Steward Health Care bankruptcy leaves 8 Mass. hospitals in limbo

As part of the bankruptcy process, Steward said it is “finalizing the terms” of $75 million in new “debtor-in-possession financing” from Medical Properties Trust, an Alabama-based company that bought its Massachusetts hospital buildings in 2016, and expects to receive $225 million more if it meets unspecified conditions acceptable to MPT.

The filing said Steward’s board named John Castellano, managing director of New York-based consulting firm AlixPartners, as chief restructuring officer, managing the company’s bankruptcy process. It said Steward had more than 100,000 creditors. It listed the company’s liabilities as between $1 billion and $10 billion, and its assets in the same range.

Steward sought protection from creditors in US Bankruptcy Court in Houston, after the debt-burdened company missed a payment deadline from a consortium of private credit firms that provided a loan of about $600 million last summer, followed by a second “bridge” loan of $150 million in January, in a last-ditch effort to keep the system solvent.

In its press release, the company said it was forced into bankruptcy because of a delay in a plan to sell its nationwide physicians group, called Stewardship Health, which would have provided additional capital to pay off its lenders.

It also blamed “insufficient reimbursement” from Medicare and Medicaid, the federal health insurance programs for seniors and low-income residents, and higher costs of labor and medical supplies. However a recent analysis showed that Steward hospitals are paid the same as if not better than many Massachusetts hospitals.

“It is Steward’s goal to resolve the Chapter 11 process as quickly as possible, with the help of the court, with a view to the long-term and sustainable financial health of the system,” the press release said.

It quoted Steward chief executive Ralph de la Torre as saying, “Steward Health Care has done everything in its power to operate successfully in a highly challenging health care environment. Filing for Chapter 11 restructuring is in the best interests of our patients, physicians, employees, and communities at this time.”

The fate of the hospitals’ hundreds of thousands of patients, and its nearly 16,000 employees in Massachusetts, will be determined by a bankruptcy process in which Steward’s lenders, deemed secured creditors, will hold an interest in the system as collateral. Some Steward hospitals have already seen employee departures and service cuts. Good Samaritan temporarily closed its Brockton cancer infusion center last month.

Governor Maura Healey and other top state officials, in a hastily called news conference Monday morning, stressed the continuity of hospital care while acknowledging there could be some “inconveniences and disruptions.” The governor said she hoped the bankruptcy filing would clear the way “to get Steward out of Massachusetts” while offering transparency about the company’s debts and liabilities.

“One of the good things about bankruptcy is that Steward and its CEO and its management team will no longer be able to lie,” Healey said, calling out the “greed and mismanagement” of Steward’s leader.

As part of the bankruptcy process, a US trustee working for the Justice Department will appoint a panel of unsecured creditors, a large cast ranging from staffing contractors to medical supplies firms, who will negotiate with Steward and its secured creditors about how to resolve its debts.

De la Torre, in a letter to Steward employees Monday morning, took no responsibility for the hospital system’s financial problems, writing, “We have done everything in our power to operate successfully in a highly challenging health care environment.”

He acknowledged that “the term ‘bankruptcy’ can raise some questions, adding, “We fully expect that there will be some distracting local and media commentary as a result of this announcement.”

Independent bankruptcy experts said Steward will be required to come up with a plan that could involve raising new capital and replacing management, in addition to selling some or all of its hospitals.

The plan would have to be filed within 120 days and approved by the bankruptcy judge, they said. If that doesn’t happen, other parties of interest — including the state of Massachusetts — could submit alternative plans to reorganize the hospital system and enable it to emerge from bankruptcy.

“Getting into bankruptcy is easy,” said D. Ethan Jeffery, an attorney for Boston law firm Murphy & King, who has represented debtors, trustees, and creditors in Chapter 11 cases. “Getting out is the trick.”

Trustees in hospital bankruptcy filings also typically name an ombudsman to watch out for the interest of patients while debtors and creditors haggle over who gets paid and how much.

While the state has a clear interest in keeping the hospitals open, and preventing a patient influx to other resource-strained hospitals, its role in the bankruptcy process will initially be limited. Governor Healey has called on Steward to turn over the hospitals to new operators. So far, no formal bids for Steward hospitals have been disclosed.

Health and Human Services Secretary Kate Walsh, who’s been the governor’s point person on the crisis, issued a statement reiterating that the Healey administration “is working with Steward and any potential partners to support an orderly transfer of ownership that protects access to care, preserves jobs and stabilizes our health care system.”

Walsh’s statement noted that the administration has been preparing for a bankruptcy filing and stressing that “Steward hospitals remain open, and patients should not hesitate to seek care.” Last week, state officials activated a command center to manage the fallout on the Massachusetts health system from the anticipated breakup of Steward’s system.

In a statement, the Massachusetts Nurses Association and health care workers union 1199SEIU said that the state should use the bankruptcy process to protect health care assets.

“The bankruptcy declaration should only embolden the administration, the legislature, the healthcare industry, and all those who value the health of our communities to immediately take whatever steps are needed to ensure the preservation of these facilities and the safe transition to more stable and responsible not for profit ownership,” the unions said.

Steward operates two Boston hospitals, St. Elizabeth’s Medical Center in Brighton, and Carney Hospital in Dorchester. It also runs Good Samaritan in Brockton, Holy Family in Methuen and Haverhill, Morton Hospital in Taunton, Nashoba Valley in Ayer, and Saint Anne’s in Fall River.

Steward-operated Norwood Hospital was temporarily shut down because of flooding in 2020. A rebuilding effort stalled earlier this year when contractors halted work, saying they hadn’t been paid.

Most of the hospitals were formerly part of the Caritas Christi Health Care, a Catholic system run for decades by the Boston Archdiocese. Steward, backed by private equity firm Cerberus Capital Management of New York, acquired the Caritas hospitals in 2010, converting them into for-profit institutions before launching a national expansion.

Under the bankruptcy procedure, Steward will likely be obliged to disclose far more detailed financial information than it has in the past. The company has not publicly filed financials since 2020, when Steward Health Care System reported a $407 million loss.

The bankruptcy filing will also shine a spotlight on the multimillion-dollar rent obligations Steward hospitals have had to pay to MPT, the real estate investment trust that bought the Massachusetts hospital buildings in 2016 for $1.2 billion. In 2021, Steward paid out a $111 million dividend to equity owners, including chief executive de la Torre, a former heart surgeon, according to a lawsuit filed against the company by a California medical staffing firm.

Steward’s cash crunch came to light in January when its commercial landlord, MPT, disclosed that the health system hadn’t been paying full rent for months. The company, which moved its headquarters from Boston to Dallas in 2018, has also been sued by at least two dozen vendors alleging they weren’t paid for supplies and services.

One big question hovering over the future of the hospitals is whether any new operators would inherit the rents Steward agreed to pay MPT, a major disincentive for would-be buyers of its hospitals.

“The big problem in the Steward situation is they no longer own the buildings and they have these lease payments,” said Jeffery, the Boston bankruptcy lawyer. Most of the hospitals also operate in low-income communities, where lower-paying government health insurers such as Medicaid and Medicare account for much of their revenue, he said.

“In these areas, the economics of health care don’t work without the help of the government,” he said. “Whoever’s going to buy these hospitals is still stuck with a fundamental problem that’s hard to fix.”

Another question is how the bankruptcy will affect Steward’s plan to sell its doctors network, Stewardship Health, to the Optum unit of insurance giant UnitedHealth. The parties have negotiated a letter of intent but have yet to disclose a purchase price or file a definitive asset purchase agreement with Massachusetts regulators.

Before the bankruptcy, Steward had been counting on the transaction to help pay off lenders. But the state review process won’t formally begin until Steward and Optum finalize their purchase agreement, and it could take as long as nine months. Regulators from other agencies, including the Massachusetts attorney general, the Federal Trade Commission, and the US Justice Department, may also review the deal.

Robert Weisman can be reached at robert.weisman@globe.com. Jessica Bartlett can be reached at jessica.bartlett@globe.com. Follow her @ByJessBartlett.