Our Take: Steward Health files for bankruptcy protection, puts all of its hospitals up for sale
In a move that was not unexpected, Steward Health Care, the nation’s largest private, for-profit health system, filed for Chapter 11 protections last Monday in the U.S. Bankruptcy Court for the Southern District of Texas.
The physician-led company said the step was necessary so that it can continue to provide care without disruption while working through its financial situation. All 31 of the health system’s hospitals are for sale, according to court documents.
In the documents, Steward revealed that it has more than $9 billion in total liabilities, which includes $1.2 billion in loans, $6.6 billion in lease obligations through 2041, and nearly $1 billion in unpaid bills from vendors and suppliers.
Also among the debts listed in the documents was $290 million in unpaid compensation, including $68 million in unpaid employee salaries, $106 million in payments for physician services, and $48 million the health system owes to staffing agencies.
Regulators and other officials were anticipating the bankruptcy filing after Steward missed an April 30 deadline to pay back at least part of the $750 million it owes six private lenders.
In tandem with the filing, Steward said it is working to finalize a debtor-in-possession financing arrangement with its landlord, Birmingham, Ala.-based Medical Properties Trust (MPT). Steward is MPT’s largest tenant.
Initially, MPT will provide Steward with $75 million, a step that Judge Chris Lopez, who is overseeing the bankruptcy proceedings, has approved. Another $225 million could follow if Steward is able to sell its hospitals quickly enough.
To satisfy MPT’s conditions for the additional $225 million, Steward intends to hold an auction in late June for all of its hospitals other than those in Florida and another auction for its Florida hospitals, which Steward says are its most profitable, at the end of July.
During a virtual hearing on Tuesday, Ray Schrock, an attorney representing Steward, told Judge Lopez that although Steward would do everything it could to meet the agreed-upon timeline, selling all of the hospitals so swiftly was “not feasible.” He said the health system’s goal is to keep all of its hospitals open and that Steward hopes to complete the sales by the end of the summer, Reuters reported.
Healthcare Finance reported that marketing of Steward hospitals in six states (Arizona, Arkansas, Louisiana, Massachusetts, Pennsylvania, and Ohio) began in January, with more hospitals, including several in Florida and Texas, added to the list in the ensuing months.
In March, UnitedHealth Group’s Optum signed a letter of intent to acquire Stewardship Health, Steward’s physician group, for an undisclosed amount. Schrock said during the hearing that the sale would have allowed Steward to pay off its asset-based and bridge loans and potentially avoid bankruptcy proceedings, but the transaction “got held up in regulatory approval.”
While it’s true that lawmakers and other officials have expressed concerns over Optum’s proposed acquisition of Stewardship Health, particularly in Massachusetts, a spokesperson for the Massachusetts Health Policy Commission told Healthcare Dive that Steward had not submitted all of the necessary paperwork for review — including the definitive agreement.
Although Steward is now based in Dallas, it began in Massachusetts and is the state’s third-largest hospital system. In April, Steward closed New England Sinai Hospital in Stoughton, Mass. It has also shuttered facilities and services in Florida and Texas.
Steward’s CEO, Dr. Ralph de la Torre, told employees in an email last Monday that industrywide economic headwinds and delays in planned asset sales had made it necessary to initiate the restructuring proceedings, according to Healthcare Dive. Dr. de la Torre said in the email that the step was not a closure or a liquidation.
In a news release, the health system laid the blame for its burgeoning financial woes “in large part” on “challenges created by insufficient reimbursement by government payers as a result of decreasing reimbursement rates,” along with “skyrocketing labor costs, increased material and operational costs due to inflation, and the continued impacts of the COVID-19 pandemic.”
Steward said it does not anticipate any interruptions in its day-to-day operations during the Chapter 11 proceedings and stated that its commitment to its employees “will not change.”
A final hearing on certain first-day motions is scheduled for June 3.
Our Take: Dr. de la Torre points to external factors as the reasons for Steward’s predicament, but he and other Steward Health owners, along with private equity partners at Cerberus Capital Management, must also take responsibility.
We wrote in February about an opinion piece Dr. Edward Hoffer, an associate professor of medicine at Harvard Medical School, penned earlier this year for a community newspaper in southeastern Massachusetts. In the article, Dr. Hoffer said Steward was “a textbook example” of how private equity firms like Cerberus Capital put profit before quality.
In 2010, when Cerberus bought what was then a six-facility Catholic health care enterprise based in Boston and known as Caritas Christi Health Care for approximately $895 million, the PE firm promised to turn the beleaguered organization around. Cerberus promptly converted Caritas Christi to a for-profit company called Steward Health Care System led by Caritas Christi’s CEO, Dr. de la Torres.
Then, in 2016, Steward sold its Massachusetts properties to a real estate trust — Medical Properties Trust — for $1.25 billion and leased them back, “saddling the hospitals with hundreds of million in annual rent,” Dr. Hoffer noted. Some of the proceeds were used to pay Cerberus back for its initial investment. According to Dr. Hoffer, the transaction allowed Cerberus “to quadruple its investment and pay investors a $100 million dividend.”
A year later, Steward bought Franklin, Tenn.-based IASIS Healthcare. With 36 hospitals in 10 states, Steward had become the largest private for-profit hospital chain in the U.S. Presumably, Steward did the same thing with the newly acquired properties — sold them to MPT and then leased them back, loading the hospitals with debt.
In 2020, Cerberus sold its controlling interest in Steward Health to a physician group led by Dr. de la Torres. The transaction resulted in the physician group owning 90% of Steward and MPT owning 10%.
Given his history with the health system, we have to believe that Dr. de la Torres was fully aware of Steward’s financial status when the physician group assumed ownership. We also have to believe he would not have taken that step if he didn’t believe Steward was financially viable.
Dr. Hoffer criticized Dr. de la Torres — as did Brian McGrory, a former editor at The Boston Globe, in a separate article — for using money he obtained through Steward for expensive personal purchases, including a $40 million superyacht and a $15 million custom-built sport fishing boat, as Steward struggled to stay afloat.
“So, Steward’s CEO has a very expensive yacht, and communities around the country are dreading the closure of what is often their only nearby hospital,” Dr. Hoffer wrote.
Massachusetts’ congressional delegation sought answers, and accountability, from Cerberus Capital in a letter sent to the PE firm in February. The delegation voiced specific concern about “the extent to which Cerberus and its affiliates literally stripped out and sold the property from underneath [Steward’s Massachusetts hospitals], creating hundreds of millions of dollars in profits for private equity executives, while leaving the facilities with long-term liabilities that are magnifying — if not creating — the current crisis.”
Of the states in which Steward does business, it’s likely that Massachusetts will take the hardest blow. Officials there have been monitoring Steward’s eight hospitals and preparing for this possibility the last several months.
Gov. Maura Healey sent a letter to Dr. de la Torres in February giving him a deadline for submitting oft-requested financial documents to state regulators and advising him that, after many months of discussions, it was time for Steward to begin a safe, orderly transition of its Massachusetts facilities to new operators as soon as possible.
The information Steward subsequently submitted was “incomplete and insufficient,” according to the governor’s office, and Gov. Healy said it was clear that Steward must “complete an orderly transition out of Massachusetts.”
WBUR, Boston’s NPR news station, reported that state officials started meeting privately with local health care leaders last month “to help navigate the uncertainty around the Steward crisis.”
On May 3, the last business day before Steward filed for bankruptcy, Massachusetts’ public health department deployed an incident command system to help ensure access to care at the hospitals and respond to “transitions in care” that might result in cascading effects, according to WBUR.
Dr. Robert Goldstein, the health department’s commissioner, said the command system would also allow the health department to “rapidly respond to any clinical needs or issues that arise,” while facilitating communication “with other regional health care organizations, first responders, and community leaders.”
On Thursday, MPT released its first-quarter earnings report reflecting a net loss of $736 million, which included $693 million in impairment charges, “primarily non-real estate adjustments related to Steward” and a South American entity called International Joint Venture.
MPT’s chief financial officer, Steven Hamner, said during an earnings call with analysts, “Our plan and expectation are that during the five months until September 30, we will replace Steward with better qualified operators at many of our hospitals that are currently leased to Steward.”
Rob Simone, an analyst with Hedgeye, told Healthcare Dive he thinks “really material rent concessions” will have to be made before other operators will take on Steward’s leases, “given the unaffordability of the leases.”
We expect more information about how Steward got into such a tight spot will be made public in the weeks and months ahead. According to various news outlets, Steward has battled with regulators in Massachusetts for years over submitting routine financial statements, and Healthcare Dive reported that Steward failed to provide MPT with audited year-end financials for 2022, which MPT was required to disclose to the Securities and Exchange Commission.
We’ll also be waiting to see what impact the bankruptcy filing will have on Optum’s proposed acquisition of Stewardship Health. There’s a chance the bankruptcy judge or the DOJ may try to block it. There’s also a chance that Optum may try to renegotiate the terms or the timeline of the deal.
Health Care Rounds #167: Why Accountable Care Models Are So Important, with Bill Lane
Having equal access to quality health care across the United States shouldn’t be a privilege, but a reality. Yet, seniors battling multiple chronic conditions often face disparities. The challenges are significant, from struggling to reach appointments to affording basic needs. Enter Accountable Care Organizations: Are they the answer to improving coordinated care? Today, Bill Lane, VP of Network Development for ilumed, joins John to explore how ACOs are transforming health care delivery. Listen here or wherever you get your podcasts. Now on YouTube.
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