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Public Health, Private Equity, and the Pandemic

UPMC Susquehanna closed the former Sunbury Community Hospital on January 31, 2020–about six weeks before the COVID-19 pandemic reached the area. Photo credit: Paul Weaver, Flickr

Among the more troubling realities laid bare during the ongoing Covid-19 pandemic has been the glaring lack of access to acute medical care that plagues many rural communities. The federal government now designates nearly 80 percent of rural America as “medically underserved,” a condition which seems likely to worsen in the face of the mutually compounding public health and economic crises unleashed by the novel coronavirus. Yet even before the pandemic began, an epidemic of hospital closures had turned whole swathes of the country into vast “health care deserts,” where in some cases there is no doctor or hospital bed for a hundred miles in any direction. In 2017, the Sheps Center for Health Services Research at the University of North Carolina recorded ten rural hospital closures nationwide; in 2018, the number was fourteen and in 2019, eighteen—the highest single-year total since the Sheps Center began keeping track in 2005. By the end of the disastrous spring of 2020, after many rural hospitals had been forced to cancel income-generating elective procedures during the long months of quarantine, another twelve rural hospitals had already shut their doors.

. . . [E]ven before the pandemic began, an epidemic of hospital closures had turned whole of the country into vast “health care deserts”. . .

There have been a number of forces driving the spike in hospital closures. Declining populations and economic stagnation in rural areas pose real, long-run fiscal challenges, the solutions to which are not obvious or immediately forthcoming. Meanwhile, the refusal of some heavily rural states, particularly in the South, to take advantage of the Medicare expansion option included in the Affordable Care Act (ACA)—which would bring a much needed influx of federal dollars to hospitals serving populations that are disproportionately poor and underinsured—has aggravated an already perilous situation along distinctly partisan lines.

But there has been another factor behind the recent trend, one that has received comparably little attention in most conversations about the diminishing availability of medical care in rural America: private equity. Private equity firms have grabbed up a significantly expanded share of the broader healthcare market over the last few decades, with rural hospitals and healthcare providers—which were often financially distressed to begin with, and relatively cheap to buy—among some of their favored targets for acquisition. The results have often been ugly.

Take the case of Quorum Health Corporation, a rural hospital operator spun-off from Community Health Systems (CHS) in 2016. CHS was one of the very earliest hospital systems to be acquired by a private-equity firm, when Forstmann Little & Co. took it private in 1996. In the intervening twenty years, Forstmann and other private equity firms used a series of leveraged-buyout acquisitions of smaller healthcare companies to turn CHS—which went public again in 2000—into the second-largest for-profit hospital chain in the country. But the same process also left CHS saddled with so much debt by the end of 2015 that its only option was to begin frantically shedding its least profit- able assets. And so CHS took thirty-eight of its already struggling rural and small-town hospitals—and $1 billion of its lowest-grade debt— and created Quorum.

Needless to say, it was not a recipe for a success. Quorum lost $348 million during its first year, and almost immediately began scaling down its business. In effect, Quorum became not a rural hospital operator but a rural hospital chop-shop: by the end of 2019, it had divested itself of fourteen of its original thirty-eight properties. Two of the hospitals Quorum shut down directly; two more were closed soon after Quorum sold them to other operators. The divestitures generated more than $85 million in net proceeds for Quorum—but virtually all of that money was put toward paying down the mountain of debt inherited from CHS. It still was not enough to get the company out from under. In April of this year—with Quorum’s stock trading at well under $1 per share, and another twenty-four hospitals still on the chop- ping block—the company filed for bankruptcy.

In McKenzie,Tennessee, the closure of Quorum-owned McKenzie Regional Hospital in 2018 not only cost the town its 45-bed hospital, but also one of its largest and better-paying employers.

The impact of Quorum’s failure on the communities served by its hospitals has been no less significant. Of the thirty-eight hospitals spun off from CHS in 2016, thirty-two were the sole providers of acute-care hospital services in their local area. When Sunbury Community Hospital closed its doors earlier this spring— just a little over two years after Quorum offloaded the distressed property—it left the central Pennsylvania town of Sunbury without a hospital for the first time since 1895. In McKenzie, Tennessee, the closure of Quorum-owned McKenzie Regional Hospital in 2018 not only cost the town its forty-five-bed hospital, but also one of its largest and better-paying employers. In a county that already had one of the higher unemployment rates in the state, and a town where one-in-five people were already living under the poverty-line, the loss of McKenzie Regional cut deep. “The hospital has been an anchor for our community,” McKenzie Mayor Jill Holland lamented after the closure. “Where do you even start?”

Today, the Healthcare Private Equity Association, a trade group founded in 2010, includes more than 70 member firms, with $2 trillion in assets under management among them collectively.

The fate of the Quorum hospital network is just one piece of a larger story. As the scholars Eileen Appelbaum and Rosemary Batt have documented in a recent white paper produced for the Institute of New Economic Thinking, entitled “Private Equity Buyouts in Healthcare,” the amount of private equity capital invested annually in the healthcare sector—in everything from hospitals and nursing homes, to specialty care practices, physician staffing firms, ambulance companies, and bill collection services— has ballooned from less than $5 billion in 2000, to more than $100 billion by 2018. Today, the Healthcare Private Equity Association, a trade group founded in 2010, includes more than seventy member firms, with $2 trillion in assets under management among them collectively. Many of the very largest private equity firms in the country—Bain Capital, Blackstone, The Carlyle Group, KKR—are members.

Although the phenomenon remains new enough that much of the data are still coming in, there are strong indications that private equity-ownership at best replicates—and at worst exacerbates—many of the problems related to excess costs and diminished quality-of-care which already plague the for-profit medical sector. As Appelbaum and Batt conclude from experiences like those of CHS and Quorum, it is clear at the very least that “the private equity business model—of growing through add-ons in leveraged buyouts—under- mines the stability of local healthcare systems,” especially those serving poor and under-insured populations. Appelbaum and Batt’s research has also revealed the role that private equity has played in recent scandals related to “surprise” medical billing, particularly in the case of two market-leading physician staffing firms— Envision Healthcare and TeamHealth—which happen to be owned by KKR and Blackstone, respectively. In each of these instances, the particular practices which define private equity’s modus operandi—highly leveraged acquisitions, short-term value extraction, maximal returns for investors—create conditions that are anathema to delivering accessible, affordable, and high-quality medical care.

Which brings us back to the current medical crisis. How will the Covid-19 pandemic impact private equity’s growing foothold in the health- care sector? Well, as Kara Murphy, co-head of Bain’s Healthcare Private Equity Practice, put it rather eagerly in a webinar for investors in late March: “For those with the courage to play offense”—“and to help in this crisis,” she quickly added—”there’s a real opportunity.” Indeed, Bain’s forecasts for the “new normal” that will emerge from the wake of the pandemic looks, in many ways, a lot like the old normal of the last couple decades: a rising number of “intriguing distressed asset investment opportunities,” to quote Murphy again; a continued trend toward industry consolidation through the kinds of mergers-and-acquisitions that produced CHS and Quorum; an increased appetite for market innovations that have recently brought us the likes of physician out-sourcing firms Envision and TeamHealth. (The latest look to be “next-gen technologies” in the fields of digital health and especially telemedicine, which, as the head of Bain’s Global Private Equity Practice practically trumpeted during the same March webinar, “will blow through S-curves”—those inflection points after which a business or investment really starts raking in the dough—“faster than anything else.”)

So the pandemic does not sound like it will be all that bad for the titans of private equity on Wall Street. (It bears mentioning that many of the wealthiest hospital networks are also doing quite well during the pandemic, with twenty of the largest chains—some of which have private-equity owners—pocketing more than $5 billion in federal assistance funds via the Coronavirus Aid, Relief, and Economic Security Act, according to the research group Good Jobs First.) For residents of places like Sudbury, Pennsylvania, or McKenzie, Tennessee, how- ever, the picture is much bleaker. A week before Bain convened its call for investors, Alan Morgan, the head of the National Rural Health Association, offered his own projections for how the fallout from Covid-19 would impact the 21,000 healthcare providers and hospitals his association represents. “We’re going to see hundreds of rural hospitals close before this crisis ends,” he told Kaiser Health News. “This is not hyperbole.”

A hospital CEO in southwestern Georgia— the site of one of the worst outbreaks of Covid-19 in rural America this spring—had an even more ominous prediction. “This is going to be the death blow,” concluded Robin Rau of Miller County Hospital in Colquitt. Colquitt is a town of just under 2,000 people, more than one-quarter of whom live below the poverty line. The uninsured rate locally is 17 percent; twice the national average, and one reason there are only two primary care physicians in the entire county. The next nearest hospital is across the county line, in Donalsonville.

During a public health crisis, like the one we are living through now, that should sound like a tragedy waiting to happen. To private equity firms, though, it may sound a lot like something else: an intriguing distressed asset investment opportunity.

Author Biography

Max Fraser is an Assistant Professor of American History at the University of Miami. He has been writing the “Organized Money” column since 2014.