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Why Steward Health Care’s Fate Was ‘So Predictable’

A sale-leaseback that doomed many other businesses preceded the bankruptcy of the local health system.
Courtesy: iStock

Steward Health Care is in the process of declaring bankruptcy and selling its 31 remaining hospitals and its physician group to settle the for-profit system’s $9 billion in debt. The physician-owned system celebrated its emphasis on value-based care and leaned into its unique operations. But it fell prey to a financing hurdle that has ended the life of many businesses before it: selling its land and leasing it back from the new landlords.

Just a few years ago, the hospital system was in growth mode, purchasing five hospitals from Tenet in South Florida in 2021. The Dallas-based system’s North American President at the time was Dr. Sanjay Shetty, who had been with the system in several roles since 2010. Shetty sat down with D CEO magazine to discuss the system and how it was on the leading edge of payment models, but court records paint a different picture today.

Reuters first reported that Steward has more than $9 billion in liabilities, including $290 million in unpaid employee wages and benefits, nearly $1 billion in unpaid bills to suppliers and vendors, $1.2 billion in loans, and $6.6 billion in long-term rent obligations.

That $6.6 billion in unpaid rent is key to Steward’s status today, according to Rosemary Batt, the Alice Cook Professor of Women and Work at Cornell University, who has studied the system for years. So how did we get here?

How We Got Here

Steward was formed when private equity firm Cerberus Capital bought Caritas Christi and rebranded it Steward in 2010. In 2016, Steward sold its Massachusetts properties to Medical Properties Trust for $1.25 billion and leased them back from the real estate investment trust. This system now had liquidity to expand but was also burdened by hundreds of millions of dollars in ever-increasing rent each year.

In 2020, Cerberus sold the system back to its doctors, turning a $800 million profit in ten years. Steward’s new ownership team paid itself a $100 million dividend, and the company’s CEO bought a $40 million yacht, according to the Lown Institute. In 2024, Medical Properties Trust went public about Steward’s $50 million in unpaid rent, and Massachusetts asked Steward to get out of the state.

In May, the system filed for bankruptcy, later announcing that it was planning to sell its physicians group and all its hospitals in the process. But according to Batt, the system was likely doomed once it made itself a tenant in its old property. “Everything that happened was so predictable because of the sale and leaseback,” she says. “Medicaid and Medicare reimbursement does not go up three percent per year as rents do.”

After the 2008 recession, Batt and a colleague began studying how capital markets can impact different industries and decided to focus on healthcare. As a private equity-owned system, Steward made the perfect case study for her studies. She published several white papers in the Institute for New Economic Thinking and Center for Economic and Policy Research focusing on the financial market’s impact on healthcare with titles like “Private Equity Buyouts in Healthcare: Who Wins, Who Loses?” and “Private Equity and Surprise Medical Billing:  How Investor-owned Physician Practices Are Driving up Healthcare Costs.”

Batt points to the sale and leaseback as the root of Steward’s downfall, as it has for others. Bankrupt clothing retailer Mervyn’s sued Cerebrus and another private equity firm for forcing into bankruptcy after a sale and leaseback in 2008, and senior living giant HCR ManorCare suffered the same fate after a sale and leaseback. J. Crew and Nine West also suffered bankruptcies after sale-leasebacks and private equity buyouts. While the sale gives the business cash to grow, it forces the company to pay increasing rent. Meanwhile, private equity companies can make money on the deal by just sitting on the land until the price goes up enough to sell, even if the business can’t make rent and fails.

A 2017 Steward deal paints the picture of where the value lies in these private equity transactions. Steward’s first interstate expansion after the sale of its property to MPT was to purchase eight hospitals from Community Health Systems for $311 million. The real estate for those hospitals was sold to MPT for $301.3 million shortly thereafter, meaning the eight hospitals were worth just $10 million. The value is in the land, and for a private equity company doing right by its shareholders, there isn’t much incentive to keep rents down and preserve an operator when more lucrative opportunities await.

“The real estate is more valuable, and the operating companies are worth almost nothing,” Batt says. “Seventy-five to 95 percent of the value of these deals is in the real estate and buildings.”

Why Hospitals Are a Good Investment

In other industries, it might be a risk to raise the rent on a property so much so that you drive your tenant out of business, as the landlord may not be able to find someone else to take the place as renter. But healthcare facilities are often too essential to the economic and physical health of a community to be shut down, and if operators don’t purchase the distressed hospitals, the state likely will do so rather than leave a community without access to healthcare. Additionally, many of these hospitals were built decades if not centuries ago in prime real estate that can likely be turned into luxury residential or retail space.

Unlike other businesses, healthcare systems can’t just raise prices as rent increases. They have to negotiate once a year with more powerful insurance companies for reimbursement rate hikes, often at the risk of the negotiation going public and the hospital being blamed for increasing health prices. With the spike in labor costs and the inability to have the leverage to negotiate with suppliers, hospital operators are caught in a pinch, especially if they don’t own their land. When Medical Properties Trust raises rent each year, systems like Steward are caught in the consequences of market forces and their decision to sell their land.

“These firms are trained in finance, and they have a logic of how they make the most money through capital investments, though it’s more about buying and selling and extracting dividends rather than investing in the business,” Batt says. “Their only lens is a financial return. They know they will get out in five years and want to go back to their funders to raise another follow-on fund. This is the cycle of PE fundraising.”

Of course, most private equity-backed healthcare deals don’t end in bankruptcy. More and more practices sell to private equity, hospital systems, and insurance companies every day, and most continue to operate well and benefit everyone involved. Consolidation can be a life raft for a hospital or practice in an underserved area that would have closed without the cash injection. However, most of the data says that consolidation in healthcare (of which private equity is just one of several aggregators) increases prices for consumers, all while benefitting the consolidator’s shareholders and allowing the seller to reap the reward of the business they owned.

As of now, the private equity firms are for the most part operating within the rules of established finance, even if certain parties don’t like the result. But because of what happened to Steward in Massachusetts, Batt says she is working with Senator Elizabeth Warren to propose legislation meant to reign in private equity, add transparency to PE deals in healthcare, and focus on the real estate deal.

“The key is the sale-leaseback, which cuts deeply into net revenues over time,” Batt says. “That model is particularly dangerous and can undermine the financial viability of companies.”


Will Maddox

Will Maddox

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Will is the senior writer for D CEO magazine and the editor of D CEO Healthcare. He's written about healthcare…