On a brisk 2023 October morning at St. Elizabeth’s Medical Center in Boston, Sungida Rashid and her husband Nabil held their newborn daughter for the first time. Rashid soon began to experience severe complications, including bleeding of the liver. This normally would be treated with embolization coils; however, the manufacturer had retrieved all coils at the hospital weeks before because Steward hadn’t paid its bills. According to a lawsuit filed that same month by the manufacturer, Steward owed about $2.5 million in unpaid bills. Tragically, Rashid’s complications escalated, and she lost her life.
This malfeasance on the part of Steward’s management was not isolated: The WSJ reported that, at this time, “[Steward] faced a mountain of lawsuits by vendors over unpaid bills, including a pest-control company hired to remove about 3,000 bats . . . at one of Steward’s Florida hospitals. It claimed Steward owed $1.6 million . . . ” In fact, just seven months after Rashid’s death, Steward Health Care System LLC and 166 of its affiliated debtors each filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.
This failure was the culmination of many challenges, but Steward’s 11-year ownership by Cerberus, a Private Equity (PE) firm that had realized about $800 million of profit from its investments into the health system prior to selling its final stake in 2021, played a significant role. The same WSJ analysis remarks that “Cerberus has said that Steward ‘was financially healthy with substantial liquidity’ at the time it ceased owning it. The implication was that Steward fell on hard times only afterward. But Steward’s numbers show it was in a deep financial hole [in 2020]…“
Nor are Steward’s problems owing to Cerberus’s ownership isolated healthcare providers owned by PE firms. In September of 2023, the Federal Trade Commission (FTC) sued U.S. Anesthesia Partners, Inc., the dominant provider of anesthesia services in Texas, and its owner, Private Equity (PE) firm Welsh, Carson, Anderson & Stowe, alleging an anticompetitive scheme that unfairly raised prices. And now the US Department of Justice’s Antitrust Division and the Department of Health and Human Services have now joined the FTC to formally investigate the impact of PE acquisitions in healthcare.
While capital investment, efficiency gains from consolidation, and managerial improvements can be among the benefits of PE ownership, the stakes in healthcare—where patient lives are directly impacted—are uniquely high, so the alleged increases in bloodstream infections, falls, ER visits and hospitalizations correlating with PE acquisitions in healthcare are especially troubling.
Given these high stakes and the growth of PE ownership in healthcare over the last decade, both government and PE must do better to safeguard the benefits of much-needed private investment in healthcare while mitigating the asset class’s short-termist and financial gaming tendencies, including any cost-cutting measures that negatively impact patient care. Such a tradeoff is simply not necessary.
First, PE consolidators need to be honest, competent and transparent: One can execute industry roll-ups without engaging in monopolistic behavior. HBS professor Michael Chu’s in-depth work on the development of the microfinance industry showcases the power of competition to bring prices down over time. Often, innovators are rewarded for a time with excess profits, a form of arbitrage. But excess profits should erode over time with/ sufficient competition. As he writes in Commercial Returns at the Base of the Pyramid, “Competition is precisely what reconciles profitability and the creation of social Value.” The source of sustainable profits over time is to provide superior patient care at more affordable prices. Technology is an important part of this equation.
Second, the government can and should go after anticompetitive or short-termist behavior: On the part of PE firms that harm the healthcare interests of patients and communities, but at least as important is a continued expansion of legislation to increase the scope of practice for less credentialed provider types, e.g. could we expand what skilled nurses can do in the way of anesthesiology? Perhaps aided by technology? As a point of interest, over 500 AI algorithms have now been cleared by the FDA to definitively diagnose a variety of conditions under the “Software as a Medical Device” designation. This has happened just in the last few years and is a really big deal in the way of technological enablement for expanding the scope of practice for less credentialed, less expensive, and more numerous provider types, thus reducing the cost and improving the quality of care.
Finally, Investors must emphasize innovation and long-term value in healthcare: PE firms must up their game when making healthcare investments to focus on fundamental innovation gains that drive sustainable value for society at large and not just their LPs. In this regard, they should take a page out of the Venture Capital playbook to scale already-proven care delivery models that indeed reduce cost and improve outcomes. This is where truly sustainable investment returns come from, and the firms that pull this off with integrity and skill will be richly rewarded. Focused factory provider models like the Shouldice Hospital in Toronto, which specializes in performing mostly non-mesh hernia repair surgeries, are fruitful ground. And tech enablement is creating new ways to do things that reimagine how a practice operates end to end; for example, one of our portfolio companies, PathologyWatch, which was acquired by Sonic Healthcare in 2023, created a new dermatopathology solution that replaced the glass slide/microscope workflows with an AI-driven, cloud-based platform featuring a much more precise, reliable sample preparation process that reliably delivered exceptional results with a lower cost structure. These types of tech-native solutions form cores upon which to build rollups or expansions while unlocking significant additional value with fundamentally better operations.
About Austin Walters – Senior Partner, Springtide Ventures
Austin Walters is a seasoned executive with extensive experience in private equity and venture capital, specializing in the healthcare and Health Tech sectors. As a Senior Partner at Springtide Ventures, Austin has led numerous successful investments and consolidations, focusing on innovative healthcare solutions and strategic rollups. With a deep understanding of the complex dynamics within the healthcare industry, Austin has been instrumental in driving value through operational efficiencies and strategic growth initiatives.
Austin is a recognized expert in Health Tech and healthcare. He frequently speaks at industry conferences and authors several articles on private equity trends and healthcare innovation. He holds an MBA from Harvard and is deeply committed to advancing the role of technology and sustainable practices in healthcare, a commitment that gives him optimism about the industry’s future. Outside of his professional endeavors, Austin is passionate about mentoring emerging leaders and contributing to community health initiatives.