Outrunning the Beasts of Hell: How One Community Hospital Avoided the Fallout of Private Equity’s Investments in Health Care

Landmark Medical Center sits not far from the Blackstone River and its waterfalls’ “thundering mists,” which translates in Algonquian to “Woonsocket,” the northern Rhode Island city the medical center serves. 

Like the hospital itself, Woonsocket is old and under-resourced. Filled with cavernous textile mill buildings that once attracted thousands of French Canadians immigrants to produce woolen goods, the city now struggles with a median family income less than half the state average, a child poverty rate over twice as high, and a school system where one-third of the students fail to graduate from high school on time.     

Licensed for 230 beds, with a separate inpatient rehabilitation facility, the medical center’s fortunes have waxed and waned with the city’s. Founded by proud and wealthy town leaders in 1873 as part of the first wave of private hospitals in the country, Landmark saw its resources and ability to meet the demands for evermore complex and sophisticated acute care services diminish in last quarter of the last century. By 2008, saddled with high Medicaid caseloads, diminished patient volumes and debt from an ill-advised foray into complex cardiac care, the medical center entered into receivership in anticipation of possible bankruptcy. 

Showing up at the fire sale and looking for a bargain was none other than Steward Health Care, the for-profit hospital chain then backed by private equity giant Cerberus Capital — named after the three-headed beast who watches over the gates of hell.   

Steward dangled promises of more services and more revenue for an impoverished hospital and community with few other options. Armed with lots of new capital, it was the same plan they were offering many other communities in similar straits at the time.  

Sixteen years later, having executed the private equity playbook of cutting costs (namely staffing and supplies), extracting financial assets, and loading its hospitals with capital debt and rent payments — all in the name of generating outsized returns for impatient investors — Steward has declared bankruptcy, casting doubt on the future of 30 hospitals, including eight in neighboring Massachusetts.  

However, in Woonsocket, Steward was sent packing and the community staved off the private equity beast. The process was not elegant, and the result has been less than universally satisfying, but as states and communities struggle with health system consolidation, health care affordability, and difficult resource allocation decisions, this story of how the private equity wolves were thwarted may offer lessons.   

Deal or No Deal 

In a receivership, the court appoints a special master to help a financially troubled business met its obligations to its creditors. In 2008, Steward looked like a pretty good option for the special master of Landmark’s receivership. The head of the company, Ralph Della Torre, a brash cardiac surgeon, had money and ambitions. The track record for private equity–backed health care of higher prices and poorer quality had not yet been established. And prospective suitors were not exactly beating down the special master’s door.  

Weak finances and a lack of options for the Caritas Christi Health System in Boston had given Steward its initial foothold in Massachusetts. Now it was expanding by targeting smaller, financially weak community hospitals and their communities such as Landmark and Woonsocket. Like many hospital boards desperate to keep the lights on and politicians eager to avoid a shutdown on their watch, the special master and public officials in northern Rhode Island were willing to look past their concerns and do a deal with Steward to save Landmark.  

But there were problems. First, Rhode Island had a long and complex process for reviewing changes in health system control that called for approval by both the Department of Health and the Attorney General. The review was even more extensive for an entity converting from not-for-profit control to for profit. Could such scrutiny be avoided? 

There were also concerns about the quality of obstetrical care at Landmark. As a result, a local community health center, the largest source of deliveries to Landmark, had moved all its maternity cases to another hospital. Steward would need that volume back to make its finances work, and the health center and its providers were skeptical that Steward could make good on its many promises to turn things around at Landmark. 

Finally, Landmark needed significantly higher commercial insurance rates from its largest commercial insurance payer, Blue Cross and Blue Shield of Rhode Island. Steward made the case that it could attract volume from other hospitals that were even more highly paid. But under the terms of the Rhode Island Health Insurance Commissioner’s Affordability Standards, Blue Cross could not raise its rates higher than inflation. The insurer pointed to those standards and held firm. 

Disgusted, Steward walked away from the deal and subsequently, in a fit of pique, sued Blue Cross, alleging monopsony practices. (The case was settled out of court.) Efforts by some public and private sector leaders to quietly broker an arrangement in which Landmark would become part of the state’s largest health system foundered. The special master went back to the health care equivalent of match.com and struck a deal with another for-profit hospital chain (without private equity backing), Prime Health Care, which was quickly approved. 

As of today, Landmark is surviving if not exactly thriving. The medical center has 140 staffed beds, about 450 deliveries a year, an active residency program, and an emergency room that is often crammed. Prime Health Care — not ruled by the private-equity-sized return demands of its investors — has converted the Medical Center back to a nonprofit and made it part of a foundation it controls. The Medical Center has earned an “A” rating for patient safety from the Leapfrog Group. Health system architects point out that Rhode Island still has excess inpatient beds, and — with Woonsocket only 20 miles from much larger inpatient facilities — Northern Rhode Island would be well served by a smaller facility focused on emergency room, outpatient, and behavioral health services. But Woonsocket has a solvent hospital that is a source of local pride and employment, which is more than its neighbors in similar towns in Massachusetts with Steward hospitals can say. 

The Consolidation Pack  

Private equity investors are industry agnostic. They put their money where there is money to be made — quickly. And, with multiple cross subsidies among payers and services, little financial transparency, and numerous market failures, there is money to be made in health care. Buyers employ tactics like increasing service volume, negotiating higher commercial rates, going out-of-network and charging patients list prices, and monetizing assets like land and buildings. Meeting patient needs, maintaining the quality of services, and responding to the community are not aspirations or even obligations, but the costs of doing business. 

Such a philosophy may be acceptable for other industries but should not be for health care, where private equity’s fundamental strategy is not to create value but to extract it. It is the job and the responsibility of public and private sector leaders to make health care a less attractive investment opportunity for private equity investors by leveraging admittedly clumsy and often bureaucratic tools like those used in Rhode Island: transaction review, commercial insurance oversight, and responsible nonprofit governance. 

Private equity is, however, only the hungriest of the wolves in the health system consolidation pack. Even as policy actions to make private equity in health care a less attractive investment are debated and sometimes implemented, health care is becoming ever more unaffordable for people. Costs are driven primarily by health systems that are growing in size and power and commanding higher prices, as well as pharmaceutical companies using patent law to stifle competition. Impoverished communities like Woonsocket across the country deserve a broader discussion about how best to confront these growing threats to their health and health care.