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Buy a failing hospital and make a profit. This could be a dangerous new book for wealthy investors



"It's not safe. We're in the middle of it all. Jefferson [University Hospital] isn't that far, but for a life-threatening situation, it's minutes that matter," said Maria Gutierrez, Hahnemann's oncology nurse who received a call on Wednesday from a manager who said that all of her shifts had been canceled. "That's why he wants the country."

Not included in the filing: The unit that owns the entire city block's worth of land under the hospital, as well as a few associated medical office buildings and parking garages, which Freedman had shared from the operating businesses when he and his co-investors bought them. The same central location that made Hahnemann valuable as a health professional ̵

1; spitting distance from the town hall and conference center – also makes the site incredibly desirable for a high-end hotel or condominium.

"There is no way he is not making money in the country," said Patrick Clancy, president and CEO of Philadelphia Works, the city's workforce development agency, now accused of helping thousands of unemployed workers. "He wants to leave our city and go back where he calls home with money in his hands and 2,400 people walking around."

Freedman declined to comment on this story, commenting via email "I want to say a lot about the Hahnemann situation in a few weeks." In a statement released July 15, he said the state of Pennsylvania had declined to provide necessary financial assistance – as the state disputes – and that he remained open to any solution that would keep the hospital operating. Freedman has not commented publicly on what may lie ahead of the site.

Still moving away from ailing companies while earning real estate is straight out of the private equity playbook.

It happened again and again in the retail and grocery sectors, which are filled with low-margin companies sitting on land that can be more valuable if relocated. From Toys & # 39; R to Payless Shoesource, thousands of people have lost their jobs when their employers are wound up after being downloaded with unsustainable debt.

"Businesses know that even if everything else goes wrong, it's always this property to sell," said Jim Baker, who runs the Private Equity Stakeholder Project, a nonprofit that advocates for people who are adversely affected by private equity ownership. "It will be part of the deal from the beginning."

When it comes to a hospital, however, the efforts of the community are even higher. If the Hahnemann bankruptcy goes through as planned, advocates worry other private corporations could try it with demanding hospitals in gentrifying neighborhoods across the United States.

"If you have a success like Hahnemann – it will blow up," said Eileen Appelbaum, a private equity expert who is co-director of the Left-wing Center for Economic and Political Research. "Everyone wants to know that you can make money from properties in a hospital."

  Senator Bernie Sanders held a meeting at Hahnemann Hospital in early July, promising to enact legislation that would create a $ 20 billion fund to help local governments buy hospitals in financial need.

Private equity at the edge of the bed

The drama in Hahnemann plays on the background of a healthcare industry that private investors are rapidly transforming.

According to Bain & Company's management consulting firm, the global value of revealed private equity acquisitions of healthcare services ranging from nursing home chains to medical device manufacturers to $ 63.1 billion in 2018, the highest level since 2006. In general, the health care system has higher margins than any other industry, Bain reports, and is seen as relatively sustainable in the event of a financial downturn, which is why health care purchases as a proportion of all volume of private equity offerings have also increased.
It is not yet clear what this means for patients. A recent article in the Journal of the American Medical Association expressed concern that private investors tend to demand high returns in the short term, which could push doctors to push more expensive treatments over less profitable ones, and press hospitals to rely on medical personnel who have less training.

More broadly, wrote authors Suhas Gondi and Zirui Song of Harvard Medical School, private equity firms do not have the same incentives as hospitals and academic hospitals to use revenue streams from private insurance to subsidize nursing care and medical research. Their cost is first and foremost to increase profits for investors, usually by consolidating assets in a given geographical area or specialty, before selling them.

"In the last couple of years, there has been a tremendous acceleration in private equity deals in the healthcare system," said Joseph Bruch, a Harvard doctoral student studying how this trend affects patient care, and there are currently little definitive studies on. "We just don't know, and it's happening very quickly."

From the start, Hahnemann Hospital seemed like a strange target for a private equity investor.

Its former owner, Tenet Healthcare, had lost $ 15 million on Hahnemann and St. Christopher's in fiscal year 2017. Philadelphia is a very competitive market, with several major academic health systems all offering state-of-the-art facilities and cutting edge for patients. with private insurance plans.

Hahnemann, who largely served patients insured through Medicaid and struggled to stay afloat at the low reimbursement rates, would have needed large investments in equipment and IT systems to get a shot at attracting a more lucrative clientele. And the health care system has generally moved away from large residential institutions towards smaller community-based clinics that can offer most services at a lower cost.

Freedman said he would try to turn it around. "We are thrilled and proud to be the new owners of these venerable hospitals in Philadelphia and the outstanding clinical and academic programs they are recognized for," he said in a press release when the sale went through in 2018.

His company, American Academic Health System, is a subsidiary of El Segundo-based Paladin Healthcare, of which Freedman is the sole board member. The acquisition was funded with a $ 51 million loan from the Harrison Street Real Estate investment firm and with a MidCap Financial revolutionary line with Apollo Global Management, one of the largest private equity firms in the country.
  Joel Freedman (left) poses for a photo with Howard University President Wayne AI Frederick in January 2018. Freedman & # 39; The company, the American Academic Health System, previously managed Howard University Hospital, but the university has said it will not renew the contract, which ended in March.
On its website, American Academic touts the leadership of Howard University Hospital in Washington DC since 2014, saying they cut costs and increased revenue. However, that contract was terminated in March, and Howard said it decided not to renew with American Academic. The second hospital system run by a subsidiary of American Academic – Avanti Hospitals, a California portfolio of facilities that Freedman co-owned until January – agreed in December 2018 to pay $ 8.1 million to the federal Department of Justice to settle claims that it filed false claims Medicare and Medicaid.
Finally, American Academic did not invest much in Hahnemann through its Pennsylvania Academic Health System subsidiary. In bankruptcy filings, the company's restructuring offer said that Hahnemann lost more money than the previous owner had stated, that technology systems were a mess, and that it had significant pension obligations, along with more than $ 100 million in debt to Drexel University College of Medicine – which used Hahnemann as its primary teaching facility – and a number of suppliers. St. Christopher's also paid a monthly rent of $ 1.3 million for properties owned by Freedman and Harrison Street. On May 8, MidCap filed a notice of default, after which the Pennsylvania Academic Health System tried to sell the hospitals. When this failed, it moved to take them through bankruptcy.

The city and state tried to keep the hospital open. A spokesman for Governor Tom Wolf told CNN Business that the state deferred taxes and offered to put Hahnemann on a payment plan, something the hospital management never agreed to. Jim Engler, Chief of Staff for Philadelphia Mayor Jim Kenney, said public officials had begun meeting with hospital management in April to find a funding scheme that would keep the hospital open but coy.

"During all that time, when we were discussing the future of the hospital, we asked for documentation to see what the actual financial condition of the hospital was," says Engler. "And they never provided any of that documentation."

In a joint statement released in early July, Wolf and Kenney said Hahnemann's owners "want a bankruptcy to protect the profits they made from the hospital and community," and welcomed any suggestions on "how we can help mitigate the damage that Joel Freedman and his company have done. "

Allen Wilen, chief of hospital restructuring, said in a statement that the talks had been fruitless." Although certain aspects of these discussions were initially promising, there were countless matters that were presented as was not feasible, "he said. Freedman accused the state of reducing the additional payments the hospital had received for its Medicaid population, and according to bankruptcy documents, a potential sale to Drexel fell.

last ditch effort, the city even ordered the hospital to stay open under a 1969 regulation requiring the city's health commissioner to cancel upon closure of an emergency room. But the hospital still stopped admissions on July 17. And there is little else the officials can do: Hahnemann is private property, and the regulation provides many different uses, so the city does not have much leverage.

  Doctors and nurses have been among those who demonstrated against the closure of Hahnemann University Hospital in Philadelphia in protests over the past few months.

In bankruptcies such as these, if creditors can prove that the debtor never really planned to try to turn the business over and just remove their assets, a judge may decide that they are entitled to the dividend. In this case, it will mean that the former owner Tenet, Drexel University and other suppliers can get some of their money back.

The real winner may be MidCap Financial, whose nearly $ 60 million loan is secured by the mortgage loan to Hahnemann's main hospital building and the land under it, as well as the right to collect Hahnemann's unpaid bills. In the meantime, it charges interest and fees that can generate millions of dollars.

No matter who gets paid, it's unlikely that Hahnemann will ever reopen as a full-time hospital, said Joseph Fetterman, a Philadelphia-based executive director of commercial real estate Colliers International. The land may be more valuable as hotels or cabins, Philadelphia's health care system is already over-saturated, and there is no way to profitability for a safety net that needs large capital investment.

"These hospitals are closing under their own weight," said Fetterman. "The value proposition for these older facilities is, of course, a diminishing statement. This will not be the last. And the real question is, how is society's needs balanced with the right planning for the city?" [19659040] That issue is being actively debated on the national stage. Sanders held a meeting at the hospital in early July, using it as a backdrop to stump up his Medicare for All plan, promising to enact legislation that would create a $ 20 billion fund to help local governments buy hospital in financial distress.

In addition to helping demanding hospitals, Democrats are moving to cut the wings for private equity. Earlier this month, a group of lawmakers led by Massachusetts senator and presidential candidate Elizabeth Warren introduced a bill that would restrict many of the fund's activities, notably by making the private equity firm itself liable for any debt arising from acquisitions. [19659007] This legislation is likely to come nowhere in the Republican-controlled Senate, but is a chance to pass if the political winds change after the 2020 election.

  If the Hahnemann bankruptcy goes through as planned, advocates may worry other private corporations a similar strategy with demanding hospitals across the United States.

A system stressed

the effect of Hahnemann's closure is already beginning to be felt. Over the past three weeks, the nearby Thomas Jefferson University Hospital emergency room has seen up to 290 patients per day, up from an average of 175. Despite additional staffing and expanding new space, the time from when a patient goes is increasing. at the door to when they meet a supplier from 13 minutes to 18 minutes. The maternity ward has gone from an estimated annual birth rate of 1,800 births to about 2,800.

"It's been stressful," said Jefferson President Bruce Meyer. Complicates the problem: The vast majority of new patients are insured through Medicaid. The state and federal government funneled millions of dollars a year to Hahnemann to supplement low reimbursement rates. "Brightly, we would need to see some of what comes to Jeff to maintain the finances of this patient population," Meyer said.

About 573 medical residents who started at Hahnemann July 1 – the day after the bankruptcy petition was filed – now have to find new places to call home the next year. The approximately 800 nurses employed at the hospital have a good shot at new jobs in Philadelphia's strong healthcare market, said Clancy of Philadelphia Works. But with so many watching at once, many may have to travel much further or return to school to upgrade their certifications. And, at the moment, no final reimbursement money has been offered to ease the transition.

There are other kinds of disturbances from the downturn, which have been more abrupt and chaotic than anyone expected.

Hahnemann oncology nurse Emma Vrancik, 26, had planned to give birth to her second child in August. But when she was told that her health insurance would be terminated in July, after suffering serious complications during her first pregnancy, she decided she couldn't take the risk of countless medical bills if something went wrong again. So she asked her doctor to induce the birth early. Her daughter, Dylan, has lost half a pound since birth due to difficulty eating, and remains in the sixth percentile by weight.

"I forced my body to do something it shouldn't do," said Vrancik, who brought the newborn to a protest outside the hospital Wednesday, tearing up the difficult choice.

Still, she thinks mostly about her patients. Vrancik didn't know what to tell them when they asked her what was next for their care.

"Of course we all wonder where are we going," Vrancik said. "But the bigger question for us is, where are they going to go? Nobody else wants the people we treat. But we want them."

"Our patients come back. We spend birthdays with them. We get them Christmas presents. We are there when they get their diagnosis, and to whatever end they have, and they are family," Vrancik continued. "We lose paychecks. We lose maternity leave. We lose health insurance. But we're losing a family, too. "


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