Home Health Buy and Bust: When Private Equity Comes for Rural Hospitals

Buy and Bust: When Private Equity Comes for Rural Hospitals

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MEXICO, Mo. — When the new corporate owners of two rural hospitals suddenly announced they would stop admitting patients one Friday in March, Kayla Schudel, a nurse, stood resolute in the nearly empty lobby of Audrain Community Hospital: “You’ll be seen; the ER is open.”

The hospital — with 40 beds and five clinics — typically saw 24 to 50 emergency room cases a day, treating patients from the surrounding 1,000-plus acre farms and tiny no-stoplight towns, she said. She wouldn’t abandon them.

A week later Noble Health had the final word: It locked the doors.

Noble, a three-year-old startup that acquired Audrain and nearby Callaway Community Hospital, offered explanations on social media, including “a technology issue” and a need to “restructure their operations” to keep the hospitals financially viable.

The company should have had plentiful resources to keep them afloat: Noble was launched in late 2019 by Nueterra Capital, a venture capital and private equity firm that has raised millions of dollars to back dozens of health care companies, according to Nueterra’s portfolio and federal filings.

What’s more, in addition to Medicare and Medicaid funds, Noble had received nearly $20 million in federal covid relief money in the 18 months before it closed the hospitals — funds whose use is still not fully accounted for.

Private equity investors, with their focus on buying cheap and reaping quick returns, are moving voraciously into the U.S. health care system; investments increased twentyfold from 2000 to 2018, and have only accelerated since. Financially distressed rural hospitals like Audrain are targets, putting vulnerable communities at the mercy of firms whose North Star is profit, rather than patient health. A recent report found that 441, more than 20%, were at risk of closing or losing services.

The saga that followed Noble into these towns may well serve as a warning flare from the rolling wheat and corn fields between Kansas City and St. Louis.

Noble acquired the hospitals after charming local leaders desperate to save beloved local institutions. And federal regulators did nothing to block or thoroughly vet the acquisition, despite red flags.

Noble’s directors had little health care experience. The one who did was Donald R. Peterson, whose previous foray into the space, an infusion company, ended with charges of Medicare fraud. Just months later, he became one of two directors of Noble, along with Nueterra’s chairman, Daniel R. Tasset, according to a state filing.

In an emailed response to questions from KHN, Peterson said the startup was meant to do good: “We created Noble to save a rural hospital that was about to close.” Tasset could not be reached for comment.

Audrain had struggled before Noble came calling, said Dr. Joe Corrado, a longtime surgeon at the hospital: On an average day in 2019, 40% of beds were empty, as more treatments moved to the outpatient setting and some patients drove an hour to larger hospitals for specialty care.

Dr. Joe Corrado has worked as a general surgeon at Audrain Community Hospital for 40 years. “I never in a million years thought this day would come, that the actual doors would lock,” he says.(Sarah Jane Tribble / KHN)

Things grew worse rather than better under the new private equity owners, according to Corrado as well as state and federal documents, gained through months of public records requests, and dozens of interviews with community leaders, health officials, and residents.

Once Noble owned Callaway and Audrain, the hospitals stopped paying their bills, according to lawsuits filed by contract nurses, security guards, and others. Inspection reports from the state workers coordinating with the Centers for Medicare & Medicaid Services were alarming, listing 135 pages of deficiencies that put patients “at risk for their health and safety.”

Corrado saw his hospital being whittled away. Supplies for surgery disappeared, crucial medicines went unstocked, paychecks never came, he said. Just days before Noble suspended operations, he told management: “We don’t have the ability to do the things we need to take care of patients.”

When state health department surveyors arrived at the Callaway hospital in late summer 2021, only three patients remained, all in the geriatric psychiatry unit.

Inspectors reported they witnessed a suicidal 77-year-old stab her own leg with an ink pen, that an 85-year-old missed his medicine over the weekend because a pharmacist was unavailable, and that nurses waited five minutes to provide oxygen after surgery because the machine malfunctioned.

Ambar La Forgia, a Columbia University assistant professor who studies private equity in health care, said the business model, in general, is “all about creating short-term returns for shareholders.” The emphasis on profit, she said, is “not necessarily great for the patient.”

That, La Forgia said, raises hard questions for rural America: “Is a bad hospital better than no hospital?” And how should federal regulators who approve hospital purchases and monitor their performance thread that needle?

Hospitals Hollowed Out of Drugs, Supplies, and Salaries

Audrain was once a 247-bed regional destination for care, with more than 4,300 admissions in 1992, according to a county bond report. Internal medicine doctors, orthopedic surgeons, and pulmonologists competed to admit the most patients.

By 2019 it was a shadow of that former self. Yet patients like Dee Tate, diagnosed with cancer in 2020, relied on it. She got blood tests, scans, port placement, and chemotherapy to put her into remission — all at Audrain.

So she was shocked when her oncologist, Dr. Shahid Waheed, told Tate he couldn’t perform her scheduled infusion this January.

“If I don’t take this treatment, the likeliness of this kind of cancer coming back goes way, way up,” she said.

The medication, Rituxan, was not in short supply nationally. Noble could not stock it because the hospital purchasing department did not have the money for it, according to a former hospital employee who spoke on condition of anonymity. Ultimately, the person said, the staff bought it directly from the supplier.

Tate’s infusion was five weeks late. “It came from Indiana,” she recalled. Tate, along with about 500 other patients, now must travel at least 40 miles for cancer care.

The cancer that settled in Dee Tate’s lymph nodes is in remission — thanks to the diligent care of her oncologist at Audrain Community Hospital. Now, with Audrain’s cancer center closed, Tate and roughly 500 other patients on its roster have to travel at least 40 miles for care in Columbia, Missouri.(Joe Martinez for KHN)

In the operating suite, Corrado said he could never be sure supplies like anesthesia medicines, bandages, and catheters would be available for surgeries, from mastectomies to emergency appendectomies.

Management determined who would be paid on a week-by-week basis, he said: “On one Friday, they would pay the employees, and they couldn’t buy anything else. And another week they would be able to maybe buy supplies.”

Money troubles were not new to the hospitals. Despite federal subsidies, rural hospitals often struggle because their patients tend to be on Medicare or Medicaid or have no insurance, providing less revenue than commercial insurance.

The year before Noble bought Audrain, the hospital reported an $18 million loss for patient services on $44 million in patient revenue. The Callaway hospital had eked out a $170,000 profit from patient care while still owned and operated by Nueterra.

The next year, under Noble’s management, Callaway reported a nearly $6 million loss on patient services, its 2020 Medicare cost report showed. On paper, financial filings show, it had spent 43% more than the year before.

But much of the money was not spent on delivering health care, said Ge Bai, a professor of accounting at Johns Hopkins Carey Business School, who reviewed Callaway’s most recent Medicare cost reports for KHN. She noted that the hospital received millions in covid relief that it reported as miscellaneous income.

The hospital’s spending on laboratory, medical supplies, contract nursing, and care all increased, as is expected in a pandemic, Bai said. But she questioned other line-item cost increases.

For example, spending on the non-salaried employee benefits climbed 273%, to $1.4 million. Callaway’s 18-bed hospital nearly doubled its spending on administration, adding $1.1 million in fees paid to Nueterra subsidiaries NueHealth and Noble in 2020. The hospital also paid Noble a $38,000 lease in 2020, a statement filed with Callaway County showed.

“These dramatic increases raise a red flag,” Bai said. “To whom did the money go?”

Noble executives repeatedly declined requests for comment or interviews to clarify such questions. In late March, Noble spokesperson Nancy Mays said they did not have time to answer questions because they were “talking to potential buyers and figuring out how to best serve employees right now.”

A Sales Pitch Heavy on Charm

Audrain County officials were easy prey for investors. Noble was the only bidder for the failing hospital, said Lou Leonatti, the longtime local attorney, and many in Mexico, a town of 11,000 and the county seat, “believed we were saved.”

Dana Keller, the head of Mexico’s Chamber of Commerce who felt a hospital was essential to keeping business in town, said she set up meetings so Noble’s executives could “talk about their philosophy for rural health care.”

Leaders who called themselves “Progress Mexico” tried to evaluate the startup. “At the time we looked at it, Nueterra had an ownership interest, Don Peterson had an ownership interest, Drew Solomon, and Tom Carter,” Leonatti said.

Source : Kaiser Health News

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