Hospital Assets and Private Equity Acquisition—Reply

Abstract

COMMENT & RESPONSEIn Reply Dr Larkin theorizes that hospitals are better off renting than owning their facilities. This theory might hold if, as he suggests, the "sale-leaseback" deals private equity firms make for their hospitals merely involved, as he posits, a "change in asset type," with the sales' proceeds deployed to strengthen hospital finances and augment services. In practice, however, private equity firms have often used the proceeds from selling hospitals' land and buildings to reward their executives and investors while saddling the hospitals (not the private equity firms) with burdensome rent payments. That financial maneuver is possible because private equity firms, while controlling all decisions of their acquired hospitals, hold them in corporations separate (on paper) from the private equity parent.Steward Health Care provides an example. In 2010, Cerberus Capital Management purchased 6 hospitals from Boston's archdiocese for $895 million and soon added more hospitals. 1 In 2016, Cerberus sold the hospitals' real estate for $1.2 billion, using much of the proceeds to pay off investors, leaving the hospitals responsible for exorbitant lease payments. 2 Cerberus subsequently sold the hollowed-out system, having more than tripled its original investment during its decade of ownership. 2 Steward Health Care then used similar sale-leaseback deals to finance its expansion to 31 hospitals, whose lease payments totaled $341 million annually. 3 Meanwhile, bills for repairs and vital supplies went unpaid, and care quality spiraled downward. In August 2024, the Steward system filed for bankruptcy. With no private buyers prepared to salvage Steward's Massachusetts hospitals, 2 of them closed; the state's governor has, as of this writing, offered hundreds of millions of taxpayer dollars to purchase the other hospitals' real estate so they can remain in operation.Hospitals in California, Connecticut, Pennsylvania, and Wyoming have experienced similar misadventures from private equity-engineered sale-leasebacks, 4 as did the HCR ManorCare nursing home chain, the nation's second largest. After the Carlyle Group bought ManorCare-leaving the nursing homes, not Carlyle, responsible for repaying $5 billion of the loans used to buy the chain-Carlyle sold off the nursing homes' real estate for $6.1 billion and kept the proceeds. ManorCare's $472 million yearly rent bill (which automatically escalated 3.5% annually) led to layoffs, mounting citations for quality violations, and, finally, bankruptcy. 5 Larkin suggests that we should adjust the figures we used to assess capital assets for the lease expenses recorded on Part III of Worksheet A-7. Such adjustment would obscure Cerberus' (and other private equity firms') pilfering of hospitals' assets.