Friday, March 26, 2010

What standards would you apply?

There were several comments on my blog post and also on the story about the sale of Caritas Christi to Cerberus Capital Management that expressed skepticism about the wisdom of the sale and the transformation of this non-profit hospital system to a for-profit one.

Some legal background. The transaction is governed by Mass. General Laws Chapter 180, Section 8A. That section provides, in relevant part:

Prior to a sale, notice is required to be given to the Attorney General, not less than 90 days prior to a sale or other disposition of the assets or operations to a for-profit entity;

The AG is required to investigate the transaction, and consider any relevant factors, including whether:

-- Due care was followed in the process;

-- Conflict of interest was avoided;

-- Fair value is being received; and

-- The proposed transaction is in the public interest;

There will be at least one public hearing, preceded by public notice. Prior to the hearing, copies of all the transaction documents will be made available upon request;

Any charitable fund resulting from the transaction shall be subject to AG and Court approval. A public hearing in connection with the AG review of the governance of the charitable fund is also required; and

Following the transaction, a monitor will be in place to monitor community health access and the levels of free care provided by the entity for three years.

Pretend you are testifying as a citizen in the public hearings. What standard would you want to be applied to these issues? Assume for the moment that the first three tests have been met (due care, conflict of interest, and fair value), what theory or facts do you want to be used to determine if the transaction is in the public interest? And, if a charitable fund results from the transaction, how large should it be; for what purposes would you want it to be used; and how would you want it to be governed?

And before you answer, read Steve Syre's column in today's Boston Globe.


Anonymous said...

I have no recommendations, but a question that didn't occur to me before - are for-profit hospitals, since they pay taxes, required by "someone" to provide charity care, other than EMTALA? If so, why?


Anonymous said...

Well, I should look before I leap; the Globe has apparently answered my question:

“Of course, that’s the big fear: that a nonprofit hospital, because of its nonprofit status, is legally required to offer a level of care . . . they can’t turn people away,’’ said Foley Hoag partner Richard Schaul-Yoder, a longtime adviser to tax-exempt organizations. “And as a for-profit business, they can do whatever they want, subject to making agreements with the attorney general’s office.’’

I am still scratching my head.


Anonymous said...

Do the three elements of high quality, for-profit, and service primarily to underserved coincide elsewhere? What are the chances that investors will be interested in quality and safety when hospital boards and physicians without the additional financial conflict seem so detached from measurable quality on the ground?

Anonymous said...

The Attorney General is accountable here. If these hospitals turn into for-profit surgi-centers, lots of inner-city residents are going to lose access to basic healthcare services. I am worried.

Lachlan Forrow, MD, FACP said...

As Director of BIDMC Ethics Programs I actually enjoy challenging ethical dilemmas, because I have found that with enough effort, creativity, and especially teamwork (among patient, family, and BIDMC staff) there is almost always a win-win path that can be forged even when major differences may initially seem irreconcilable. (That’s usually when I or others in our Ethics Support Service get called.)

But I would not want to be a Board member or senior executive of a for-profit Caritas. If I were CEO (as Paul knows I think that that either stands for “Chief Ethics Officer” or there’s a major problem), or any other Board member or senior executive, then on a daily basis I would face the following trilemma:

1. My fiduciary responsibility to stockholders (or other private investors) to maximize their financial returns on their financial investment;

2. My responsibility as a hospital dedicated to caring for the poor to making sure that every patient gets what s/he needs even if that loses the hospital money; and

3. My responsibility as a leader of a Catholic institution (I am not Catholic, but deeply admire Catholic social justice traditions) to heed Jesus’s warning in Luke 16:13: “No servant can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and mammon.”

Some of the people I admire most in the world, for their values as much as anything, are involved in Caritas leadership, within the health system and/or Archdiocese. If any people in the world can reconcile 1., 2., and 3. then they will be able to. But frankly I would be stumped.

Barry Carol said...

I think there are several issues that need to be clarified. First, if the Massachusetts reform effort drove the uninsured population down to about 3% of the total, it seems that charity care is not the issue that it once was in MA and still is in states with a much higher percentage of uninsured. What is charity care anyway? Is it free care or just waiving deductibles and co-pays that would otherwise be due from insured patients? Presumably, all hospitals already work with patients on financial matters. Who owns Caritas Christi now? If it’s the Catholic Church or the Boston Archdiocese, shouldn’t they be trusted to redirect some appropriate portion of the proceeds into other charitable endeavors that relieve suffering or advance social justice? If there is too much hospital capacity in the Boston market, perhaps the overall system would be best served if at lease some of these facilities close.

Regarding a for profit entity taking over and running Caritas Christi, my main concern as a potential patient would be the impact, if any, on patient care. Hopefully, the new management would not try to cut costs by increasing the number of patients each nurse is responsible for overseeing. Are nurse staffing ratios regulated to preclude this possibility? At the same time, injecting capital would be a good thing if it’s used to reduce debt, replace obsolete facilities and equipment or invest in technology that can improve information systems including provider access to patients’ medical records. As for the potential profitability of the investment, I wonder if Cerebus is betting that the market will move toward either all payer hospital rate setting or utility like regulation that would allow for recovery of prudently incurred costs including a fair return on capital. Under either approach, Caritas Christi would probably be a net beneficiary vs. the likes of, say, Partners. If its costs are lower than the competition and its quality is competitive, it should be able to increase market share as employers pay more attention to costs.

Engineer on Medicare said...

Cerberus' obligation is solely to its investors.

1. Cerberus will buy Caritas for little money because, as a non-profit, it is of little value to the current owner who needs money.

2. Cerberus will take it public, pile on a lot of debt, and extract enough cash to make a profit on its investment.

3. Having fulfilled their obligation to their investors, Cerberus will declare that it is impossible to sustain the debt payments with the rates they are being paid and will threaten to close the hospitals.

4. The resulting uproar from the communities being "served" will result in either large subsidies or direct takeover of the system by the state, which will then be responsible for the debt, the retirement obligations, and the collective bargaining contracts.

Does anyone else have an alternative plan?

Anonymous said...

Wow, I thought I was cynical!! (:
Not that such companies haven't made us so.


Anonymous said...

I have been waiting for someone in the press to comment on Caritas doing a deal with a firm named "Cerberus," the three-headed guard dog of Hades in Greek mythology. Might be appropriate to have a three-headed being trying to reconcile the trilemma that Lachlan lays out.

Just a point of clarification about the obligation of hospitals in Massachusetts to provide free and reduced cost care. We still have the "Health Safety Net" (the new name given under health reform to the decades old Uncompensated Care Pool). The HSN is run by the state's Division of Health Care Finance and Policy (you can get more info on the HSN at and click on the HSN on the left-side of the homepage). All Massachusetts hospitals, regardless of profit status, and community health centers, participate in the HSN, which sets uniform rules across the state for who is eligible for free and reduced cost care, and finances that care through an assessment on hospitals, a surcharge on payors, and an annual state appropriation. (The state gets federal matching funds for some of this spending as well.) Eligibility is based on income (free care under 200% of the federal povery level and partial care between 200-400%, with a sliding scale deductible based on income).

As Barry notes, the percent of people without insurance has declined dramatically as a result of health reform, and part of that coverage expansion has been financed by reallocating funds from the HSN to new coverage. But there is still a lot of care being provided by hospitals and community health centers to uninsured and underinsured people in the state, and the HSN helps to finance many of those services for eligible people--total amount was more than $400 million in the HSN's last fiscal year. (From the latest DHCFP report, it looks like all the hospitals in the Caritas system received net payments from the HSN, which means that they provided more eligible care than their assessment from the HSN.)

The HSN has been an important part of the Massachusetts health care financing system for many years, and it creates a structured and uniform way across the system for deciding who is eligible for fee and reduced cost care and distributing the financial responsibility. While the HSN isn't perfect, it's a wonder compared to what happens in virtually every other state--which is a free-for-all and race to the bottom because no hospital wants to be the one with the most generous free care policies in its community.

Nancy T.

Anonymous said...

Now the Globe adds that de la Torres approached Nardelli for $$, that he is a physician entrepreneur, and that he stands to gain in “incentive compensation” if he succeeds with the cash infusion. Also that he will be in charge of acquiring other hospitals for Cerberus. This is both good and bad news – if Cerberus truly plans to enter the health care market long term and function as a HCA or Tenet, then they will learn how to run hospitals – although both of those companies had their scandals. However, clearly Dr. de la Torres is also pursuing considerable personal ambition, which can cloud good judgment. Physician entrepreneurs are often dangerous. Also, Partners’ Board chair is mentioned in the article – how do they fit in here?

My conclusion: Caritas needs the money and serves a needy population. But there are considerable questions as to both buyer’s and seller’s motivation for this move, and Engineer’s endgame prediction is not unrealistic. Therefore, patient interests and the state’s own interests must be carefully protected; proceed with caution.


Larry, MD said...

I would support the selling of a non-profit to a for-profit corporation. Most non-profits provide very little charitable care and with the passing of universal coverage this amount will only diminish. States need more tax revenue and the tax exempt status of every hospital should be considered, unless the hospital serves a large indigent population or is an academic institution.

The proceeds from the sale could be placed in a trust fund to provide for teaching at nursing, dental and medical schools. States that have a large number of undocumented workers might consider using some proceeds to help pay for nonemergent care that SOBRA may not cover (ie prenatal care)

Finally, every community could look at the distribution of their healthcare providers. Parts of the community that lack access could use some of the proceeds to recruit providers to serve these areas.

Anonymous said...

In response to Anon 8:23, the short answer is no. Taxable hospitals (I prefer the terms taxable and tax exempt vs. profit and for-profit because it is more accurate) are not obligated to provide a certain level of charity outside of EMTALA. I am not from Mass so there may be a state rule I am unaware of. I think the better question is if charity care should be the defining factor in determining tax exempt status. Here in Illinois a recent Supreme Court ruling made that case. I do not agree but it can be very hard to differentiate taxable from tax exempt hospitals in terms of their business practices. By the way, Engineer on Medicare you got it right. That is what will happen at least until the point where Cerberus will have leveraged the assets for as much as they can and then try to unoload it on the State. Whether the State will take the bait is open to question.

Anonymous said...

“A vast majority of our hospitals are on the low end of pay, and we made a profit last year.” - Ralph de la Torre

How did the Globe accept this statement as fact? When everyone in the industry knows that in 2009 they received massive rate increases that makes them the MOST expensive hospitals in all of their market geographies. Dr. De la Torre states that this will reduce healthcare costs in MA. And Blue Cross, inexplicably does not challenge this assertion though they know better.

An important part of the public interest is ensuring that Cerberus money does not create another high cost juggernaut like Partners. The Globe needs to take a closer look rather than accepting convenient statements as fact.