Understanding Steward Health’s bankruptcy

The recent bankruptcy filing by hospital operator, Steward Health, has significant implications for its stakeholders, particularly the shareholders of Medical Properties Trust (MPT), which is intricately linked to Steward through real estate investments. The potential impact of Steward’s financial struggles on MPT’s shareholders, along with the potential for federal intervention to maintain health care services in affected markets, could have far-reaching implications for regulations on real estate transactions in the health care sector.

Federal government involvement: Is it time for oversight?

The federal government has a vested interest in ensuring that health care services remain uninterrupted, especially in underserved or economically vulnerable communities where Steward operates. There are several ways in which the government might intervene:

1. Financial assistance: Direct financial aid to Steward Health could be a temporary measure to stabilize the hospital operator while a more sustainable solution is sought.
2. Regulatory forbearance: The government could offer temporary relief from certain regulatory requirements, allowing Steward more flexibility to manage its financial crisis without compromising patient care.
3. Facilitating acquisition or partnerships: The government could play a role in facilitating an acquisition by, or partnerships with, financially stable health care providers to ensure continuity of services.
4. Legislative changes: New legislation aimed at protecting critical health care facilities from closure due to financial distress could be proposed, including possible incentives for health care providers to operate in high-need areas.
5. Regulate sale proceeds: The government could elect to mandate how proceeds derived from a sale-leaseback arrangement are used. To ensure sufficient reinvestment into operations, limitations could be imposed on distributions that financially benefit top executives.

Impact of Steward Health’s sale-leaseback to Medical Properties Trust

The transactional relationship between Steward Health and MPT initially aimed to free up capital for Steward, but it also increased its operational costs significantly due to lease commitments. Currently, Steward owes approximately $6.6 billion in long-term lease payments and $1.2 billion in total loan debts to more than 30 different lenders. Furthermore, according to the bankruptcy filings, Steward is projected to owe MPT more than $6.9 billion in debt and lease obligations by 2041.

This strained relationship that now exists between Steward and MPT highlights the critical balance required in sale-leaseback arrangements for health care real estate, suggesting a potential area for regulatory improvement. The federal government might consider regulatory measures to oversee such transactions more closely, ensuring that they do not just serve financial goals, but also operational sustainability goals. Potential regulatory actions could include:

• Setting minimum standards for the financial health of health care operators engaging in large-scale real estate transactions.
• Creating frameworks for emergency federal support for health care facilities in financial distress, preventing a sudden loss of healthcare services in vulnerable communities.

Related: FTC, DOJ’s new ‘anti-merger’ stance: How the feds will scrutinize health care in 2024

Potential for future legislation

Given the systemic risks highlighted by Steward’s bankruptcy and its impact on MPT shareholders, future legislation might focus on enhancing the stability and transparency of transactions in critical sectors like health care. This could include:

• Stricter oversight of leaseback arrangements, possibly requiring federal approval for deals exceeding certain thresholds in critical areas.
• Incentives for investment in health care real estate that prioritize long-term operational stability over short-term financial gains.

Toby Scrivner is Senior Vice President at Northmarq