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As reported by our colleague Maureen Tkacik and elsewhere, the basic story of the insider pillaging of Steward Health Care is this: In 2010, a money-losing Catholic health system owned by the Archdiocese of Boston called Caritas Christi was sold to Cerberus Capital, a private equity firm. Cerberus rebranded the chain as Steward. The cost of the acquisition plus capital improvements and acquisitions of other hospitals was put on Steward’s own books as a debt to be repaid to Cerberus.
Since the purchase of a nonprofit by a for-profit is vulnerable to abuse, the Massachusetts attorney general had to approve the deal. Then-AG Martha Coakley conditioned the deal on several commitments by Cerberus, some of which were not kept. For instance, Cerberus promised to keep Quincy Medical Center open for ten years. They closed it after three.
The typical private equity business plan is to make a windfall profit by paying itself a “special dividend,” at the expense of the company it has acquired, financed by the debt on the company’s books. However, this was not immediately possible because Cerberus was investing in improvements to Steward hospitals under the terms of the deal approved by Coakley and was also buying up other hospitals. There was no spare cash to extract.
So in 2015, Cerberus executed part two of the plan. Cerberus arranged to sell off all the hospital real estate to a closely affiliated REIT called Medical Properties Trust, in a sale-leaseback deal, for $1.2 billion. Per the terms of the sale-leaseback, Steward had to now pay rent on the real estate that it once owned. Cerberus then paid itself $800 million, breaking off the majority of the funds that Medical Properties Trust paid for the real estate, before exiting the investment.
Then MPT kept filling Steward’s coffers, to the tune of several billion dollars over the past eight years. Steward has used some of that money, about $400 million a year, to pay rent back to MPT, in a kind of circular funding cycle. Other creditors have not been so lucky. The hospital chain is mired in dozens of lawsuits, including with a pizza shop in Brockton, for not paying its debts. Now, not surprisingly, the Steward chain, which has grown to 30 hospitals encumbered with debt and lease payments, is broke.
We know that Steward’s founder and CEO, Ralph de la Torre, a Cerberus crony, also took out tens of millions. (Last Friday, The Boston Globe ran a hilarious “correction.” The Globe had reported that de la Torre owned a yacht worth $40 million. It turns out he owns two yachts.)
What’s really needed is a clawback of much of the money that Cerberus looted from Steward, via a criminal prosecution that would result in a big financial settlement. But how to achieve that?
Medical Properties Trust is a publicly traded company, which gives the SEC jurisdiction. MPT’s practice of advancing Steward money, which Steward owes MPT but cannot possibly pay back, makes it effectively a Ponzi scheme. The SEC has been pressing MPT to disclose the full financials of Steward for several years, to no avail. If Steward goes broke, or falls further behind in its payments to MPT, then MPT is vulnerable to charges of fraud or of deceiving investors, or both. But the SEC has yet to launch a full investigation.
Meanwhile, the state attorney general, now a progressive named Andrea Campbell, has much clearer and broader jurisdiction, especially since Cerberus failed to carry out some of the commitments that were made in 2010 to AG Coakley as a condition of the original deal.
A full investigation could well reveal a lot of misrepresentation, fraud, and self-dealing at various points in the sordid history of Cerberus, MPT, Steward, and Steward’s CEO Ralph de la Torre. The AG could go after the entire scheme for being a criminal enterprise. That in turn could result in a settlement and a substantial clawback. Cerberus is worth about $60 billion.
The broader problem is that the entire business model of private equity is one grand abuse. The right remedy to that problem is to shut it down. Massachusetts Sen. Elizabeth Warren has proposed legislation that would do just that, the Stop Wall Street Looting Act. Since private equity owns so many Democratic legislators, the Warren bill stands a snowball’s chance.
In the meantime, the second-best option is to go after these deals for violations of law, to make an example of the offenders and claw back some of the illicit gains. Warren plans a full investigation.
While de la Torre enjoys his yachts and Cerberus executives enjoy their payday, thousands of patients at Steward hospitals can’t get care and thousands of medical professionals stand to lose their jobs. Private equity is a travesty under the best of circumstances. It is especially toxic when it buys and loots hospitals.
