Hahnemann University Hospital: Healthcare Bankruptcy Highlights the Tension When Private Equity Collides with the Public Interest
A “little bit of a crisis” was averted last week in the Chapter 11 bankruptcy case of St. Christopher’s Hospital for Children, a Philadelphia-area hospital with ties to Hahnemann University Hospital, which is also a Chapter 11 debtor. On Tuesday, Delaware bankruptcy judge Kevin Gross said he could not approve a $65 million DIP loan requested by St. Christopher’s over the objection of several creditor groups because the terms of the loan were too onerous. The failure to obtain the much-needed liquidity might have forced the hospital into a chaotic, freefall liquidation, potentially jeopardizing patients and most certainly spelling disaster for creditor recoveries. But by Wednesday, after last-minute negotiations between the Debtor and the DIP Lender, MidCap Financial Trust, the parties reached a deal that increased the cash infusion to the estate. Later that same day, Judge Gross said he would approve the revised loan package. The funding is expected to keep St. Christopher’s open long enough to conclude a sale of the hospital as a going concern.
The approval of the DIP is an important step, but hardly the last chapter in the bankruptcy cases for these storied Philadelphia hospitals. In early 2018, private equity firm Paladin Healthcare paid $170 million to Tenet Healthcare to buy St. Christopher’s and Hahnemann, a hospital with a history that dates back to its founding in 1848 as a teaching hospital. Less than 18 months later, the new owner placed Hahnemann and St. Christopher’s into bankruptcy.
The closure of Hahnemann, which serves primarily a low-income community in Philadelphia, has brought renewed focus on the role of private equity in healthcare. In 2018 alone, there were 316 publicly disclosed private equity healthcare acquisitions with a total deal value in excess of $63 billion, according to Bain & Company. Even presidential candidates are taking notice, with Sen. Bernie Sanders participating in a rally to save the hospital in July that drew national focus.
The consequences of private equity’s push into healthcare may not be fully known. In theory, the acquisition of a struggling or distressed company by a private equity firm can lead to operational and financial improvements to increase performance, preserve jobs, and grow the business to profitability. A win-win. But private equity firms often raise capital to fund an acquisition by causing the acquired company to incur debt, which can make it harder for an already distressed entity to survive. And, even where there is no new debt, the profit focus of a private equity investor may not always align well with the mission of a hospital, especially one like Hahnemann that serves a primarily low-income community.
Some commentators have “expressed concern that private investors tend to demand high returns in a short time frame, which can pressure physicians to push more expensive treatments over less profitable ones, and pressure hospitals to rely on medical staff who have less training.” And, of particular concern to critics in this case, is that Paladin may have acquired the hospital for the value of its real estate, not for its mission to provide care to low-income Philadelphians. The hospital is located in central Philadelphia, near Temple University, which could make the land valuable to developers. If Hahnemann’s owner is able to monetize the land where the hospital sits, even if that means closing a key resource for the city’s residents, it might serve as a blueprint for other investors to attempt with struggling hospitals in gentrifying neighborhoods elsewhere in the country.
 “Hahnemann Lands Final Approval of Bankruptcy Financing, Averts Crisis, Peg Brickley, August 21, 2019, The Wall Street Journal (Available at: https://www.wsj.com/articles/hahnemann-lands-final-approval-of-bankruptcy-financing-averts-crisis-11566406257).
 “Private equity rushed into health care -- now, a nurse warns: ‘Be scared,’” Aimee Picchi, July 29, 2019, CBSNews.com (Available at: https://www.cbsnews.com/news/private-equity-rushed-into-health-care-now-a-hospitals-fate-raises-fears/).
 See https://www.bain.com/globalassets/editorial-disruptors/2019/healthcare-pe-report/bain_report_global_healthcare_private_equity_and_corporate_m_and_a_report_2019.pdf
 “Rich investors may have let a hospital go bankrupt. Now, they could profit from the land,” Lydia DePillis, July 29, 2019, CNN.com. (Available at: https://www.cnn.com/2019/07/29/economy/hahnemann-hospital-closing-philadelphia/index.html).