The Path Forward: Crafting Guardrails Without Stifling Innovation

Legislative Efforts Falter Amidst Public Outcry

Across the nation, state legislatures dominated by Democrats have attempted to introduce legislation aimed at increasing oversight over private equity deals in healthcare. In California, Governor Gavin Newsom vetoed a bill that would have allowed the state to block such transactions for most healthcare facilities. Similar initiatives faltered in Pennsylvania, Connecticut, Oregon, Washington, and Minnesota. The collapse of these legislative efforts highlights the complex challenge of balancing regulatory oversight with the need for investment in the healthcare sector.

In Massachusetts, the bankruptcy filing by Steward Health Care, one of the largest hospital operators in the state, ignited a firestorm of criticism against private equity firms. A bill intended to increase scrutiny of these investors remains stalled in the legislature, with only days left before the session ends. This setback underscores the difficulty in enacting meaningful reforms amid competing interests and priorities.

A Complex Web of Interests and Consequences

The breakdown of legislative efforts, even in politically progressive states, suggests that stricter rules for financial dealmakers in healthcare may not be imminent. Federal action remains unlikely, leaving states to explore less radical approaches. One potential avenue is enhancing disclosure requirements to provide lawmakers with earlier warnings when businesses face financial distress. Indiana, for example, has enacted laws requiring special notice of certain healthcare transactions but stopped short of granting outright blocking powers.

Private equity firms argue that they play a crucial role in providing much-needed capital to American companies, including those in the healthcare sector. Drew Maloney, CEO of the American Investment Council, emphasized that private equity and private credit are vital sources of investment. However, critics like Zirui Song, a professor at Harvard Medical School, contend that cost-cutting measures often employed by financial firms can lead to staff reductions and adverse health outcomes. Without robust guardrails, crises like Steward’s bankruptcy could become more frequent, according to Mary Bugbee, healthcare director at the Private Equity Stakeholder Project.

Steward's Collapse: A Cautionary Tale

The fallout from Steward Health Care's bankruptcy has been profound. Former nurses testified to harrowing conditions, including the use of cardboard boxes for deceased newborns due to unpaid vendor bills. With reported liabilities of $9.15 billion, Steward’s collapse stands as one of the largest corporate bankruptcies this year. The story of Steward’s rise and fall is intricate, revealing the challenges lawmakers face in pinpointing blame and crafting effective legislation.

Steward's origins trace back to six financially troubled hospitals in Massachusetts previously owned by the Boston Archdiocese. Dr. Ralph de la Torre led the chain’s expansion, securing a sale to private equity firm Cerberus Capital Management in 2010. In 2016, Steward sold and leased back its properties to Medical Properties Trust Inc. (MPT) in a $1.25 billion deal. While Cerberus earned a profit of about $800 million, the transaction saddled Steward with exorbitant rents, exacerbating its financial woes.

Beyond Blame: Seeking Constructive Solutions

Critics argue that singling out financial dealmakers for stricter scrutiny risks sending a negative message to startups in industries reliant on venture capital funding, such as life sciences and climate technology. US Senator Edward Markey, a Massachusetts Democrat, has called for shared responsibility among all parties involved in Steward’s collapse. Markey and fellow Senator Elizabeth Warren introduced federal legislation aimed at curbing private equity and real estate investor practices, but it has yet to advance.

In Massachusetts, House and Senate lawmakers failed to reconcile their competing versions of the state’s healthcare bill before the end of the regular term. Despite common ground on reforms, reaching an agreement remains challenging. Building consensus may prove more difficult as the immediacy of the Steward crisis fades. Nonetheless, efforts to find constructive solutions continue, with hopes of striking a balance between regulation and innovation in the healthcare sector.