Crackdown on Private Equity in Healthcare Flops in State Houses

A series of healthcare facility bankruptcies has fueled public anger towards financial dealmakers in the sector, prompting lawmakers across the country to draft stringent regulations. However, these regulatory efforts are faltering as several states decide against enacting the proposed curbs.

State Legislatures Fail to Enact Tough Regulations

Californian Governor Gavin Newsom vetoed a bill that would have given the state the power to block private equity deals for most healthcare facilities. Similar regulations aimed at bolstering oversight of financial firms or outright prohibiting specific healthcare investments faltered in Pennsylvania, Connecticut, Oregon, Washington, and Minnesota.

Massachusetts Fails to Pass Legislation in Healthcare Oversight

In Massachusetts, public condemnation of private equity and real estate firms reached a peak after Steward Health Care, one of the state’s largest hospital operators, filed for bankruptcy in May. A bill intended to increase scrutiny of such investors is currently stuck in the state legislature with only a few days remaining before the end of the legislative session.

Federal Intervention Remains Unlikely

With federal action unlikely, the discussion is shifting towards less extreme measures to manage potentially risky practices. This includes more comprehensive disclosure requirements that may alert lawmakers more promptly to the financial troubles of healthcare businesses. Certain states, including Indiana, have adopted laws requiring special notification for specific healthcare transactions without outright blocking powers.

“I don’t think eliminating private equity altogether is either practical or doable. I think there is a role for private equity in health care — but the question becomes what is the role? How do you define that role? I think the legislature is right to be looking at what are the guardrails that we need here.”

— Massachusetts Governor Maura Healey

Criticisms and Defenses

Critics argue that the Massachusetts and California bills unfairly tar private equity and real estate firms for the broader issues plaguing the healthcare industry. Drew Maloney, CEO of private equity lobbyist American Investment Council, wrote that private equity and private credit are vital sources of capital for American companies across various sectors.

Healthcare Sector’s Vulnerability to Financial Pressures

Despite these defenses, private equity-backed companies contribute significantly to healthcare sector bankruptcies. According to the Private Equity Stakeholder Project, around 20% of bankruptcies in the healthcare sector last year were associated with private equity firms. Without additional safeguards, events akin to the collapse of Steward Health Care may continue to occur.

The Steward Health Care Case

The fallout from Steward’s bankruptcy caused widespread public outrage, with former nurses testifying about the horrors they endured. The hospital chain filed for bankruptcy with over $9.15 billion in liabilities, making it one of the largest corporate failures of the year.

The Complexity of Health Care’s Financial Challenges

However, the root causes of Steward’s financial crisis are complex and multifaceted. Singling out financial dealmakers for stricter scrutiny could inadvertently deter investment in emerging sectors such as life sciences and climate technology.

Controversial Sale-Leaseback Deals

A sale-leaseback deal with Real Estate Investment Trust (REIT) MPT gave Steward the capital needed to expand. Lawmakers criticized the transaction, arguing it saddled Steward with excessive rent and exacerbated its financial struggles. Currently, only the House version of the Massachusetts healthcare bill specifically bans hospitals from leasing their main campuses from REITs.

Investigations and Alleged Misconduct

Investigations into Steward’s collapse are ongoing, focusing on alleged financial malfeasance. Former CEO Edward de la Torre has faced criticism for enriching himself while Steward accumulated debt. Federal agents seized his phone, and Steward board members have been summoned to answer questions in a grand jury probe.

“They all made money and the hospitals crumbled. All of these players were cooperating simultaneously, which led to the collapse of the Steward system.”

— US Senator Edward Markey

Senator Edward Markey and his colleague Elizabeth Warren introduced federal legislation aimed at tightening controls on private equity and real estate investors and imposing stricter penalties for instances of misconduct. However, this legislation has not progressed.

Failed Reconciliation of Healthcare Bills

In Massachusetts, the House and Senate failed to agree on the scope and provisions of the healthcare bill by the end of July. Evan Horowitz, executive director for Tufts University’s Center for State Policy Analysis, suggests that reaching an agreement before the session ends on December 31 is unlikely.

Persistent Unrest

The collapse of Steward Health Care illustrates the ongoing tension between profit-driven financial strategies and patient healthcare. Despite the failure of the regulatory bill, Governor Maura Healey remains committed to health-care reform. Future debates will likely address the role of financial intermediaries in healthcare, focusing on how to balance financial viability with patient care.

Continued Involvement of Financial Firms

Financial firms continue to play a significant role in the healthcare sector. In October, private equity firm Kinderhook Industries purchased Steward’s physician network, maintaining its presence in Massachusetts.

Conclusion

The failed attempts at regulatory reform highlight the challenges lawmakers face in balancing financial investment in healthcare with the need for oversight. As healthcare continues to evolve, finding a delicate equilibrium between supporting and scrutinizing private and public players will be crucial.

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