Medical Properties Trust (MPW)
Week#12
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On a hike this last weekend, a dear friend and I, we will call him Cruiser, discussed the problems with our interaction with the healthcare industry and how expensive it has become. He had read an article that blamed all of the difficulties and expenses on the profit motives of greedy investors. Here is a link to the article.
The Plundering of America’s Hospitals
To say the article is filled with hyperbole is an understatement. It is also a fair statement that neither the author (usually an outstanding author) nor several of the authors cited seem to have remembered rudimentary economics or understand how messed up the US Medical Industry has become. Nor had they adequately researched some of the claims—such as in 2019 when St. Luke's Medical Center, which had treated patients in Phoenix for more than a century, shut its doors was somehow due to greedy investors.
A quote from the article
"It's the biggest scam that almost no one knows about," says Rob Simone, a researcher at the risk-management firm Hedgeye who has spent hundreds of hours digging through MPT's financial filings and business dealings.
Writ large, MPT's hospital investments represent a breathtaking scheme that has decimated healthcare in communities across America. And while the legal universe is not the same as the moral one — despicable actions, such as getting rich by cutting off care to the poor, can be perfectly legal — MPT's deals underscore how giant private equity firms have profited while gutting a critical piece of America's infrastructure, even on deals that turned out to be financial catastrophes for the hospitals and their communities.
All told, at least 13 hospitals have closed or gone bankrupt after their land was sold to MPT. And the damage is far from over. In January, MPT reported that its biggest tenant, a nationwide chain of 32 hospitals called Steward, could no longer pay its rent. The announcement — which has left health officials scrambling for fallback plans to provide care to the 2.2 million people served by Steward — could foreshadow more hospital closings to come.
"MPT existed to allow private equity to take money out of our hospital system through uneconomic transactions," says Justin Simon, who runs a successful healthcare-focused hedge fund called Jasper Capital. "Now they've bankrupted the hospitals. The communities are left holding the bag, and no one is going to jail."
Wow, the problem with all US Health Care is because of private equity firms. It further implies MPT is a vampire blood-sucking monster that is making money hand over fist at the expense of the sick and injured.
The transactions in concept are straightforward. A hospital needs more money to upgrade its facilities or drive a pivot in its business model. The hospital administration of the community-owned hospital explores many choices. A private equity firm offers to inject money and use its managerial expertise to help the hospital improve its efficiency. (Medical management is the 2nd worst of any industry, with education being the worst and legal being the 3rd worst, all based on my experiences). Private equity firms make the purchase and sell all those assets that are not directly tied to the cash flow generated by patient care. The land and buildings are often the first to be sold, followed by joint venturing with 3rd parties to assist in providing services. This is a generalization, but it makes the point.
The main problem I saw was that the hospitals were in poor areas or outdated. Their main customers were clients of a single-payer (Medicare/Medicaid) who will only pay what they choose to pay, even if it is less than the cost of care. That is why many medical practices refuse to take Medicare or Medicaid patients. Also, many of the hospitals were out of date.
Quick back-of-an-envelope calculation. If you have a hospital that is fiscally marginal and trades the cost of owning and repairing a building for a rent payment that has all of those costs plus the cost of capital, the cost of occupancy of the facilities has increased significantly. If all of the other predicted cost savings and the flowering of joint ventures do not materialize. The hospital will close. The community loses a healthcare facility, the investors lose their money, and the owners of the building, companies like MPT, have significant problems.
"In January, MPT reported that its biggest tenant, a nationwide chain of 32 hospitals called Steward, could no longer pay its rent." When a hospital’s doors close, opening the doors will require a lengthy process.
The landlord has to find someone who wants to operate a hospital in a location and in a building where another hospital failed.
If the landlord finds someone who might be interested, the first thing an interested party will do is conduct a physical and technical survey of the property. They will assess what would be needed to bring the facility up to current medical standards of operation and comply with current hospital building codes. The question being asked is, “How much will it cost to be able to open the doors?” Hospitals have significantly different operating and design standards than office buildings. The duration of a full assessment can take six months and cost hundreds of thousands of dollars to millions, depending on the size of the hospital and the complexity of its facilities.
The next step would be petitioning the local or federal government for a Certificate of Need (CON). Several factors spurred the requirement of CONs in the healthcare industry. The first concern is that the construction of excess hospital capacity would cause competitors in a saturated market to cover the costs of an insufficient pool of patients by overcharging or convincing patients to accept unnecessary hospitalization. Getting a CON could take 9 months to 2 years.
CONs are also an asset and can be sold by the shuttered hospital. I have seen purchased CONs used by competitors to block the reopening of shuttered hospitals. While the state may approve a new CON, it allows existing providers to block the opening of a new competing facility.
What does this mean for the landlord? In the absolute best case, they have zero income from the property for 3 to 4 years, yet they still must maintain the property, insure it, and pay taxes.
If a landlord is still looking for a willing tenant after 2 to 3 years, the landlord is sunk. Also, because of their design, hospitals do not lend themselves to being converted into something else - they were designed as, and will always be, a hospital. The property's value is now the value of the raw land minus the cost of the hospital's demolition and rezoning. It is possible for the building and property to have a negative value.
The cost of building a medical facility is astronomical, from $300 to $750 per square foot, depending upon the level of care and the equipment it will house.
Further, if the building is 15 to 20 years old, upgrading it to meet current medical best practices and zoning requirements often approaches the cost of building a new modern facility.
Recall at the beginning of this article: “2019 that St. Luke's Medical Center, which had treated patients in Phoenix for more than a century, shut its doors somehow due to greedy investors.”
“St. Luke's Medical Center in Phoenix, which has served the city for the past 100 years, will close late next month, according to a letter posted on the hospital's website from its president. The decision was made because the hospital, at 1800 E. Van Buren St., in Phoenix, is not drawing enough patients.”1
Even though it was in private hands, it had nothing to do with greedy investors. It had everything to do with a changing marketplace for health services in Phoenix. It has since been reopened as a very successful behavioral health facility.
If a community, a county, or a collection of cities and counties needs local healthcare, let them buy the land and enter a public-private partnership to construct a facility and provide care. Don’t complain; take community action.
As investors, we must internalize that capitalism is about profit and loss. Without the potential of loss to discipline the investor, capitalism does not work. Safety nets encourage risky bets. To reiterate, the investors lose when a hospital owned by a private equity group closes.
The economics of healthcare is horribly skewed, and it is not a free market; it is a well-rigged, opaque, and over-regulated market.
For Investors - Now, our tale of woe.
Unicus Research, LLC missed a darn good short #$^@‡!
MPT's NYSE symbol is MPW. MPW has taken a beating, from $10 last August to as low as $3 in January. We are sorry we missed this company for a short. Investor dividends dropped from $0.29 per share on June 15, 2023, to $0.15 by October 12, 2023.
From Stock charts.com March 20th, 2024
My expectations for MPT are poor. Their business model involves incremental returns on many properties coupled with punishing losses if a tenant defaults. In short, it takes the income of 10 good tenants to cover the losses caused by default. Unlike a home or office that you can release in 60 days, it will take 3 to 4 years at minimum to find a new tenant for a hospital. I do not like the business model at all—not one iota.
Podcast for good insight into how screwed up the economics of medicine has become. Even if you are not looking at the investments in health care, listen to it.
https://www.econtalk.org/keith-smith-on-free-market-health-care/
Weekender Music
Oh Ya, !!!
Club Des Belugas - A Men 's Scene
Thank You
L. Burke Files CACM DDP
Sr. Researcher and Advisor to the Founder
https://www.azcentral.com/story/news/local/phoenix/2019/10/25/closing-st-lukes-medical-center-phoenix-hospital-100-years/2461053001/
Was the author of the article you quoted - an idiot, a communist, or a socialist. Very very slanted.