Steward Health Care, the largest private hospital operator in the U.S., filed for bankruptcy on May 6, 2024 which threw 31 hospitals in seven states into chaos. But the Steward case is not isolated; it reflects a trend concerning the future of safety-net hospitals across the U.S., regardless of ownership status. Preventing sales to bad actors won’t resolve the underlying problem – the failure of the traditional safety-net hospital model. Even well-managed hospitals that are vital to their communities are vulnerable to outfits like Steward and the private equity (PE) companies backing them. This failure involves financial unsustainability and appalling inequities.
Unsustainability
Multiple stressors act on underperforming hospitals. Roughly 40 percent of our country’s hospitals lose money and 703 rural hospitals face financial trouble. Public outrage regarding safety-net hospital closure announcements – e.g., at Carney and Nashoba Valley in Massachusetts – leads to calls for action. Responses typically aim to preserve the status quo of full-service institutions requiring large capital and operating subsidies or the sale to PE-backed entities. Sadly, the result is often continued losses, growing disparities, and another failed institution. It is particularly unfortunate that the short-term focus on saving safety-net hospitals crowds out innovations such as dedicated 1115 waivers for affordable housing, transportation, and other social investments.
Like overvalued homes backed by questionable appraisals that contributed to the 2008 global financial crisis, these underperforming assets are worth less than companies like Steward and Medical Properties Trust claim on their balance sheets. The Steward bankruptcy disproved these claims. The actual value of the worst-performing hospitals is often far less than believed; many are not financially viable as acute care hospitals, whether owned by PE or nonprofit entities. The pressure to sell increases as systems strive to improve operating margins by shedding underperforming assets.
Disparities
The community inequities are mirrored in the hospital milieu. Many hospitals receive insufficient reimbursements because they care for underinsured who live in environmental conditions that are profoundly detrimental to their health. An analysis of factorsincluding life expectancy, prevalence of diabetes, housing insecurity, and education, demonstrates that the communities surrounding Carney and Nashoba hospitals face challenges. Clearly, more is needed than clinical services to make these communities healthier. The same holds true for vulnerable Northern Louisiana hospitals. Every U.S. state faces this issue.
Solutions
The Steward episode should prompt a reevaluation of how policymakers assess safety-net assets. Many of these hospitals have negative value due to their poor operating margins, the investments required to mitigate environmental shortcomings, and needed capital subsidies. Their true value is directly related to the public good they provide. Whether investments are made by PE, government, or non-profit health care systems, we believe that for taxpayers, patients, and the communities these hospitals serve, preserving the status quo, full-service, acute care model is often a poor investment whether by PE or government bailouts.
The solutions we advocate:
- Reimagining these hospitals and the adjacent neighborhoods as comprehensive “hubs” that meet the clinical, social, and economic development needs of the communities.
- This involves streamlining essential medical services within a portion of the facilities and locating partners focused on drivers of health in the liberated space, using an integrated plan to encourage community collaboration.
- The properties, often the largest and most well-maintained structures in their neighborhoods, can be efficiently transformed at a fraction of the cost of new construction or investing in deferred maintenance to retain them as full-service hospitals. Such transformations have already occurred often in lieu of selling to PE-backed companies.
- As value-based care gains momentum, there is increasing interest in the transformation model, incorporating the properties into larger systems of care to ensure equitable access to quality treatments and emerging technologies. Transforming underperforming hospitals to address a broad spectrum of community needs is an approach that gives for-profit and nonprofit owners a futuristic health care solution rather than clinging to outdated models, thus reducing the incentive to sell the assets to Steward-like organizations. Hubs would focus on addressing the Seven Vital Conditions for Community Health and Well-being, including essential treatment services, e.g., ERs and pre- and post-acute care.
- To attract capital to these transformations, we also recommend establishing low-cost guaranteed financing for viable transformation plans. In 1946, the Hill-Burton Act provided financing for communities to build hospitals. Policymakers believed every town needed hospitals but today a novel health care facility that embraces value-based care is required. Financing could facilitate such transformations preserving their critical functions at a time when producing good health goes far beyond access to ERs and short-term hospital beds.
Conclusion
The Steward bankruptcy highlights the greed of PE in extracting large sums at the expense of vulnerable individuals and the limited capacity of safety-net hospitals to efficiently improve health outcomes. While preventing sales to irresponsible PE firms is necessary, it is not sufficient; it will not address the imperative to improve health and lower costs. As underperforming acute care hospitals see their balance sheet value decline, there is an urgent need to develop sustainable solutions. Facilitated by government-guaranteed financing modeled after the Hill-Burton Act of 1946 (in reverse), transformations would incentivize reputable owners and purchasers to develop community hubs that align with value-based care to comprehensibly serve the needs of the individuals in these disaffected communities. Effective health care delivery planning will also be essential to integrate these community resources into valuable systems of care. With a new Administration and Congress, there is added uncertainty about the levels of future federal funding to support health care services. It certainly seems that the issue of failing safety-net hospitals will likely not disappear no matter what federal policies are ultimately pursued, or whether ownership of such institutions is in for-profit or non-profit hands. We believe our policy recommendations are fiscally prudent and should work to improve health status and reduce overall growth in health care spending.
The opinions expressed in this blog post are the author's own and do not necessarily reflect the view of AcademyHealth or of their respective affiliated employers/organizations.