The New Yorker June 7, 2021 pp30-37 |American Chronicles|”DEATH OF A HOSPITAL”. “When private equity came to a Philadelphia health-care institution” by Chris Pomorski
Image by Emma Lee Whyy.org July 29, 2019
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Summary provided by 2244
An interesting look into how private equity purchased Hahnemann University Hospital on the border of impoverished northern Philadelphia. Joel Freedman’s Paladin Healthcare Capital (PHC) funded the deal for American Academic Health System (AAHS). Under Freedman’s leadership AAHS had previously “turned-around” private hospitals that were underperforming financially. PHC like other venture capitalists love to buy undervalued assets then leverage them by borrowing more money, leaning out the organizational excesses and then exiting with a profit.
In the case of Hahnemann, it was a long-time public institution and was a teaching hospital. Unbeknownst to Freedman, costs and operations of academic hospitals are higher and more complex than community hospitals. Furthermore, patients in poor neighborhoods lack less costly primary care and instead get treatment in the Emergency Room (ER). Complicating finances, Hahnemann, being in one of the poorest urban areas in America, didn’t have much outreach into wealthier neighborhoods. Those wealthy communities, flushed with private payer insurance, provide higher revenue and profit due to performing more elective procedures and better reimbursement from private insurance. Even worse Hahnemann's Reimbursement rates were very low. Those low reimbursement terms were negotiated by the previous owner Dallas-based Tenet Healthcare were iron-clad. Tenet took the lower rates in exchange for higher rates at its other more profitable locations across America.
Simply put the cupboard was bare and the hospital's mission of providing “care of the people no one else wanted” clashed with the idea of health-care as a profit-making business. Profit-making in healthcare is a trend that developed over decades with the advent of Medicare, Medicaid and followed by well-paying private employer-provided private medical insurance. Not widely understood, by the American public, but many rural and academic hospitals are failing financially and closing. The root cause being is basic math. A business cannot receive payments for services that are lower than costs and expect to survive financially. Hospitals have high overhead costs and often reimbursement doesn't even cover the direct cost of each procedure. No amount of patient or procedure volume overcome such a deficit on each transaction.
For the VC, their bills come due as well. Unable to get bank loans on such risky investments, they borrow money at high rates from Private Equity. As those came due, Hahnemann went bankrupt and Freedman claims to have lost $10 million of his own wealth. As bankruptcy neared, the hospital wasn't paying their bills in a timely way and vendors stop providing materials and service. Workers were laid-off, as well, leaving the remaining healthcare providers to improvise and patient care suffered. Patients were released without clear care instructions or were released too hastily only to be readmitted. Rather quickly, other hospitals in the area began to plan and prepare to ramp up their ER operations by 10-20% and take on more patients.
As a measure of controversy, Freedman kept the Hahnemann property isolated from bankruptcy. Apparently, this common practice of shielding certain assets, fueled speculation that Freedman intended all along to close the hospital and then sell or otherwise develop the now valuable property. Staff reported being told by Freedman that "if they couldn't make the hospital succeed, he would simply turn the property into something else" a claim Freedman denies. Other business experts believe such a tactic would be an unlikely plan.