Ronald Reagan was wrong.
Specifically, I’m talking about one of our 40th president’s most famous quotes — “The nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’”
In reality, the nine most terrifying words in the English language is, “A financial services firm just bought your employer’s company.”
Reporting by the Wall Street Journal — not exactly known to be a Marxist publication — indicates that Cerberus Capital Management may have played a role in the troubles facing Steward Health Care System and, by extension, Sharon Regional Medical Center.
When Steward purchased Sharon Regional and seven other hospital systems in 2017, Cerberus, a private equity firm, had an ownership stake in the parent company.
Documents made public during hearings by Massachusetts’ congressional representatives indicate Cerberus wanted to cut itself loose from Steward in 2020 during the Covid pandemic.
However, Steward needed a lot of money — $400 million — to remain afloat and facilitate the sale to a group led by Dr. Ralph de la Torre. The Journal reported that Cerberus had leverage over Medical Properties Trust, and used it.
The financial dealings are complicated and, until the public revelations stemming from those hearings, impossible to uncover.
MPT, a medical real estate firm, was dependent on Steward for roughly 30% of its revenue.
Cerberus — which had made $1.3 billion in 2016-18 when MPT bought eight Massachusetts hospitals which the real estate company then leased back to Steward — was looking to cash out just as Steward needed capital during the pandemic.
MPT purchased Steward’s overseas hospitals and two Steward-owned Utah hospitals for $400 million, which the Journal said was well above the properties’ market value.
The de la Torre group acquired Steward from Cerberus with a $350 million promissory note, which it then transferred to MPT for $335 million. The cost was added to Steward’s debt.
Between the hospital property sale to MPT and the transferred promissory note, the Journal reported that Cerberus made a profit of $800 million off Steward. Cerberus said in a statement on the Massachusetts hearings that the money was used to enable Steward hospitals to continue services and pay investors.
Cerberus-owned Steward’s sale of the Massachusetts hospitals to MPT comes right out of the financial services playbook.
After buying the Red Lobster restaurant chain in 2014, the Golden Gate Capital private equity firm financed the purchase partly with a sale-leaseback arrangement. Golden Gate handed the bag in 2016 to Thai Union.
Red Lobster filed for Chapter 11 bankruptcy Monday. Analysts have cited the 2014 sale-leaseback arrangement — and a disastrous “Endless Shrimp” promotion — as a factor.
Business of Home, a home design and furniture industry trade journal, characterized private equity firms in a September 2023 article as investing in companies for a good time — “good” meaning “profitable” — not a long time.
“Private equity firms often take out loans to finance a purchase, then saddle the company with the debt,” the story’s author, Fred Nicolaus, wrote. “In other cases, they’ll push a company to sell its real estate to generate cash, then rent the property back from the new landlords … Such arrangements can saddle a company with bank debt and expensive leases …”
That sounds a lot like what happened with Steward.
Cerberus took buildings and property Steward owned, sold them to MPT for a lump-sum payment now, and left MPT to get its profit at some indeterminate time in the future.
Or never.
Then, during the pandemic when Steward’s balance sheet was awash in red ink, partly because it was paying rent for property that it owned only a few years earlier, Cerberus leaned on MPT to keep the hospital network afloat so the private equity firm could sell for a profit.
Steward then found itself buried so deeply in debt and rent payments that it was unable to pay its operation costs, forcing Sharon Regional and other hospitals to delay surgeries when medical equipment vendors withheld deliveries because of overdue payments.
Sharon Regional’s violations, cited after an inspection by Pennsylvania Department of Health, included maintenance tasks, such as needed repairs to fire doors, that hadn’t been performed because contractors hadn’t been paid.
This financial crisis has compromised safety and patient treatment at Sharon Regional and threatens the existence of a hospital that has been a Shenango Valley community asset for more than a century.
If Sharon Regional’s prospects are tenuous, it’s not the fault of anyone at the hospital, which provides a valuable behavioral health service and was promoted as Steward’s regional cardiac treatment flagship hospital.
State Sen. Michele Brooks, R-50, Jamestown, said last week two entities are interested in buying Sharon Regional. But Steward’s May 6 bankruptcy filing and its debt complicates any potential sale.
Regardless of how the Steward Health Care situation ends, there will be winners. Investors in Cerberus walk away with portfolios fortified by the company’s paper shuffling.
But unless Steward can find a buyer for Sharon Regional, this community won’t be on that list.
And “a financial services firm just bought my local hospital” might wind up being the nine most terrifying words in the English language.
DISCLOSURE: Eric Poole’s wife works for a western Pennsylvania-based hospital system.
ERIC POOLE is Editor of The Herald and Allied News. Contact him with complaints, story ideas and hospital tales by email at epoole@sharonherald.com or by phone at 724-981-6100 ext. 247. For links to sources, access this article at sharonherald.com.
