Steward Health Care tells bankruptcy court it plans to sell all 31 hospitals, but summer deadline 'not feasible'

All of Steward Health Care’s hospitals are up for grabs as the now-bankrupt system works to settle its debts, but, as of now, the company doesn’t believe there will be any closures that would interrupt care, legal representation said this week in bankruptcy filings and in court.

The Dallas-based for-profit health system filed for Chapter 11 on Monday, a move anticipated by government leaders in Massachusetts and other states who have been concerned that the company’s dire finances could lead to healthcare service interruptions or degradation.

It currently operates 31 hospitals and about 400 total facilities across eight states, providing care for more than 2 million people and employing almost 30,000 staff including 4,500 physicians.

During a Tuesday morning meeting with a U.S. Bankruptcy Court in Texas, Steward attorney Ray Schrock, with Weil, Gotshal & Manges, described the system as an “impressive” and “very good” company. He said it, along with its CEO Ralph de la Torre, M.D., has “been taking a lot of flak, and frankly taking a lot of punches in the press over the last several months” amid word of its unpaid vendor obligations, $50 million in overdue rent and impending financial implosion.

“You’re only hear[ing] half of the story,” the lawyer told U.S. Bankruptcy Judge Christopher Lopez early in the full-to-bursting virtual hearing.

Steward has a particularly complex structure with nearly 170 debtors, “thousands and thousands of vendors” and a mix of “very profitable” and not-so-profitable hospitals, Schrock said. Pre-bankruptcy, it claimed about $6 billion in annual revenue but has about $9 billion in total liabilities—$1.2 billion in loans, $6.6 billion in rent obligations through 2041, almost $1 billion in unpaid vendor bills and $290 million in unpaid wages and benefits.

Per his comments during the hearing and documents filed as part of the bankruptcy, the system plans to begin selling all of its hospitals in phases denoted by their geography: Texas and Arizona hospitals first; Massachusetts, Pennsylvania and Ohio hospitals second; and Florida (its “most profitable” portion of the portfolio) third. That marketing process kicked off in January and is planned to run through July, though Schrock said there are concerns that a quick timeline is "not feasible” and could hamper the facilities’ return.

“We’re trying to sell all of these hospitals, but conducting a massive M&A process like this, we need to get it done efficiently, we need to get it done fast—but we also need to do it faithfully. And we think that there are homes for all of these facilities,” he said while noting some promising early valuations from potential buyers.

Lopez did grant Steward an extended timeline, about two months, to provide the court with a full disclosure of its assets and liabilities.

The judge also signed off on a $75 million debtor-in-financing arrangement with its landlord, Medical Properties Trust, which could also provide an extra $225 million should the system meet outlined conditions including the tight timeline of hospital sell-offs.

Schrock described Medical Properties Trust as a “steadfast partner” through the process. Both Steward and Medical Properties Trust, in its own separate statement, have sought to distance the system’s rent obligations as a primary factor in financial stress as opposed to other operational challenges and “market trends” like high labor costs, payer mix changes and inflation.

Schrock noted that Steward’s operations ran into difficulty last year when it could close a loan that would have paid off some of its debt and other bills “created a cycle where it was just very difficult [for Steward] to catch up, and was keeping the company in kind of a constant state of extremis. No matter where we were trying to run to or turn to, it was difficult to get up in front of that without a major sale.”

The company’s largest pending sell-off is the planned divestiture of its physician group to Optum. Discussions began late last year, and the deal was made public in late March. The arrangement “would have been more than enough to settle” Steward’s outstanding loans but has been gummed up in regulatory review, the lawyer said.

“We’re still working through that. It is what it is … we’ve already reached out to the Department of Justice and told them, ‘Listen, we’re going to be in Chapter 11, we’re going to need to move along as quickly as possible.’”

Schrock reaffirmed statements made by the health system on Monday that its goal “remains that there are zero hospitals closed on our watch” over the course of the bankruptcy proceedings. Government officials, particularly those in Massachusetts, have been quick to set up response systems and oversight to keep the company true to its word and prevent service interruptions.

They were also among the first to critique Schrock’s portrayal of Steward as a victim of external financial circumstances. Massachusetts Attorney General Andrea Campbell told the court in a filing that Steward had “extracted value from Massachusetts,” had “over-leveraged its hospitals” and “continued to enrich its investors and management” while putting off its vendor obligations.   

The state’s view of Steward’s business has been echoed by federal regulators, lawmakers and clinicians alike, many of whom have pointed to the system’s prior private equity owner Cerberus Capital Management as the source of its financial distress.

Another court hearing on the bankruptcy proceedings is scheduled for June 3.