By Brian Spegele and Laura Cooper
April 26, 2020
Pennsylvania’s governor was urgently preparing for a surge in Covid-19 cases last month when a private-equity-owned hospital said it would shut its doors unless the state secured a $40 million bailout.
Steward Health Care System LLC said it needed the money from the state in three days or “Easton Hospital will no longer be able to serve the community’s health-care needs and will be forced to close,” read a letter to the governor from Steward, which is owned by $43 billion New York investment firm Cerberus Capital Management LP.
Gearing up for an expected surge in patients, Pennsylvania didn’t want to lose any hospital beds, local and state officials said. “That’s how they kept the state hostage,” said Sal Panto, Easton’s mayor and a member of the hospital’s board of trustees.
Private-equity investors including Cerberus poured around $200 billion into U.S. health-care buyouts in the last decade. An aging population, strong health-care returns and huge cash piles for private-equity funds supported the deal making.
But a playbook that often includes loading portfolio companies with debt, selling assets to lock in profits and sometimes shutting hospitals is adding to the health-care system’s strains. Now the firms with struggling health-care investments find themselves in unwelcome fights with local communities.
“Hospitals should be community assets,” said Rep. Robert Freeman, a Democratic Pennsylvania state representative whose district includes Easton. “They shouldn’t be subject to the kinds of corporate raiding that goes on in the private sector.”
A Steward spokesman said the company has gone “above and beyond to try to keep the Easton Hospital open” during the pandemic. He said Easton Hospital has struggled financially for years and money it accepted from the government was the bare minimum to maintain operations.
Beyond Easton, Steward faced complaints in Massachusetts from lawmakers of both parties and a nurse’s union for reducing services for two small intensive-care units. Two private-equity-owned hospitals in Philadelphia and San Antonio have also closed in the last year, sparking protests.
Total assets controlled by private-equity firms have more than doubled since the financial crisis to more than $4 trillion. That cash has flowed from global investors such as sovereign-wealth funds and pension funds into investments that touch every corner of the U.S., including hospital chains.
Advocates of private equity say their investments help provide access to new technologies that improve patient care and their operating experience can help to turn around struggling companies.
One of the best-known firms is Cerberus. The company, known for investing in distressed assets, ran into trouble in the financial crisis after it bought an 80% stake in Chrysler for $7.4 billion.
When Chrysler executives turned up in Washington for a bailout, lawmakers demanded to know why Cerberus didn’t put up money to save the company. Cerberus argued its fiduciary obligations prevented it from putting more money into Chrysler. The firm gave up its Chrysler stake as part of the auto-industry bailout, although Cerberus continued to own Chrysler’s financing arm until 2011. Firm co-founder and co-Chief Executive Stephen Feinberg has been a major Trump election donor and was appointed to lead the president’s intelligence-advisory board.
The situation for Easton, a city of around 30,000 best known as the home of Crayola crayons, puts Cerberus in another difficult position.
Founded 130 years ago with donations from local churchgoers, Easton Hospital was a nonprofit until 2001, when it was sold to Community Health Systems Inc., a publicly traded hospital chain.
In a complicated eight-hospital deal in 2017, the company sold the operations of Easton and the other hospitals to Steward, the company owned by Cerberus, and it sold the hospitals’ property to a real-estate trust in which Cerberus held a small stake for about $300 million.
As a result, the Easton hospital was forced to pay millions of dollars in annual rent on property it previously owned.
Steward “thought they were going to turn it around, but they didn’t,” Mr. Panto said. Unlike a local owner, “they have no skin in the game.” Steward responded that Easton Hospital paid millions of dollars in taxes last year.
Even before the virus hit, Steward wanted out of the struggling investment, with Easton Hospital losing more than $5 million in February alone. It lined up a buyer for Easton Hospital, a local nonprofit medical system called St. Luke’s University Health Network, but warned officials that if the deal failed to close on time, Steward would close Easton Hospital around May 15.
The pandemic led St. Luke’s to postpone the deal. The delay led Steward to seek a bailout. Worried that Easton would suffer if the hospital closed, St. Luke’s cosigned the bailout request letter to Gov. Tom Wolf. Both companies today say they remain committed to negotiating a deal for Easton Hospital.
By late March, Pennsylvania officials feared Easton—about 70 miles from both New York and Philadelphia—could be hard-hit by the virus.
Steward’s bailout request came on March 22. “Without your assistance, Steward must now close the hospital,” read the letter signed by Michael Callum, a Steward executive vice president.
State Rep. Freeman asked Mr. Wolf to intercede. “I cannot stress enough the importance of keeping Easton Hospital open,” Mr. Freeman wrote to the governor’s office. “They are a critical hospital in the Easton area for providing medical care in the face of the Covid-19 pandemic.”