After Steward, new law takes aim at private equity in health care

“The Massachusetts bill has a lot of weaknesses but it’s a big step forward over what we had in the past and what other states have done,“ said Eileen Appelbaum, co-director for the Center for Economic and Policy Research, a Washington D.C.-based think tank. ”And it’s a message to other states — hey, you can regulate.”

It does this in part by targeting one of the primary ways that Steward’s owners extracted money from the system — a major contributing factor in its collapse last year in Massachusetts — by prohibiting hospitals from selling their primary campus to outside investors.

The Massachusetts law also accomplishes what many states have tried and so far failed to do — establish ongoing financial monitoring and oversight of investors in a health care provider.

Under the law, investors with as little as 10 percent equity will be required to participate in the state’s annual health care oversight hearings and file ownership and governance information with state watchdog agencies, including notice when they buy or sell stakes in a system. State watchdogs could go so far as to require audited financial statements from equity investors.

David Seltz, executive director for the state’s Health Policy Commission, said that before, researchers had to resort to searching Google and listening to investor podcasts to understand the scale of private equity investment in Massachusetts health care. The law is a tremendous first step to “pull back the veil” on ownership and the effects of those relationships, he said.

While the law will help regulators understand who is profiting from the state’s critical health care infrastructure, it will not stop that profiteering entirely. Mary Bugbee, a researcher with the nonprofit watchdog Private Equity Stakeholder Project, said true reform would be legislation to fully curb the profit-driven decision-making that has contributed to health systems failures in the first place.

“There’s an avoidance of actually going after the business practices themselves that we know really have only an extractive role in health care,” Bugbee said.

But it will curb one business practice that the Globe Spotlight Team found played a major role in Steward’s troubles: the sale and leaseback of hospital buildings themselves.

Much of those sales have involved companies known as real estate investment trusts, or REITs, which hold portfolios of properties and make money by leasing them out. Steward sold its Massachusetts real estate to one such company — Birmingham, Alabama-based Medical Properties Trust — for nearly $1.3 billion. The sum was nine times what Steward itself had initially paid, and Steward’s owners profited handsomely from the sale. But the deal tied the hospitals to long-term leases, which saddled the international health system with onerous rent payments that contributed to its bankruptcy, and ultimately led to the closure last summer of Dorchester’s Carney Hospital and Nashoba Valley Medical Center in Ayer.

Such deals would be prohibited, in most cases, under the new law.

A spokesperson for Medical Properties Trust did not return messages seeking comment on the new Massachusetts law.

Zirui Song, an associate professor of health care policy and medicine at Harvard Medical School in Boston, said the new law does not touch many of the other tools private equity firms use to draw money out of the companies the own, such as loading up hospital systems with debt while they draw out payments for their investors and themselves. But in many ways, he said, the state had to do this step first to uncover who owns what in the health care industry.

“We can certainly go further. That is undoubtably true,” he said. “But … I think of it as a substantial meaningful step in the right direction.”

State Senator Cindy Friedman of Arlington had supported a stronger version from the Senate, which would have required private equity firms to post a bond with the state when filing notice of a transaction. But she, too, hailed the measure as a good start. She said she plans to file a bill in the new legislative session that would further restrict private equity ownership in health care, including the bond requirement.

“This was a compromise; it took the first step,” Friedman said. “Now we have to keep going.”

It’s far more than other states have done.

In September, California Governor Gavin Newson vetoed a proposal that would have required private equity groups and hedge funds to receive approval from the state’s attorney general for certain investments in health care facilities and provider groups. Similar efforts in Minnesota, Oregon and Connecticut also failed.

Connecticut State Senator Dr. Saud Anwar stressed the need for federal, state, and local protections from what he said was “the greed of private equity and entities like REITs more interested in profit than of the well-being of the patient.”

In his work as a physician, Anwar said, he has seen the harm private equity control can bring, such as delayed results for important medical tests including a CT or MRI scan.

“I have yet to see any good example come out of it,” he said. “This activity is nothing short of being criminal. It is centered on financial benefits for some people whose greed sees no boundaries, and it’s a situation that does not help the patient’s well-being.”

Other states are grappling with the teetering of private-equity owned health systems. Prospect Medical Group, once backed by private equity group Leonard Green, owns three hospitals in Connecticut and two in Rhode Island, and filed for bankruptcy earlier this month.

Rhode Island Senator Lou DiPalma said his state has robust oversight of hospital conversions, but in light of the Massachusetts bill, particularly the restrictions on real estate investment trusts, he said perhaps they could go further.

Louisiana state Representative Michael Echols, whose district is near Steward’s Glenwood Regional Medical Center, also intends to file legislation there to hold executives of equity investors such as REITs civilly liable if a health care facility was not appropriately operated for 36 months in a row.

“It’s just like a big cartel with a shield,” Echols said. “I just want to take away the shield so the cartel can’t win.”

Jessica Bartlett can be reached at [email protected]. Follow her @ByJessBartlett. Catherine Carlock can be reached at [email protected]. Follow her @bycathcarlock.