A cautionary tale about private equity and healthcare

This summer the state’s healthcare industry suffered its first visible bruise from the clenched fists of private equity. Two hospitals serving Arkansas residents, Wadley Regional Medical Center facilities in Hope and Texarkana, Texas, both risked abrupt closure when their owner, the largest physician-led hospital operator in the country, Steward Health Care, declared bankruptcy in May.

The fallout from the bankruptcy led the Dallas-based for-profit company to put all of its 31 hospitals in eight states and its physician network up for sale in an effort to settle the company’s massive $9 billion debt. In August, the company offloaded its physician network for $245 million to private equity firm affiliate Rural Healthcare Group as efforts to sell off hospitals in other states stalled, including two in Massachusetts that have since closed.

Residents of Southwest Arkansas have been more fortunate, with the federal judge overseeing Steward’s bankruptcy approving the sale of both Wadley Regional Medical Center hospitals in two separate hearings in September. A community group consisting of the city of Hope, Hempstead County, and Pafford Medical Services agreed to purchase the hospital in Hope. CHRISTUS Ark-La-Tex, the only qualified bidder and owner of a competing hospital in in the border town, agreed to purchase the Texarkana hospital, albeit not without objection from a local business that the consolidation could result in fewer healthcare options and lower quality of care.

It’s a cautionary tale, and we should count ourselves lucky that the damage in Arkansas wasn’t worse. Responsible acquisition and management of hospitals by private equity firms can revive struggling hospitals or reinvigorate stagnant ones, fueling innovation and growth. Irresponsible acquisition and management, which is what appears to have happened with Steward Health Care, can jeopardize hospital operations as the private equity owner seeks to enrich its fund managers and their investors by taking out loans and stripping the hospitals’ capital assets.

Private equity ownership in the healthcare industry is not a new phenomenon. Over the past decade, private equity firms have increasingly targeted hospitals, nursing homes, and home care providers for acquisition, and, more recently, specialty physician practices have attracted private equity attention. According to a national nonprofit group advocating for more transparency and regulation of these types of investments, private equity isn’t as big a player in the Arkansas healthcare market as it is in other states such as New Mexico, where about 1 in 4 hospitals is private equity-controlled.

Federal regulators are now eyeing private equity more closely. The Securities and Exchange Commission finalized a rule in November 2023 requiring increased transparency about the identity of investors in private equity arrangements. In May, the Federal Trade Commission and the U.S. Department of Justice launched a public inquiry into “stealth consolidation schemes” in all sectors, including healthcare, that seek to avoid antitrust scrutiny and thus harm competition and consumers.

The demise of Steward Health Care has also drawn bipartisan attention in Congress and from lawmakers in statehouses across the nation. The Steward Health Care CEO recently stepped down after the Senate voted to hold him in criminal contempt for refusing to testify about decisions preceding the company’s bankruptcy. According to the National Conference of State Legislators, at least 35 states require notification to an authorized state entity of proposed hospital mergers, closures, or contractual affiliations. Some states require review and approval of private equity transactions.

Traditionally taking a more of a “hands-off” regulatory approach with market transactions, Arkansas is not currently among these groups of states. That may be changing, though, as evidenced by state lawmakers’ recent approval of an emergency rule to guarantee that insurers and their pharmacy benefit managers pay pharmacists a “fair and reasonable” dispensing fee.

Free markets work until they don’t. Sometimes we get lucky, and their dysfunction only results in a bruise. We can recover from a bruise, but we must recognize that Arkansas healthcare providers and the communities they serve are susceptible to more grave damage. Without adequate monitoring and oversight, communities that lack adequate local capital to maintain — and perhaps even grow — their healthcare infrastructure will continue to be vulnerable to private equity players whose profit may come at the expense of the healthcare Arkansans need.

Editor’s note: Craig Wilson, J.D., M.P.A., is the director of health policy for the Arkansas Center for Health Improvement, an independent, nonpartisan health policy center in Little Rock. The opinions expressed are those of the author.