'A house of cards': What's going on with Steward's finances?

When developments around a health system's financial distress unfold quickly, it usually suggests that something bigger has been brewing for a long time. Such is the case with Steward Health Care.

After falling $50 million behind on year-end rent to Medical Properties Trust, the largest hospital landlord in the U.S., the Dallas-based health system has also received backlash from state and federal lawmakers, Steward employees and concerned community members in response to the risk of hospital closures.

Before it spanned across nine states with 33 hospitals, or even had the Steward name, the system as it's known was born from an unlikely combination of healthcare players in Boston. Over the span of 12 years, it would go from being purchased for $895 million in 2010 to losing more than $800 million from 2017 to 2020.

Rosemary Batt, PhD, management and employee professor at Ithaca, N.Y.-based Cornell University, has studied Steward closely since 2012. 

In July 2022, Dr. Batt and Eileen Appelbaum, PhD, co-director of the Washington, D.C.-based Center for Economics and Policy Research, published a working paper titled, "The Role of Public REITS in Financialization and Industry Restructuring," which includes a deep dive into the financial history of Steward. 

They posit that the outcome of Steward is largely hinged on real estate company Medical Properties Trust, with an unusual approach to property ownership contributing to the hospital operators' financial downturn.  

To better understand the system's financial position today, it is helpful to go back to the beginning. 

Initial M&A

Cerberus Capital Management, a private equity firm, acquired nonprofit, Boston-based Caritas Christi's six hospitals and affiliations in 2010 for $895 million and created Steward Health Care. The acquisition came as a $420 million buyout and included $475 million in assumed debt and pension liabilities, according to the working paper. 

Ralph de la Torre, MD, led Caritas Christi since 2008 and continues to lead Steward today as its founding chairman and CEO. Dr. de la Torre previously the CEO of the cardiovascular institute at Beth Israel Deaconess Medical Center in Boston and practiced as a cardiac surgeon, earning the distinction as the hospital’s youngest chief of cardiac surgery at the time. 

To convert Caritas Christi, now known as Steward, into a for-profit system, Cerberus was required by the Massachusetts attorney general to meet specific requirements, such as making a $400 million investment in Caritas's hospital infrastructures, the paper said. From funding the health system's operating losses to its infrastructure expenditures, Cerberus met the attorney general's requirements and moved forward without further oversight.

By 2012, Steward's revenue was $1.9 billion with 17,000 employees under Cerberus.

MPT enters the picture 

In 2016, Birmingham, Ala.-based Medical Properties Trust acquired $1.25 billion worth of Cerberus's hospital properties, including a $50 million stake, or 5%, in Steward equity. 

Following the sale, Cerberus used $484 million of the proceeds to decrease acquired debt and to conduct more acquisitions.

Founded in 2003, Medical Properties Trust is a publicly traded company and one of the world's largest owners of hospital real estate. It comprises 441 facilities and around 44,000 licensed beds, according to its website.

Backed by Medical Properties Trust and Cerberus, Steward in 2017 bought eight hospitals across Ohio, Pennsylvania and Florida from Franklin, Tenn.-based Community Health Systems for $311.9 million. Steward then sold the hospitals to MPT for $301.3 million later that year.

Acquisition spree 

Steward went on a shopping spree and conducted a $2 billion deal in 2017 with TPG, a private equity firm, to snag Franklin, Tenn.-based Iasis Healthcare, which comprised 18 hospitals across six states. The deal nearly doubled Steward's size, but came with a debt estimated at 6.5 times Iasis's earnings. 

As a result of this spending, Steward saw losses of about $207 million in 2017 and around $271 million in 2018. 

The acquisitions and mounting debt led to Steward's Massachusetts hospitals having the worst reported financial performances of any system in the state, including the highest level of debt. Steward also had a -37.6% equity financing ratio in the fiscal year 2018.

When the COVID-19 pandemic hit, the financial challenges continued. In 2020, Steward received $675 million in government funding, Bloomberg reported, but still saw a net loss of more than $400 million that year, The Wall Street Journal reported.

In an effort to provide relief to Steward, Medical Properties Trust loaned $200 million to a joint venture it had formed with Steward in the summer of 2020, which allowed Steward to purchase international assets, resulting in a $27 million book value and $173 million cash gain for the health system. Medical Properties Trust also converted mortgages it had on two Steward-owned Utah hospitals into leases and paid Steward around $200 million through acquiring the real estate in 2020.

Cerberus says goodbye

Cerberus began its exit from Steward in 2020 amid the continued financial losses. Rather than sell its stake, the private equity firm transferred its interest to a group of Steward physicians, led by Dr. de la Torre. The exchange included a note, which was due in five years, that ensured Cerberus was paid regular interest payments that could be converted to equity, regardless of whether Steward performed well. 

Cerberus's five-year note was purchased by Steward through the borrowing of $335 million from MPT in January of 2021, which placed MPT as Steward's landlord, largest creditor and its minority owner. 

Cerberus fully exited Steward in May of 2021, walking away with around $700 million, the paper said. Steward then went on to purchase five Florida hospitals for $1.1 billion from Tenet Healthcare, after which MPT acquired the associated real estate for $900 million and entered a sale-leaseback deal with Steward. 

Medical Properties Trust and Steward: a complicated dance

While Dr. Batt and Dr. Applebaum's working paper was published nearly two years ago, one statement eerily predicted the ongoing financial woes that Steward and Medical Properties Trust are experiencing today.

"Should Steward, MPT's largest tenant, falter financially, however, the effects on MPT could be disastrous," the paper said. 

After Cerberus exited Steward, an investor presentation in June 2021 revealed that MPT had invested $4.5 billion in Steward. 

Medical Properties Trust revealed in February 2022 that Steward had paid it around $1.2 billion in rent and mortgage interest since 2016. In 2023, Medical Properties Trust also sold $105 million of its Steward interest.

Dr. Batt told Becker's that if Medical Properties Trust were to financially fail, Steward would face the same fate.

"It's a house of cards," Dr. Batt said. "Yes, other health systems are struggling, but not this badly, because other healthcare systems own their own property. They're not paying inflated rents that keep rising every year."

Current day 

Tackling all of Steward's debt as it stands today could be tricky.

Apart from the $50 million in rent owed by Steward to Medical Properties Trust, the health system's nine Massachusetts hospitals have multiple outstanding liens of nearly $4 million in debt to multiple contractors, the Boston Herald reported Feb. 4. 

"Given the amount of wealth extracted from the hospitals and the high rents they're paying, the challenge of continuing to provide quality care to these communities who are in great need will be extraordinary," Dr. Batt said.

Another piece of the Steward history puzzle is Massachusetts Gov. Maura Healey. 

In 2015, then attorney general Healey was in charge of monitoring the health system's fiscal health and issued a report that stated while Steward-owned hospitals were ensuring important elderly and low-income patient services, "its mounting losses raise concerns about the for-profit hospital's financial stability," The Boston Globe reported Feb. 5. 

Now as governor, Ms. Healey has made it clear that Steward won't be bailed out for its financial troubles, and must come up with a plan to ensure the protection of patients and jobs, along with keeping stability across Massachusetts' healthcare system. 

However, amid concerns over the potential sale of four Steward hospitals in Massachusetts, the health system recently shared that it now has the ability to put a financial safety net around all of them.

"Steward has agreed upon the principal terms for a significant financial transaction to help stabilize our company," Michael Callum, MD, executive vice president of Steward, said in an employee message shared with Becker's.

Dr. Callum said Steward has no current plans to close any of its Massachusetts hospitals, but is exploring partnership and transfer options for them.

"Moreover, the company is advanced in an M&A process that would bring in a significant equity partner to our physician organization, and the company has already received very significant bids as part of this process," Dr. Callum said.

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