FOR JOHN MCDONOUGH and Paul Hattis, the crisis surrounding Steward Health Care is a cautionary tale about the perils of mixing private equity and health care.
The two academics – McDonough at the T.H. Chan School of Public Health at Harvard University and Hattis at the Lown Institute – see greedy, real-life villains behind the precipitous decline of a group of Massachusetts hospitals in working class areas of the state that care for thousands of patients, employ thousands of workers, and play central roles in their home communities.
“What we have right now in Massachusetts for the nation is we have a new poster child of private equity and his name is Dr. Ralph de la Torre,” McDonough said on The Codcast, referring to the CEO of Steward. “So if we’re looking for a, what can you say, forgive the expression, a Snidely Whiplash – I’m dating myself here – for representing this scandal to the public, it’s Ralph with his jets and his yachts and the amazing money he has taken out of this. It is just reprehensible behavior. We need to kind of clean the deck on this and have a little bit of a start over. These wealthy people who have abused this system, I hope they come out of this with nothing.”
The story began innocently enough with a struggling Catholic health care system called Caritas Christi, which brought in de la Torre, a rising star heart surgeon, to run it in 2008. Two years later, the system was renamed Steward and sold to Cerberus Capital Management, a major private equity player, for nearly $900 million, the bulk of the money borrowed.
“Cerberus, by the way, refers to the three-headed dog that guards the gates of hell, which is ironic to have the archdiocese basically sell their acute care hospital chain to such an outfit,” McDonough said.
Six years later, Steward sold its hospital properties to an Alabama-based real estate investment trust called Medical Properties Trust. The price tag was $1.2 billion, which Steward apparently used not to invest in its existing hospitals but to finance the purchase of more hospitals around the country.
At the same time, however, the company had to lease back its hospitals from Medical Properties Trust, which put Steward on a financial treadmill that required continued growth and the frequent cash infusions that the sale-leaseback transactions provided for Steward to keep up.
The growth came to a halt during COVID, when operating rooms largely shut down and patients dried up. Hattis said Steward, now based in Texas, lost $400 million in 2020 even though it received a $400 million infusion of cash from the federal government during that period.
McDonough said other hospitals used the federal money to break even. “The problem for Steward is that they had so highly leveraged themselves and loaded themselves to the gills with debt that they found themselves particularly financially vulnerable relative to their peers in the industry and even relative to their for-profit peers,” he said.
Cerberus walked away from Steward in 2021 with a profit of about $800 million, according to Hattis. The situation at Steward continued to deteriorate, to the point where Steward was only able to pay a quarter of its lease payments in the fourth quarter of 2023. Steward, working with Medical Properties Trust, is now trying to find buyers for the hospitals.
The situation could be seen as a business model that failed, but McDonough sees something more sinister.
“It is a conspiracy of sorts. Steward has always been central to it. At certain points, it’s been Cerberus that has been more in the driver’s seat. At other times it’s been Medical Properties Trust,” said McDonough. “All three sort of fed on each other.”
The problem with the Steward story is that solid information is limited. Healey insists Steward is withholding key financial information (Steward denies that) but the governor herself has not been very forthcoming. Indeed, her administration began talks with Steward many months ago but kept those discussions secret.
Hattis and McDonough are beginning to focus on what comes after Steward. They want to see the state get more involved in health care planning and adopt regional approaches to care that would buck up hospitals like Boston Medical Center, UMass Medical Center, South Shore Hospital, and Lawrence General – not the giants, such as Mass General Brigham and Beth Israel Lahey.
“There has been no comprehensive health planning for the Massachusetts health care system since the late 1980s, early 1990,” McDonough said. “We made a decision as a state in 1991 under Gov. Bill Weld that we were going to let the market work this out. The free market was going to do it because that was the trend across the nation and so we just haven’t had anyone at the wheel guiding the system in a serious way. This is an opportunity to get the message out that we really need to get some of that back.”
Hattis worries about for-profit health care businesses purchasing the Steward physician group, but McDonough is more pointed. “Paul is too polite. I’ll be less polite,” he said. “The fear comes from the largest insurance company in North America, United Healthcare out of Minnesota. One of their fastest growing parts is called Optum, which is a national system of physicians and physician practices and clinics that they own.”
McDonough said Optum has already made inroads into the Massachusetts health care system with the purchase of two non-profits — Reliant Medical Group in 2018 and Atrius Health in 2022. “If Optum gets Steward’s physician network, the knowledgeable people all agree that’s going to be a big step back in terms of really trying to take this crisis and put us at the end of the day in a stronger, better, more patient-centered community.”
McDonough said Massachusetts should close the door to private equity companies in the health care space. He says there’s a national movement in that direction under the banner of “Take medicine back.”
“There’s a revolt and it’s a national revolt and it’s not hypothetical,” he said. “It’s based on people’s real lived experience working in and for private equity in these vulnerable professions and the devastating consequences that come out of it while the private equity owners laugh all the way to the bank.”