States are targeting private equity-backed acquisitions amid the financial fallout from Steward Health Care and Prospect Medical Holdings, threatening to curb corporate investment in healthcare.
Over the past two years, more than a dozen states have passed laws bolstering healthcare merger and acquisition notification and financial disclosure requirements, in some cases requiring clearance from state attorneys general when corporate investors are involved. New legislation is poised to further limit healthcare mergers and acquisitions, particularly smaller deals that fall outside of the Federal Trade Commission’s review process. The spate of new laws has spurred a debate over the potential pitfalls and merits of private equity, hedge funds and real estate investment trusts in healthcare.
Related: Steward Health Care files for Chapter 11 bankruptcy protection
Private equity supporters argue corporate investors provide much-needed capital in underfunded sectors. Critics claim the risk of private equity’s short-term, profit-oriented goals outweighs potential benefits.
“It’s no secret that private equity has seen a lot of opportunity in healthcare,” said John Kelly, an attorney at the law firm Barnes & Thornburg who advises providers. “But their ability to stay off the radar is not on the table anymore.”
Massachusetts learns its Steward lesson
Like other states, Massachusetts has experienced a significant increase in private equity investment in hospitals, home health agencies, behavioral health providers and physician groups.
Private equity was involved in nearly two-thirds of all provider transactions from 2019 to 2023, compared with less than a third from 2014 to 2018, data from the state's Health Policy Commission shows. That is one reason the commission wants authority to deny, approve or impose conditions on proposed deals.
Massachusetts also is grappling with the fallout from Steward's spiral, and policymakers are looking to prevent other systems from hitting that point. On Monday, Steward filed Chapter 11 bankruptcy in U.S. Bankruptcy Court for the Southern District of Texas.
Dallas-based Steward ran into financial trouble after private equity firm Cerberus Capital Management purchased the small Catholic health system in Massachusetts in 2010 and converted it to a sprawling for-profit hospital chain. The national for-profit system has been selling and closing hospitals since last year, recently shuttering one of its nine Massachusetts hospitals — New England Sinai Hospital in Stoughton.
Lawmakers worry more facilities will close as Steward’s outstanding rent and vendor payments pile up. State officials say they were caught off guard because Steward refused to share its audited financial statements as the health system is locked in a related seven-year legal battle with the state.
Sen. Elizabeth Warren (D-Mass.) said last month that regulators lack the appropriate tools to hold Steward and Cerberus, as well as real estate investment trust Medical Properties Trust, to account.
Steward declined to comment.
The Massachusetts legislature is considering a bill that aims to prevent similar scenarios in future transactions by requiring hospitals disclose audited financial statements about their parent organization’s out-of-state operations, private equity investors, real estate investment trusts and management service organizations. It also would require hospitals own their real estate, require vendors give 60-days’ notice before repossessing medical equipment and broaden the Massachusetts Health Policy Commission’s authority.
“The most important thing that can happen in Massachusetts and the country is that we move very quickly to develop legislation, policy and oversight to stop [private equity investment in healthcare] from happening,” Barbara Blakeney, a member of the commission, said during an April 11 meeting. “It feels like cannibalism to me. We don’t have a strong enough healthcare system to sustain this, and it is not right.”
Rhode Island safeguards access
Sen. Edward Markey (D-Mass.) also released a discussion draft last month of the Health Over Wealth Act, which borrows some elements from Rhode Island’s approach to acquisition oversight.
The bill would require private equity firms that acquire healthcare companies to set aside funding to protect access to care, remove tax breaks that could incentivize corporate investors to strip hospital assets and require private equity firms to disclose their finances to the Health and Human Services Department and make them public. It also would force private equity firms to acquire a license from HHS, which the department could revoke, to be able to participate in healthcare transactions.
Rhode Island officials have the power to set conditions, like price growth caps and funding to protect care access, on healthcare transactions.
“You need comprehensive health system financial oversight so when [health systems] plead poverty, we understand what the finances are,” said Christopher Koller, president of the Milbank Memorial Fund and former Rhode Island health insurance commissioner.
Rhode Island Attorney General Peter Neronha (D) required Los Angeles-based Prospect to fund an $80 million trust as part of its 2021 acquisition of two safety-net hospitals in Providence. The trust ensured the hospitals would keep their services and remain viable, Neronha said.
Over the past year, Prospect Rhode Island hospitals have allegedly racked up more than $24 million in outstanding vendor payments, threatening access to care, according to a November lawsuit filed in state court by Neronha.
Prospect did not return a request for comment.
“Private equity should never be let within 10 feet, 100 feet, 1,000 feet, 1,000 miles of healthcare,” Neronha said during a March FTC hearing on private equity investment in healthcare. “They just cannot be trusted with what we care about most."
Other approaches in California, Indiana
Other states including California, Indiana and New York also are boosting regulatory oversight.
Indiana Gov. Eric Holcomb (R) signed a law in March requiring healthcare entities and private equity firms to notify state officials about pending mergers or acquisitions. The law, which takes effect in July, applies to any transaction with a healthcare entity that has at least $10 million in total assets.
New York enacted a law in February that imposes a similar notification requirement for any healthcare entity increasing its total in-state revenues by at least $25 million within 12 months after a merger, acquisition, joint venture or partnership is completed.
California's legislature is considering a measure that would require a 90-day notice and the attorney general’s approval of healthcare transactions involving private equity groups or hedge funds. The legislation also would prevent private equity firms from controlling certain aspects of physician or psychiatric practices.
Connecticut policymakers are also looking at legislation that would require state approval when a hospital sells more than 10% of its assets, including its real estate. Prospect has been trying to sell its three Connecticut hospitals, which have struggled to pay taxes, to Yale New Haven Health.
The regulatory efforts will help guard healthcare services against the risk of prioritizing financial returns over patient outcomes, said Dr. Imamu Tomlinson, CEO of Vituity, a doctor-owned physician group.
"Sustainable healthcare requires a delicate balance between investment and patient care, and increased oversight can help maintain this balance," he said.
Weighing oversight against economic interest
Not all agree that stricter oversight will help. Focusing on piecemeal state laws distracts from systemic cost and quality issues in healthcare, said Ari Markenson, an attorney at the law firm Venable who advises providers.
“This is not the answer to fixing the problems in the healthcare system,” he said. “There are a lot of private investors that are doing some really amazing things in healthcare. The government isn’t necessarily putting in the capital to make structural changes to our system, and stopping private money from doing that doesn’t seem to make a lot of sense.”
State premerger notification laws will continue to impact the strategy and scope of proposed hospital mergers, said Thomas Shorter, a healthcare attorney at law firm Husch Blackwell who represents providers.
“I know of two deals that have collapsed because of the state-level scrutiny applied,” he said. “Providers don’t want to spend a lot of money and time on a deal to have it get jammed up at the state-level review. There’s the political cost and true dollar cost to that.”
Along with the new state regulations, FTC and Justice Department investigations and increasing interest rates have had a chilling effect on private equity-related healthcare transactions, said Colin Luke, a healthcare attorney at law firm Holland & Knight who represents providers. Health systems are turning to joint ventures and clinical affiliations as an alternative, he said.
“I don’t think we’ve looked at the long-term implications of these state laws,” Luke said. “What are we going to do if a hospital has to find a partner to be viable?”
