As Coronavirus Bears Down, A Private Equity Deal Haunts A Top Puerto Rican Hospital
As the coronavirus pandemic reached Puerto Rico’s shores in mid-March, the island enacted one of the strictest lockdowns in the United States, installing a nightly curfew and threatening violators with fines of up to $5,000 and six months in jail.
Hospitals, the vast majority of which are run by for-profit companies following a wave of privatization in the 1990s, prepared for a deluge of wheezing, feverish patients and dwindling supplies of protective gear. But they weren’t ready for a severe drop in overall patients and the loss of revenue that caused. Hospitals across the island started furloughing nurses and doctors last month even as the death toll from COVID-19, the deadly respiratory disease caused by the virus, continued to climb.
Grupo HIMA San Pablo, Puerto Rico’s No. 2 hospital chain, announced the deepest cuts of all. In late April, the company, which operates five hospitals across the island’s populous northeast, said it would lay off or reduce hours for 2,000 of its 4,900 employees. The decision ― ultimately dialed back to 10% of its workers ― came just two weeks after a pediatrician at its medical center in the mountain town of Caguas became the first doctor in Puerto Rico to die of COVID-19.
Grupo HIMA blamed Puerto Rico’s government for failing to deliver on extra stimulus funding it promised to keep hospitals afloat during the crisis, and said its struggles are no different from other health care providers across the country. By June, the company said it rehired most of its furloughed workers through a federal Paycheck Protection Program loan.
But the reprieve is temporary. When it runs out, workers and union officials fear the company made steeper cuts than any of its rivals because it’s struggling to pay back past-due loans to a notorious “vulture” fund.
A HuffPost review of financial disclosures and regulatory filings indicate Grupo HIMA is past due on paying off nearly $20 million to WhiteHorse Finance, the lending subsidiary of Miami-based private equity giant HIG Capital whose $34 billion portfolio includes major investments in for-profit prisons and immigrant detention centers. While Grupo HIMA appears to also owe money to other lenders, watchdog groups say the spending cuts track with the private equity playbook and mirror similar attempts by the industry to squeeze profits out of health care companies amid a historic pandemic.
“We’re scared,” said one employee, who spoke on condition of anonymity for fear of being fired. “We’re scared for our jobs. We’re scared we might get infected at any moment. And we’re scared about the hospital falling into these creditors’ hands.”
The turmoil is a microcosm of the decadeslong crisis in Puerto Rico, an American territory whose colonial status and high poverty rate rendered the island vulnerable to predatory lending practices and left its roughly 3 million residents with fewer protections than those enjoyed in the 50 states. The situation within Grupo HIMA represents what some see as a philosophical debate unfolding in Puerto Rico, as the business class seeks to restore the island’s creditworthiness through tough choices and workers, bearing the brunt of those decisions, feel pushed to their limits.
Yet it may also offer another example of how the private equity industry, whose cut-throat profit squeezing earns frequent comparisons to birds that subsist on the carcasses of others, has inflamed a devastating public health crisis.
In Philadelphia, private equity baron Joel Freedman shuttered a 456-bed hospital that primarily served poor patients in September and refused in March to reopen the facility to treat coronavirus victims unless the city paid him $1 million a month, a price officials said was too steep. North of the city, in the Lehigh Valley, Cerberus Capital Management’s health care subsidiary threatened to close a 196-bed hospital it bought in 2017 unless the state paid the private equity firm $8 million for the month ― to which the state agreed. And multiple private-equity-owned emergency room staffing companies have cut salaries or furloughed workers in recent weeks, as ProPublica reported.
The Walking Debt
Grupo HIMA’s financial woes started in February 2013, when the hospital system received a $262 million loan from Credit Suisse and the Bank of Nova Scotia.
The loan was intended to fund Grupo HIMA’s first expansion outside Puerto Rico ― a bid to take over a trio of public hospitals in Madrid as the Spanish government sought to sell off public assets at the peak of that country’s own debt crisis. The company put up its properties in Puerto Rico as collateral.
A month later, WhiteHorse Finance entered the fray, announcing its control of two liens against Grupo HIMA’s properties.
Things started to unravel soon after. In an April 2013 lawsuit, the Federal Deposit Insurance Corporation cited a 2007 loan Grupo HIMA received from the now-defunct Eurobank as an example of the San Juan-based bank’s reckless lending to companies that failed to demonstrate adequate income to pay back the borrowed money. (The lawsuit may have made it difficult for Grupo HIMA to access traditional lines of credit, though the company rejected that characterization and said another bank picked up the loan after Eurobank’s closure.)
A month later, health care workers at the Spanish hospitals went on strike to protest privatization efforts, including Grupo HIMA’s planned takeover of three hospitals. In January 2014, Spanish officials canceled the deal.
Repaying the loans depended, in theory, on Grupo HIMA expanding its operations to increase its revenue. Instead, the company started to cut costs.
In December 2015, the company refused to pay its workers the annual Christmas bonus required under Puerto Rican law. The firm said the Puerto Rican government granted an exemption from the law amid a wave of requests from other troubled companies. But the bonuses were enshrined in workers’ contracts at Grupo HIMA’s three unionized hospitals. In January 2016, the General Union of Workers, a local affiliate of the Service Employees International Union, sued over the missed bonus payments.
Years later, the lawsuit is still pending final judgment in a Puerto Rican court, as Grupo HIMA has continued appeals. The company listed the lawsuit as one of its two biggest liabilities in its most recent audit filing to the Puerto Rico State Department. Grupo HIMA did not disclose an estimate of the total potential sum “due to the complexity and stage of this litigation,” according to the filing. But one union official told HuffPost the company owes at least $6 million in unpaid bonuses.
Debt was the other, bigger liability the company reported. By the end of 2018, the most recent year covered in the audit disclosures, Grupo HIMA’s debt swelled to $280 million, a $20 million increase from 2017. Between
The company’s revenues, meanwhile, stagnated. Grupo HIMA reported unbilled receivables ― a line item that typically represents money the company is technically owed but deems unlikely to recoup ― from Puerto Rico’s Medicaid-backed government health insurer increased by 3 percentage points between 2017 and 2018.
“Their cash flow is not improving because they’re still owed a ton of money from health care providers and insurance companies ― but not enough to justify a $20 million bump in indebtedness,” said Armando Santiago Pintado, a legal expert and coordinator with Hedge Clippers, a nonprofit watchdog that tracks public institutions’ debt to private financiers. “It’s just insane.”
Between 2017 and 2019, Grupo HIMA shed nearly 200 workers at its biggest hospitals, according to a HuffPost analysis of employment numbers the company disclosed in the annual Caribbean Business Book of Lists for each year. By contrast, Metro Pavía Health System, the island’s largest private hospital chain, lost just 59 employees during that same period. Hospital Auxilio Mutuo, another large hospital in San Juan, was down six employees.
Grupo HIMA has not yet submitted its 2019 audit to the island’s regulators and, as a private company, it does not release its quarterly earnings to the public. But WhiteHorse’s quarterly reports show Grupo HIMA owed the final payments on its two loans in July 2018 and April 2019, respectively. But recent filings list a new May 2019 acquisition date on one of the loans, suggesting Grupo HIMA refinanced the deal.
A spokesman for WhiteHorse did not respond to multiple emails requesting comment.
Grupo HIMA Vice President Heidi Rodríguez Benítez acknowledged “that loan expired.” But, in two lengthy phone interviews, she repeatedly declined to comment on the deal, stating the company’s “relationship with the lenders” is “confidential” and she was “not at liberty to speak about individual lenders.”
But she said “decisions regarding our workforce and the times when we have made a determination to reduce the workforce are all decisions that the hospital has made,” and while “we discuss these topics with our lenders, we do not allow them to intervene in those decisions.”
“We’re having all of the costs without any of the returns,” she said during the first interview in April. “It’s just simple math.”
Rather, she said Grupo HIMA had banked on the Puerto Rican government directing stimulus money to hospitals. But the fiscal control board that since 2016 has had final say over any public spending in Puerto Rico quashed legislation that would have provided more money to hospitals.
In June, Grupo HIMA received some funding from the government, and secured a Paycheck Protection Program loan through the federal Small Business Administration, allowing the firm to bring furloughed employees back full time. But the fate of the workforce once that program expires rests in restoring revenues from patients returning for service.
“We’re doing everything we can to go back to resuming our occupancy from before the pandemic,” Rodríguez Benítez said. “Hopefully that’s where we’re headed.”
Yet narrowing the company’s financial pressures to the past few months ignores the reality that the “interest they’re paying to a private debt firm is money that’s not going into providing care for patients at the hospital,” said Jim Baker, executive director of the group Private Equity Stakeholder Project, a watchdog group that tracks the effects of loans.
“It’s millions of dollars they’re paying in interest annually on this debt to HIG,” Baker said. “If they’re ultimately stuck in high-interest loans with companies like this, it undoubtedly impacts the quality of care they can provide.”
A Troubled Private System
Profit-seeking wasn’t always a fixture of Puerto Rico’s medical system. From the 1960s to the 1990s, the island experienced a period of relative economic stability as the United States poured resources into its biggest quasi-colonial possession in hopes of quelling calls for independence and making Puerto Rico an example of capitalism’s supremacy over neighboring communist Cuba.
But in 1996, President Bill Clinton struck a deal with congressional Republicans to phase out the tax break that encouraged U.S. manufacturers to set up shop in Puerto Rico, setting off a downward debt spiral as the island’s government took out loan after loan to compensate for lost tax revenue as companies fled. At the same time, Puerto Rico’s then-Gov. Pedro Rosselló was transforming the island into a haven for conservative policy experiments, slashing capital gains taxes by 65%, granting parochial school vouchers and privatizing industries from telecoms and hotels to tap water and health care. Some experiments went bust; a government agency took back control of the water systems in 2001. But private hospitals proliferated.
Of the 66 hospitals listed in a 2018 directory from Puerto Rico’s Department of Health, 52 are private, 13 are public and one is federal. The majority of private hospitals are controlled by four companies. The largest, Metro Pavía, operates 12 hospitals and is controlled by the Artau family, which owns not only the health care providers but one of the largest private insurers, First Medical, according to a report from watchdog group LittleSis. Grupo HIMA is the second-largest, with five hospitals.
Yet as the majority of hospitals turned into profit-seeking enterprises, roughly half of Puerto Ricans remained on the Government Health Plan, a program funded through Medicaid.
The problem there is that Puerto Rico, as a territory, does not receive the open-ended federal funds to match Medicaid-covered expenditures that states receive. It receives only a fixed block grant each year “that does not come close to covering the costs of health care for its Medicaid enrollees,” according to an April 2019 report from the nonpartisan Center on Budget and Policy Priorities. Once the block grant is spent, the island “must use its own funds to pay the entire remaining cost of Medicaid health care services,” the report read.
“We have the reality in Puerto Rico that the system was privatized in the ’90s, and more parts of the health care structure here are drawing private actors,” said Víctor Ramos Otero, the president of the College of Physicians-Surgeons of Puerto Rico, a trade group. “We’re dealing with that, and I think that’s a problem.”
Yet, since 2016, the Puerto Rican government hasn’t had direct control over its finances. After decades of selling bonds to make up for the tax revenue lost when manufacturers left the island, the territory defaulted on its loans. Unable to declare bankruptcy, Congress and the Obama administration established an unelected fiscal control board with final say over Puerto Rico’s spending. The control board has generally made paying back the island’s bondholders a higher priority than maintaining social services and pension payments to Puerto Ricans, and moved to reduce Medicaid spending.
The Government Health Plan made up 20% of the Grupo HIMA’s billed receivables ― money it’s owed ― in its 2018 regulatory filing, a 5% decrease from 2017. But the percentage of unbilled receivables ― money it’s owed but doesn’t expect to collect ― rose 3 points to 28%. The problem, said Santiago Pintado, is it’s costly to take insurers to court.
“They rarely go after them because it’s expensive and they don’t have the cash flow to do it,” he said.
Rodríguez Benítez was blunt: “If you speak to anyone from a hospital anywhere in the United States, I think most people would say health plans suck. That’s just true. It’s true about the government health plan, for sure.”
COVID-19, meanwhile, could be on the brink getting worse as businesses and beaches start reopening. In June, the island began experiencing its highest seven-day averages of new coronavirus cases yet.
Hermes Ayala contributed reporting from San Juan.
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