From Steward Health Care to Capitol Hill: The Growing Debate Over Private Equity Regulations

By: Mack Fisher, Class of 2027

Introduction

Senator Elizabeth Warren of Massachusetts introduced the Stop Wall Street Looting Act in 2019, aiming to regulate buyout firms’ private equity investments.[1] Supporters of the bill argue that harsher rules are necessary to prevent private equity firms from “looting” the businesses they acquire.[2] The act has undergone two revisions. The first, in 2021, was influenced by the discussions surrounding changes to bankruptcy venue rules.[3] Most recently, Senator Warren, along with five other senators and eight U.S representatives, published an updated version of the act in response to the collapse of Steward Health Care.[4] 

Steward Health Care Collapse

Calls for increased regulatory measures have intensified following the collapse of Steward Healthcare System.[5] Steward Healthcare is the largest, for-profit hospital chain in the nation and is responsible for the operations of thirty hospitals, including eight in Massachusetts.[6] Financial failures caused the company to file for Chapter 11 bankruptcy in May of 2024.[7] 

Numerous lawmakers have blamed the collapse on Cerberus Capital Management, which owned Steward Health Care System.[8] In 2016, Cerberus Capital Management received the majority of a $790 million dividend payout from a deal with Medical Properties Trust (MPT), a real estate company. MPT bought and subsequently leased back five hospitals, investing $1.2 billion into Steward Healthcare.[9] Despite this large dividend payout, Steward Healthcare reported a $300 million loss in 2016.[10] 

In 2020, while Steward Healthcare faced serious financial struggles, Cerberus Capital Management sold its ownership stake to a physician-led group led by CEO Dr. Ralph de la Torre.[11] However, ongoing financial difficulties ending in bankruptcy have forced Steward Healthcare to sell off hospitals. The state of Massachusetts has played a significant role in facilitating the sales and ensuring that the hospitals stay open in their state.[12] 

Focus on Healthcare Investments

The newest version of the Stop Wall Street Looting Act refines previous proposals and introduces a focus on healthcare investments, particularly in response to the issues surrounding the Steward Healthcare situation.[13] One of the key features of the bill would cap dividend payments at 10% of the total debt.[14] To promote transparency, the bill would require funds to disclose their fees, returns, and other relevant information related to their corporate loans.[15] This step aims to empower investors to better monitor their investments.[16] This push for transparency stems from Congress’s inability to require Cerebrus to disclose the terms of their investment into Steward Health Care.[17] Furthermore, the bill calls for increased disclosures from any firms that receive federal funding.[18] These firms must show how they’re using the funds and face restrictions on acquiring other companies or distributing profits to investors for two years following the receipt of federal money.[19] Lastly, the act seeks to limit the involvement of Real Estate Investment Trusts (REITs) in healthcare investments.[20] The measure would prohibit federal health programs from making payments to any entity that secures loans by selling or using assets tied to a REIT.[21] This restriction would have most likely stopped the sale-leaseback transaction that Steward conducted with MPT.[22]

Looking forward

The Stop Wall Street Looting Act has failed to gain traction or bipartisan support in Congress, primarily receiving backing from the more progressive members of the Senate.[23] Opposition to these measures has been led by the American Investment Council (AIC), which argues that private equity firms play a vital role in fueling small businesses, jobs, and retirements for many Americans.[24] Specifically in Senator Warren’s home state, private equity owned companies account for over 300,000 jobs.[25] Moreover, the AIC highlights that private equity investments have been the most successful asset class for pension funds, providing a median 10-year annualized return of 8.6 percent.[26] This performance is significant, as these funds are crucial to the retirements of schoolteachers, first responders, and other public servants.[27] 

At the state level, similar initiatives have faced significant challenges. In California, Governor Gavin Newsom vetoed a bill that had passed both the state house and senate in September.[28] The bill would have granted the Attorney General power to review and block healthcare business acquisitions by private equity firms or hedge funds.[29] Additionally, other states, including Massachusetts, Oregon, Minnesota, and Pennsylvania have attempted to introduce legislation to regulate private equity firms, but progress has stalled.[30] Investors will continue to monitor the changing landscape as much of the increased regulation movement continues at the state level.[31] Although federal efforts to pass new legislation remain unlikely, they could influence and shape the overall narrative surrounding private equity and prompt further state-level actions that will impact future investments.

[1] Chris Cumming, Warren Toughens Private-Equity Bill, Aiming to Prevent Healthcare Abuses, The Wall Street Journal (Oct. 10, 2024, 3:35 PM),  https://www.wsj.com/articles/warren-toughens-private-equity-bill-aiming-to-prevent-healthcare-abuses-6a3fd47f?mod=WTRN_pos1&cx_testId=3&cx_testVariant=cx_188&cx_artPos=0/.

[2] Id.

[3] Alexander Saeedy, Elizabeth Warren Floats Expanded Powers for Bankruptcy Creditors Against Private Equity, The Wall Street Journal (Oct. 20, 2021, 1:17 PM), https://www.wsj.com/articles/elizabeth-warren-floats-expanded-powers-for-bankruptcy-creditors-against-private-equity-11634750237.

[4] Chris Cumming, supra note 1.

[5] Id.

[6] Elisabeth Harrison, Lisa Creamer, & Priyanka Dayal McCluskey, Steward Health Care seeks bankruptcy protections, WBUR (May 6, 2024), https://www.wbur.org/news/2024/05/06/steward-bankruptcy-massachusetts-for-profit-hospitals-debt.

[7] Id.

[8] Jonathan Weil, How a Private-Equity Payday Drained a Hospital Chain of Cash, The Wall Street Journal (Sept. 11, 2024, 10:00 AM), https://www.wsj.com/finance/how-a-private-equity-payday-drained-a-hospital-chain-of-cash-35a5cb35.

[9] Id.

[10] Id.

[11] Id.

[12] Deborah Becker, State may spend hundreds of millions to shore up Steward hospitals, WBUR (Aug. 25, 2024), https://www.wbur.org/news/2024/08/23/cost-massachusetts-deals-save-steward-hospitals.

[13] Chris Cumming, supra note 1.

[14] Id.

[15] Id.

[16] Mark Pocan, Pocan, Warren Lead Lawmakers in Renewed Push to Stop Private Equity Looting, Press Release (Oct. 10, 2024), https://pocan.house.gov/media-center/press-releases/pocan-warren-lead-lawmakers-renewed-push-stop-private-equity-looting.

[17] Id.

[18] Id.

[19] Id. 

[20] Id.

[21] Id.

[22] Id.

[23] Chris Cumming, supra note 1.

[24] Id.

[25] Id.

[26] Drew Maloney, AIC Issues Statement on Warren’s Harmful Economic Proposal, American Investment Council (July 18, 2019), https://www.investmentcouncil.org/aic-issues-statement-on-warrens-harmful-economic-proposal/.

[27] Id.

[28] Chris Cumming, California’s Newsom Vetoes Bill to Rein in Healthcare Buyouts, The Wall Street Journal (Sept. 30, 2024, 5:25 PM), https://www.wsj.com/articles/californias-newsom-vetos-bill-to-rein-in-healthcare-buyouts-6e9a1768.

[29] Id.

[30] Id.

[31] Christina Bergeron, Devin Cohen, & Natalie LaRue, Health Care Transaction Laws Unwrapped: Deal Impacts for Private Equity Firms, MSOs & DSOs, Ropes & Gray, LLP (Nov. 12, 2024), https://www.ropesgray.com/en/insights/podcasts/2024/11/health-care-transaction-laws-unwrapped-deal-impacts-for-private-equity-firms-msos-and-dsos.