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The Stewardship of Hospitals

By: David Ostrowsky

Hospitals, ambulatory surgery centers, long-term care facilities, primary care physician practices, nursing homes, hospice care. They are the most indispensable institutions of any functioning society, but unlike a Fortune 500 company or professional sports franchise, the identity of their respective owners often remains an afterthought. That is, unless you work for or are served by a financially distressed health care system, such as for example Steward Health Care, the massive private-for-profit healthcare conglomerate that recently filed for Chapter 11 bankruptcy protection.

Steward’s sad demise, one of the most impactful health care stories this spring, serves as a cautionary tale about the potential issues stemming from private equity firms (otherwise known as “PE firms”) establishing a prominent foothold in the healthcare space. While this trend has cooled of late due to the current high interest rate environment and pervasive staffing shortages, the pre-COVID numbers are undeniable: per the Institute for New Economic Thinking, private equity investment in health care skyrocketed twenty-fold from 2000 (less than $5 billion per year) to 2018 ($100 billion per year). During that time span, private equity firms closed approximately 7,300 healthcare-related deals, amounting to $833 billion.

One of the core elements of this high-debt, for-profit financial model of hospital ownership in which PE firms primarily use debt to finance acquisitions is that significant cost-cutting measures ensue whereby some of the longest-tenured, most capable (in other words, most highly compensated) employees see their jobs vanish. Not coincidentally, patients receive lower quality care (not to mention, often higher costs) and underserved populations face even greater barriers to accessing adequate services. Just this past December, researchers at Harvard Medical School revealed results from a study that indicated patients are more prone to fall, get new infections, or experience other forms of harm during their stay in a hospital after it is acquired by a private equity firm.

Unfortunately, the honest to God truth is that this problem isn’t going away. Certainly not anytime soon. Purely from a dollars-and-cents perspective, it is in the best interest of PE firms to cut costs quickly after acquiring a hospital or healthcare system because they make the majority of their profits when they sell and often look to do so several years after the acquisition. With their acute short-term focus, PE firms can rake in substantial profits even when their target healthcare organization goes belly up. For a recent example, one needs look no further than the above-mentioned Steward case: from 2010-2020, as the health care system was drowning in debt, Cerberus Capital Management, the New York-based private equity firm that owned Steward at the time, made nearly $800 million off its investment.

How Steward Health Care System fares in bankruptcy court remains to be seen, but the larger, systemic issue, that being the impact of PE-owned health care facilities on patient welfare, warrants a closer look. Naturally, when staffing levels and adherence to patient safety protocols start to wane, trouble looms. But ultimately, from a macro perspective, there are seemingly two irreconcilable dynamics coming into play with the financialization of healthcare: the PE firms’ incentive to rapidly extract a profit and the health care industry’s vested interest in taking care of patients and keeping them healthy.

Tragically, society’s most vulnerable members are so often caught in the middle.