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Private equity rushed into health care -- now, a nurse warns: "Be scared"

Private equity targets hospitals
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  • Hahnemann University Hospital in Philadelphia is slated to close in September, less than two years after private equity firm Paladin Healthcare bought it.
  • Critics accuse the buyout firm of preferring to close the hospital, rather than keep it running, because the city real estate is valuable to developers. 
  • Private equity investment in hospitals and clinics has surged in the last decade, reaching $10.4 billion last year.

As 171-year-old Hahnemann University Hospital in Philadelphia prepares to close down later this summer, nurse Sue Bowes said she has a message for other communities around the U.S. where private equity firms have snapped up hospitals: "Be scared."

Bowes, who has worked at Hahnemann for 14 years, said she had high hopes when private equity firm Paladin Healthcare bought the urban hospital last year. But those expectations curdled as Hahnemann suffered through layoffs, bankruptcy and, most recently, its planned closure and reports the property could be redeveloped as luxury condos.

In early 2018, Paladin paid $170 million to Tenet Healthcare  to buy Hahnemann and another Philadelphia-area hospital, St. Christopher's Hospital for Children. The children's hospital is now seeking bids from potential buyers. At the time, the hospital staff was hopeful, Bowes recalled. Paladin founder Joel Freedman "came in, and he said, 'We're going to make it work, we'll make these changes,' and then, nothing," she said. "I wish I knew then what I know now." 

What Bowes learned is that private equity firms are focused on profit goals that don't always align with the mission of a hospital, especially one like Hahnemann that serves a primarily low-income community. And Hahnemann is far from the only hospital that's been bought in recent years by a buyout firm -- private equity players spending a total of $10.4 billion last year to snap up hospitals and clinics, according to data provided to CBS MoneyWatch by Pitchbook, a research firm that tracks private investment data.

That's a huge increase from 2009, when private equity firms spent less than $250 million on hospitals and clinics. It's also double their spending from 2014, Pitchbook's data shows. The reason? The expectation that health care will provide a sure return in volatile economic times, said Eileen Appelbaum, co-director of the Center for Economic and Policy Research and an expert on private equity. 

"Health care is a major area of investment for private equity," Appelbaum said. "They look at health care the way they used to look at supermarkets. They said, 'People have to eat, so this is safe investment.' Now they are saying that about health care."

"Vampires bleeding the company dry"

The record of private equity firms hasn't gone unremarked by lawmakers and policy experts, especially after the high-profile failures of retailers such as Toys R Us, which was saddled with a heavy debt load from a $6.6 billion leveraged buyout by private-equity firms Bain Capital and KKR & Co. in 2005. 

More than 1.3 million retail workers have lost their jobs because of bankruptcies or financial struggles at retail companies owned by private equity and hedge funds, according to a new study from several left-leaning advocacy groups.

On July 18, Sen. Elizabeth Warren, D.-Mass., introduced a bill to hold private equity firms financially liable for the debts and pension obligations of the companies they acquire. It also would restrict the investment firms' ability to pay dividends as well as reward themselves with high operations-management fees that pull money out of acquired companies. Sen. Bernie Sanders has also called attention to Hahnemann's plight, arguing that providing care for patients is more important than corporate profits.

"[F]ar too often, the private equity firms are like vampires -- bleeding the company dry and walking away enriched even as the company succumbs," Warren wrote in a Medium post.

A real estate play?

Private equity funds acquire companies that are struggling or distressed yet still have value. PE executives then direct management to make operational changes in order to boost a business' performance. The goal is to turn around the businesses and eventually sell them for a profit. 

But private equity firms also tend to raise money by issuing debt from their target company, which critics say can make it tougher for a struggling company to make a recovery. In the worst cases, critics say, fragile businesses can be pushed into insolvency by their new debt burdens.

But in Hahnemann's case, economist Appelbaum said, it appears the hospital was bought for the value of its real estate, not for its mission to provide care to low-income Philadelphians. The hospital is located near a burgeoning arts district in central Philadelphia, as well as Temple University, which makes the land valuable to developers.

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"It's the first time I know for a hospital being bought by a private equity company in what appears to be a pure real estate play," she said. 

To make Hahnemann a financially viable hospital, its management could have taken several steps, such as buying hospitals in wealthier, suburban neighborhoods, which would have diversified its revenue. It could have also opened smaller, urgent care clinics, which are increasingly popular with patients, she said.

"They did none of those things," she said. "Surprise, surprise, the hospital tumbled more and more into the red, then 18 months later they went to bankruptcy."

"We stopped getting supplies"

Since the Hahnemann staff was told last month that the hospital would be closing, new supplies have dried up, said Bowe, who also serves as the president of the Hahnemann chapter of the Pennsylvania Association of Staff Nurses and Allied Professionals union. 

"We stopped getting supplies. There wouldn't be scrubs, washcloths, towels -- the basic things we needed," Bowes said. "That's when the full scope of it hit us."

Attempts to reach Freedman, Paladin's founder, weren't successful. Emails to Paladin Healthcare and American Academic Health System, another business he owns, weren't returned.

Bowes said she worries about her patients, who won't have a nearby hospital to seek care. And she says other Americans should be concerned, given the growing ownership of hospitals by private equity firms. 

"This will happen more and more and they will lose their hospitals," she said. "Be scared."

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