Three years makes a trend

Priyanka Dayal McCluskey reports that Steward Health Care System, owned by the private equity firm Cerberus Capital Management, has finally given the state a portion of the accounting data concerning its 2013 operations.  The system, which operates 10 hospitals in Eastern Massachusetts, showed a loss of $55 million on revenues of $2.1 billion.

Last year, Commonwealth Magazine reported that the system had lost $22 million on operations in 2012, down from a larger operating loss in 2011.  At the time, the company said:

[T]he numbers are in line with the company’s business plan, which calls for turning around each of its individual hospitals within three years. “We are exactly where we expected to be in terms of quality, sustainability, and financial performance,” he said.

These numbers should not be taken to mean that Cerberus has not done well on the deal.  Private equity firms, as noted by Warren Buffett, are marvelous at extracting cash from their operating units.

Later, the business will be resold, often to another leveraged buyer. In effect, the business becomes a piece of merchandise.

But that is more difficult here. When it comes time to flip this investment, the likely buyers would be large for-profit hospital systems. As those companies tend to hold on to their assets and run the hospitals with a long-term view in mind, they will look at the actual bottom line performance of the system. A persistent negative operating margin is not good news for the company's exit strategy, especially when revenue-producing assets have been sold off for short-term cash gains.

As I have noted, this transaction will have a tail that will leave Massachusetts policy-makers with difficult choices.

But it sure is nice to see the company's ads at Logan Airport.