Wednesday, November 19, 2014

The die was cast for Quincy Medical Center in 2011

I wish I could say that it was unexpected, but the current story around the closing of Quincy Medical Center in Massachusetts, after its purchase by a private equity company several years ago, was so predictable.  Short version:  The Attorney General is powerless in making the company stand by its original promises.  She can "offer to negotiate" and other elected officials can bluster all they want, but the closure is done.

Here's the original prediction:

So your private equity firm offers to buy the property, making promises to regulators and stakeholders in the community.  Few objections are raised and the deal is approved.  The private equity firm, new to health care, gives an unprecedented level of authority and autonomy to the CEO.  He rewards your confidence by executing the key elements of the business plan.  Assets are sold for short term gain, with little concern for the downstream costs: After all, the hospital properties will be flipped in a few years anyway.  The hospital system's laboratories are sold to a private laboratory service company, in return for a long-term contract to use that company.  Real estate is sold and leased back.  The system agrees to a front-end-loaded risk-based reimbursement contract with the largest private insurer, one that calls for substantial reductions from the trend of medical expenses in future years.  Physician practices in the community are purchased at above-market prices to create an increased flow of referral business to the hospitals. 

But then the money falters.  Revenues take a tumble and days in accounts receivable grow during an extended transition to a new centralized billing system that was designed to take the place of the billing systems run by each hospital.  The risk contract with the insurer starts to limit annual price increases.  Medicare and Medicaid rates are constrained by the federal and state government.  Top line revenues fall, EBIDTA falls, cash flow falls.  Finally, the private equity partners are nervous. 

They turn off the spigot and impose cash constraints on the system.  Normal maintenance of building systems is deferred.  Medical equipment expenses, too, are kept to a minimum.

The only place to save money is on staffing.  He must make dramatic cuts in the upper management levels but will also be forced to make other cuts in the clinical support and lower administrative staff. Band-aid capital spending will be permitted when unsafe conditions exist, but the hospitals will start to fall behind on upgrades of important medical equipment and devices.  He will be in a race against the clock.  Can he hold it together long enough to permit the investors to get a return in the flip?  Finally, he will realize that closing one of the hospitals has to be part of the answer.  Investors will be relieved when he does so, but the community and governmental constituencies that supported the initial acquisition will get worried. 

[It] would be around this time that regulators would begin to understand that the corporate guarantees that might stand behind the private equity firm's acquisition of the hospital system are a nullity.  The owners' resources are legally separated from those of the hospital system.  It would take years of litigation to pierce that corporate veil.  Thus, the commitments that have been made to the governmental and private constituents in the community are supported solely by the financial resources of the hospital system itself.  But that hospital system faces high debt service costs and obligations, other long-term cost commitments, and increasingly difficult revenue restrictions.


nonlocal MD said...

It would seem to be a good thing that your AG lost her bid for governor, as she does not seem able to see beyond the end of her nose. One hopes the Partners agreement, should it be approved, doesn't wind up with similar powerlessness on the part of the government, after having given up so much.

Brad F said...

"It would take years of litigation to pierce that corporate veil."

In this case, whats behind the corporate veil we cant see now? What would an investigation uncover? On record malfeasance, ie, this was the intended outcome?


Paul Levy said...


I mean piercing it to try to use other money from the private equity firm to support the hospitals.

Not an investigation.

Barry Carol said...


While I agree with everything you wrote and the Quincy closure will further enhance the market power of the remaining hospitals, especially the Partners hospitals, I’m interested in your opinion about whether or not the removal of these beds from the regional supply will, at the end of the day, reduce the number of hospital inpatient bed days across the region along with aggregate healthcare costs vs. what they would have otherwise been if Quincy were able to survive. In other words, were there too many hospital beds in the Boston region before this announcement?

Anonymous said...

why did Quincy Med Center shut down now?

Steward has invested substantially in it [press reports state $100 million], and Steward was planning more investment for a birth center

Radius closed because at least partially because South Shore hospital directed its rehab patients elsewhere. [Radius had a satellite in QMC, which paid rent and brought patients] Maybe under prodding from Partners?

Beth Israel Deaconess and Atrius (in the form of Granite Medical) directed more of their in in patient traffic to BID Milton and South Shore Hospital.

QMC was largest low cost alternative to South Shore Hospital on the route 3 belt.

Now South Shore Hospital has an effective monopoly between Carney and Jordan on the route 3 belt and substantial part of the South Shore.

And this will likely be controlled by Partners.

Not sure what is happening. But the trajectory doesn't appear to be good for health care costs and competition in this region.

Anonymous said...

I think the other bargaining chip Steward has in the game is to threaten the state with closing other facilities or walking away from the entire system which would leave it in the state's hands. That would be a nightmare for the state in terms of job losses in the tens of thousands. I'm sure they're telling the AG that Carney could be next if they don't come to some settlement on Quincy. If they can't close Quincy they will have to make cuts elsewhere at hospitals that don't have contractual language to force them to keep a site open. Carney would be first up followed by Holy Family and Morton. They are going to cut costs so if not at Quincy then where? This is the old playbook by Cerberus.... buy something, sell off assets, load it up with debt, cut expenses where possible and then dump it. This will end very badly and as Paul has said in the past people will be asking "where did all the money go?".

Susannah said...

Paul, you do remember that Quincy filed Ch 11 in 2011. I think maybe Prem Reddy's FP chain may have been bidding for it too, but seriously?! And how would it have stayed in operation without either suitor? I do not believe PHS was even interested

retired doc said...

Paul, Good job shining a light on the Steward mess. Time for the AG to shut them down and divide up the hospitals they have disemboweled before they flip the mess, take the last drops of blood and profit out and move on to ruin things somewhere else. Number of beds needed is indeed smaller, but care in the community and ERs remain essential. The Big Bostons could equitably divide the present hospitals in the Steward chain and save everyone more misery. There are enough teaching hospital in Boston----St. E's is no longer good enough.

nonlocal MD said...

Well now, the AG could substantially improve her sellout to Partners if she added a requirement that they take on and run one or more of the failing community hospitals from Steward - now there would be a public service and with their huge $$ stash they could easily afford it.
(Said only partially with tongue in cheek - this just might work.)

retired doc said...

Steward would not give up any turf without a big payout or promise of a payout to the company and their execs who are just waiting for such a big hit. Carney is a mess and should be closed----there are already more than enough beds in hospitals providing better care in Boston. For now, there do remain a few hospitals in the Steward chain which might be salvaged. Steward specializes in broken promises---the AG should hold their feet to the fire until they either man up and behave like reasonable business people and a decent healthcare system, or expire quietly and get out of they way for folks who know how and will do what they promise.

Anonymous said...

Only two small community hospitals lefts in Boston

Faulkner - which is Partners.

All other acute care beds in Boston are at Academic Medical Centers.

Most of which are Partners - and therefore very highly priced.

Partners should be allowed to run Quincy Med instead of South Shore.

South Shore has put Quincy out of business. Partners wants a community hospital south of Boston it should be Quincy Med NOT south shore hospital.

Carney will come back. There is a new Family Medicine Residency that will, over time, bring more doctors into the Dorchester community affiliated with Carney.

If Steward can't make a go of QMC and Partners wants a community hospital south of Boston that should be the option available to Partners. But with the proviso that Quincy Med has to negotiate its own contracts in perpetuity. No bundling with others Partners hospitals.