What Really Happened at Hahnemann
Our Private Equity Reporting on Philly Had Errors, But Boy, Were We Right
Several weeks ago, Philadelphia Inquirer reporter Harold Brubaker offered Healing and Stealing some stinging criticism of our private equity media analysis, which appeared both here and at FAIR. Brubaker has covered the Philadelphia hospital industry for 12 years, and found a series of inaccuracies in our recounting of the story of Hahnemann University Hospital’s collapse.
Healing and Stealing appreciates the criticism and regrets the errors. We’ve updated the PE story at both sites, and we’ll discuss the specific errors below. There’s never an excuse for lazy or sloppy research. But email exchanges and an interview with Brubaker, coupled with an overdue thorough review of the Inquirer’s coverage make something clear: when it comes to private equity’s importance in Philadelphia healthcare, we were right.
The national media tried to impose a narrative about the unique depravity of private equity ownership on Hahnemann, with a significant boost from Senator Bernie Sanders. Our original story questioned that narrative.
The factual and analytical corrections prompted by Brubaker’s feedback significantly strengthen that critique and reinforce a different story - a once-great hospital mismanaged by a series of owners representing the spectrum of private hospital ownership: not-for-profit, publicly traded for-profit and a for-profit owner backed with private equity loans.
With much of Hahnemann’s patient base paid through low Medicaid rates, it’s not clear that any owner with any corporate structure could have kept Hahnemann a going concern in the face of competition from rapidly growing regional non-profit health systems with access to higher-paying commercially insured patients. But private equity played no unique role in Hahnemann’s demise.
As for the facts, first of all, Paladin Healthcare, the company through which L.A. businessman Joel Freedman bought Hahnemann and St. Christopher’s Hospital for Children, wasn’t a private equity company. The $170 million purchase was financed with loans from 2 PE firms - Apollo Global through two investment trusts with the name “MidCap” and Harrison Street Real Estate Capital LLC.
“Equity” means ownership, but private equity firms have increasingly shifted from owning companies to “private debt” - making loans to businesses, some of which wouldn’t otherwise attract lending. We should have made that clear.
Second, the real estate under Hahnemann and St. Christopher’s is not now, nor has it ever been condominiums. Hahnemann’s bankruptcy isn’t even finished yet - but St. Christopher’s real estate sold early in the bankruptcy process and is now leased to the hospital and Drexel University School of Medicine. One of the Hahnemann buildings has been refurbished as commercial lab space and another may wind up as a city homeless shelter.
Although he tried to do so, Freedman actually failed to insulate all of Hahnemann’s land from bankruptcy. Six pieces of Hahnemann real estate owned by a separate Freedman-controlled company were pulled into the bankruptcy to help pay off Hahnemann’s creditors. National reporters covering the hospital’s closing couldn’t have known this, since it happened after their stories were written and was an unusual move by the bankruptcy judge, but the hyperventilating over “safety net hospital becomes condos!” was false on its face, and part of a narrative that ignored how truly complex health care business transactions can be. It was sloppy reporting for Healing and Stealing to repeat it.
“Private Equity ‘Takeover’ Is Not Driving Healthcare Crisis” contained other errors, including misnaming the Children’s Hospital of Philadelphia as “Pennsylvania.” However, as media analysis, the article’s most significant error was failing to distinguish the Philadelphia Inquirer’s coverage from national media that parachuted into Philadelphia seeking confirmation of their beliefs about private equity.
Regular Inquirer readers knew that Hahnemann’s collapse came in the context of years of financial losses by the prior owner and dramatic consolidation in the rest of the industry. Harold Brubaker’s story on the announcement of Tenet’s sale of Hahnemann and St. Christopher’s to Freedman noted:
The region's hospitals are undergoing dramatic consolidation. Just this week, Cooper University Health System said it was acquiring rival Lourdes Health System. Jefferson Health is merging with Kennedy Health System in South Jersey and exploring a deal with Magee Rehab, after joining with Aria Health and Abington Memorial Hospital. Reading Health is buying five hospitals from Community Health Systems. And Penn Medicine is adding hospitals in Princeton and Lancaster to extend its reach.
The criticism that cut hardest from Brubaker was that, despite the story’s core thesis that media exaggerations about private equity have distorted public policy debates, Healing and Stealing still gave too much credit to the narrative of private equity acting as a uniquely rapacious owner in Philadelphia. Hahnemann failed over 30 years under serial ownership by several types of private hospital corporations - non-profit, publicly traded for-profit and, for the last year and a half, private equity backed for-profit.
Hahnemann was founded in 1848 as part of a homeopathic medical school. Ultimately abandoning homeopathy as the center of its practice, the hospital earned a reputation for innovation, particularly through the work of pioneering cardiologist Dr. Charles Bailey.
By the early 1990s, Hahnemann was suffering financially and found rescue in the arms of the non-profit, charitable, tax-exempt Allegheny Health, Education and Research Foundation (AHERF). AHERF also bought Hahnemann University, the medical school successor to the original homeopathy school and merged it with Medical College of Pennsylvania, founded in 1850 as the world’s first medical school for women, according to an archived Drexel University history.
Five years later, AHERF collapsed. The story closely resembles other high-profile healthcare business failures. Starting as Pittsburgh-based Allegheny General Hospital, AHERF went on a debt- and ultimately fraud-fueled buying binge in an attempt to become Pennsylvania’s first statewide “integrated delivery system.” The company gobbled up hospitals, physician practices and medical schools, its assets growing by 800% and revenues by 1,000% in ten years.
AHERF’s 1998 failure, the U.S.’s largest non-profit hospital bankruptcy to that date, has been widely dissected, including a 2011 book by author Judith Swazey, Merger Games. AHERF leadership radically misunderstood industry trends at the time and the Philadelphia market in particular. Laden with unsustainable debt, management began a series of internal cash transfers from the healthier hospitals to failing ones, triggering a board revolt, lawsuits and a criminal investigation.
The for-profit, publicly traded Tenet Health corporation bought AHERF’s Philadelphia operations and assets in bankruptcy court, with Drexel University assuming control of the merged medical schools. Tenet was originally called National Medical Enterprises, but rebranded itself in 1995, a year after agreeing to pay the federal government $362.7 million in what was then the largest civil and criminal healthcare fraud settlement in history.
By 2007, Tenet had sold or closed 6 of the 8 Philadelphia area hospitals it bought from AHERF and was left with Hahnemann and St. Christopher’s. According to Brubaker’s reporting, when Freedman bought the two hospitals in 2018, Tenet had lost money on Hahnemann’s operations for 14 consecutive years and had been looking for buyers for at least two years.
Shortly after the sale, the two parties began suing each other, with Freedman alleging that Tenet had misrepresented Hahnemann’s financial status before the sale and left him with antiquated IT and billing coding infrastructure. Tenet in turn demanded payment on a post-acquisition contract to run those systems for Freedman, which he stopped paying as the hospital’s losses mounted.
Hahnemann University Hospital’s demise and Joel Freedman’s bumbling, abrupt closure of the facility have little to teach us about the nature of different types of hospital ownership. A large non-profit health system, the second largest for-profit hospital corporation whose shares trade publicly on Wall Street and a private-equity funded investment banker all tried and failed to succeed with what Brubaker called “a declining business locked in the low end of a brutal hospital market.”
After discussing the specific issues in the original story, Healing and Stealing asked Brubaker if he had anything important to add. “Just a caution about getting swept up in these narratives,” he replied, “especially when they take their cues from Bernie Sanders.”
Brubaker said the narrative that Freedman bought the two hospitals to shut them down and extract real estate wealth didn’t fit the facts. “That’s truly not what he wanted to do here.”
Freedman, according to Brubaker, wanted to join the city’s medical empire builders. “These people have enormous egos,” Brubaker told Healing and Stealing. “He really thought he was going to build something here.” Freedman’s vision of himself crashed immediately against the reality of a hospital with a poor market position that had been run into the ground in by previous non-PE owners.
In a final and fitting irony, Freedman found eager “non-profit” partners in the most audacious attempt at asset-stripping in the entire saga, led by its former close competitor Thomas Jefferson University.
Hahnemann had been the anchor of Drexel’s medical residency program. The University oversaw the residents’ training, while the hospital formally employed them. This common arrangement entitled Hahnemann to reimbursement from Medicare for the cost of physician labor. Medicare pays employment costs for more than 150,000 residents a year nationwide.
Reimbursed residency positions or “slots,” are allocated to hospitals according to federal law by the Centers for Medicare and Medicaid Services (CMS). Drexel’s residency program is one of the largest in the U.S., and included more than 500 federally-funded slots at Hahnemann along with a smaller number at other sites around Philadelphia.
Hahnemann’s bankruptcy estate held an auction for the “assets” of its residency program, supposedly including control of the residency slots. Jefferson led a coalition of six non-profit health systems that won the auction with a bid of $55 million. Bankruptcy court judge Kevin Gross approved the sale over objections from CMS.
The agency appealed, arguing that the proposed sale “gravely misconceives the nature of Medicare funding.” According to the CMS court filing, “Medicare-funded medical residencies are not a hospital’s property to be sold to the highest bidder.” A federal judge agreed with CMS and the “sale” of the non-existent “assets” was voided.
Seeing a private equity-backed hospital owner join hands with large, tax-exempt competitors to invent a property right to monetize privileges granted by the federal government is a potent counterpoint to the one-sided narrative of private equity’s uniquely depraved behavior as a hospital owner.
Using expensive lawyers and novel legal theory to privatize public goods is exactly what we have come to expect in American health care. It’s hardly unique to private equity. Thomas Jefferson University and its tax exempt coalition partners’ attempt to buy these nonexistent rights offers another interesting example of how the dominant owners of American hospitals define “charity.”
Healing and Stealing thanks Harold Brubaker for taking the time to discuss his criticism of our work. The portions of the original story ““Private Equity ‘Takeover’ Is Not Driving Healthcare Crisis” about Hahnemann and Philadelphia now include substantial corrections.