The Formula for Hospital Bankruptcy
PEA + RL + SLB = Ch 13
Healthcare is a tough industry on a good day. With fixed reimbursement from Medicare and Medicaid, managed care and increasing operating expenses, it is very hard to make money running hospitals. Half the hospitals in the country are in the red. Those that are not have slim margins. Executives in other industries such as technology are shocked when they learn how puny hospital margins are. It is no wonder we have distressed hospitals.
Recently, the headlines in healthcare finance have been dominated by bankruptcies of several hospital systems. Dissecting these failures is an eye opening exercise. It turns out, there is a formula for doing so and for getting rich in the process. Here it is.
The three-pronged strategy—Private Equity Acquisition → Recapitalization Loans → Sale-Leasebacks—is not only well described in health finance literature, but has become a highly scrutinized playbook for extracting short-term value from healthcare systems. It's sometimes referred to as a “financial extraction model” and is increasingly viewed as unsustainable or even predatory when applied to essential public services like hospitals.
Here’s how it works:
THE THREE-PRONGED STRATEGY: EXPLAINED
1. Private Equity Acquisition
Objective: Gain control of undervalued or financially distressed hospitals using investor capital and leverage.
What happens:
A PE firm acquires a majority stake.
New leadership is installed to “optimize operations.”
Staff reductions, outsourcing, and aggressive billing are often introduced to quickly improve EBITDA (earnings before interest, taxes, depreciation, and amortization).
2. Recapitalization Loans (Dividend Recaps)
Objective: Extract cash by taking out loans secured by the hospital’s improved cash flow and real estate value.
What happens:
The company borrows hundreds of millions against its assets and future earnings.
The borrowed money is often paid out as special dividends to the PE firm and executives — not reinvested in operations.
The hospitals are now highly leveraged.
3. Sale-Leaseback Transactions
Objective: Monetize the real estate by selling it to a REIT and leasing it back under long-term contracts.
What happens:
The hospital sells its physical buildings and land (often at above-market rates).
The buyer, usually a Real Estate Investment Trust, provides immediate cash
The seller signs 10–20 year leases, agreeing to pay fixed rent + escalators, regardless of financial health.
Purpose of the Strategy
This three-phase model is designed to:
Maximize short-term cash flow
Provide immediate returns to investors
Allow the PE firm to exit with a large ROI — even if the hospital system becomes financially unstable later.
It’s not inherently illegal, but it is controversial because:
It prioritizes investors over patients and staff
It often leaves the hospital unable to reinvest in facilities, staffing, or safety
It increases the likelihood of bankruptcy or closure
Is This a Well-Described Strategy?
Yes. This playbook has been:
Detailed in government investigations
Analyzed in ProPublica and Wall Street Journal investigations
Cited in academic work on the risks of private equity in healthcare (e.g., NEJM, Health Affairs)
Bottom Line
This is a well-documented, sequential strategy for extracting financial value from hospitals — but it’s short-termist, high-risk, and in many cases has left communities with degraded or closed hospitals.
What is even more shocking? The same scoundrels who enrich themselves executing this three pronged extraction model often remain in place during the bankruptcy and get paid handsomely to restructure the systems they pillaged.
This is an awful thing to do community assets essential to public health. It is deeply unethical and needs to be stopped.
Michael A. Patmas, MD, MMM, CPE, FACPE, FACHE