43BloombergBusinessweek August 10, 2020
arlyoneSundaymorninginMay,a mousewandered
ontoa high-voltagetransformeratSt.Elizabeth’s
MedicalCenterinBoston.Therodentdied,andso
didpartofthepowersupply.Inonebuilding,a 1970s
beigebricktower,lightswentout.Nursesgrabbedflashlightsto
searchformedicine.Asminutesbecamehours,staffersrigged
upfloodlamps,connectedtostill-functioning outlets by exten-
sion cords that snaked through hallways and stuck to the floors
with colored tape. Electric beds no longer worked. A nurse
gathered a pile of pillows to prop up a stroke victim for a meal.
In a building next door, the lights didn’t go out, but it
wasn’t safe to rely on the backup generator alone. Severely ill
patients without Covid-19 needed to be moved from a tempo-
rary “clean” intensive-care unit into the main ICU, which had
no power issues but was packed with Covid cases. So nurses
created a makeshift boundary, a privacy curtain on wheels,
to keep the two sets of patients apart. “I was beside myself,”
says Jackie Fabre, an ICU nurse. “That was unacceptable. That
was terrible.”
The for-profit company that owns St. Elizabeth’s, Steward
Health Care, says backup power kicked in after the transformer
blew, the outage didn’t affect patient outcomes, and the hos-
pital had been planning to consolidate the two ICUs. Steward
also points to the more than $100 million it’s spent to upgrade
St. Elizabeth’s. To be fair, the power crisis that began on May 10,
and lasted 38 hours, was a confluence of freak events. Medical
centers across the Northeast were battling a pandemic. Then a
mouse showed up in the wrong place at the wrong time.
But for some who work at St. Elizabeth’s, the outage capped
years of complaints about what they see as the company’s
penny-pinching approach. Steward has long been heralded
as a bold experiment in using Wall Street financial engineer-
ing to save commu-
nity hospitals. A decade
ago, Cerberus Capital
Management, a private
equity firm, bought St.
Elizabeth’s and five other
Catholic hospitals in
Massachusetts. The buy-
out created Steward, whichhasbecomeoneofthe largest U.S.
chains of for-profit hospitals, with $6.6 billion in annual reve-
nue in 2018.
The Massachusetts hospitals were hardly a prize. When
Cerberus bought them, they were in precarious financial con-
dition and had substantial pension obligations. Cerberus’s own-
ership wasn’t only supposed to spruce up old buildings but also
revolutionize health care. Steward would build an “accountable
care organization” under Obamacare, which passed the same
year as the buyout and brought the sense that big reforms were
possible. Steward’s network of family physicians, specialists,
and hospitals could work together seamlessly to manage every
aspect of a patient’s health, offering better care at a lower cost
to the working-class communities many of the hospitals served.
As the U.S. faces an uncertain economic future linked to
the relentless coronavirus, providing affordable health care has
never been more urgent. Steward says it’s taken steps toward
that goal. It points to improvements in mortality and other mea-
sures at its hospitals since the Cerberus purchase. Yet for all
of Steward’s impressive growth, the company, like so many
created through buyouts, remains on a financial knife’s-edge.
TopayoffCerberusanditsinvestorsaswellastofinancethe
healthsystem’sgrowth,Stewardhassoldoffsomeofitsmost
valuableassets—therealestateitshospitalsoccupy—and is now
saddled with debt.
In May, as St. Elizabeth’s was dealing with its electrical glitch
and the crush of Covid patients, it faced another upheaval.
Cerberus transferred control of the company to a group of the
hospitals’ doctors. In an example of the strange magic of pri-
vate equity, Steward’s financial struggles now hardly matter
to Cerberus. The investment firm has already made its money
backseveraltimesover.rivateequity firmssee healthcareas a growth
opportunity, in part because of the graying of
America, and they’ve been buying like crazy. As a
whole, they made a record $78.9 billion worth of med-
ical investments last year, according to consultant Bain & Co.
Along with hospitals, investors have bought doctors’ offices,
surgery centers, and drug-treatment clinics.
Cerberus and the Massachusetts hospitals, which were part
of a nonprofit group called Caritas Christi Health Care at the
time of the deal, made for especially sharp contrasts. The hos-
pitals were anchors of local communities and had names such
as Good Samaritan and Holy Family. Cerberus, named after
the three-headed dog that guards the gates of the underworld,
is as powerful and connected as they come. Its leadership
includes billionaire Stephen Feinberg, former Vice President
Dan Quayle, and former Treasury Secretary John Snow.
Private equity typically buys a company, overhauls its
operations, and tries to make it grow. Generally this strategy
involves piling on a lot of debt—but, crucially, that debt sits on
the books of the target company, not the private equity fund.
David Johnson, chief executive officer of 4sight Health, a health-
care advisory firm, says Cerberus and other private equity firms
bring market discipline to an industry that really needs it. “I
look at private equity the same way I look at nuclear energy,”
says Johnson, who wrote a case study about Steward with one
of its investment bankers from Cain Brothers. “It has beneficial
and detrimental uses. It is a heat-seeking missile for profits.”
Cerberus needed approval from the state and even the
Vatican to do the deal. The firm paid $246 million in cash and
agreed that Steward would assume a more than $200 million
pension shortfall and make $400 million in investments over
several years.
Under its CEO, Ralph de la Torre, a heart surgeon who’d also
headed Caritas Christi, Steward lived up to its deal, the state
says. It ultimately invested $800 million in its Massachusetts
hospitals, with new operating rooms and emergency depart-
ments to show for it. Steward recruited respected doctorsSt Elizabeth’sMedicalCenterin
an undated photo