Where you stand depends on where you sit

I know from personal interactions that the CEO of Steward Health Care System has an excellent sense of humor.  But he certainly cannot have meant to be funny when he appeared at the state health cost trends hearings hosted last week by the state Health Policy Commission and appealed to the state to enact more health cost containment legislation that would further limit prices for higher-cost doctors and hospitals.  Julie Donnelly at the Boston Business Journal summarized:

The demand for additional regulation is somewhat unusual given that de la Torre is the CEO of one of the few for-profit health systems in the state, a company owned by private equity firm Cerberus Capital Management. De la Torre says that new government intervention is needed to fix a broken market that makes it difficult for Steward to compete.

“We not comparing (the price of) liver transplants, we don’t provide them and we don’t care,” de la Torre said at the hearing. “But CT scans, MRIs, hernias – there’s price disparity that creates unfair competition.”

Wait, I thought that disparity was the basis for the Steward's business model.  Let's look back a few months.  As Bruce Mohl in Commonwealth Magazine reported in July 2012:

At a time when private insurers and state and federal regulators are trying to rein in the cost of health care, Steward thinks its cost advantage over teaching hospitals gives it a significant competitive edge. “Our model is very disruptive to the academic medical centers,” says David Morales, Steward’s vice president of public policy and strategic planning. 

Morales and Murphy, the Steward spokesman, say the only reason the big Boston teaching hospitals are gobbling up community hospitals in the suburbs is so more patients can be referred into Boston “to feed the beast.” By contrast, they say, Steward wants to keep care (and jobs) in local communities where it can be provided more cheaply. Morales estimates community hospitals are 25 percent less expensive than teaching hospitals. “The key for us is the economics,” he says. “Our hospitals, and community care in general, are lower cost.”  

Steward is trying to enhance any cost advantage it has by paring back the cost of services it provides and attempting to reduce how often those services are needed. 

Steward is also positioning itself to take advantage of a shift by insurers toward paying health care providers based on patient outcomes rather than the individual services they provide.

The position taken by Steward this last week might have generated more sympathy if the company had not tried to increase referrals by paying to acquire community-based primary care practices.  Mohl noted:

To steer more patients to its hospitals, Steward is aggressively adding doctors to its physician network, in several instances wooing them away from the networks run by Boston’s big teaching hospitals. 

One way of doing that was by using the padded, front-end loaded global payment contract signed with Blue Cross Blue Shield of MA.  In the early years of that deal:

Steward was left with a contract that brought in revenue that far exceeded its expenses, allowing it to share the wealth with doctors who joined with Steward.

The comments might have also generated more sympathy if Steward had not engaged in an arrangement to send its high-end tertiary care patients to Massachusetts General Hospital and Brigham and Women's Hospital, the highest priced hospitals in Massachusetts, instead of lower-priced but equally capable facilities like Tufts Medical Center, Boston Medical Center, Lahey Clinic, and BIDMC.  Robert Weisman at the Boston Globe reported this in October 2012:

Expanding ties between the state’s two largest medical care providers, fast-growing Steward Health Care System has struck a deal with Partners HealthCare System to send its most severely injured patients from emergency rooms at Steward’s 10 community hospitals to Partners-owned Massachusetts General and Brigham and Women’s hospitals in Boston.

The alliance isn’t the first between Partners hospitals — which have been cited by state Attorney General Martha Coakley as among the most expensive in Massachusetts — and two-year-old Steward, which many in the state health care industry welcomed as a lower-cost alternative.

Last year, Steward teamed with Tufts Health Plan to offer small employers less expensive health insurance that restricted patients to Steward hospitals for routine care. At the same time, it agreed to refer more complicated adult care to MGH and the Brigham and complex children’s procedures to Mass. General’s pediatric branch, MGH for Children.

Finally, the comments might have carried more weight in the absence of high-priced advertising campaigns by this hospital system, including the above-pictured banner attached to one of the passenger bridges at Logan Airport.

The final words in Mohl's article offer a rich irony:

“In a world of Neiman Marcuses, we’re OK being Filene’s,” de la Torre said, according to a report in The Boston Globe. “The key, when you’re a regionally focused, community-based, accountable care organization, is to keep health care local.” 

What was probably lost on the audience in San Francisco was the fact that Filene’s, once an iconic retailing brand of Massachusetts, no longer exists.

But let's turn from humor for a second.  If the business model adopted by Steward turns out to be dependent on state action to help it compete, was this the intent of the private equity firm that bought the Caritas Christi hospital system?  If so, they misrepresented things to state authorities at the time.  If the original business model was not meant to be reliant on that additional state action, but the company turns out to need state help, what does that suggest about the company's valuation to future potential investors when the private equity firm decides to flip the hospitals in an IPO or to another investment group?