How Wealthy Investors Got Rich Looting America’s Needy Hospitals

In group after group, the hospitals preserve closing. In 2018, it was Northside Regional Medical Heart in Youngstown, Ohio.

In 2019, it was Ohio Valley Medical Heart in Wheeling, West Virginia, together with East Ohio Regional Hospital throughout the river in Martins Ferry, Ohio. That November, St. Luke’s Medical Heart, which had handled sufferers in Phoenix for greater than a century, shut its doorways.

In 2020, because the pandemic hit, it was one in Massachusetts and one other in West Virginia. Adopted by 4 extra — in California, Pennsylvania, and Texas — over the following three years.

Different hospitals are teetering on the brink. In 2022, Conemaugh Nason Medical Heart in Pennsylvania introduced it was ending OB-GYN deliveries, leaving some mothers-to-be to journey nearly an hour to present beginning. Final 12 months, Glenwood Regional Medical Heart in Louisiana was ordered by the state to show away sufferers due to insufficient provides and staffing ranges.

Along with their monetary struggles, the entire hospitals shared three issues in widespread. All of them served low-income communities that suffered from a scarcity of entry to healthcare. They had been all owned at varied factors by for-profit buyers, together with main private-equity companies like Cerberus, Leonard Inexperienced, and Apollo. And in a transfer that stripped the hospitals of one in all their prime belongings, the homeowners had bought the land beneath the services to a little-known real-estate investor referred to as Medical Properties Belief. MPT, which has bought some $16 billion of hospital actual property over the previous twenty years, now payments itself as one of many world’s largest homeowners of hospital beds.

For most of the hospitals, the offers proved disastrous. As soon as their actual property was bought to MPT, they had been compelled to pay hire on what had all the time been their very own property. That added to the large debt burdens already positioned on the hospitals by their for-profit homeowners, deepening their monetary woes. It additionally disadvantaged People of desperately wanted healthcare and put lives in danger — all whereas enriching a few of the world’s wealthiest buyers.

“It is the most important rip-off that just about nobody is aware of about,” says Rob Simone, a researcher on the risk-management agency Hedgeye who has spent tons of of hours digging via MPT’s monetary filings and enterprise dealings.

Writ giant, MPT’s hospital investments symbolize a panoramic scheme that has decimated healthcare in communities throughout America. And whereas the authorized universe shouldn’t be the identical because the ethical one — despicable actions, akin to getting wealthy by reducing off care to the poor, will be completely authorized — MPT’s offers underscore how large private-equity companies have profited whereas gutting a important piece of America’s infrastructure, even on offers that turned out to be monetary catastrophes for the hospitals and their communities.

All instructed, at the least 13 hospitals have closed or gone bankrupt after their land was bought to MPT. And the injury is way from over. In January, MPT reported that its greatest tenant, a nationwide chain of 32 hospitals referred to as Steward, may now not pay its hire. The announcement — which has left well being officers scrambling for fallback plans to offer care to the two.2 million folks served by Steward — may foreshadow extra hospital closings to return.

“MPT existed to permit non-public fairness to take cash out of our hospital system via uneconomic transactions,” says Justin Simon, who runs a profitable healthcare-focused hedge fund referred to as Jasper Capital. “Now they’ve bankrupted the hospitals. The communities are left holding the bag, and nobody goes to jail.”

MPT was based in 2003 by Ed Aldag, an Alabama native who serves because the agency’s president, chairman, and CEO. The core thought was easy: to purchase hospital actual property, pocket the lease funds, and use the cash to reward buyers. (By legislation, real-estate funding trusts like MPT should pay 90% of their taxable earnings to shareholders.) Over the previous few a long time, loads of private-equity companies have engaged in an identical type of monetary engineering, referred to as sale-leasebacks, with accommodations and retailers. Promoting the true property was a key component, as an illustration, of the financier Eddie Lampert’s plan to generate profits from a struggling Sears. However nobody had carried out it at a large scale with hospitals — for causes, maybe, that ought to have been apparent.

MPT got here alongside on the good second. Hospitals in rural and underserved communities have all the time been a troublesome enterprise, for the easy motive that they serve extra sufferers who’re uninsured or who depend on Medicaid, which reimburses at a fraction of the speed of business insurance coverage. However then two issues occurred. First, in 2006, Bain Capital and a handful of different buyers purchased the large hospital chain HCA and rapidly made a fortune. Second, the passage of the Reasonably priced Care Act in 2010 added to the gold-rush mentality by promising to dramatically increase the variety of People with insurance coverage, thereby enhancing hospital margins. By 2011, seven of the nation’s prime for-profit chains had been owned by private-equity companies.

To say the investments did not pan out can be an understatement. Obamacare did not wind up offering the anticipated infusion of money, and the federal government has continued to slash Medicaid reimbursements. In consequence, hospitals in rural and underserved areas continued to be a troublesome enterprise proposition, and their private-equity buyers had been going through critical losses. “The hospital chains confronted main challenges in assembly mortgage obligations,” the economist Eileen Appelbaum and Rosemary Batt, a administration professor at Cornell College, discovered.

What began out as a option to rescue failed investments wound up creating an entire new type of monetary engineering for private-equity profiteers.

If capitalism labored the way in which it is speculated to, that may have been the top of the story. Buyers make a wager, it goes sideways, and voilà, they lose their cash. However on this case, private-equity companies discovered a brand new option to save their failed investments — by promoting the land beneath the hospitals to MPT.

The corporate, which did not reply to requests for remark, has insisted the offers are good for hospitals in addition to buyers, as a result of they inject much-needed money into underfunded programs. “We offer as much as 100% of a hospital’s actual property worth to assist fund facility expansions, investments in folks and expertise, and the execution of long-term progress methods,” MTP says on its web site. “In the end, we assist hospitals serve sufferers higher world wide with our capital options.”

Personal-equity companies inform the identical story. In statements to Enterprise Insider, Cerberus, Apollo, and Leonard Inexperienced stated not one of the cash from the MTP offers was distributed to shareholders. As a substitute, they stated, the funds benefited the hospitals by enabling them to do issues like enhance their services, pay down their money owed, present advantages to their workers, and lengthen free care to their communities. The companies additionally insisted that their selections left the hospitals in robust monetary well being. Leonard Inexperienced, as an illustration, stated that when it exited its funding in a hospital system referred to as Prospect in 2021, the corporate had “entry to over a half billion {dollars} to assist its operation.”

However wherever the funds from the MPT transactions had been positioned on the books, the offers saddled the hospitals with years of hire funds, contributing to their monetary struggles. And within the aftermath of the offers, private-equity companies wound up getting wealthy off investments that, by any rational measure, ought to have been failures — usually by paying themselves and their buyers hefty dividends. “I estimate that lower than 10% of the cash has really been reinvested into the hospital programs,” says Richard Mortell, the managing accomplice of Third Coast Actual Property Capital, who has studied MPT’s offers. “The overwhelming majority was both distributed to homeowners, or used to repay debt taken out to distribute cash to homeowners.”

Personal-equity buyers have lengthy turned a revenue by saddling the businesses they purchase with huge debt, even when it means operating the companies into the bottom. However with MPT, what began out as a option to rescue a failed funding technique wound up creating an entire new type of monetary engineering for private-equity profiteers. Corporations like Apollo, Cerberus, and Leonard Inexperienced could not generate profits by promoting their debt-laden hospitals again to the general public markets — however they may exploit the worth of the underlying actual property. Within the course of, they caught the struggling hospitals with one thing they’d by no means had earlier than, and could not afford to pay: hire.

MPT’s greatest offers have been with Cerberus, the secretive monetary colossus run by Stephen Feinberg, a billionaire whose investments in gun firms have been the topic of a lot controversy. All of it started in 2010, when Cerberus acquired a struggling nonprofit hospital system and rebranded it as for-profit Steward Well being Care. Steward’s CEO, a charismatic physician named Ralph de la Torre, talked a giant sport about fixing healthcare in marginalized communities. In asserting the deal, Cerberus assured The Boston Globe that it was “a giant win for the hard-working communities of Larger Boston.”

State regulators had been suspicious of the deal. In return for state approval, Steward promised it would not add any debt to the hospitals for the aim of paying Cerberus a dividend or distribution for 3 years. Because it turned out, regulators weren’t suspicious sufficient: They did not foresee MPT.

From 2016 to 2022, based on an organization report, MPT acquired a web $3.3 billion of actual property underlying 34 Steward services. MPT then leased the true property again to Steward. The deal was carried out to “give Cerberus some liquidity” and “get better the unique funding,” based on an announcement on the time. Steward now has an annual hire burden of just about $400 million, based on Simone, the overwhelming majority of which matches to MPT. Within the course of, Steward turned MPT’s largest tenant, at one level accounting for as a lot as 30% of its annual income.

After the MPT deal, Cerberus made some huge cash from its funding in Steward. In response to a confidential investor doc acquired by Bloomberg, one in all Cerberus’ funds collected a dividend of $484 million. Total, Steward’s buyers quadrupled their cash, even because the hospitals themselves had been hemorrhaging money.

“Cerberus generated a home-run a number of on an unsuccessful funding,” says Mortell, the longtime real-estate investor. “That is not the way in which capitalism is meant to work.”

In a press release to BI, Cerberus stated its involvement with Steward enabled the chain to speculate $800 million on infrastructure, expertise, and personnel, reworking its failing hospitals into “a world-class accountable care group.” However Steward did not precisely thrive after its buy by Cerberus. One after one other, most of the chain’s hospitals have both closed or been compelled to chop providers. Through the pandemic, Easton Hospital in Pennsylvania acquired a last-minute bailout from the state after Steward threatened to shut it. Native leaders had been incensed. “It is onerous to consider that Easton Hospital may have sat vacant within the coming months — shedding 700 jobs within the course of — as the remainder of the Lehigh Valley scurried to liberate each room, ventilator, and medical staffer to attempt to save lives,” fumed the native newspaper’s editorial board.

What’s extra, Steward has been sued by a handful of distributors for leaving what seems to be a path of unpaid payments. In January, at St. Elizabeth’s Medical Heart in Boston, a brand new mom bled to demise after a tool that would have saved her life had been repossessed by collectors as a result of Steward had didn’t pay the invoice. Now, the hospital chain’s looming collapse may endanger much more lives, most of them in poor communities. “The burden of Steward hospital closures,” a letter signed by the state’s complete congressional delegation warned, “can be borne primarily by the Massachusetts residents who already expertise the best challenges accessing well being care.” The delegation has requested Cerberus to offer particulars of its funding in Steward, together with how a lot cash it extracted from the chain. “The online results of these transactions,” the delegation wrote, “seems to be an unfolding tragedy.”

Buyers at Cerberus, in the meantime, aren’t the one ones who scored a house run by inflicting monetary ache on Steward. In 2021, MPT loaned the hospital chain’s working crew, together with de la Torre, $335 million to purchase out Cerberus. Steward then circled and paid its new homeowners, together with de la Torre, a dividend of about $100 million. Just a few months later, de la Torre purchased a $40 million yacht named the Amaral, which encompasses a library, a gymnasium, and a whirlpool on the highest deck. Simply after that, Steward filed with the federal government to delay paying again pandemic-era loans, citing “excessive monetary hardship.” (Steward didn’t reply to requests for remark.)

The sample of utilizing MPT to revenue from the ache of impoverished sufferers was repeated by different main buyers. Prospect, a series of hospitals in underserved communities, was purchased by Leonard Inexperienced in 2010. It turned out to be a nasty funding. In response to the Personal Fairness Stakeholder Venture, a analysis and advocacy group, Prospect misplaced over $600 million between 2015 and 2020.

Then, in 2019, Leonard Inexperienced bought $1.55 billion of Prospect’s actual property to MPT. In a press release to Enterprise Insider, Leonard Inexperienced stated its possession of the hospital chain “enabled Prospect to speculate roughly $750 million in its hospitals, present $900 million in free care, contribute $170 million to native taxes, and fund $300 million into worker pensions and 401(okay) plans.”

However after Leonard Inexperienced bought off Prospect’s actual property, the hospitals continued to wrestle. Ambulances had been unable to gas up as a result of their bank cards had been lower off. Elevators stopped working. Six aged psychiatric sufferers with COVID-19 died as a result of poor an infection management. But the possession group led by Leonard Inexperienced, the Stakeholder Venture discovered, was one way or the other in a position to extract $658 million in dividends and different charges from the struggling hospital chain. Prospect is now trying to promote three of its hospitals in Connecticut to Yale New Haven Well being System, however the deal could fall via due to Prospect’s mounting debt and unpaid payments. If Yale does not purchase the hospitals, they may probably go bankrupt.

Then there are the offers that MPT has carried out with Apollo. In 2015, the private-equity large purchased its first hospital system and launched into what’s referred to as a “roll-up technique” — a well-liked play through which buyers make an organization greater, although not essentially higher, by persevering with to amass companies. The Apollo-backed enterprise bought a number of extra healthcare firms and bought a few of the underlying actual property — $700 million — to MPT. In a press release to BI, Apollo referred all questions in regards to the deal to its hospital firm, as if it had nothing to do with the offers. However Aldag, the MPT founder and CEO, has boasted that the transactions had been brokered straight with Apollo. “They beautiful a lot gave us their complete portfolio and stated, ‘Right here, choose what you’d prefer to have for this specific worth,'” Aldag instructed buyers in a convention name explaining the deal. Right this moment, Apollo owns some 220 hospitals throughout 36 states.

If Congress does its job and follows the cash, it could discover itself confronting one of many greatest monetary heists in American historical past.

After Apollo bought off their actual property, the hospitals continued to endure. In response to their monetary statements, capital expenditures had been lower than depreciation within the years after the sale-leaseback offers with MPT, which suggests the asset base was being eroded, not elevated. “Apollo’s hospital profiteering has resulted in harmful situations, closures and decreased entry to providers, and declining high quality,” concluded Eileen O’Grady, a senior researcher on the Personal Fairness Stakeholder Venture. Hospitals in a single Apollo hospital chain, LifePoint Well being, rank among the many worst of their states, and Moody’s has downgraded the corporate’s debt to mirror the corporate’s “elevated monetary leverage.” Sufferers and communities, as soon as once more, paid the worth for personal fairness’s funding mannequin.

Whereas the real-estate offers with MPT have offered private-equity companies with an enormous monetary windfall, they’ve posed an issue for MPT itself. The extra hospital actual property that MPT buys, the more cash it makes in hire funds from the hospitals. However as a result of its offers place big monetary stress on the hospitals, MPT is actually working as a landlord that’s driving its personal tenants out of enterprise. Now, as hospital chains throughout the nation discover themselves unable to pay their hire, MPT is going through monetary issues of its personal. In 2020, its inventory worth hit $24. Right this moment, it is beneath $4.

However that does not imply that MPT’s leaders did not get wealthy off its hospital offers. High executives, together with Aldag, acquired hefty bonuses primarily based partly on the greenback quantity of transactions they did — that means the extra hospitals they drove into debt, the higher. By no means thoughts that, as Simone discovered, MPT apparently used accounting assumptions that overinflated the lease funds it may realistically anticipate to obtain from troubled hospital programs. From 2019 to 2022, based on SEC filings, MPT’s prime three executives had been paid some $125 million in money and fairness grants. They obtained wealthy, in brief, by making hospitals poor.

In December, Congress introduced a bipartisan investigation into non-public fairness’s affect in healthcare. MPT was included on the record of firms that acquired subpoenas. Sen. Chuck Grassley, the rating Republican on the Senate Finance Committee, has requested Apollo and Leonard Inexperienced to submit particulars about its offers with MPT, amongst different issues; the Massachusetts congressional delegation is asking Cerberus to account for what occurred at Steward. The elemental query is: The place did all the cash go? If Congress does its job and follows the cash, it could discover itself confronting one of many greatest monetary heists in American historical past — one which transferred billions of {dollars} from needy sufferers to grasping buyers. Lawmakers aren’t empowered to get any of that cash again. However they will at the least make MPT and its private-equity companions account for what they obtained away with.

Bethany McLean is a particular correspondent at Enterprise Insider.