Dive Brief:
- A new report from the Private Equity Stakeholder Project alleges skilled nursing facility operator Genesis Healthcare’s bankruptcy filing last month can be traced to financial mismanagement at the hands of its private equity owners.
- Formation Capital, which acquired Genesis nearly two decades ago utilized leveraged buyouts, sale-leaseback transactions and layered debt to extract value from the operator, while Genesis struggled to stay viable, according to the report.
- Genesis’ bankruptcy isn’t an isolated event, the report argues. Private equity-backed firms were involved in more than half of large healthcare bankruptcies last year, according to the watchdog group.
Dive Insight:
Genesis, which once operated 175 skilled nursing facilities across 18 states, filed for Chapter 11 bankruptcy protections in July. It declared $708 million in secured debt and over $1.5 billion in unsecured debt, including money owed to workers and vendors.
The Pennsylvania-based company blamed the filing on industry headwinds, including reimbursement challenges from payers and legacy liabilities.
However, the Private Equity Stakeholder Project said Genesis’ financial problems stemmed from the management decisions of its private equity owners.
Formation Capital, along with JER Partners, purchased the operator for $1.7 billion in 2007 via a leveraged buyout. In 2011, Formation executed a sale-leaseback transaction of 147 properties to Health Care REIT for $2.4 billion.
The deal brought cash for investors, but stripped Genesis of the property and saddled it with long-term triple-net leases, in which the tenant is responsible not just for rent, but also covering property taxes, insurance and maintenance costs.
Collectively, the financial tactics reduced Genesis’ financial flexibility and resources needed to respond to a changing healthcare landscape, the report said.
Meanwhile, Genesis appeared to cut corners on patient care as it reduced investments in staffing and resident care.
For example, in 2020 a Genesis Healthcare subsidiary reached a settlement with the Vermont attorney general after the state found inadequate staff training had led patients to incur injuries and in one instance die from receiving improper care.
Another Genesis facility, St. Joseph’s Center in Trumbull, Connecticut, was slated for closure this year following multiple health and safety failures.
Nearly 200 residents were relocated from the facility this spring after Legionella bacteria was discovered in the facility’s water system. Then, two months later, patients were moved again due to fire safety concerns.
“Genesis Healthcare’s bankruptcy was a predictable result of a financial strategy that extracted value through debt and real estate transactions while leaving the company with fewer resources to sustain care,” said Michael Fenne, senior research coordinator at PESP, in the report. “Unless these tactics are addressed directly, more nursing home operators may follow the same path and leave more patients, workers, and public programs to absorb the costs.”
Across healthcare, private equity ownership is associated with a heightened risk of bankruptcy. Last year, private equity-backed firms were involved in seven of the eight largest healthcare bankruptcies, as tracked by the Private Equity Stakeholder Project. Steward Health Care and WellPath Holdings, a healthcare provider in jails and prisons, were two of the largest filings last year.
