Sunday, February 11, 2024

Private Equity in Health Care

Those of you in the metro Boston news market have been regaled with the saga of the failing Stewart Health Care System, owner of nine hospitals in eastern Massachusetts. One eye-catching story described the $40 million yacht purchased by Stewart’s CEO, Dr. Ralph de la Torre, while Stewart hospitals were having equipment repossessed because of failure to pay their bills.

While a 190-foot yacht catches attention, it is only a symptom of a deeper problem.

Private equity (PE) firms’ business model is to buy companies as cheaply as possible, pull as much cash as they can from the company and then either resell it or declare bankruptcy. To be able to sell the business, they have to jack up profits by cutting costs and/or raising prices.

Private equity investment in healthcare is a recent phenomenon but one which is rapidly growing. These firms focus on specialties where lucrative procedures can be done and/or where patients have little choice. Many emergency medicine groups, pathologists and anesthesiologists now work for entities controlled by private equity. These groups were responsible for most of the “surprise” out-of-network bills that made headlines in the last few years. Knowing that patients rarely if ever have the option to select a physician in these fields, they would pull out of insurance contracts and then bill whatever they wanted.

Quality is secondary to the acquiring PE firm; profits come first. They can increase revenue by raising fees and/or encouraging their employed physicians to do as many well-paid procedures (such as catheterizations and endoscopies) as can be justified, even if not all are truly needed. They can cut costs by skimping on equipment and supplies that are not “revenue-producing,” even if they improve quality care. They can also substitute less-qualified, lower-paid personnel, such as aides in place of nurses.

Steward offers a textbook example. Cerberus Capital bought the troubled Massachusetts-based Caritas Christi hospital system, promising to turn it around. Soon after, they sold the land and buildings of its own hospitals to a real estate trust, pulling out $1.2 billion and saddling the hospitals with hundreds of millions in annual rent. That transaction allowed Cerberus to quadruple its investment and to pay its investors a $100 million dividend. They bought hospitals around the country, including Texas, Florida and Ohio. Many of these have since been closed, doubtless after the PE investors had pulled as much money out as possible.

So, Stewart’s CEO has a very expensive yacht and communities around the country are dreading the closure of what is often their only nearby hospital.

Tell your state legislators that private equity has no place in health care, certainly not without very strict guidelines and oversight.

Prescription for Bankruptcy. Buy the book on Amazon

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