Does Private Equity Harm Competition in the Hospital Industry?

Writing in ProMarket, Brent Fulton examines private equity's investments in hospitals and the risks they create for several stakeholder groups. He argues that the underlying problem is often not private equity itself but lenders that provide debt without covenants restricting dividends to equity holders, a pattern that can emerge when debt supply exceeds demand and lenders relax terms. Because patients and the government sometimes bail out distressed hospitals, Fulton contends that regulators should ensure private hospital financing is transparent so fraudulent transfer and bankruptcy laws can be enforced.

Fulton notes that private equity-owned companies have grown from 1,900 to 11,200 over the past two decades, while publicly financed companies declined from 7,300 to 4,300 since 1996. He acknowledges that acquisitions can bring improved management, lower costs, and access to capital for infrastructure and technology, but that this capital carries higher default and bankruptcy risk. He poses the question, in the framing of Senator Bernie Sanders, of whether profits are privatized while losses are socialized.

Fulton highlights debt investors, which he says have received little attention in healthcare private equity research. He argues that private debt funds often share investors with private equity funds and underwrite deals carefully, though lenders relax covenants when debt is plentiful. He examines Medical Properties Trust, a real estate investment trust that functions as a lender through sale-leasebacks. Steward Health (formerly owned by Cerberus Capital Management) and Prospect Medical Holdings (formerly owned by Leonard Green & Partners) both filed for bankruptcy in the past year after sale-leasebacks in which roughly $1.5 billion was paid to private equity owners as dividends. Fulton reports that Steward founder and CEO Ralph de la Torre allegedly received $250 million and Prospect founders Sam Lee and David Topper allegedly received $195 million. He notes that MPT's stock and dividend suffered as a result, with losses from distressed sale-leasebacks borne by the lessor, though he characterizes these as atypical given MPT's 139% total return since its 2005 IPO.

On patient outcomes, Fulton writes that the evidence on private equity's effect on hospital quality is mixed. He cites The Boston Globe's investigation of Steward, which identified 15 patients who allegedly died after not receiving accepted standards of care due to equipment or staffing shortages.