The plundering of America’s hospitals

In 2020, as the pandemic hit, it was one in Massachusetts and another in West Virginia. Followed by four more — in California, Pennsylvania, and Texas — over the next three years.

Other hospitals are teetering on the brink. In 2022, Conemaugh Nason Medical Center in Pennsylvania announced it was ending OB-GYN deliveries, leaving some mothers-to-be to travel almost an hour to give birth. Last year, Glenwood Regional Medical Center in Louisiana was ordered by the state to turn away patients because of inadequate supplies and staffing levels.

In addition to their financial struggles, all of the hospitals shared three things in common. They all served low-income communities that suffered from a lack of access to healthcare. They were all owned at various points by for-profit investors, including leading private-equity firms like Cerberus, Leonard Green, and Apollo. And in a move that stripped the hospitals of one of their prime assets, the owners had sold the land beneath the facilities to a little-known real-estate investor called Medical Properties Trust. MPT, which has purchased some $16 billion of hospital real estate over the past two decades, now bills itself as one of the world’s largest owners of hospital beds.

For many of the hospitals, the deals proved disastrous. Once their real estate was sold to MPT, they were forced to pay rent on what had always been their own property. That added to the massive debt burdens already placed on the hospitals by their for-profit owners, deepening their financial woes. It also deprived Americans of desperately needed healthcare and put lives at risk — all while enriching some of the world’s wealthiest investors.

“It’s the biggest scam that almost no one knows about,” says Rob Simone, a researcher at the risk-management firm Hedgeye who has spent hundreds of hours digging through MPT’s financial filings and business dealings.

Writ large, MPT’s hospital investments represent a breathtaking scheme that has decimated healthcare in communities across America. And while the legal universe is not the same as the moral one — despicable actions, such as getting rich by cutting off care to the poor, can be perfectly legal — MPT’s deals underscore how giant private-equity firms have profited while gutting a critical piece of America’s infrastructure, even on deals that turned out to be financial catastrophes for the hospitals and their communities.

All told, at least 13 hospitals have closed or gone bankrupt after their land was sold to MPT. And the damage is far from over. In January, MPT reported that its biggest tenant, a nationwide chain of 32 hospitals called Steward, could no longer pay its rent. The announcement — which has left health officials scrambling for fallback plans to provide care to the 2.2 million people served by Steward — could foreshadow more hospital closings to come.

“MPT existed to allow private equity to take money out of our hospital system through uneconomic transactions,” says Justin Simon, who runs a successful healthcare-focused hedge fund called Jasper Capital. “Now they’ve bankrupted the hospitals. The communities are left holding the bag, and no one is going to jail.”

MPT was founded in 2003 by Ed Aldag, an Alabama native who serves as the firm’s president, chairman, and CEO. The core idea was simple: to buy hospital real estate, pocket the lease payments, and use the money to reward investors. (By law, real-estate investment trusts like MPT must pay 90% of their taxable income to shareholders.) Over the past few decades, plenty of private-equity firms have engaged in a similar form of financial engineering, called sale-leasebacks, with hotels and retailers. Selling the real estate was a key element, for instance, of the financier Eddie Lampert’s plan to make money from a struggling Sears. But no one had done it at a massive scale with hospitals — for reasons, perhaps, that should have been obvious.

MPT came along at the perfect moment. Hospitals in rural and underserved communities have always been a tough business, for the simple reason that they serve more patients who are uninsured or who rely on Medicaid, which reimburses at a fraction of the rate of commercial insurance. But then two things happened. First, in 2006, Bain Capital and a handful of other investors bought the massive hospital chain HCA and quickly made a fortune. Second, the passage of the Affordable Care Act in 2010 added to the gold-rush mentality by promising to dramatically expand the number of Americans with insurance, thereby improving hospital margins. By 2011, seven of the nation’s top for-profit chains were owned by private-equity firms.

To say the investments didn’t pan out would be an understatement. Obamacare didn’t wind up providing the expected infusion of cash, and the government has continued to slash Medicaid reimbursements. As a result, hospitals in rural and underserved areas continued to be a difficult business proposition, and their private-equity investors were facing serious losses. “The hospital chains faced major challenges in meeting loan obligations,” the economist Eileen Appelbaum and Rosemary Batt, a management professor at Cornell University, found.

What started out as a way to rescue failed investments wound up creating a whole new form of financial engineering for private-equity profiteers.

If capitalism worked the way it’s supposed to, that would have been the end of the story. Investors make a bet, it goes sideways, and voilà, they lose their money. But in this case, private-equity firms found a new way to save their failed investments — by selling the land under the hospitals to MPT.

The company, which didn’t respond to requests for comment, has insisted the deals are good for hospitals as well as investors, because they inject much-needed cash into underfunded systems. “We provide up to 100% of a hospital’s real estate value to help fund facility expansions, investments in people and technology, and the execution of long-term growth strategies,” MPT says on its website. “Ultimately, we help hospitals serve patients better around the world with our capital solutions.”

Private-equity firms tell the same story. In statements to Business Insider, Cerberus, Apollo, and Leonard Green said none of the money from the MPT deals was distributed to shareholders. Instead, they said, the funds benefited the hospitals by enabling them to do things like improve their facilities, pay down their debts, provide benefits to their employees, and extend free care to their communities. The firms also insisted that their decisions left the hospitals in strong financial health. Leonard Green, for instance, said that when it exited its investment in a hospital system called Prospect in 2021, the company had “access to over a half billion dollars to support its operation.”

But wherever the funds from the MPT transactions were placed on the books, the deals saddled the hospitals with years of rent payments, contributing to their financial struggles. And in the aftermath of the deals, private-equity firms wound up getting rich off investments that, by any rational measure, should have been failures — often by paying themselves and their investors hefty dividends. “I estimate that less than 10% of the money has actually been reinvested into the hospital systems,” says Richard Mortell, the managing partner of Third Coast Real Estate Capital, who has studied MPT’s deals. “The vast majority was either distributed to owners, or used to repay debt taken out to distribute money to owners.”

Private-equity investors have long turned a profit by saddling the companies they buy with massive debt, even if it means running the businesses into the ground. But with MPT, what started out as a way to rescue a failed investment strategy wound up creating a whole new form of financial engineering for private-equity profiteers. Firms like Apollo, Cerberus, and Leonard Green couldn’t make money by selling their debt-laden hospitals back to the public markets — but they could exploit the value of the underlying real estate. In the process, they stuck the struggling hospitals with something they’d never had before, and couldn’t afford to pay: rent.

MPT’s biggest deals have been with Cerberus, the secretive financial colossus run by Stephen Feinberg, a billionaire whose investments in gun companies have been the subject of much controversy. It all began in 2010, when Cerberus acquired a struggling nonprofit hospital system and rebranded it as for-profit Steward Health Care. Steward’s CEO, a charismatic doctor named Ralph de la Torre, talked a big game about fixing healthcare in marginalized communities. In announcing the deal, Cerberus assured The Boston Globe that it was “a big win for the hard-working communities of Greater Boston.”

State regulators were suspicious of the deal. In return for state approval, Steward promised it wouldn’t add any debt to the hospitals for the purpose of paying Cerberus a dividend or distribution for three years. As it turned out, regulators weren’t suspicious enough: They didn’t foresee MPT.

From 2016 to 2022, according to a company report, MPT acquired a net $3.3 billion of real estate underlying 34 Steward facilities. MPT then leased the real estate back to Steward. The deal was done to “give Cerberus some liquidity” and “recover the original investment,” according to an announcement at the time. Steward now has an annual rent burden of almost $400 million, according to Simone, the vast majority of which goes to MPT. In the process, Steward became MPT’s largest tenant, at one point accounting for as much as 30% of its annual revenue.

After the MPT deal, Cerberus made a lot of money from its investment in Steward. According to a confidential investor document acquired by Bloomberg, one of Cerberus’ funds collected a dividend of $484 million. Overall, Steward’s investors quadrupled their money, even as the hospitals themselves were hemorrhaging cash.

“Cerberus generated a home-run multiple on an unsuccessful investment,” says Mortell, the longtime real-estate investor. “That’s not the way capitalism is supposed to work.”

In a statement to BI, Cerberus said its involvement with Steward enabled the chain to invest $800 million on infrastructure, technology, and personnel, transforming its failing hospitals into “a world-class accountable care organization.” But Steward didn’t exactly thrive after its purchase by Cerberus. One after another, many of the chain’s hospitals have either closed or been forced to cut services. During the pandemic, Easton Hospital in Pennsylvania received a last-minute bailout from the state after Steward threatened to close it. Local leaders were incensed. “It’s hard to believe that Easton Hospital could have sat vacant in the coming months — shedding 700 jobs in the process — as the rest of the Lehigh Valley scurried to free up every room, ventilator, and medical staffer to try to save lives,” fumed the local newspaper’s editorial board.

What’s more, Steward has been sued by a handful of vendors for leaving what appears to be a trail of unpaid bills. In January, at St. Elizabeth’s Medical Center in Boston, a new mother bled to death after a device that could have saved her life had been repossessed by creditors because Steward had failed to pay the bill. Now, the hospital chain’s looming collapse could endanger even more lives, most of them in poor communities. “The burden of Steward hospital closures,” a letter signed by the state’s entire congressional delegation warned, “would be borne primarily by the Massachusetts residents who already experience the greatest challenges accessing health care.” The delegation has asked Cerberus to provide details of its investment in Steward, including how much money it extracted from the chain. “The net result of these transactions,” the delegation wrote, “appears to be an unfolding tragedy.”

Investors at Cerberus, meanwhile, aren’t the only ones who scored a home run by inflicting financial pain on Steward. In 2021, MPT loaned the hospital chain’s operating team, including de la Torre, $335 million to buy out Cerberus. Steward then turned around and paid its new owners, including de la Torre, a dividend of about $100 million. A few months later, de la Torre bought a $40 million yacht named the Amaral, which features a library, a gym, and a whirlpool on the top deck. Just after that, Steward filed with the government to delay paying back pandemic-era loans, citing “extreme financial hardship.” (Steward did not respond to requests for comment.)

The pattern of using MPT to profit from the pain of impoverished patients was repeated by other leading investors. Prospect, a chain of hospitals in underserved communities, was bought by Leonard Green in 2010. It turned out to be a bad investment. According to the Private Equity Stakeholder Project, a research and advocacy group, Prospect lost over $600 million between 2015 and 2020.

Then, in 2019, Leonard Green sold $1.55 billion of Prospect’s real estate to MPT. In a statement to Business Insider, Leonard Green said its ownership of the hospital chain “enabled Prospect to invest approximately $750 million in its hospitals, provide $900 million in free care, contribute $170 million to local taxes, and fund $300 million into employee pensions and 401(k) plans.”

But after Leonard Green sold off Prospect’s real estate, the hospitals continued to struggle. Ambulances were unable to fuel up because their credit cards had been cut off. Elevators stopped working. Six elderly psychiatric patients with COVID-19 died due to poor infection control. Yet the ownership group led by Leonard Green, the Stakeholder Project found, was somehow able to extract $658 million in dividends and other fees from the struggling hospital chain. Prospect is now attempting to sell three of its hospitals in Connecticut to Yale New Haven Health System, but the deal may fall through because of Prospect’s mounting debt and unpaid bills. If Yale doesn’t acquire the hospitals, they will likely go bankrupt.

Then there are the deals that MPT has done with Apollo. In 2015, the private-equity giant bought its first hospital system and embarked on what’s known as a “roll-up strategy” — a popular play in which investors make a company bigger, though not necessarily better, by continuing to acquire businesses. The Apollo-backed business purchased several more healthcare companies and sold some of the underlying real estate — $700 million — to MPT. In a statement to BI, Apollo referred all questions about the deal to its hospital company, as if it had nothing to do with the deals. But Aldag, the MPT founder and CEO, has boasted that the transactions were brokered directly with Apollo. “They pretty much gave us their entire portfolio and said, ‘Here, pick what you’d like to have for this particular price,'” Aldag told investors in a conference call explaining the deal. Today, Apollo owns some 220 hospitals across 36 states.

If Congress does its job and follows the money, it may find itself confronting one of the biggest financial heists in American history.

After Apollo sold off their real estate, the hospitals continued to suffer. According to their financial statements, capital expenditures were less than depreciation in the years after the sale-leaseback deals with MPT, which means the asset base was being eroded, not increased. “Apollo’s hospital profiteering has resulted in dangerous conditions, closures and reduced access to services, and declining quality,” concluded Eileen O’Grady, a senior researcher at the Private Equity Stakeholder Project. Hospitals in one Apollo hospital chain, LifePoint Health, rank among the worst in their states, and Moody’s has downgraded the company’s debt to reflect the company’s “elevated financial leverage.” Patients and communities, once again, paid the price for private equity’s investment model.

While the real-estate deals with MPT have provided private-equity firms with a huge financial windfall, they’ve posed a problem for MPT itself. The more hospital real estate that MPT buys, the more money it makes in rent payments from the hospitals. But because its deals place huge financial stress on the hospitals, MPT is essentially operating as a landlord that is driving its own tenants out of business. Now, as hospital chains across the country find themselves unable to pay their rent, MPT is facing financial problems of its own. In 2020, its stock price hit $24. Today, it’s under $4.

But that doesn’t mean that MPT’s leaders didn’t get rich off its hospital deals. Top executives, including Aldag, received hefty bonuses based in part on the dollar volume of transactions they did — meaning the more hospitals they drove into debt, the better. Never mind that, as Simone found, MPT apparently used accounting assumptions that overinflated the lease payments it could realistically expect to receive from troubled hospital systems. From 2019 to 2022, according to SEC filings, MPT’s top three executives were paid some $125 million in cash and equity grants. They got rich, in short, by making hospitals poor.

In December, Congress announced a bipartisan investigation into private equity’s influence in healthcare. MPT was included on the list of companies that received subpoenas. Sen. Chuck Grassley, the ranking Republican on the Senate Budget Committee, has asked Apollo and Leonard Green to submit details about its deals with MPT, among other things; the Massachusetts congressional delegation is asking Cerberus to account for what happened at Steward. The fundamental question is: Where did all the money go? If Congress does its job and follows the money, it may find itself confronting one of the biggest financial heists in American history — one that transferred billions of dollars from needy patients to greedy investors. Lawmakers aren’t empowered to get any of that money back. But they can at least make MPT and its private-equity partners account for what they got away with.

Bethany McLean is a special correspondent at Business Insider.

Correction: March 11, 2024 — An earlier version of the story misstated the committee on which Sen. Chuck Grassley serves as the ranking Republican. It’s the Senate Budget Committee, not the Senate Finance Committee.