Jim Shannon On Hospitals Going “For-Profit”

Posting that photo this morning reminded me that former Congressman/former Massachusetts Attorney General Jim Shannon wrote a thoughtful op-ed piece in the Globe back in September 2010 about the Cerberus/Steward take-over of the six-hospital Caritas Health Care System. The situation with Saints Medical Center and a quite likely buy-out by Steward makes this an appropiate view to consider. With a nod to the Globe here is an exerpt from that piece:

…Cerberus uses investors’ money to acquire undervalued businesses and then takes drastic action to improve their performance quickly. Usually it starts by dumping the weakest parts of the business. The key moment in a private equity investment is the exit. Private equity investors do not want to hold and run businesses for a long time. They want to flip them as soon as they can, usually within a few years, with a healthy return…

In a free market system those kinds of failures happen and the investment firms behind them just move on to other things. But we should ask whether the future of an important piece of our state’s health care system should be put in the hands of a private equity firm — particularly one like Cerberus that has never owned a hospital.

It is not just the Caritas Christi hospitals that are at risk in this deal. In Greater Lawrence, Brockton, and Fall River, the community is served by two hospitals, one run by Caritas Christi and the other a private not-for-profit institution.

I serve as a trustee of Lawrence General Hospital, which together with Caritas Christi’s Holy Family Hospital serves the Greater Lawrence community. There has always been an element of competition in these communities served by two hospitals, and that has benefited the public because both hospitals have a real stake in the long-term well being of their communities.

That will change with Cerberus. It will operate with a different set of incentives and it can use its access to capital to undercut its competition. For example, it can lure doctors with the most patients who have private insurance away from the competing hospitals to pump up revenues. It can engage in predatory pricing where it subsidizes prices, for a period of time, to gain a greater market share from the other hospitals. It can enter into exclusive agreements with health plans to squeeze out the competition. And since it has only made a commitment to hold the hospitals for three years these kinds of practices might pay off very quickly.

In this process the competing hospitals could be seriously harmed and forced to cut back drastically on the services they provide to their communities. If, after all of that, Cerberus’s investment in Caritas Christi were to end up like Chrysler, the effect on the health care available to people in the Lawrence, Brockton, and Fall River areas would be catastrophic.

It may be too late to find a more appropriate buyer for the hospitals. Regardless, the deal should be approved only with conditions limiting Cerberus’s ability to engage in anticompetitive practices and with a provision requiring that it holds on to this investment for at least seven years.

It is understandable, given its financial problems, that the Archdiocese would be pushing this acquisition hard. It has turned up the pressure by threatening the Massachusetts Nurses Association with the closure of St. Elizabeth’s and Carney Hospitals if the deal doesn’t go through soon. That threat was not aimed at the nurses as much as it was at the attorney general.

For the past several months, Coakley has been gathering information and seeking public comment. Some of this information has been hard to get because private equity firms tend to be secretive about their business. The attorney general should not act until she has all of the information she needs. With appropriate conditions this deal could still give Cerberus a good return on its investment, and at the same time protect the public interest.

 Since the Merrimack Valley Hospital in Haverhill had already become a for-profit institution there was probably little if any concern by the current AG. The question is… will any sale of Saints Medical Center undergo the scrutiny required by the Caritas sale last year. If so, then the issues of continued service to the community, competitive practices and other issues of concern for stakeholders may be addressed. Stay tuned.

Read the full op-ed piece from the Globe on September 28, 2010 here.