Private equity owned businesses have been going belly up at a pretty rapid and
concerning pace ever since the federal reserve started to increase interest
rates.
The troubling trend will likely lead to job losses and more economic pain for
workers, especially when you consider how massive some of these firms really are.
The Blackstone Group this summer became the first firm to cross $1
trillion in assets.
The industry now accounts for about $1.7 trillion of the US GDP, and
their businesses employ some 12 million workers, according to its own estimates.
But the biggest impact could be on the country's healthcare system, where
private equity made investments as part of their profit maximizing business strategy.
>> Speaker 2: Private equity firms use the pooled money to invest in existing
companies that are typically private or not publicly traded.
Then they look for ways to improve a company's performance or
value, often trying to squeeze more juice out of them.
To maximize profit and
then flip them quickly, generally in three to seven years.
It can be tiring work managing the business side of a practice.
So more and
more doctors have partnered with or sold their practices to private equity funds.
Why would this be attractive to investors?
The sprawling ecosystem of physician practices lets them enter a market and
quickly consolidate smaller practices under unified management to save money.
>> Speaker 1: So look, as you can tell from that video, private equity's role in
our healthcare system was already bad enough because the firms took a for
profit model.
And put it on steroids to maximize revenue and profits for themselves of course.
That led to staff shortages, subpar care due to corners being cut and
even hospital closures due to consolidation.
But now private equity firms that took on debt to invest in the healthcare
sector are struggling with their loans following the federal
reserve's decision to raise interest rates.
Political reports that historically low interest rates following
the global financial crisis allowed the firms to finance acquisitions
with cheap floating rate debt.
That didn't matter when the economy was humming and inflation was low.
But now higher interest payments have started to put pressure on them.
About two thirds of the $1.4 trillion leveraged loan
in the leveraged loan market, which is composed of riskier debt,
wasn't hedged to protect against possible losses from higher rates.
According to Oaktree Capital Management's Armen Panossian and Danielle Poli,
who wrote in a recent research note.
Now, these borrowers might need a break from their lenders.
I mean, normal people don't get breaks or their private equity backers, and
that could further limit the capital available for new deals.
I just love as soon as private equity might be in some financial trouble,
there are calls for lenders to take it easy on them.
Now, those challenges have been particularly noticeable among healthcare
companies.
A prominent example was Envision Healthcare, a physician staffing and
ambulatory surgery business that was acquired by KKR for $5.5 billion in 2018.
The company cited declining patient volumes, wage inflation during COVID-19
and battles with insurance providers when it filed for Chapter II back in May.
According to S and P Global Market Intelligence Data,
while bankruptcies at businesses owned by private equity are in fact rising,
the losses in healthcare are at the very top of that list.
But it would be a huge mistake to take what these firms allege at face value.
So if you're under the impression that private equity takes out these loans
in order to invest in improving hospitals rather than pay their executives,
I've got a bridge to sell you.
In fact, just take a look at what Prospect Medical did to
Delaware County Memorial Hospital in Pennsylvania,
which shut down just last year.
>> Speaker 3: Delaware County Memorial was part of a Nonprofit Pennsylvania health
system that was in danger of failing when it was purchased in 2016 by
Prospect Medical Holdings.
A Los Angeles based for profit company.
With the backing of private equity investors,
Prospect Medical's portfolio would, by 2018, grow to 20 hospitals in six states.
After the Pennsylvania purchase, the company had promised to invest $200
million to dramatically increase service to the community.
>> Speaker 4: They tried to tell us that they were gonna run us the same way.
Don't worry, trust us.
>> Speaker 3: Did they actually say that to you?
>> Speaker 3: Instead, Napole Tano says Prospect Medical dismantled the hospital
piece by piece, leading to longer waits in the And
forcing staff to transfer more patients to other hosptals.
>> Speaker 4: They have on cutting services.
Things wouldn't get fixed.
Our elevator in the back of the emergency room has been broken for over a year.
Holes in walls.
>> Speaker 3: Of the 20 hospitals owned by Prospect Medical, five have closed,
including this 89 year old hospital in San Antonio, laying off more than 500 workers.
>> Speaker 1: It's just absolutely disgusting.
One of the things that these private equity firms do is they take out these
massive loans and allege that they're gonna use those
loans to improve the businesses that they've purchased.
Or the hospitals, in this case, that they've purchased.
Instead, what they do with the money is they pay themselves and
they pay their investors massive dividends, huge returns on investment.
And by the way, Pennsylvania, as you saw in that video, wasn't the only state where
Prospect Medical got caught with its hand in the cookie jar.
They've driven hospitals in other states into unmanageable debt so their
executives can run off with a fortune even as the same facility shut down.
>> Speaker 3: Rhode Island attorney general Peter Neronha says what's
happening in Pennsylvania is what Prospect Medical tried to do in his state.
Where he says the company drove two hospitals deep into debt.
>> Speaker 5: Their hospitals were in real danger of closing.
>> Speaker 3: In 2019,
Neronha investigated a proposed company transaction invoking state law to
force Prospect Medical to turn over its financials.
And found it put every hospital in its system at risk of reduction in services,
sale or closure.
>> Speaker 3: Did they say, look, there was a pandemic.
Who could have predicted that?
And that's really largely responsible.
>> Speaker 5: Well, this had nothing to do with the pandemic.
Hospitals all over the country were facing the pandemic, but
the problems here were exacerbated, frankly, by greed.
>> Speaker 3: Two different outside experts followed the money and
discovered one reason why the company was so far in the red.
Summed up in a ruling by Neronha in 2018,
the owners of Prospect Medical took out a $1.12 billion loan.
Using proceeds to pay themselves and their private equity
shareholders a $457,000,000 dividend.
>> Speaker 1: Let me repeat that they took out a $1.2 billion loan to pay their
executives hundreds of millions of dollars I'm sorry their investors,
I should say hundreds of millions of dollars in dividends, okay?
So they saddled these hospitals with all this debt not to improve them,
not to invest in them, but to pay themselves, to enrich themselves.
And then they turn around and say, no.
The pandemic, the rising interest rates are really hurting us.
They had no interest in improving these hospitals, maintaining these hospitals.
All they cared about was raping and pillaging these hospitals and
private businesses, by the way, all across the country.
That's exactly what happened with Toys R uS and
other brands that I grew up with, that I grew up loving.
All those businesses that shut down, partly shut down due to the grade of
private equity, saddling those businesses with unmanageable debt.
Now, this is clearly a serious problem, and it's putting the lives of Americans
in jeopardy just so Wall Street goons can game the system and enrich themselves.
So what the hell is Congress doing about this?
For one, there's been an ill fated bipartisan effort to force these firms
to disclose more information about their debt and ownership structures.
The House Energy and Commerce Committee unanimously passed a bill led by
Republican Chair Cathy McMorris Rogers of Washington in the spring.
That would require certain private equity backed businesses to
disclose more information about their operations.
And that's it, just a little disclosure, okay?
No talk of enforcement mechanisms, no talk of actual regulations to protect
hospitals and patients from this disgusting, unmitigated greed.
And even these impotent measures are unlikely to go anywhere.
While that bill made it out of committee, it stalled in the house, of course it did.
But don't worry.
Congressional lawmakers are at least pretending to be
concerned as they propose weak regulations that they don't even fight for.
Pramila Jayapal, who's the leader of the House Progressive Caucus,
told Politico that I'm very worried that we're going to see more closures.
And also that we're going to see worse health outcomes.
We're talking about life and death situations.
Yeah, she absolutely shouldn't be worried.
We are talking about life and death situations.
I mean, she and the 104 members of the House Progressive Caucus should have
maybe considered reining in private equity firms before things got out of control,
but they didn't.
Hospitals are already shutting down and filing for bankruptcy.
Federal agencies are looking into the matter as well, and
it does seem that they're having a little more success on the disclosure front.
The Securities and Exchange Commission, under hard charging Chair Gary Gensler,
last month finalized the most sweeping investment transparency rule ever for
the industry.
Forcing firms to give investors more clarity on how their companies perform,
as well the fees they charge to boost their own balance sheets.
You caught that, right?
Even in this case, notice how the disclosures are meant to help
the investors rather than protect hospitals and patients.
Look, I get that it's the SEC, and that's their whole role in this pretty gross
system, but it certainly says something that Congress,
the regulatory body that's supposed to protect us.
The American people, is so inefficient negligent and useless,
while efforts to protect investors tend to go smoothly.
Kinda shows you what our current government values and prioritizes,
doesn't it?
All right, well, I know that was a downer, but it's important to know what's actually
going on with private equity, why these hospitals are closing.
And when you come across a story that alleges that rising interest
rates is really the reason why you're seeing these hospitals shut down.
Make sure you're armed with the actual information to fight back against that BS
narrative, because that's exactly what it is.
BS, businesses and hospitals were shutting down well before the pandemic as a result
of private equity and their greed.
As a result of them taking out unmanageable debt in order to enrich
themselves.