♪ ♪ ♪ ♪ (ambulance sirens) >> In Los Angeles County, ten people are getting sick with COVID every single minute.
>> LAURA SULLIVAN: Earlier this year, L.A. County was the epicenter of the winter COVID surge.
>> Hospitals in this area say they're preparing to ration care.
>> One, two... (grunts) >> SULLIVAN: In East L.A., L.A. County U.S.C.
Medical Center was regularly seeing more COVID patients than any other hospital in the region.
>> I'm sorry to meet you this way.
Okay, coming in.
Nobody deserves to die alone.
Okay, here's your mom.
And we allow family members to see their relatives before they pass.
(sobbing) I told her that I love her.
>> But that's the truth of COVID-- there are some that's going to win, there's some that's going to lose.
>> Ma... Ma!
>> SULLIVAN: COVID exposed longstanding inequities in America.
>> We are now getting a look at data that reveals racial disparities in medical outcomes.
>> SULLIVAN: And turned a spotlight on the hospitals that serve low-income, working-class communities like East L.A. >> ...a huge problem not just in the Latino community, but also in the Black community.
>> SULLIVAN: This is a story about those hospitals, largely government-funded, whose primary mission is to care for the poor and uninsured.
They're called safety net hospitals.
>> Why are safety nets hit the hardest?
Because our patients are vulnerable.
We serve a community of working poor.
We serve people who are working essential jobs.
(speaking Spanish) Homeless patients, patients with mental illness.
Substance abuse addiction disorder-- we are expected to care for the patients the other hospitals won't care for.
>> SULLIVAN: More than 70 million Americans rely on Medicaid, and roughly 30 million have no insurance at all.
But at a time when safety nets have never been more needed, they're in crisis-- and, it turns out, have been for years.
>> Community leaders plan a protest tomorrow, hoping to stop the planned closing of Westlake Hospital.
>> Announcement from Hahnemann University Hospital that it too will cease operations.
>> A demonstration was held tonight for the hospital that mostly serves Black, Latino, and low-income people... >> I think we're on the brink of a precipice.
Even before the pandemic, many of these hospitals were losing money.
And the pandemic is only going to make that worse.
>> SULLIVAN: Over the past year, "Frontline" and NPR have been trying to understand why safety nets have been struggling so much, while other hospitals have been doing so well.
You know, HCA, one of the first and biggest hospital systems in the country, posted a $3.8 billion profit last year, also during COVID-- what do you think is going on there?
>> It is a little unfathomable to me how a hospital system could be making a huge profit in the middle of a COVID pandemic, but honestly, nothing surprises me anymore.
The system itself makes no sense, and when you have a system that makes no sense, there are going to be some winners and there are going to be some losers.
Is that how you want your healthcare to be delivered?
♪ ♪ >> SULLIVAN: In the foothills of southeastern Tennessee, the city of Chattanooga has been growing steadily for years.
It has three sizable hospitals and its largest is downtown, the 680-bed, county-owned Erlanger.
It's Chattanooga's safety net hospital.
(medical equipment beeping) >> We got a gunshot going to 11.
>> SULLIVAN: Dr. Sudave Mendiratta started at Erlanger in 2008 and is now chief of emergency medicine.
>> So, six goes to 101, and Burns going to six... Chattanooga's my hometown, and when I had the opportunity to come work at Erlanger, I was excited to work with a diverse patient population.
Musical chairs, we'll get through this.
I was excited to be part of a public hospital mission.
If it were easy, everybody'd work here, right?
>> SULLIVAN: While many hospitals care for people who are poor or uninsured, as a public hospital, Erlanger is obligated to take all patients regardless of their ability to pay.
>> Erlanger performs vital services, not just in some specialties, like trauma or stroke or cardiac care, but just the day-to-day healthcare for most Americans who don't have access otherwise.
Because of that, and that we're open 24/7, 365, we've become a convenient option for healthcare for those who may not have a doctor.
We're working on getting you a space so we can get you better treatment, okay?
Our doors are open all the time regardless of where you come from.
It's the most pure form of medicine.
>> SULLIVAN: In recent years here, the number of patients on Medicaid... >> Hello, ma'am!
>> SULLIVAN: ...or with no insurance has been climbing.
>> Again, I'm Dr. Mendiratta, and thanks for being so patient with us this evening.
I just wanted to hear a little bit more of your story.
>> I have been clean from 2007 till June of last year.
>> Oh, that's fantastic, that long of a time.
>> I mean, I wouldn't even came now, because, you know, I know it's a process, but rehab put me out.
>> So the only reason you came here to the emergency room tonight is because you weren't able to continue with your, with your rehab.
>> Honestly, yes.
I mean, I don't have insurance and I don't have a doctor, so I didn't have no choice, but to come to the emergency room.
>> Yeah, that's what we're here for.
>> Yes, sir.
So does that mean you guys are going to give me... >> Yes, ma'am.
You're going to be ready to go back, okay?
>> We're lucky to have Erlanger.
I don't feel like that they change the way they would treat me.
As in, you know, if I needed this scan and didn't have no money, they still did it.
And I like that.
I like to be somebody no matter where I go.
I don't like to be less than, and they've always treated me that way, like I was somebody.
>> SULLIVAN: But to take care of people like Theresa, safety net hospitals face a fundamental problem: they often don't get enough money from the government to cover the costs.
So they have to look elsewhere to survive.
They have to attract a lot of insured patients that pay well.
And in Erlanger's case, that means it has to compete against its two crosstown rivals, both part of national hospital chains.
Memorial belongs to one of the largest groups of nonprofit hospitals in the country.
Close by is Parkridge Medical Center, part of the nation's largest for-profit chain, the Hospital Corporation of America, HCA.
Former senator Bob Corker was the mayor of Chattanooga in the early 2000s and saw the challenges facing Erlanger.
>> So you have this competition that's taking place between a safety net facility that's owned by the public, a for-profit facility that, generally speaking, around the country, is well-run, a nonprofit Catholic hospital, all engaging in similar practices in order to garner market share.
And yet, Erlanger's at a disadvantage.
>> SULLIVAN: That competitive disadvantage has continually left Erlanger struggling to make ends meet.
After years of financial peril, in 2012, the hospital was losing so much money, its future was in jeopardy.
So hospital leadership made a desperate decision: they would refocus.
Like their competitors, they would prioritize attracting profitable patients.
>> The patient that is the most profitable is the healthy patient who is coming in for a simple surgery and going home.
That's how-- that's the patient that you can make the most money on.
Hello, sir, I'm Dr. Young.
>> SULLIVAN: Dr. Chris Young is chief of the medical staff.
He's been practicing at Erlanger for 30 years and supported the change in strategy.
>> All right, we're going to take good care of you.
>> Yeah, I hope you do.
>> I think the approach was, we're going to need to make money in a competitive environment.
We're going to have to shift our patient mix into a more profitable patient mix.
And we're going to use those profits to keep Erlanger alive, keep it functioning on some level.
>> I want you to take some big, deep breaths for me, just as big as you can.
>> SULLIVAN: The hospital cut some expenses and staff benefits, and by tapping into additional federal funds and borrowing heavily, it began aggressively expanding over the next six years.
>> A health system living up to a higher standard.
>> SULLIVAN: It opened a new campus in the suburbs to attract a wealthier clientele.
>> The Erlanger Orthopedic Institute is blazing new trails.
>> SULLIVAN: It invested in specialty practices with high-margin profits.
>> The Erlanger Heart and Lung Institute is bringing together experts from all over the world.
>> SULLIVAN: And it bought a smaller regional hospital.
>> ...with six hospitals and over 5,500 employees.
>> We had new helicopters, which we were so excited to talk about our regional reach.
There was a sense of excitement that we were part of the cutting-edge healthcare system.
>> Please join me in giving sick and injured children every chance to get better.
Put your money where the miracles are.
>> There was a big advertising campaign.
>> This is world class.
This is Erlanger.
>> You know, that was, that was kind of, in my view, was a little bit over the top in terms of it.
But the positive effect was, it did allow people to think, "Oh, well, you know, this is going to be fine."
>> I was not astute enough to interpret financial statements, but I assumed that through the banners, through the Super Bowl advertisements, through the glossy mailers, the fancy robots that we were buying, that Erlanger was doing not just good, but Erlanger was doing great.
That Erlanger was doing things that got the attention of Wall Street.
>> A leader on a global scale.
>> SULLIVAN: But despite all the investments and expansion... >> This is Erlanger.
>> SULLIVAN: ...the strategy wasn't working for everyone.
While Erlanger had its eyes elsewhere, in the working-class neighborhoods on the south side of Chattanooga, the immigrant population was growing.
And with it, the community's healthcare needs.
(knock at door) >> Karla?
(speaking Spanish) >> (speaking Spanish) >> SULLIVAN: Dr. Kelly Rodney Arnold runs Clínica Médicos.
She got her start working as a staff physician at Erlanger.
>> (speaking Spanish) Clínica Médicos, really, there was nothing like it.
It was the first bilingual medical home for a population that largely seemed voiceless, seemed cast away, and in many ways seemed dismissed.
>> SULLIVAN: Since the clinic opened, thousands of low-income patients, many without insurance, have been seeking primary care here, the kind of care that Erlanger hadn't been prioritizing.
>> (speaking Spanish): >> How's your new job going?
>> It's good.
The clinic was an alternative, because it's something we could afford.
>> So it's along here on the back.
She makes $13 an hour.
Now I'm making $16 an hour.
But it's not enough.
>> SULLIVAN: When you were watching Erlanger do the expansion and spending a lot of money on, you know, its facilities and its equipment and its campus, what did you see happening?
What did you think of it?
>> It was disheartening, really, and it was insidious, because as things got bigger and wanted to get bigger, and wanted to become world-class, the very mission became eroded.
Chasing margins-- that was put at the front of the train, instead of the patient.
>> SULLIVAN: Do you think that affected some patients more than others?
>> Of course-- and those patients who aren't as empowered absolutely get pushed by the wayside.
>> SULLIVAN: By 2019, there were problems inside Erlanger, too.
Its new strategy wasn't covering its rising costs.
>> We had a lot of growth, but that didn't translate into profit.
>> SULLIVAN: Why doesn't having more patients mean more profit?
I mean, it seems like, in any other business, the more customers you get in the door, the more money you're making.
>> Well, first of all, they need to have...
They have to be able to pay for their service, okay?
You can't make-- add up on volume if you're not being paid for it, and so that's where people started running into trouble.
>> SULLIVAN: The troubles were especially acute in the E.R., where doctors were warning leadership that the ratio of nurses to patients had become dangerously low.
When did you start to think the expansion wasn't working out?
>> We knew that when we did not have capacity to care for patients, yet we accepted more, that was an issue.
We were seeing patients in hallways and in the waiting room.
It became very clear that spending money as an organization to gain market share and to increase volume was not effective to deliver quality care.
>> Over time, people became discouraged.
Many people left.
They didn't feel good about the care that was being given.
We looked to hospital leadership to say, you know, "Why aren't we changing this?"
And clearly, it was, it was because of financial concerns.
>> SULLIVAN: It all came to a head in April 2019.
>> There was one day where it just became painfully apparent that we can't continue to operate the hospital in this way.
>> SULLIVAN: The emergency room was overwhelmed, short on beds and staff.
A man arrived with trouble breathing.
After initial tests, he was placed back in the crowded waiting room.
There wasn't space to admit him.
Five hours later, he was unresponsive and died.
>> That was a very clear marker that this has gone too far.
I still carry this guilt with me.
That I may have been complicit in something that caused harm.
It's the first part of the Hippocratic Oath, "Do no harm."
And yet, when we are constrained within a system that caused harm, it is, it's a moral dilemma for us as physicians.
>> SULLIVAN: Soon, the medical staff had had enough.
They wrote a letter to the hospital's board of trustees saying they had "no confidence" in the leadership "to ensure the quality and safety of patient care."
The board never publicly commented on the man's death, but it pledged to address the doctors' concerns.
By the end of 2019, the board brought in new leadership and staffing levels were improving.
But once again, Erlanger was losing millions and in financial crisis.
So that strategy of going after the market share, going after the, the high-margin procedures, that's a strategy that has worked for some hospitals.
Why didn't it work at Erlanger?
>> Because we could not only take the patients with the best insurance for the highest-profit procedures.
That that inherent discord of fulfilling our safety net hospital mission paradoxically kind of hamstringed the ability for us to have a targeted healthcare marketing strategy towards higher-income ZIP codes and performing the higher-margin procedures.
>> We talk a lot about health systems, but the reality is, we have a healthcare marketplace.
And so people are selling healthcare to customers.
And so for us to survive, we have to compete, but we have to accept all patients.
That's our burden, that's our mission.
We don't have the luxury of picking and choosing.
>> Erlanger is an incredibly important facility here in our community.
The needs of our community would not be dealt with appropriately without Erlanger being here.
But, you know, at the end of the day, that competition and that overlap and that grab for market share is actually not good for the community.
♪ ♪ >> SULLIVAN: The competitive pressure on safety net hospitals in America took off about 50 years ago, amid a wave of change in an unlikely place two hours down the road from Chattanooga.
Nashville made its name on music, but the industry that's made the city what it is today is healthcare.
>> Healthcare is big business.
When we talk about healthcare being a $3.9 trillion industry, just think about that industry having its tentacles, its roots, in and around Nashville.
>> SULLIVAN: Paul Keckley lives in Nashville and is a longtime industry analyst.
>> It's 400-plus companies just in Nashville, plus over 150,000 people that are employed in the industry that live in Nashville.
Pretty big business.
>> SULLIVAN: Some of the biggest for-profit healthcare companies in the country got their start here.
The hospital chain LifePoint, with $7 billion in revenues.
Community Health Systems, with 84 hospitals in 16 states.
And HCA, one of the first for-profit chains.
Jeff Goldsmith was a consultant with HCA in its early days.
>> It is an exceptional institution, and I, you know, I mean, I say that as a shareholder.
>> SULLIVAN: What is the secret to their success that other hospitals should be learning from?
>> Operating discipline.
They're very focused, they don't run off and chase rabbits.
They don't get distracted by the shiny object.
They've stayed in the business of managing hospitals.
And if you go visit their corporate offices, it's basically the same corporate office they had 40 years ago, when I worked with them.
>> SULLIVAN: HCA bought its first hospital in 1968, just years after the marketplace was flooded with revenue from two new government health insurance programs, Medicare and Medicaid.
The hospital industry had long been dominated by nonprofits.
Now entrepreneurs saw opportunity, and companies like HCA emerged as key drivers of competition.
>> What began happening in the '70s is that you had corporations that began acquiring hospitals and chaining them together to try and achieve economies of scale and efficiency.
>> We got the idea to do this thing from seeing what Holiday Inns ten years before had done in changing basically the travel industry.
>> The managerial challenges of running a hospital increased dramatically during the '70s and '80s.
There was a steady increase in the complexity of the business, a steady increase in the cost and capital requirements associated with staying in the business, and a steady improvement in the quality of the management trying to do all of that stuff, all at the same time.
>> The for-profit hospitals say they've introduced sound management to the hospital industry.
They say they can raise money faster, build new hospitals quicker, and offer quality care.
>> SULLIVAN: Is this an issue where the for-profit hospitals came in and said, "We see a problem and we can fix this, we can do it better"?
Or was this a situation where they came in and just said, "We see a situation where we can make money"?
>> It's both, but it began with, "We can build a better mousetrap."
>> SULLIVAN: Yeah.
>> So what investor-owned operators would do is go into communities where there was a large hospital that had operated pretty much by its own rules, and they'd say, "We're going to compete with you, and if we put in a competing hospital, we'll get better service, we'll get lower cost, and every patient's going to have a choice."
>> Now hospitals are going head to head, competing for your business.
>> SULLIVAN: As the for-profit industry expanded... >> ...the growing phenomenon-- hospitals that operate for profit.
>> SULLIVAN: ...controversies followed over who was being left behind... >> One of the biggest controversies about profit-making hospitals is how they treat people who cannot afford to pay at all.
>> SULLIVAN: ...and questions over a widening divide.
>> They're usually in prosperous suburbs and usually in states where there's little regulation of hospital rates.
>> Location is half the battle for producing return to shareholders.
Is it a market where you've got a few large employers that have very attractive health benefits for their employees, and they happen to have a workforce that's in their 30s and 40s and 50s?
That's a better scenario than if you're in a market when they're all in their 70s, and their problems are very severe chronic conditions.
So what's clear is, they are in the business to make money for their shareholders, for their stockholders.
>> It's the biggest merger in history outside the oil industry.
>> SULLIVAN: Over the decades, the size and the scale of hospital companies grew, as consolidation swept through the industry, giving rise to massive healthcare systems.
>> The entire health system was consolidating.
It wasn't just in the investor-owned sector.
>> The multi-billion-dollar deal between New York Hospital and Presbyterian Hospital... >> You had a parallel development of systems in the nonprofit world during that period of time.
>> ...produces a network that includes nearly 30 hospitals and healthcare... >> You know, I mean, it really didn't matter whether they were investor-owned or not-for-profit, because they were all trying to do essentially the same thing.
In this industry, geography is destiny, it's your fate.
And if you can't figure out how to spread the cost of managing that enterprise and managing that risk across a large enough population, you drown.
>> The only hospital in Chicago's Bronzeville community just announced it will close next year.
>> SULLIVAN: And that's what was happening to many safety net hospitals as they tried to live up to their mission and stay afloat in this increasingly competitive marketplace.
>> After serving Northeast D.C. for more than 150 years, Providence Hospital officially closed.
>> Investor-owned is growing dramatically, but it's doing so at a point where the pie is actually shrinking.
The number of hospitals is going down and the percentage of hospitals operating that are owned by investors is going up, and those are happening at the same time.
(applause) >> SULLIVAN: For-profits now make up about 24% of the hospital business, and some big systems, like HCA, are stronger than ever.
(bell ringing) Its stock price has more than doubled in the last four years.
Do you worry at all that there is a growing divide between the safety net hospitals and the for-profits, and even the nonprofits?
>> Geography is destiny.
>> SULLIVAN: Does that mean that there's a growing divide?
There's no question that there are, there are significant differences in the economic circumstances of these institutions.
But so much of those differences depend on the geography and the economics of the patients that they serve.
And that hasn't changed at all.
>> SULLIVAN: And when people say that other hospitals, for-profit and nonprofit hospitals, make too much, that it's not fair, are they wrong?
>> The real problem is the inequities in the society as a whole have reached the point where we really need to address them.
And the disparities in the circumstances of the hospitals are an outgrowth of a failure of social policy and politics.
That's what I believe.
I'm not going to blame the hospitals.
>> SULLIVAN: Back in Chattanooga, we wanted to take a deeper look at the divide between Erlanger and the other two main hospitals, the nonprofit Memorial and HCA's for-profit, Parkridge.
(keys clicking) We got access to a database of financial information that hospitals report to the federal government.
It offered a glimpse into how Erlanger was stacking up against its crosstown competitors.
In 2019, the year before COVID, Parkridge reported $78 million in operating profit, a margin of almost 24%.
Memorial took in $40 million, a nearly seven percent margin.
Erlanger lost about $13 million.
HCA declined our request for an interview, but said in a statement that the government data can't always be used to accurately calculate margins.
It also said, in 2019, nearly a third of Parkridge patients were on Medicaid or uninsured.
>> Both the nonprofit and the, and the for-profit benefit from Erlanger being here.
>> SULLIVAN: From having Erlanger in the market.
By having a safety net hospital in the market, where more of the lower-pay, no-pay patients are going to go, ends up being of benefit to the other facilities.
>> SULLIVAN: Chattanooga is just one market, but reflects disparities in the industry, according to Bruce Siegel, who represents more than 300 safety net hospitals around the country.
>> So when we look at our membership, before the pandemic, close to half our hospitals were losing money in a given year.
The average was about a one or two percent positive margin.
>> SULLIVAN: Wow.
>> It's very minimal.
Some years, the average has been negative.
The average American hospital had a margin of closer to about seven percent.
>> SULLIVAN: Seven percent?
>> Yes, average.
And there are some hospitals in America who have margins, profit margins of ten, 15%, 20%.
So we've seen this divergence, and, you know, to some degree, it's always been there, but I think the pandemic has made it much worse.
And I think that gap has just opened further.
>> SULLIVAN: This gap exists in large part because Medicaid often doesn't pay enough to cover the costs of care, leaving hospitals about $19 billion short every year.
To help offset these losses, and the costs of caring for the uninsured, the government gives hospitals additional Medicaid funding.
They're called supplemental payments.
How important to the viability of safety net hospitals are supplemental payments?
>> Oh, supplemental payments are absolutely critical.
They can be the difference between keeping your doors open or going under.
>> SULLIVAN: Really?
>> You know, when you're being paid so much less on a Medicaid patient, and you're caring for people whom you get paid nothing-- completely uninsured patients-- supplemental payment can be the difference between life and death.
>> SULLIVAN: Diane Rowland was a top adviser to Congress for the Medicaid program.
When did the federal government decide that these safety net hospitals needed supplemental funding?
>> The program really began around 1980.
>> SULLIVAN: Okay.
>> The federal government wanted to maintain access for the Medicaid population that they knew needed to use these hospitals, because many of the for-profit hospitals had very low Medicaid patient loads.
So if these safety net hospitals were where the population that was low-income was going, they wanted to make sure that they had enough substantial cash flow to be able to stay operative and to maintain the quality of their services.
>> SULLIVAN: Medicaid funding is split between the federal government and the states, which are responsible for distributing the money, including the supplementals, now about $50 billion a year.
Can the public see how much money is going out in these supplemental payments and what it's being used for?
>> Well, it's a black... it's a black box.
>> SULLIVAN: It's a black box.
>> You can see how much is going out in different parts of the supplemental payment, but it's not very clear, always, where it's going.
(keys clicking) >> SULLIVAN: We tried to take a look at how the money was flowing to hospitals in Chattanooga and across Tennessee.
We analyzed annual hospital filings and obtained supplemental payment information from the state Medicaid agency, TennCare.
The data covered 2015 to 2019.
Following a methodology used by numerous Medicaid experts, we found that for the six hospitals designated as safety nets, the uncompensated costs of caring for Medicaid and uninsured patients increased by 31%.
But the supplemental payments only increased by five percent.
At the same time, we also saw that some for-profit and not-for-profit hospitals received much greater increases in supplemental payments.
Medicaid officials in Washington and Tennessee would not agree to an interview.
(computer chiming) But in a statement, TennCare said the disparity we found is not reliable, because it does not take into account key factors, like care provided to out-of-state patients.
They said the payment formulas are approved by the federal government, and that overall, 40% of the supplemental money went to the safety nets.
We just looked at Tennessee.
Is there reason to believe that this could be going on elsewhere in the country?
>> I think that it's going to vary.
Your findings really show that in Tennessee, there's obviously something worth examining going on.
I suspect that one would find similar differences among other states.
There's a lot of financing that allows states to make different decisions about how to channel their funds and who to, who to compensate.
>> SULLIVAN: Who does that hurt?
>> I mean, it hurts equity.
It hurts targeting the funds to the most needy places for the most needy populations.
>> Everybody's chasing every dollar.
Folks get really smart about these formulas and smart about the politics.
And when I... you know, if a safety net hospital is seeing their support through these payments drop over time, that troubles me a lot.
>> SULLIVAN: Hm.
>> So when I look at large safety net hospitals in America, the expense, what it costs just to run that hospital, increases about five to six percent per year.
>> SULLIVAN: I see.
>> So that hospital will fall further and further behind.
>> SULLIVAN: That's what was happening at Erlanger, where its supplemental payments only rose by an estimated 3.6%, despite a 53% jump in the uncompensated costs for Medicaid patients and the uninsured.
Before COVID hit, what kind of financial shape was Erlanger in?
>> Um, it was in tough financial shape.
Erlanger was left in a situation where it was in significant financial distress.
>> SULLIVAN: As the pandemic took hold, the hospital had to furlough nurses and staff.
It closed down more than 80 beds, its future more uncertain than ever.
In August 2020, Senator Corker was called to a meeting.
>> I got a call from the mayor of the county, which is the entity that really has direct control of the hospital.
And he'd received a call from someone that neither one of us had ever heard of, who wanted to come and meet with him about making an offer.
>> SULLIVAN: It was a meeting with a new company out of Pennsylvania that was set up to buy distressed safety net hospitals.
>> Part of my role was to ask probing questions, which I did.
And as soon as they walked out the door, we looked at each other and, you know, the only thing that might come out of this that could be positive would be for there to be some type of community conversation about how Erlanger figures out a way to not be in a constant crisis financially.
>> SULLIVAN: They were offering nearly half a billion dollars, and had the backing of private equity investors.
>> Time now for the good, the bad, and the ugly.
>> SULLIVAN: It was part of a growing trend of investors turning to the healthcare industry for high-margin returns.
>> ...agrees to be bought by private equity firm Blackstone Group.
>> We thought it was coming.
It's now come.
>> That's right.
>> This is a big private equity deal, right?
>> It is a big private equity deal... >> SULLIVAN: Over the past decade, private equity investments in healthcare have doubled.
>> Hospitals and medical staffing controlled by private equity firms.
>> Private equity's business model is perfect for hospitals.
Private equity wants to buy an asset that's undervalued, reduce its operating cost, borrow a lot of money-- which ends up as debt on the balance sheet-- and then sell the hospital to somebody else in five to seven years, having made a 20% compound annual rate of return on their money.
Buy it, lien it, leverage it, sell it.
♪ ♪ >> SULLIVAN: With the Erlanger offer on the table, I headed to Rhode Island, where I'd heard there was an escalating fight over the role of private equity in two safety net hospitals there.
>> The fate of Fatima Hospital and Roger Williams Medical Center rests in the hands of the Health Department and the attorney general.
>> SULLIVAN: The state was deciding whether to allow a private equity firm to sell its controlling stake in the hospitals.
>> Both have conducted hearings regarding who has control of the hospitals.
>> SULLIVAN: But the sale was facing stiff opposition from the hospital unions.
When I first got to Providence, I sat down with the top union leaders from one of the hospitals.
You guys are so far away.
(laughing) Both had been big boosters of the 2014 deal that gave ownership of the hospitals to the private equity firm and its partner, Prospect Medical.
So you're hearing this group, Prospect Medical, is coming in.
What are you guys thinking?
>> This was the white knight coming in to save us.
>> Exactly, we were being saved.
>> SULLIVAN: By this group.
What made you think that?
>> Because they came in with all the promises of what they were going to do to make us succeed.
They were going to provide the financial stability that we needed to continue to move forward.
>> We felt that it could be good.
It could save jobs.
>> SULLIVAN: How long did that sense of happiness last?
>> I would say not even two months for us.
>> SULLIVAN: Wow.
>> SULLIVAN: What did you start seeing?
>> We started seeing layoffs, not only management, but the workers.
They started laying off, cutting hours.
>> SULLIVAN: What else started concerning you?
>> You were always used to being able to just walking into the supply closet, reaching for what you need, and knowing it's there.
And we find now that doesn't happen.
You call down to the supply room and say, "We need more saline."
"Oh, we're out of stock."
"It's on back order."
>> SULLIVAN: You hadn't had that experience before.
>> No, in all, in the worst of times, we always knew we had what we needed for the patients.
>> SULLIVAN: During this time, did you ask somebody, anybody at Prospect, like, "What's the deal here?"
>> We wanted to know what, what the story is.
Why are these things happening?
"Well, this is the system and this is how the system works, and this is how we're going to survive."
And when we couldn't get the answers or we couldn't get the responses that we needed, then we started our own campaign.
(music playing, whistle blows) >> SULLIVAN: Facing repeated staff cuts, the union went to war against Prospect over its contract and working conditions-- even created attack ads.
>> Prospect Medical Holdings is a California-based for-profit that took over Fatima Hospital- Roger Williams Medical Center, healthcare facilities that provide critical care to thousands of Rhode Islanders every day.
What do we know about... >> SULLIVAN: The man behind the campaign was union attorney Chris Callaci.
>> We started to do some research on them, and we were able to start to find out that there was a pattern of conduct with them.
The Department of Public Health in California had gone in and done some inspections in some of their hospitals and found all sorts of problems.
>> In California, Prospect's hospitals were cited by federal regulators for a long list of stunning violations.
>> And we looked at that and we thought, "Okay, that's a problem."
>> It looks like Prospect Medical Holdings may have brought some of their West Coast safety problems with them to Rhode Island.
>> And so more and more of this started turning up.
>> From California to Rhode Island, Prospect can't be trusted.
>> And as they continued to buy hospitals after they bought the Rhode Island hospitals, you then started seeing communities there starting to complain about the same things.
>> SULLIVAN: We presented the union's allegations to Prospect and its private equity owner, Leonard Green & Partners, but neither would agree to an interview.
In a statement, Prospect called the claims untrue, and said they had good relations with the hospitals' unions and staff.
They said they'd invested more than $100 million in the hospitals in Rhode Island, and received awards for the quality of their care.
♪ ♪ But just a couple hours from Providence, in Waterbury, Connecticut, I heard many of the same complaints about Prospect's ownership of a hospital there.
>> We come into the space every night.
We don't come to tear down.
We come to lift up.
>> SULLIVAN: On the north end of town, at the Long Hill Bible Church, Pastor Rodney Wade told me about his concerns.
>> We come to talk about those things that really matter in our world.
I just started to see my members in and out of the hospital.
In and out of the hospital.
And I started to question that.
Like, "Where is so and so at?"
"Oh, they're not here.
They went back to the hospital."
And my position was, "Well, wasn't they just at the hospital?"
>> SULLIVAN: You're wondering if they're not getting the right treatment the first time.
>> SULLIVAN: And the problem isn't getting solved.
Why are they going back, right?
Did they receive quality care the first time?
>> SULLIVAN: I see.
♪ ♪ >> Prospect Medical Holdings bought Waterbury Hospital last October.
One year in, and some local religious leaders are raising concerns.
>> SULLIVAN: Wade and other local clergy arranged a meeting with the hospital C.E.O.
>> And so when he finally came in the room, he kind of asked us, "What is it that you want?"
And we started to kind of articulate it, and out of nowhere, he kind of leans back in his chair and he says, "Why don't y'all worry about what y'all worry about and let us worry about the hospital?"
I would say at that moment, it became crystal-clear to me that this was not going to be a pleasant journey.
But it also started to create this sense of, if we're coming here in good faith, why doesn't he want to talk?
>> And safe.
>> SULLIVAN: I also sat down with two veteran healthcare workers at Waterbury Hospital.
They, too, had problems with the way Prospect was running things.
>> They were looking at giving us paper towels to wash patients.
Not washcloths-- paper.
>> SULLIVAN: Paper.
>> I said, "How do you charge a patient all this type of money, and you give them a paper towel to wash themselves for the day?"
This is unacceptable.
>> Isn't that about the same time they told us to not change the linen?
>> Right, you change the linen what, once a week?
>> Every third day.
>> Every third day.
>> SULLIVAN: In a hospital?
>> In a hospital, yep.
>> SULLIVAN: Do you feel like these changes that have happened since Prospect came have affected the care of the patients?
>> Oh, yes.
This is the worst I've seen it in the 30 years that I've worked for Waterbury Hospital.
>> SULLIVAN: In 30 years.
>> You know, I got an email the other day, they told us to stop talking in the hallways about being short-staffed, because we don't want the patients to think that their care is going to be compromised.
Their care is compromised.
>> Staffing is such a big piece of it.
You're constantly waiting for supplies to come in.
I mean, you're doing a... >> SULLIVAN: Still.
>> SULLIVAN: Almost a year into COVID, you're still fighting over this.
>> Still fighting for supplies.
Just for basic stuff to do your daily... >> SULLIVAN: Just masks and gloves and gowns.
>> Everything, yeah.
>> SULLIVAN: In its statement to us, Prospect said most union members are satisfied with the company's safety practices, including efforts to ensure adequate PPE during the pandemic.
But staffing, supplies, and quality of care were only part of the controversy.
In Rhode Island, what had really gotten the attention of regulators were financial maneuvers by Prospect and its private equity partner.
>> Hello, Senator, welcome.
>> SULLIVAN: Maneuvers that have been under review by the Rhode Island attorney general, the Department of Health and a State Senate committee.
Its chairman is Louis DiPalma.
What do you think so far, now that you've been looking into these hospitals?
>> I'm extremely concerned.
Our Health Services Council, which is an arm established by the General Assembly, hired a consultant.
Their review and analysis raises some caution flags.
>> SULLIVAN: What kind of caution flags?
>> They have a note coming due in 2022.
Not quite certain how they're going to pay for it.
They are heavily leveraged, and they went and paid almost $500 million in dividends to shareholders.
>> SULLIVAN: It's this dividend payment that's at the crux of the fight.
In 2018, Prospect borrowed over a billion dollars and paid out $457 million of it to its investors.
What did you think when you heard that the owners of Prospect had given a 400-and- some-million-dollar dividend payment to themselves and their investors?
>> Well, so what I, what I thought was, this is, this is, this is, um... Boundless greed.
They go to struggling communities that need these safety net hospitals to provide care, and that they're going in there, and they're taking advantage of these communities and these people to buy these assets, borrow against the assets, to then free up capital to make these grotesque dividend payments.
>> SULLIVAN: In a letter to Congress, the private equity firm Leonard Green & Partners rejected any implication it mismanaged Prospect or put its own financial interests ahead of the hospitals'.
In a statement to us, the firm said that Prospect's financials are solid and the debt from the dividends has been repaid.
And Prospect told us it has always acted in good faith, never losing sight of the best interests of its employees, patients, and communities.
Prospect Medical would say, "Look, we kept your hospital open, but we are here to make money and we're not making a secret about it.
What's so wrong with that?"
>> But you're dealing with people's lives, you know.
And when you're dealing with people's lives, if you endeavor to just simply make money at the expense of people, then for me, that's problematic.
>> Battle over hospitals: a showdown between a hospital company and Rhode Island's attorney general.
>> SULLIVAN: Just last month, it was reported that the Rhode Island attorney general will require Prospect to put up at least $120 million in escrow to ensure the hospitals' viability.
>> Well, that is not sitting well today with the owners of Prospect, and they are threatening to shut down Fatima.
>> SULLIVAN: Prospect says if it can't get an acceptable deal, it may close both hospitals.
♪ ♪ In Chattanooga, opposition to selling Erlanger to private equity investors quickly took hold.
>> I can't imagine Erlanger ever taking a private equity deal.
Unless it just got to the most dire of circumstances, which would be irresponsible for our community to let happen.
I can't imagine that selling to a private equity firm would ever be something this community would want to see happen with Erlanger.
(woman speaking over intercom) >> SULLIVAN: But even those opposed to private equity say dramatic change may be needed.
>> We've come to the point where we're failing in terms of being able to run the hospital sufficiently.
If we can't get funding from the public sector, we're going to have to go to the private sector in some form or fashion to get the funding that we need.
>> SULLIVAN: You're talking about investors.
>> Uh, yeah.
We're going to have to go to the private sector.
>> SULLIVAN: For now, like many safety nets, Erlanger's losses have been buffered by COVID relief funding from the federal government.
The hospital got about $75 million in federal grants.
>> Because of the federal government's inputs as a result of what happened with COVID, they actually ended up with about double the amount of cash on hand that they had had in the past.
But that's, you know, that'll be, that'll be good for a while, but then they'll face the same challenges that they face as a safety net hospital in our community.
>> Unless there's a substantive change in the way safety nets are funded, things are simply going to keep going in the direction they are, which is, there will be great disparities in, in how patients are taken care of.
>> SULLIVAN: You're saying it's just going to keep... >> That divide is only going to grow.
>> The problem is that we have 30 million people without health insurance coverage and we need to fix it.
>> SULLIVAN: Hm.
>> That's the problem.
>> SULLIVAN: So, you think if those people had health insurance, we wouldn't have to worry about the safety net hospitals?
And you'd still have issues about whether Medicaid paid a sufficient amount of money to cover the cost of caring for them-- you'd still have that issue.
But you wouldn't have this gaping hole in health coverage that we have today.
>> SULLIVAN: Over the past decade, more and more states have expanded Medicaid to cover the uninsured, though 12, including Tennessee, have yet to do so.
♪ ♪ >> Medicaid expansion is a good thing.
I mean, don't get me wrong, but even if everybody's on Medicaid, it pays less for any kind of service than what private insurance does.
So Medicaid expansion, great thing, but it's only part of the puzzle and part of the solution.
When we see hospitals struggling because they take care of, you know, lots of Medicaid patients, and get paid less because Medicaid pays less for care, that is completely a result of the structural racism baked into the fabric of how we pay for healthcare and how the Medicaid program has been underfunded over time.
>> SULLIVAN: You're saying that because so many Medicaid patients, statistically, could be people of color.
>> Well, they are.
And that is part and parcel of how the healthcare system is structured today.
>> How long are we talking about?
>> He's been here 24 days.
>> SULLIVAN: Here in L.A., and around the country, the pandemic is subsiding.
But the financial problems facing safety nets are only growing.
How urgent a crisis do you think the safety nets are in right now?
>> Well, I think the entire healthcare system is in a huge crisis, and I think safety nets are the canary in the mine of that crisis.
They're going to go down first.
How are you guys handling this?
>> We just get to see the complications of the disease.
It's just almost like a spiraling.
>> One could hope that we've all learned something from the last 12 months.
I know that's asking for a lot, but one could hope.
The question is, at a broader level, will society have learned the value and importance of safety net hospitals, and will society have learned that the system we have in place is not capable of handling stressors like COVID, and in fact, was not very functional even before COVID.
>> SULLIVAN: There is this group of players who's doing quite well.
>> They're doing what they're supposed to do.
In the rules that we have set up, there are winners and there are losers.
And the winners are winning big.
Are we mad at them for doing what the system is saying they should do?
What their board of directors is saying they should do?
If you're mad, change the rules!
>> Go to pbs.org/frontline for more reporting from our partners at NPR.
>> How important to the viability of safety net hospitals are supplemental payments?
>> And a closer look at safety net hospitals.
>> Oh, supplemental payments they can be the difference between keeping your doors open or going under.
>> Connect with "Frontline" on Facebook, Instagram, Twitter and TikTok and stream anytime on the PBS App or pbs.org/frontline.
♪ ♪ >> For more on this and other "Frontline" programs, visit our website at pbs.org/frontline.
♪ ♪ "Frontline's" "The Healthcare Divide" is available on Amazon Prime Video.