Success of private equity investment in hospitals, post-acute to be determined

Most private equity investors have steered clear of acute-care hospitals. But several firms have moved aggressively into the acute and post-acute space, with mixed results so far.

There’s been one clear failure. The parent company of Hahnemann University Hospital, acquired by private equity firm Paladin Healthcare from Tenet Healthcare Corp. early last year, filed for bankruptcy in July.

Paladin’s president, Joel Freedman, announced in June that the 171-year-old teaching hospital in downtown Philadelphia would close. The parent company, Philadelphia Academic Health System, is putting its other hospital asset, St. Christopher’s Hospital for Children, up for sale.

Hahnemann’s valuable real estate in the gentrifying downtown area was not included in the bankruptcy filing. That prompted critics to say Paladin’s acquisition of the hospital, which disproportionately served poor and uninsured people, was actually a real estate play.

“That Hahnemann deal, I’m scratching my head,” said Paul Keckley, a veteran healthcare analyst, who noted that many private equity deals in healthcare put ownership of the buildings and land in a separate real estate investment trust company.

“That’s a defensive strategy,” he added. “It’s only good if the real estate is worth more than the operating entity.”

Paladin did not respond to requests for comment.

Steward Healthcare, backed by private equity firm Cerberus Capital Management and real estate investment firm Medical Properties Trust, has aggressively expanded from its home base in Massachusetts. It now operates 36 hospitals in nine states.

That expansion was made possible through a sale and lease-back deal in 2017 with Medical Properties Trust, which paid Cerberus back its initial investment. Steward was then able to buy 18 hospitals in the South and West from Iasis Healthcare, another private equity-owned company.

Steward’s current financial position is not publicly known because it has not filed required 2016 and 2017 audited financial statements with the state of Massachusetts. The state has fined the company $400,000 for noncompliance, according to a state agency spokeswoman.

Steward did not respond to requests for comment.

All these deals have put Steward in a tough spot, said Eileen Appelbaum, an economist who studies private equity transactions at the Center for Economic and Policy Research.

“Steward has to make a go of it while paying rent on properties sold to MPT and paying off debt of its own and of Iasis,” she said, noting that Cerberus has little or no skin in the game at this point. “Seems like a tall order for a chain of community hospitals.”

Last year LifePoint Health, a small-market hospital company, merged with RCCH HealthCare Partners, another rural hospital operator that’s owned by affiliates of private equity firm Apollo Global Management. The new company has 84 nonurban hospitals in 30 states. LifePoint’s top executives received large stock awards, including $140 million to former CEO Bill Carpenter.

Keckley said the merged company so far has focused on cutting costs to boost margin. After that, he expects it to exploit its lower cost base to win contracts with payers.

“They’ll look at markets where they can get value, enhance those with their capital and information technology, and exit ones where they can’t,” he said. “Then they’ll flip those to a nonprofit health system in a structured deal where they don’t have to write down the full value of what they paid, so the value doesn’t look diluted to their investors.”

In the post-acute sector, Humana and private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe last year acquired Kindred Healthcare for $4.1 billion, dividing the company in two, one focused on rehabilitation and long-term acute care and a second one focused on hospice, home health and community-care business. TPG Capital and Welsh, Carson, Anderson & Stowe own rehab and LTAC company Kindred Healthcare.

The second company is Kindred at Home, with the private equity firms taking a 60% stake and Humana getting a 40% share and the right to buy the remaining ownership within five years. Humana and the private equity firms combined that company with another purchase, Curo Health Services, a large hospice operator.

Humana hopes the acquisitions will enable it to improve post-acute care and reduce costs for its Medicare Advantage plan members. It’s implementing an electronic health record and practice management system for home health and hospice services under Kindred at Home.

“Humana is playing long ball with Medicare Advantage, and it will get value with that deal,” Keckley said. “But is Humana for sale, or will it reinvent itself?"