Riverton, Wyoming, a city of about 11,000 people at the feet of the Wind River mountain range, seems far away from the world of Big Finance. Yet like so much of America, Riverton has become well acquainted with the business that most epitomizes today’s Wall Street: private equity. In 2018, the local hospital, SageWest, was purchased by Apollo Global Management as part of the giant private-equity firm’s $5.6 billion deal to buy a chain of hospitals called LifePoint Health. Even before Apollo got involved, LifePoint had merged Riverton’s small hospital with the hospital half an hour away in Lander, the county seat. Vivian Watkins, a Riverton resident who once served as Wyoming’s economic-development director, told us that the idea sounded viable—at first. “They told us the new trend in hospitals is ‘centers of excellence,’ so you’ll have maternity care in one place and, say, orthopedics in another,” she said.
But in the Apollo era, Watkins and other Riverton residents concluded that, instead of dividing specialties between the two hospitals and beefing up the ones remaining at each location, hospital managers were simply stripping away essential services from their community. The drive to Lander isn’t hard in the summer, Watkins told us, but in the winter, the roads are often closed. Many more patients needed to be transported out of the county altogether. According to state data reported by The Wall Street Journal, the number of air-ambulance flights out of Fremont County grew sixfold from 2014 to 2019. “We went to the local CEO of both hospitals and said, ‘We’re quite concerned. What can we do to help? How can we keep services here?’” Watkins said. “To make a long story short, the answer was, ‘No, no, no—you don’t understand that we don’t want to do that.’” Apollo referred all questions about its role in Riverton to LifePoint. A spokesperson for LifePoint—which folded Riverton, Lander, and other hospitals into a new company called ScionHealth in 2021—said in an email that “our ownership structure had nothing to do with our approach to this market” and that “investment in the Riverton and Lander communities increased after the Apollo PE investment.”
A nascent effort by a group of prominent Riverton citizens to build a new hospital intensified after the Apollo takeover. In addition to raising several million dollars via community contributions and donated land for the new Riverton Medical District, the group just closed a $37 million loan from the U.S. Department of Agriculture, which uses taxpayer money to help rural development efforts. This is hardly the only time that government dollars have been used to clean up after, or subsidize, private-equity firms’ self-enrichment. In Watsonville, California, state officials kicked in to help buy a local hospital out of bankruptcy after its own brush with private equity. During the pandemic, many hospitals owned by private-equity firms, run by billionaires and themselves flush with cash, got loans and grants from taxpayers.
We are longtime financial journalists. In our new book, The Big Fail, we wrote about how the pandemic both exposed and exacerbated preexisting problems in America. One such problem is how financial engineering has helped hollow out our health-care system. Every struggling hospital’s story is painful in its own way, but Riverton’s woes are a snapshot of the turmoil that has engulfed the hospital sector in the almost three decades since private-equity funds—which use debt to buy companies with the ostensible goal of improving them—decided that the hospital business would make a good investment. By 2011, seven of the largest for-profit chains were owned by PE firms, according to the researchers Eileen Appelbaum and Rosemary Batt, who have written a number of articles and reports about private equity’s influence on health care.
According to the private-equity sales pitch, the money that investors earn is supposed to come from using their financial and operational savvy to make their portfolio companies more profitable—such as by bringing in new technology to companies that can’t afford necessary upgrades on their own. In reality, investors can prosper even when the underlying business fails.
To eke out gains, private-equity firms have cut nursing staff, slashed services, and even, in at least one case early in the pandemic, made an explicit threat to close an institution unless it received taxpayer money. Many hospitals purchased by private-equity firms have been forced to pay consulting fees to their new overlords for access to their strategic brilliance.
Far from setting troubled hospitals on a more sustainable path, PE investors’ forays into health care have mostly brought debt to essential institutions—and misery to patients and communities. In many instances, they’ve shown considerable rapaciousness and utter indifference toward the demands of running a hospital. As the pandemic underscored, hospitals are part of America’s vital infrastructure. Yet when investors take over a hospital and scale back services, sell its real estate, and weigh it down with rent payments on buildings that it used to own, the very people who depend on that institution don’t get any say in the matter.
One of the first private-equity hospital deals took place in 1996, when the PE industry was young and acquisitions in which investors borrow a lot of money to buy the target company were called leveraged buyouts, or LBOs. An investment firm called Forstmann Little & Company acquired the hospital chain Community Health Systems, or CHS, for close to $1.5 billion. The new owners began expanding it dramatically, buying more hospital companies and piling on more debt with each additional acquisition. This was and still is a common tactic in the private-equity playbook: Fold in other companies so it appears as though you’ve got a fast-growing business. Then you can flip it back to the public markets, via an initial public offering, before the problems that inevitably follow a debt-fueled acquisition binge show up in financial reports. By 2004, when Forstmann Little sold its interest in the hospital chain, it had tripled its early investment, Batt and Appelbaum estimated.
When private-equity investors see others using a certain tactic to make money, they copy it. In 2004, the firm Blackstone and other investors bought another hospital chain, Vanguard Health Systems—which later, following the “Big is better” mantra, acquired hospitals such as the Detroit Medical Center. In the ensuing years, Vanguard also added more than $1 billion of debt—money that was in part used to pay dividends to private-equity investors. Such actions have become known as “dividend recapitalizations”: The company borrows additional money not to invest in itself, but to pay the investors who control it. In 2006, three private-equity firms—Bain Capital, Kohlberg Kravis Roberts, and Merrill Lynch’s buyout unit—acquired HCA Healthcare, a publicly traded chain of hospitals and clinics, in what was then the largest LBO in history. Combined with dividend recapitalizations, HCA’s return to the public markets in a 2011 IPO resulted in the PE firms making more than three times their original investments in just five years. HCA, we should note, became highly profitable by reducing expenses and extracting more revenue from insurers.
Yet many other hospital companies have struggled to operate with the debt they took on under private-equity firms’ control. As Batt and Appelbaum wrote in 2020, “The hospital chains faced major challenges in meeting loan obligations accumulated through LBOs of add-on acquisitions; and local health markets experienced instability caused by the pressure of high levels of debt in these national hospital systems and by the imperative to earn high returns for investors.”
So CHS, which had expanded rapidly under Forstmann Little’s control, began selling hospitals to pay down debt. The first deal came in 2016, when CHS spun off 38 struggling rural and small-town hospitals into a separate publicly traded company called Quorum Health Corporation. In the course of that split, the fledgling unit took on $1.2 billion of debt to pay a dividend to its outgoing parent firm. (In 2020, in the middle of the pandemic, Quorum declared bankruptcy.) CHS’s stock price plunged from $46 a share in mid-2015 to less than $3 today.
Even money-losing hospitals still have assets that investors can exploit. As it happens, Watsonville had been a Quorum hospital. In 2019, Halsen Healthcare, a small health-care-management firm, bought Watsonville and sold the hospital’s land and facilities to a real-estate-investment company called Medical Properties Trust, or MPT. Because of that deal, known as a sale-leaseback, Watsonville now had to pay about $4 million a year in rent to occupy a facility that it had previously owned. At that point, Watsonville’s financial position looked unsustainable, and the hospital filed for bankruptcy in 2021. (Using state money and other donations, a nonprofit established by local and county governments and community groups purchased the hospital last year.)
According to the Private Equity Stakeholder Project, an advocacy group, almost 400 U.S. hospitals are still owned by private-equity firms. In deal after deal, private-equity-backed hospital companies made big promises about how the hospitals would improve. But the hospital business is hard. Over time, many PE-owned hospitals were sold off into less and less stable financial structures to pay down debt that wouldn’t have existed were it not for the previous dealmaking.
Little-known MPT became a huge buyer of health-care real estate globally and now bills itself as “one of the world’s largest owners of hospitals.” The proceeds of selling off buildings and land allowed private-equity investors to keep paying themselves dividends and fees even as hospitals were being crushed by enormous debt. Many deals left the hospitals worse off. Long leases and stiff rent payments translate into “financial instability or lack of resources for improving care for patients and training and upgrading workers,” Appelbaum and Batt wrote in 2021. MPT did not respond to multiple requests for comment, but it has previously defended its practices. “No hospital in our portfolio has ever failed or curtailed services due to an inability to pay rent—because rent constitutes only a small percent of overall hospital expenses,” a company spokesperson told CBS News earlier this year.
The Apollo-owned chain LifePoint, which operated the Lander and Riverton hospitals, has also raised money selling real estate to MPT. As a result, the two Wyoming hospitals found themselves owing at least $6.5 million in annual rent payments on what had previously been their own property, according to calculations by The American Prospect. (LifePoint told the Journal in 2021 that it has used the proceeds from its real-estate sales to MPT to reinvest in its hospitals and reduce its debt, not to pay a dividend to Apollo—but of course, the debt wouldn’t exist in the first place if not for Apollo’s purchase.)
Communities that rely on PE-owned hospitals have good reason to fear a steady erosion of services. The credit-rating agency Moody’s, noting LifePoint’s very high debt, concluded in 2021 that “LifePoint’s ownership by private equity firm Apollo Management will result in the deployment of aggressive financial policies.” According to its most recently available annual statements, for the year ending in 2022, the company had almost $6 billion in debt. That could “require us to dedicate a substantial portion of our cash flow from operations to the payment of interest and the repayment of our indebtedness, thereby reducing funds available to us for other purposes,” the company wrote.
Apollo itself, however, has already done well. In 2021, the firm booked a $1.6 billion gain by selling LifePoint from one of its funds to another, Bloomberg reported that year. In fairness to private equity, the hospital business, and particularly the rural-hospital business, has been under immense pressure because of declining populations, increased poverty, and low Medicaid-reimbursement rates. The pandemic and the widespread staffing shortages that resulted have only increased the difficulty. Hospitals facing all of these challenges might benefit from owners with experience in health care and a focus on long-term sustainability, but the one thing that private equity has indisputably brought to health care—its ability to borrow money on behalf of the companies it acquires—has been far less helpful.
In a 2018 review of 390 private-equity deals, Daniel Rasmussen, a former Bain analyst who now runs an investment firm called Verdad, found little evidence of superior strategic insight, and that what PE consistently does across industries is not to bring great strategic wisdom to running businesses, but rather to add debt. “While debt magnifies positive returns and enhances the returns of good decision-making,” Rasmussen argued in American Affairs, “it can also cut the other way, exacerbating negative returns and punishing bad decisions.”
Government policy has been slow to recognize the damage that private-equity firms’ decisions can do to the hospital industry. In Massachusetts, state regulators approved Cerberus Capital Management’s acquisition of hospitals in 2010 with a strict condition: no dividend recapitalizations for three years. They didn’t foresee that Cerberus would extract money by selling the real estate to MPT, because that tactic hadn’t yet become widespread. (In total, Cerberus made roughly $800 million on its investment in the hospitals that became Steward Health Care, Bloomberg reported.) In Pennsylvania, where the closure of multiple institutions by Prospect Medical Holdings and other private-equity-backed chains has left swaths of so-called hospital deserts, lawmakers have proposed but not yet passed legislation to limit dividend recapitalizations and sale-leaseback transactions. Senator Elizabeth Warren of Massachusetts and a group of other lawmakers have proposed the Stop Wall Street Looting Act, which would reform private-equity practices broadly, but it has gone nowhere.
Even though private-equity firms still own many hospitals, they appear to have lost interest in acquiring more, at least based on deal announcements. But they have been piling into other areas of health care, including dermatology, mental health, and autism care, and exposing some of the most sensitive services to private equity’s single-minded focus on squeezing out profits. “If [private-equity firms] want to return a huge investment bonanza to people who invest in dog food, God bless them, go for it,” Watkins told us. “I believe medical care needs to be in a completely different realm.” Indeed, the private-equity foray into hospitals shatters any pretense that investors in a business do well only if everyone does well, and should remind Americans that some things ought to be more important than financial gains.
This essay was adapted from the new book The Big Fail: What the Pandemic Revealed About Who America Protects and Who It Leaves Behind.
By Joe Nocera and Bethany McLean
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