Here's the original prediction:
So your private equity firm offers to buy the property, making promises to regulators and stakeholders in the community. Few objections are raised and the deal is approved. The private equity firm, new to health care, gives an unprecedented level of authority and autonomy to the CEO. He rewards your confidence by executing the key elements of the business plan. Assets are sold for short term gain, with little concern for the downstream costs: After all, the hospital properties will be flipped in a few years anyway. The hospital system's laboratories are sold to a private laboratory service company, in return for a long-term contract to use that company. Real estate is sold and leased back. The system agrees to a front-end-loaded risk-based reimbursement contract with the largest private insurer, one that calls for substantial reductions from the trend of medical expenses in future years. Physician practices in the community are purchased at above-market prices to create an increased flow of referral business to the hospitals.
But then the money falters. Revenues take a tumble and days in accounts receivable grow during an extended transition to a new centralized billing system that was designed to take the place of the billing systems run by each hospital. The risk contract with the insurer starts to limit annual price increases. Medicare and Medicaid rates are constrained by the federal and state government. Top line revenues fall, EBIDTA falls, cash flow falls. Finally, the private equity partners are nervous.
They turn off the spigot and impose cash constraints on the system. Normal maintenance of building systems is deferred. Medical equipment expenses, too, are kept to a minimum.
The only place to save money is on staffing. He must make dramatic cuts in the upper management levels but will also be forced to make other cuts in the clinical support and lower administrative staff. Band-aid capital spending will be permitted when unsafe conditions exist, but the hospitals will start to fall behind on upgrades of important medical equipment and devices. He will be in a race against the clock. Can he hold it together long enough to permit the investors to get a return in the flip? Finally, he will realize that closing one of the hospitals has to be part of the answer. Investors will be relieved when he does so, but the community and governmental constituencies that supported the initial acquisition will get worried.
[It] would be around this time that regulators would begin to understand that the corporate guarantees that might stand behind the private equity firm's acquisition of the hospital system are a nullity. The owners' resources are legally separated from those of the hospital system. It would take years of litigation to pierce that corporate veil. Thus, the commitments that have been made to the governmental and private constituents in the community are supported solely by the financial resources of the hospital system itself. But that hospital system faces high debt service costs and obligations, other long-term cost commitments, and increasingly difficult revenue restrictions.