QUACKONOMICS

Medical Properties Trust spent billions buying community hospitals in bewildering deals that made private equity rich and working-class towns reel.

BY MAUREEN TKACIK

payments. The hospital had always been profitable, employees say, but not profitable enough to cough up $5 million a year in rent.

A town hall to protest the deal drew a crowd of 450. A couple of nurses gave a presentation on the history of the hospital, and how it would run out of money and be forced to sell off the land to developers to pay its debt. There would be nowhere for the community to build a new one; a million dollars was the going price of an 800-square-foot shack in Watsonville. Brothman and his two minions, one of whom he’d just hired away from the small private equity firm that had just bankrupted Philadelphia’s Hahnemann Hospital, sat in the front handicapped seats. Remembers ICU nurse

Quiche Rubalcava: “We told them right to their faces how it was going to play out.”

Yet it happened much faster than anyone anticipated. Halsen immediately stopped paying vendors; they ran out of hospital gowns, printer paper, and surgical supplies almost immediately. “It just seemed like a burnout,” says Rubalcava. “Like they were going to burn through everything they could and then bounce.” By the end of 2019, none of the doctors outside the ER, which was managed separately, were getting paid. Two of the intensive care unit’s three doctors quit in early 2020 after a few months of going without paychecks, so Halsen contracted with a telemedicine service, and for most of the pandemic the six-to-ten-patient ICU was supervised by one saintly intensivist who was willing to work without pay for at least a year, and a revolving cast of Teladoc contractors, mostly retired physicians in their seventies and eighties who beamed in from out of state via iPad, when the hospital’s lousy Wi-Fi would accommodate it. “If I’d been a little fresher out of school when it happened,” says a nurse who has worked at Watsonville since the 1990s, “I would have left the profession.”

Halsen had stopped paying the nurses’ health insurance premiums, and frozen their employee savings accounts. Brothman made the rounds every day, asking nurses about their families, ribbing them about when they were going to get married, and promising he would never stiff them “He always said, our priority is to pay our nurses and to pay our doctors,” remembers Rubalcava. “Period, like he didn’t pretend it was his intention to pay anyone else.” There were whispers that all the money the hospital brought in was going to an address in Los Angeles, that a guy had been overheard bragging to a country club bartender about making $20 million off a hospital deal in Watsonville.

By the end of 2021, the hospital was in bankruptcy protection, where the nurses learned MPT had served Brothman—by that point long gone—with his first default notice 20 months earlier. By then, the hospital owed $40 million in unpaid rent and loans, on top of the value of its real estate. In its first conference call after the bankruptcy, MPT founder Edward Aldag said the firm would be writing off $31 million on the transaction, a hefty sum for an investment with a 2022 book value of just $34.2 million. It seemed obvious to anyone paying attention that Halsen had fleeced the hospital. But why had MPT, which owned some 20 California hospitals and 444 medical properties across 30 other states and nine countries, signed up to be fleeced?

The short answer is that it was all a massive Ponzi scheme. Of course it was: In the age of zero interest rates and private equity rollups, some entire industries devolved into pyramid schemes, and health care companies, with their high barriers to entry and Medicare billing privileges, were particularly vulnerable. It wasn’t even particularly illegal.

The longer answer is that MPT ’s Ponzi scheme was not necessarily the legal kind.

The plot thickened less than two weeks after the earnings call, when The Wall Street Journal revealed that MPT had suspiciously overpaid for another Quorum hospital in Big Spring, Texas, right before the original Watsonville sale, coughing up $26 million to a company called Steward Health Care for the underlying real estate of a facility it had purchased for $11.7 million. The deal was part of a larger, more alarming pattern of MPT funneling preposterous quantities of cash—$5.5 billion over six years—into Steward in exchange for increasingly dubious assets.

Steward is a chain of more than three dozen hospitals that once touted itself as “the ultimate business model for the age of Obamacare.” Unlike Dan Brothman, its cardiac surgeon founder Ralph de la Torre was widely regarded as a genius. He’d hosted a million-dollar Democratic fundraiser featuring Barack Obama at his house after ditching his Republican registration; his own father boasted that “we could drop you into a tribe of cannibals [and] you’d become king of the cannibals.”

In 2010, de la Torre had wooed SEIU health care division chairman Dennis Rivera into backing the buyout of Steward by the ruthless private equity firm Cerberus Capital Management. Cerberus had contributed $245.9 million cash to buy the hospitals, which proceeded to hemorrhage cash for four years straight. But when the system swung to a profit in 2015 by reaching a settlement involving its long-underfunded employee pension plan, Cerberus saw in MPT a chance to cash out.

Initially conceived in 1960 as a way of “democratizing” the financial gains associated with property investment, real estate investment trusts (REITs) are specialized funds that receive tremendous tax advantages in exchange for agreeing to adopt rigid, low-overhead structures and pay out 90 percent of the profits to investors, who in turn are allowed to write off a portion of those dividends as business expenses. Almost by definition, REITs give off Ponzi vibes: Their rich dividends attract investors with very little interest in underlying fundamentals; certain accounting practices can easily obscure the financial impact of delinquencies; and their tax breaks are a magnet for private equity firms, which began during the 2000s to see REITs as a fail-safe method of extracting cash from companies no one wanted to buy.

In 2007, for example, a department store chain named Mervyn’s that Cerberus had acquired from Target in 2004 began to wobble under its lack of resources. So Cerberus raked in $430 million selling the underlying real estate of 43 stores to a California REIT and ended up booking a profit, even after Mervyn’s was forced to liquidate and lay off 18,000 employees a year later. This kind of decriminalized Ponzi scheme wasn’t 100 percent kosher: It’s ostensibly illegal to extract dividends from an insolvent company. After four years of litigation, a group of Mervyn’s creditors won $166 million from Cerberus and its co-investors. But the penalties were usually laughable if they existed at all, and private equity firms would deploy what became known as sale-leasebacks to profitably bankrupt countless companies, from Shopko to Friendly’s restaurants to the HCR ManorCare nursing home chain. Hospitals were not particularly conducive to plunder via REIT, however. Hospitals are enormous revenue generators, but their low operating profit margins vary wildly depending on the whims of insurance companies, state and federal lawmakers, and regulators. REIT s are supposed to be passive landlords, legally forbidden (with a couple of exceptions) from managing the properties they own and in many cases even investing in their upkeep. It was virtually impossible to find an operator capable of turning around the finances of a bankrupt mall or nursing home while making steep rent payments, much less a hospital. And so no one really bought hospital real estate, except for MPT, a niche outfit out of Birmingham, Alabama, founded in 2003 by a tax credit expert named Edward K. Aldag and a former shopping mall REIT CFO named R. Steven Hamner.

In its first deal, MPT paid Steward $1.2 billion to buy five of Steward’s hospitals outright and lease them back, then extend mortgages on another four. The hospitals’ real estate had been assessed in 2012 at $599 million, so the price tag raised a few eyebrows, especially given that it involved Steward signing up to pay MPT a $121 million rent check in the first year of the deal, and expanding each year thereafter. To sweeten the deal, Cerberus bought $150 million in MPT stock and MPT bought $50 million in Steward stock. Then Cerberus used the proceeds of the deal to issue itself a $484 million dividend.

Steward was arguably insolvent before this first transaction with MPT, but it was definitely insolvent afterward, say multiple analysts who have spent most of the past year poring over MPT ’s financials. The Steward chain burned more than a billion dollars between 2017 and 2021. Given Cerberus’s track record of sending half its portfolio companies into default, that wasn’t much of a surprise. But between 2015 and 2021, the private equity firms GTCR , TPG Capital, Leonard Green & Partners, Apollo Advisors, and Welsh, Carson, Anderson & Stowe would also tap MPT to extract nine- and ten-figure payouts from their flailing hospital chains. To a degree, every one of those transactions crippled hospitals and the broader communities they served.

But no one did more deals with MPT than Cerberus’s Steward. Just five months after the initial $1.2 billion sale-leaseback, MPT pitched in another $301 million for Steward’s $304 million buyout of eight hospitals from Community Health Systems. Three months later, MPT put $1.4 billion toward Steward’s $1.9 billion acquisition of IASIS, a hospital chain owned by the private equity firm TPG. The following year, MPT disclosed investing another $764.4 million to buy five hospitals, including four in Massachusetts it had already paid Steward $600 million to mortgage and one in Texas it had acquired in the IASIS deal, then sold back to Steward a few months later, then bought back at a $15 million loss a few months after that. One analysis suggests the transactions represented a gratuitous $57 million giveaway to Steward from MPT

The Securities and Exchange Commission was confused enough to write to the company demanding an explanation, zeroing in on a unique feature of its original mortgage agreement with Steward that gave MPT the “right” to buy back the properties it had lent against for “110 percent of fair market value.” These financial gymnastics looked almost like an admission that MPT would promise to keep the scheme going indefinitely. And it did. MPT funneled a steady stream of cash toward Steward in seemingly fanciful quantities over the following years: $26 million for the $11 million Big Spring hospital and a mysterious $44 million promissory note in 2019; $205 million for a 49 percent stake in an international joint venture with a book value of $27 million in 2020; a $200 million “fair value increase” bonus to convert a $700 million mortgage it had supplied on another two IASIS hospitals in Salt Lake City into a sale-leaseback (that deal, which valued the two Utah hospitals at $2.4 million per bed, was a particular head-scratcher); $900 million followed by an extra $200 million for five Florida hospitals acquired from Tenet in 2021; $335 million to de la Torre in 2021 to pay back funds Cerberus had lent him to buy out its majority stake in Steward’s equity; and $169 million in capital expenses to build a new Steward hospital in Texarkana, Texas.

REIT s like MPT that rented out properties on “triple net” leases are not supposed to spend investor funds on capital expenditures, period. But even if it could, why would Steward, whose venerable teaching hospitals in Houston and San Antonio were rotting from disinvestment, spend $169 million to build a new facility in Texarkana , of all places? Rob Simone, the REIT analyst at the financial research service Hedgeye Risk Management, suspected the deal was fake, and after MPT claimed in a May 2022 SEC filing that Steward had already spent $57 million of the budget, he contracted a photographer to drive to Texarkana to inspect the progress of the construction. At the site of the future hospital, which had “broken ground” nine months earlier, the photographer found a desolate field with no office or construction equipment, just a capsized blue port-a-potty in a vast expanse of weeds.

Like Brothman, Steward had cultivated a reputation of blowing off its bills, with its own twist: It attempted to intimidate those to whom it owed money by preemptively suing them. The hospital chain owed the state of Massachusetts hundreds of thousands of dollars in fines for failing to file basic financial disclosures since 2014, so in 2017 it sued the state’s health information department . By 2021, Steward owed the travel nurse staffing agency Aya Healthcare $40 million, so it sued the staffing agency for price-gouging. It owed Tenet Healthcare $18 million for backend information technology services, so last summer Steward sued Tenet, claiming it was the one who was actually owed money. Then earlier this year, Steward successfully won a temporary restraining order requiring a franchisee of the kidney dialysis firm Fresenius to continue providing services to its Massachusetts hospitals despite not having been paid in months (though the judge ruled with the Fresenius affiliate after a hearing).

The Tenet lawsuit gave Simone and many shortsellers particular pause, because Tenet claimed in a countersuit that Steward was insolvent and had applied in October for an extension on its repayment of certain CARES Act loans on the grounds of “extreme financial hardship.” In itself, that wasn’t surprising: A 2020 Bloomberg story reported that Steward owed millions of dollars to ad agencies, a linens provider, power companies, and other vendors, and that its Brockton hospital had been cut off by a local pizza shop whose co-owner said the hospital would refuse to pay its multithousand-dollar pizza tab until at least six months had passed. But MPT had insisted as recently as August, when it announced it had loaned Steward yet another $150 million, that the hospital chain’s patient volume was up, labor costs were down, and it was on track to achieve positive free cash flow by the fourth quarter of 2022. (It didn’t; MPT ended up lending Steward anoth- er $28 million in late 2022 and another $50 million secured by insurance claims so far in 2023, it finally disclosed for the first time in late April.)

Theoretically, any money Steward hoarded by refusing to pay all those vendors should have flowed back to MPT, in the form of wildly inflated rent and interest payments that totaled roughly half a billion dollars in 2022. But Simone doubted that de la Torre’s professional austerity crossed over into his personal life, and on a lark one night he found himself googling “ralph de la torre yacht.”

Lo and behold, the hospital boss had spent $40 million in May 2021 on a 190-foot vessel named Amaral. To call Amaral a “yacht” is a bit misleading; four stories high, it looks more like an intimate cruise ship, or a floating boutique hotel. Poring over MPT’s disclosures, Simone soon discovered how de la Torre could afford it. Right after MPT loaned Steward’s founders the $335 million to buy out Cerberus in early 2021, the REIT had booked an $11 million one-time gain “pursuant to our existing 9.9 percent equity interest in Steward.” That meant that Steward’s new ownership—primarily de la Torre—had paid themselves a dividend totaling $100 million, perhaps reasoning that if Cerberus was paying itself another nine-figure dividend on the woebegone hospital chain, they deserved one, too. MPT apparently agreed.

For months, Simone had been exceedingly careful to cast MPT’s predicament as a product of poor risk management, perverse incentives, and the relatable desire to paper over bad decisions—anything but “the F-word.” But the images of de la Torre’s mega-yacht juxtaposed against the overgrown field in Texarkana did not leave much room for alternative interpretations. And soon a small band of professional short-sellers was adding to Simone’s body of work. Most notable was Fraser Perring, a British former social worker famous for his work on the crime-infested German payments company Wirecard, whose Viceroy Research beginning in January produced 15 reports on what he described as the “den of thieves” comprising MPT and its biggest tenants. In March, MPT sued Viceroy for defamation, conspiracy, tortious interference, and unjust enrichment over the dossiers he’d published, many of which explored Steward’s forays in Europe.

Armin Ernst was a Boston-area pulmonologist and an executive of Steward when, shortly before the 2016 sale-leaseback that rendered Steward insolvent, he uprooted his life to take a job in Malta. Ernst had been recruited to lead a dubious shell company that had come under local press scrutiny for having acquired a lucrative contract to manage the archipelago’s three hospitals, despite no apparent expertise or capacity for doing the job. In 2017, Steward bought the shell company—and Ernst returned to Steward—after investigative journalists revealed that the original contractor was a serial fraudster named Ram Tumuluri who had recently fled Canada after bilking some hotel investors.

The hospital deal was one of a handful of privatization contracts fast-tracked by a Maltese official named Keith Schembri amid a frenzy of mysterious payments to dubious shell companies that had been revealed or referenced in the 2016 “Panama Papers” leak of documents from the offshore tax haven services firm Mossack Fonseca. In Malta, the Panama Papers had been most obsessively scrutinized by an investigative journalist named Daphne Galizia, whose son Matthew worked as a web developer for the nonprofit foundation that had archived the leaks, and who blogged on the brazenly corrupt no-bid process by which the hospital contracts had been awarded weekly, and sometimes daily, until she was suddenly murdered in a gruesome car bombing in 2017.

Schembri’s erstwhile close friend Yorgen Fenech, the cocaine-binging casino tycoon, paid Galizia’s assassins and was arrested while trying to escape on his own (much smaller) yacht. Schembri and others were implicated in Fenech’s testimony. Steward had transferred at least 3.6 million euros into a bribery network that Schembri helped cultivate. A few months after the assassination, Ernst characterized the hospital ordeal in an email to Schembri as “the messiest situation I have seen in my professional lifetime.”

But Steward stuck it out in Malta, perhaps because Tumuluri and a partner had used the contract as a showcase for selling Steward’s hospital operation services to the governments of Montenegro, Albania, Oman, Slovakia, and Georgia. In 2020, MPT bought a 49 percent stake in this thriving international business for $200 million, even as its book value was just $27 million and nurses were complaining that Steward was funneling money into a “black hole,” while hundreds of patients languished in “camping site conditions” without basic equipment or real bathrooms. Ultimately, leaders calculated that Steward had stolen a combined 400 million euros from the government during its five years managing the three hospitals. The gravy train finally came to a halt months ago, when a judge annulled its management contract in a 140-page ruling ordering the hospitals to be renationalized. The Maltese parliament summarily kicked Steward—and MPT, which owns half of Steward’s international business—out of the country. In late 2021, the State Department even banned Keith Schembri from entering the United States due to “involvement in significant corruption.”

Back home, the government has demonstrated little interest in evicting hospital looters. When MPT agrees to overpay for a struggling community hospital, the hospital is the thing that tends to get kicked out of town. It happened to Youngstown’s Northside Regional Medical Center in 2018; the Ohio Valley Medical Center in Wheeling, West Virginia, and East Ohio Regional Hospital of Martins Ferry, Ohio, in 2019; Houston’s First

Texas Hospital Cy-Fair in 2020; Los Angeles’s Olympia Medical Center in 2021; the Philadelphia exurbs’ Delaware County Memorial and Springfield Hospitals in 2022; and most recently, San Antonio’s Texas Vista Medical Center.

During the first weeks of the COVID -19 pandemic, Steward threatened to close the only hospital in Easton, Pennsylvania, if the governor did not agree to cough up $40 million merely to keep it alive; the ploy worked. Countless MPT hospitals have slashed services to pay the rent, with maternity wards typically the first to go. The sole acute-care hospital in Dodge City, Kansas, where the two biggest employers are industrial slaughterhouses, was downgraded to a freestanding ER and regional referral center after its private equity owners sold off its real estate to MPT; now residents of Dodge City, which is home to nearly 30,000, travel to Minneola, population 750, for medical care.

In Watsonville, MPT commandeered control of the hospital’s bankruptcy reorganization in the way of the modern insolvency masters. It volunteered to provide debtor-in-possession financing, which along with its status as the biggest creditor entitled MPT to appoint a chief restructuring officer, a job for which it tapped the same man it had hired a year earlier to oust Halsen, while insisting to the hospital staff that “no negligence or malfeasance” had been found in Halsen’s books. Though the U.S. bankruptcy trustee objected to these measures, the community coalition organized by the nurses union did not have the ability to play hardball: “We were told bankruptcy lawyers billed $1,400 an hour,” explains a local physician.

The newly formed nonprofit hospital authority agreed to pay MPT a reduced monthly rent of $250,000, all too conscious of the humanitarian crisis that could materialize if a town with thousands of near-destitute farmworkers lost its hospital. Watsonville’s century-old hospital had been threatened before; after a 1989 earthquake, they were ultimately forced to sell the hospital to the for-profit Community Health Systems after sustaining steep losses rebuilding the hospital to code “It’s like the cost of having health care in California,” one local activist told me, “living with these … marauders.”

MPT ’s roots run deep in California, where Aldag bought his first community hospitals shortly after co-founding the REIT in late 2003. The first term of the Bush administration was a time of transition and opportunity for many health care entrepreneurs, as white-collar crime enforcers who’d spent the late 1990s working multibillion-dollar Medicare fraud cases channeled their energies almost exclusively to the war on terror. In California, as the big health care giants of the 1990s shed hospitals to pay their legal bills, two former business partners turned archrivals, Prem Reddy and Kali P. Chaudhuri, both found profitable second acts as professional hospital bosses.

Aldag backed Reddy, a cardiologist with a newly expunged criminal record, in his 2004 buyout of a troubled HCA hospital; Chaudhuri teamed up with a medical payday lender called Medical Capital Holdings to buy four Tenet hospitals in Orange County, including the Western Medical Center of Santa Ana, California, where Dan Brothman was CEO.

Despite Reddy’s reputation for drinking at work and allegedly pressuring employees to illegally “dump” unprofitable patients, his venture, Prime Healthcare, was an overnight success. By 2007, the team controlled eight hospitals in California, and the Los Angeles Times ran a front-page story about the financial success the company had achieved through surprise-billing patients whose insurer it deemed too stingy. In 2011, the Center for Investigative Reporting ran an investigation on the apparent epidemic of kwashiorkor, a Ghanaian term denoting a rare form of malnutrition almost exclusively observed in famine-starved children, in Prime hospitals, especially one newly acquired Northern California facility that had billed Medicare for kwashiorkor treatment in 16 percent of its elderly patients. The story revealed that Prime hospitals in the state of California had diagnosed fully a quarter of their Medicare patients with malnutrition, more than triple the state average.

A federal whistleblower investigation soon followed, as did a letter to MPT from the SEC asking for more information on its exposure to Prime, which managed 40 hospitals and comprised 20 percent of its revenue in 2014. In 2015, then-California Attorney General Kamala Harris took the unusual move of imposing a ten-year moratorium on closures or service cuts on Prime’s proposed acquisition of six former Catholic hospitals in the state. Reddy dropped the deal, sued Harris, and eased up on Prime’s expansionary aims. The following year, Aldag did his first fateful deal with Cerberus, while his son served as an intern there.

By that point, there were plenty of aggressive new hospital upstarts ready to push the envelope to pay the rent, as Reddy’s longtime competitor Jack Terner had predicted in 2007 to an L.A. Times journalist writing about Prime: “In many ways what he’s doing is obvious, but no one ever thought they could pull it off.” Terner’s own company, Prospect Medical, acquired by Leonard Green & Partners in 2010, would soon give Reddy a run for his hospital profiteering money, with $1.55 billion in backing from MPT

Reddy’s old archrival Chaudhuri pushed the envelope even further. One of Chaudhuri’s previous ventures had collapsed in spectacular fashion in 2000, and a hospital chief of staff at Western Medical Center named Michael Fitzgibbons led a campaign to minimize Chaudhuri’s involvement in facility operations. Chaudhuri dispatched Brothman to solve the problem, and Brothman in turn masterminded a campaign of psychological terror on Fitzgibbons, filing a bogus defamation lawsuit against him, recruiting a rival infectious disease specialist and warning physicians not to refer patients to him, and later spreading rumors among staff that “everyone knew” Fitzgibbons kept a gun in his car.

Concerned those actions had not sufficiently “humbled” Fitzgibbons, another Chaudhuri deputy dialed it up a notch, using hospital funds in 2006 to pay a strip club bouncer $10,000 to plant a gun in his car and call in a report of a “road rage” incident featuring a man in a white coat and black gloves waving a gun around, which quickly resulted in Fitzgibbons’s arrest in the medical center cafeteria. The physician ultimately won $5.7 million in damages, though not before his office was burglarized and flooded, his daughter and two Japanese exchange students she was hosting nearly died in a horrific car accident after her tires were slashed on the treads, and the once-beloved hospital, unable to afford basic supplies or routine maintenance under the pressure of 20 percent interest rates, was reduced to the kind of medical hellhole where the CT scanner catches fire with a patient inside. Medical Capital, the lender, was naturally exposed as a billion-dollar Ponzi scheme that diverted millions to, inter alia , a pornography business and a “party yacht.”

Somehow, no one involved in the looting of the Santa Ana hospital or the terror campaign on Fitzgibbons was ever charged with anything illegal. (To the contrary, the same year they spent framing the infectious disease physician, Chaudhuri and Brothman invited a camera crew to film a reality show about travel nurses inside the facility.) Nor, needless to say, was the mastermind of Reddy’s kwashiorkor scam, or the cop who all but admitted under oath to having planted a bag of drugs in Fitzgibbons’s car. Medical Properties Trust is still listed on the New York Stock Exchange, and though its stock has lost nearly threequarters of its value since the beginning of 2022, CEO Aldag made $16 million last year, just a 6 percent drop from the year earlier, bringing his post- COVID compensation to a cool $50 million. Steward remains the largest for-profit hospital network in the country, and Cerberus remains a fearsome private equity titan, on the verge of booking an astonishing $16 billion profit if and when regulators approve the acquisition of its portfolio company Albertsons by the supermarket giant Kroger. And last year, Dan Brothman landed a new CEO gig back home in Orange County working for Prem Reddy at Garden Grove Hospital Medical Center, which MPT has owned since 2008.

Sen. Chuck Grassley (R-IA) recently wrote to MPT demanding information about its $57 million saleleaseback of a rural hospital in his state where a nurse practitioner recently died of an overdose while on shift, after which it emerged that he had sexually assaulted numerous psychiatric patients. But outside of that, nobody in a position of power has connected the dots; it’s been left to short-sellers to do the legwork.

“What’s so abhorrent about these schemes to loot hospitals is that they’re basically picking the pockets of people who’ve had cancer and trauma and heart attacks and strokes,” says Fitzgibbons, who drove up to Watsonville to informally counsel the community group back when the Halsen sale was first announced. He’s still in litigation with one of Chaudhuri’s companies, so he did not address the crowd, but he sat in one of the front rows just so Brothman could see him, would understand that they knew. Spotting the doctor, his old boss at first looked startled. “And then he smiled, and came up and tried to shake my hand like we were old pals,” Fitzgibbons remembers with a laugh. “These guys are nothing if not shameless.” n