Governor Maura Healey has called on Steward Health Care to sell off its nine Massachusetts hospitals and cease doing business in the Commonwealth. But that’s a lot easier said than done.
Steward’s hospitals are in debt because of schemes by their past owners to strip them of enough working capital to serve patients and pay vendors. No suitable candidate who can read a balance sheet would want to buy these hospitals.
The cost of making them whole runs well into the hundreds of millions of dollars. In the absence of a government bailout, which Healey has wisely ruled out, these hospitals will probably close.
That would leave about 200,000 patients without care. It would cause some 16,000 medical professionals to lose their jobs. It would exacerbate the shortage of Massachusetts hospital beds that has forced emergency departments in even our most prestigious hospitals to put dozens of beds of admitted patients in hallways.
So what now? Some emergency short-term federal and state funding to keep these hospitals functioning may be inevitable. But the best outcome would be a full-scale criminal investigation and a settlement that includes financial restitution to put any ill-gotten money back into these hospitals, under new nonprofit ownership.
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Steward’s former and current owners took about a billion dollars out of their Massachusetts hospitals and added to the hospitals’ burdens by piling debt and lease obligations onto their books. What followed looks very much like a Ponzi scheme. A criminal investigation is needed to determine what laws may have been broken.
The looting of what is now Steward Health began in 2010 when Cerberus Capital Management, a private equity firm, struck a deal to buy what was then the Caritas Christi group of six hospitals from the Archdiocese of Boston. The terms of the unusual purchase of nonprofit hospitals by a for-profit company, negotiated by then-Attorney General Martha Coakley, required Cerberus to invest money to improve the struggling hospitals and to keep them open for at least 10 years.
Cerberus rebranded the hospital group as Steward, bought more hospitals, both in Massachusetts and nationally, and complied with some, but not all, of the terms of the deal. For instance, Steward closed Quincy Medical Center save its emergency room after only three years. In 2020 it then closed that.
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The typical private equity play involves the extraction of a substantial profit from acquired businesses. But in this case, Cerberus could not take money out because the hospitals had no funds to spare. So in 2015 Cerberus made a deal with the Medical Properties Trust to buy all of the hospitals’ physical assets in a sale-leaseback deal for $1.25 billion. Cerberus then paid itself $800 million.
In 2020, Cerberus sold the hospital chain to a doctors group headed by Steward Health Care CEO Ralph de la Torre, who took out about another $100 million. Soon, the hospital chain was juggling financial obligations; it fell behind in its payments to vendors as well as the rent money and other debt payments it owed its landlord, Medical Properties Trust. MPT has been lending Steward money for its lease payments.
It’s clear that Cerberus, MPT, and de la Torre knew that these schemes did not leave the hospital chain with enough money to operate. A full-scale criminal investigation, by the Securities and Exchange Commission, the Justice Department, and Massachusetts Attorney General Andrea Campbell, is needed to unearth what laws might have been broken.
For instance, Cerberus did not fully comply with the terms of its 2010 deal with Coakley.
MPT is a publicly traded company. As such, it is required to submit extensive disclosures to the SEC and investors. But MPT’s filings did not disclose details of Steward’s financial condition. In the past year, MPT stock has fallen by more than half, harming shareholders.
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A full-scale investigation could also reveal whether there has been self-dealing, kickbacks, misappropriation of funds, misrepresentations to auditors, Medicare fraud, or wrongful conveyance of hospital properties.
Senator Elizabeth Warren, as chair of a Senate Banking Committee subcommittee, has launched her own investigation. “The people of Massachusetts need to know how Steward executives created the hospitals’ burden of debt, and what happened to the money,” she said in an email. She will turn results over to criminal justice authorities.
The people who looted these hospitals, at the expense of patients, communities, doctors, nurses, and other front-line staff, need to be investigated — both to ensure that something like this never happens again and to claw back the money to bring these hospitals back to health.
Robert Kuttner is coeditor of The American Prospect. He teaches at Brandeis University Heller School.
