The American Prospect: Another Private Equity–Style Hospital Raid Kills a Busy Urban Hospital

September 12, 2022 Healthcare

The sudden closure announcement of Atlanta Medical Center (AMC), a busy downtown hospital with one of the city’s only two Level I trauma centers, is just the latest manifestation of a terrible reality: Too many hospitals are worth more dead than alive. AMC, a 120-year-old hospital, loses tens of millions of dollars treating tens of thousands of disproportionately low-income patients per year, but it sits on hundreds of thousands of square feet of glorious real estate in one of Atlanta’s most walkable neighborhoods. A county commissioner estimates the land alone is worth at least $100 million; if a three-bedroom luxury townhouse a block away from the hospital commands anything approaching its $1.8 million asking price, it could be much more.

If the episode gives you a bout of déjà vu, that’s because we watched an eerily similar chain of events play out three years ago in Philadelphia and Chicago to the, respectively, 181-year-old Hahnemann and the 92-year-old Westlake hospitals. Like AMC, both hospitals had been owned since the 1990s by the for-profit Tenet Healthcare Corp., which abruptly began divesting most of its big-city assets in 2015. Like Hahnemann and Westlake, AMC was sold in a package deal with other more profitable hospitals to small hospital systems that vowed to keep all the hospitals in operation. Unlike AMC, Hahnemann and Westlake were controlled by private equity flippers who promptly went back on their word and commenced sending out pink slips shortly after getting handed the keys.

AMC’s new owner, the nominally nonprofit Wellstar Foundation, at least gave the Atlanta Medical Center’s two campuses eight years before throwing in the towel.

Still, much about AMC’s “sudden” death spiral bears the hallmarks of a preordained and deliberately orchestrated private equity–style tanking. A hospital insider says Wellstar’s willful neglect—its flat refusal to bring failing electrical wiring up to code, fix the six-story main parking structure that was condemned in 2019, or apply for grants that might offset the cost of upgrading its operating rooms—has rendered the hospital virtually unsellable. More recently, staffers began whispering about cardiology equipment being removed from the hospital and trucked over to AMC’s sister facility, the 200-bed Kennestone Hospital in wealthy Marietta.

Wellstar didn’t respond to a request for comment.

Community members say Wellstar makes no secret of favoring Kennestone, the flagship of its empire of 11 (soon to be nine) hospitals. The foundation bought AMC mainly as a condition of its purchase of its sister hospital in Alpharetta, another wealthy suburb, and never displayed much interest in actually operating the grittier downtown facilities that came with the package. A hospital source told the Prospect that Wellstar passed up opportunities to apply for grants that would have substantially offset the cost of upgrading AMC’s facilities, and purposely nominated an AMC physician as the hospital’s token representative on the Wellstar board of trustees, because hospital employees are barred from voting on board decisions.

AMC turned a modest profit under Tenet’s ownership (at a time when the surrounding neighborhood was far poorer), and its fellow downtown Level I trauma center Grady Memorial Hospital reported positive net income in 2020, the last year for which the hospital reported figures. AMC’s operating losses have expanded every year under the leadership of the four presidents it has appointed to lead. (A former hospital advisory board member says a fifth was hired in June, but Wellstar had rescinded the offer by July.) All this has happened against a backdrop of steadily growing profits and assets, which reached $650 million and $5.8 billion, respectively, in 2021. Tellingly, Wellstar collected more than twice as much CARES Act bailout cash on behalf of Kennestone than AMC, despite having handled far more serious COVID-19 patients at AMC, and despite AMC having nearly four times as many beds.

Seventeen months ago, a volunteer advisory board wrote a scathing letter to Wellstar brass, accusing the foundation of sabotaging AMC’s long-term survival. “For the last four years, we have listened patiently to ideas to invest in the two hospitals and witnessed a parade of revolving CEOs and Wellstar [executives] deliver vague plans to strengthen the capacity of the AMC Downtown and East Point locations,” the letter noted. “The evidence of an authentic plan and appropriate strategy” for “making AMC a viable institution,” the board concluded, “appears nonexistent.”

On the surface, this may seem puzzling. AMC is a busy hospital that has been operating at full capacity at least since the height of the pandemic, surrounded by an increasingly affluent, well-insured population. But in the new financial math of health care management, AMC is a portfolio of artificially scarce assets whose value could be more profitably mined elsewhere.

Graduate medical residencies, for instance, are huge moneymakers that guarantee hospitals a constant influx of bright-eyed med school grads willing (actually required) to work for a phlebotomist’s salary. They are heavily subsidized by Medicare, which pays hospitals a low-six-figure annual stipend for the service of educating young doctors in accredited residency programs.

The number of Medicare-subsidized slots has been strictly capped since 1997, which has in turn driven up the value of residency slots; Hahnemann auctioned off its six residencies for $55 million in its bankruptcy. AMC has four residency programs, including one in the famously high-margin specialty of orthopedic surgery. Now, those residents can be dispatched to Kennestone, where they can be put to work at a busy surgery center backed by the private equity firm Welsh, Carson, Anderson & Stowe.

AMC’s Level I trauma center is also a prized asset. For years now, Wellstar has been vying to upgrade the trauma center at Kennestone to Level I. But the bureaucrats with Georgia’s Certificate of Need Commission were apparently wary of granting the group a second Level I designation, worried about the implications for AMC. Now, Wellstar has apparentlyinformed its trauma department that a Level I designation for Kennestone should be in the works for next year.

Of course, many trauma patients may not make it out there. Grady Memorial Hospital is comprehensively overwhelmed, and Kennestone is 21 miles away from AMC and 30 miles from the East Point satellite hospital Wellstar shuttered in April. The Atlanta Journal-Constitutionrecently published an account of a stroke victim who waited 90 minutes for an ambulance as a direct result of the shutdown of East Point.

But Wellstar has financial incentives to fill beds with the most profitable patients it can find. Last fall, when the insurance giant UnitedHealthcare balked at the 37 percent price hike the hospital system demanded over its 2020 rates, Wellstar pulled the plug on negotiations and went out-of-network with UHC patients for seven months, forcing many of AMC’s most profitable patients to seek out care elsewhere and no doubt exacerbating the hospital’s operating losses.

Using a similar rationale, Wellstar may have determined that removing AMC’s 750 licensed beds from the market will bolster the margins at its other properties. That’s a pretty safe bet: The number of licensed hospital beds in any given area has been strictly capped since 1974 by the Certificate of Need system, which imposes a rigid bureaucracy on health care construction and investment as part of a stagflation-era bid to crack down on unnecessary duplication of services. (Somestates have since repealed their CON laws.) An important by-product of the CON regime is that health care turned into a finite resource, whose value could be inflated simply by removing supply from the market. Thirty-five years ago, when he was getting his start, Florida Sen. Rick Scott bought a 350-bed hospital in El Paso from a business partner and immediately shut it down, purely as a bid to drive up prices at two other hospitals he owned in town. The gambit worked: El Paso hospital prices rose 40 percent in three years.

Numbers like this are the reason it drives me batty when Democratic politicians react to news of another red-state hospital closure by screaming predictably about Medicaid expansion. Wealthy hospital owners are willing to throw hundreds of thousands of impeccably insured UnitedHealthcare customers out of bed for seven months and you want me to believe they’re going to keep the lights on for Medicaid patients? “I understand that it’s an election cycle, but I really hope this issue doesn’t get lost in the debate about Medicaid expansion, because it’s actually a lot bigger and more structural than that,” says a hospital insider and supporter of gubernatorial candidate Stacey Abrams, who has been the loudest promoter of the “anti-Obamacare wingnuttery” theory of who killed AMC. “You’ve been seeing health care deserts in rural Georgia get bigger every year, and now we’ve got a huge health care desert in South Atlanta. And Atlanta is a rich city!”

Hospitals derive their profits from a deep tool chest of state-sanctioned monopolies, from CONs to subsidized residency programs to VIP Medicare and Medicaid billing privileges to a long litany of tax breaks and incentive payments. But the state awards those privileges—and correspondingly imposes steep barriers to entry on any would-be competition—in a kind of accountability vacuum, with virtually no mechanisms for requiring hospitals to disclose their prices, much less make good-faith efforts related to what should theoretically be their core mission: to save lives.

As former Centers for Medicare & Medicaid Services administrator Seema Verma learned in March 2020 when she vainly attempted to survey the infection control efforts of hospitals her agency funded, the government is prohibited from so much as inspecting hospitals, barring the existence of a thoroughly vetted complaint. And in the case such a complaint exists, and is deemed credible enough to warrant a negative inspection report, the agency is prohibited from imposing any monetary penalty on the hospital for flouting safety standards, short of terminating the hospital’s reimbursement privileges entirely, an extreme step that is virtually never taken, mostly for fear that admitted patients will have nowhere to go.

CON commissions, meanwhile, are endowed with the power to hand out medical monopolies to parties they deem deserving, and refuse the applications of those they deem otherwise, but never to withdraw a CON that was previously granted on the basis of ownership’s failure to legitimately regard a community’s needs. Medical residencies, likewise, are regularly now managed by private equity–controlled physician practices and for-profit hospital systems that use residents to fill nurse staffing holes. As it turns out, when the architects of American society were drafting the rules for railroads and radio waves, power plants and bank charters, and all the other “natural monopolies” that would ultimately/ruinously get deregulated when the Cold War began to wane, no one ever got around to regulating any of America’s health care infrastructure, even after Medicare and Medicaid put the government on the hook for bigger swaths of it in 1965. We’ve been paying through the nose for the consequences of this failure ever since. The trouble is, it can always get 10 percent worse, and 37 percent more expensive.

But the shock-doctrine shutdown of AMC might represent a vibe shift. Wellstar has spent millions conducting health equity focus groups and community health surveys, airing folksy commercials counseling viewers that “you are not a number,” festooning the AMC building with “Stronger Together” banners, and ubiquitizing the insipid catchphrase “Morethan healthcare. PeopleCare.”

When confronted on the disparity between Wellstar’s woke marketing aspirations and its rich suburban predilections, a former advisory board member said that CEO Candice Saunders, who made $2.6 million last year, “would always get very offended, and then try to turn the conversation back to all the ‘uncompensated care’ Wellstar provided at AMC. Didn’t we realize, they were providing so much uncompensated care at AMC that we couldn’t really be expected to ask any more of them? It was always a very circular conversation, and in all our conversations we never really managed to escape that circle.”