the Senate excluded that provision.
Lots of guilt
Former CEO de la Torre, meanwhile, has been accused by lawmakers of enriching himself while Steward racked up large debts. Federal agents recently seized De la Torre’s phone, his lawyers say, while the Boston Globe has reported that Steward board members have been called to answer questions as part of a grand jury investigation into alleged fraud, bribery and corruption. De la Torre declined to comment through a spokesperson.
“When I look at this and assess the culpability, they are all responsible,” U.S. Senator Edward Markey, a Democrat from Massachusetts, said of de la Torre, Cerberus and MPT. “They all made money and the hospitals collapsed. All these players worked together at the same time, leading to the collapse of the Steward system.”
Markey and fellow Massachusetts Sen. Elizabeth Warren introduced federal legislation this year that would have strengthened restrictions on private equity and real estate investors and created stiffer penalties for crimes. It has not progressed.
Meanwhile, in Massachusetts, House and Senate lawmakers failed to reconcile their competing versions of the health care law before the end of the regular legislative session in July. While other unfinished bills have since passed in informal sessions, including an economic development bill championed by Healey, lawmakers have not yet been able to reach an agreement on the health care proposal.
There’s still time for them to do that, but the window is shrinking before the session ends on Dec. 31 and the Legislature is unlikely to pass the bill in its entirety, said Evan Horowitz, executive director of the Center for State Policy Analysis from Tufts University.
“There is a lot of agreement” among the legislative chambers on health care reform, even as their proposals vary in scope, Ron Mariano, the speaker of the Massachusetts House of Representatives, said in a statement. Mariano said he remains hopeful an agreement will be reached before the end of the year. Gray Milkowski, spokesperson for Massachusetts Senate President Karen Spilka, said the Senate will continue working to complete the legislation this session — “and beyond if necessary.”
Should the current measure fail, Mariano also said he plans to revisit health care reform next year. Reaching a consensus may be trickier than it would have been when the outrage over Steward’s collapse was still fresh.
And so financial dealmakers continue to play a major role in healthcare. In October, private equity firm Kinderhook Industries acquired Steward’s physician network, which includes a large presence in Massachusetts.
–With help from Jonathan Randles.
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