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The entire Massachusetts congressional delegation has sent a letter to the management of Steward Health Care, demanding that they account for the several hundred million dollars taken out of the hospital chain’s operating budget to line the pockets of its former private equity owners. Steward operates nine hospitals in Massachusetts and 30 nationally, making it the country’s largest for-profit hospital chain, and the hospitals are now at risk of closing.
Insiders took out so much cash and burdened Steward with so much debt that the hospitals are routinely failing to pay vendors for basic supplies, putting patients and staff at risk. The whole chain is teetering on the edge of insolvency. The Prospect has been covering this in a series of articles going back several months.
There are now two urgent, interconnected issues: how to keep these hospitals open, and how to hold the executives who looted the hospitals accountable, so that some of the money they took can be returned to hospital operations. Neither will be easy.
As I’ve written, the looting of Steward by Cerberus Capital came in two stages. First, in 2010, Cerberus bought the six hospitals of the Catholic Caritas Christi chain, converted it to a for-profit, and rebranded the group as Steward. Under the terms of the takeover, Cerberus promised to invest in the hospitals. The debt for the costs of the acquisition was put on the books of the hospitals.
Then in 2015, the hospitals’ physical real estate was sold by Cerberus to a closely affiliated company based in Alabama called Medical Properties Trust for $1.25 billion. That allowed Cerberus to take out $800 million in cash. The sale-leaseback deal burdened the hospitals with more debt plus rental payments.
It did not take an accounting genius to realize that these burdens left the hospitals with too little money for operations. Their collapse was only a matter of time.
As it happens, Massachusetts is in a crisis of a shortage of hospital beds, a topic I’ve also covered for the Prospect. The reason is a shortage of nursing home and rehab beds, which cause patients ready for discharge to back up in acute care hospitals.
Last year, Steward treated some 200,000 patients. The closure of their hospitals would exacerbate the crisis. It would also cause thousands of medical professionals to lose their jobs.
Somebody has to bail out the failing hospitals, but who?
Massachusetts Gov. Maura Healey has flatly said that the state won’t do it. There have been rumors of talks with Massachusetts’s largest and richest hospital group, Mass General Brigham, but the last thing MGB executives want is to acquire failing hospitals that are hemorrhaging losses because of the malfeasance of prior owners.
The best outcome would be a temporary bailout by a combination of state and federal funds, to be repaid by a clawback of looted money following criminal prosecution of Cerberus and MPT. The Massachusetts congressional delegation, led by Sens. Elizabeth Warren and Ed Markey, has influence with the Biden administration. So does Rep. Richie Neal, the ranking Democrat on the House Ways and Means Committee. Any bailout would need to be combined with investigation and prosecution, and therefore coordinated with state and federal prosecutors or financial regulators.
MPT is a publicly traded company. Under the securities laws, it is required to make full disclosures to shareholders about risks. In the past year, as the crisis of Steward hospitals became public knowledge, the price of MPT stock has fallen from about $13 a share to under $4. The Securities and Exchange Commission could prosecute MPT for failing to fully apprise shareholders of the risks in its convoluted scheme. MPT management must have known that at some point Steward hospitals could not pay their bills.
MPT’s required 10-K filing with the SEC includes several pages on risks, including the risks that tenants might not be able to meet lease obligations. But it provides no detail on the actual financial condition of Steward.
More broadly, it’s inconceivable that Cerberus and MPT, as well as crony CEO Ralph de la Torre, did not grasp the simple arithmetic: All the debt and rent obligations piled onto the books of the hospitals left them with too little money to function. That in turn could leave them vulnerable to criminal prosecution for fraud, by either the Justice Department or the Massachusetts attorney general or both.
A settlement of criminal charges could also relieve the hospitals of their obligations to pay rent on the grounds that the sale-leaseback deal was corrupt. Cerberus, in a settlement of criminal charges, might also be made to disgorge some of the money it took out of the hospitals.
I have discussed these possibilities with experts who know securities law better than I do. They agree that these remedies would break new ground and are something of a long shot, but not out of the question and worth a try.
Cerberus and MPT need to be made the poster children for why private equity should be barred from the entire health care sector. Money needs to be found to keep these hospitals open and with resources adequate to their community mission. The best source of that money would be restitution by the looters.
