ANALYSIS: When private equity in healthcare goes wrong

Yulin Zhen, photo editor

Hospitals controlled by private equity often follow a troubling pattern of financial mismanagement, cutting services and jeopardizing care for the communities that depend on them.

Prospect Medical Holdings, a private hospital system, is currently in a long-running legal battle with Yale New Haven Health System over its acquisition of three hospitals in Connecticut. In the filed lawsuit, the health system said it was hesitant to acquire Prospect’s liabilities.

While policymakers propose measures to increase transparency and protect community hospitals, debate continues over how best to balance financial models with patient-focused priorities. The News spoke with healthcare professionals, policymakers and advocates about private equity’s involvement in healthcare.

“These private equity groups are using hospitals as their personal piggy banks,” Sen. Richard Blumenthal told the News. “Private equity firms put profits before patient care. Their actions lead to delayed surgeries, staff shortages and poor quality of care.”

Not-for-profit and privately owned hospitals represent different approaches to healthcare management, each with benefits and risks for the communities they serve.

Historically, hospitals in the United States have primarily operated as nonprofit organizations. Not-for-profit hospitals are required to publicly disclose financial information, ensuring accountability to donors, patients and regulators.

For-profit hospitals, including those owned by private equity firms, are not subject to the same public reporting requirements as nonprofit organizations.

While not-for-profit hospitals strive to reinvest earnings into improving patient care and facility operations, for-profit hospitals often have a responsibility to investors and prioritize profitability. Private equity firms often extract resources from health care systems without paying much attention to long-term stability, experts say.

When private equity in healthcare goes wrong

Steward Health Care filed for Chapter 11 bankruptcy in May 2024, citing unsustainable debt levels and operational problems.

The bankruptcy led to the closure of institutions nationally such as Carney Hospital in Boston and Nashoba Valley Medical Center in Ayer, Massachusetts, cutting off services to thousands of Massachusetts patients and leaving many health care workers uncertain of their future.

“Steward’s focus on profit and his desire to expand his empire nationally and internationally have led to chronic staffing shortages, lack of equipment maintenance and persistent shortages of supplies that have delayed patient care,” said David Schildmeier of the Massachusetts Nurses Association.

Schildmeier emphasized that these conditions “contributed to substandard care and preventable harm to patients, including significant deaths.”

In Connecticut, Yale New Haven Health is in legal disputes with another privately owned hospital system.

In 2022, Yale New Haven Health System signed an agreement with Prospect Medical Holdings to acquire Waterbury Hospital, Manchester Memorial Hospital and Rockville General Hospital.

Following this initial agreement, both parties sued each other, with Yale New Haven Health claiming that Prospect’s financial mismanagement violated the 2022 acquisition agreement. In the countersuit and statements to the newspaper, Prospect has repeatedly said Yale New Haven Health is delaying filing charges to get a better price.

In the lawsuit filed against Prospect, YNHHS wrote that they were hesitant to purchase Prospect’s liabilities.

Yale New Haven Health alleges that Prospect’s financial practices saddled the hospitals with a $1.1 billion debt burden, paid shareholders at least $457 million in debt-funded dividends, and sold $1.4 billion worth of hospital real estate. resulting in the hospitals having to assume approximately $35 million in rent per year. payments and diversion of resources from operational needs.

Prospect also came under fire last month for failing to fund workers’ pensions.

Financial mismanagement like what Yale New Haven Health claims Prospect committed is a common pattern for health systems run by private equity firms.

According to Dr. Howard Forman, professor of radiology and biomedical imaging at the School of Medicine, private equity firms often use “typical play”

“They target poorly performing assets, acquire them using as little cash (and more debt) as possible, typically selling the land and real estate – often to themselves into a separate real estate trust or other investment vehicle – and leasing the property back. operating structure and then proceed to reduce operating budgets,” Forman said.

While private equity-owned health care companies sometimes survive these tactics, Foreman emphasized that private equity often prioritizes short-term gains over the long-term stability of health care.

These financial strategies leave hospitals vulnerable to crises, Foreman said. Reliance on aggressive cost-cutting measures often leads to operational instability, staff reductions, and poor patient care.

Mark Schlesinger, a professor of public health at the School of Public Health, echoed Foreman’s views.

“They take value away from organizations instead of supporting them, which directly impacts the quality of care,” Schlesinger said.

Prospect declined to comment on how their management of Waterbury Hospital, Manchester Memorial Hospital and Rockville General Hospital has impacted patient care or whether there have been significant changes in staffing levels, resources or service availability since they assumed control.

Health over Wealth Act

Private equity’s involvement in healthcare has drawn sharp criticism from policymakers, who see it as a major cause of declining quality of care and financial instability of hospitals.

Blumenthal highlighted these concerns, saying that “patients in these hospitals are essentially bearing the burden of delayed care.”

In July, Blumenthal co-sponsored the Health Before Wealth Act, which he hopes will solve the problem.

The legislation aims to increase transparency and accountability for private equity firms by mandating detailed reporting on debt, executive pay and cuts to patient services. Private equity owners will also be required to open escrow accounts to cover operating expenses and prevent hospitals from going bankrupt.

As Blumenthal explained: “This legislation will ensure that the public interest is placed above private equity profits, creating stronger accountability measures to reduce the impact of corporate greed.”

The law also eliminates tax loopholes that allow real estate investment trusts to profit from hospitals through sale-leaseback agreements.

“We must ensure that our hospitals serve the public, not corporate greed. The health and well-being of millions depend on it,” Blumenthal told the News.

The Health Over Wealth Act was supported by seven Senate Democrats and Vermont Sen. Bernie Sanders.