Thursday, September 16, 2010

Threading the needle

Comments submitted to the Massachusetts Attorney General by several community hospitals give a hint of the difficult task faced by that office as it considers the take-over of the Caritas Christi System by the Cerberus private equity company. Rob Weisman reports this morning in the Boston Globe that:

Lawrence General Hospital, Signature Healthcare Brockton Hospital, and Southcoast Hospitals Group in New Bedford, said . . . restrictions [on
Cerberus] are needed to keep them viable and ensure that low-income patients have access to health care services at reasonable prices.

Recall that Cerberus is promising to invest capital in the undercapitalized Caritas hospitals; make whole an underfunded pension plan; pay property taxes to the communities in which it operates; and pay state taxes. These are powerful inducements to garner Archdiocese, local, legislative, and union support for the proposed acquisition.

Meanwhile, reports Weisman,

Among the conditions being sought by the Healthcare Access Coalition are measures to prohibit . . . Cerberus . . . from using “improper’’ incentives to recruit doctors from rival hospitals, a three-year ban on price increases for hospital services, and restrictions on “limited network’’ insurance contracts that exclude other providers. The community hospitals also want Cerberus to commit to not selling Caritas for seven years instead of three.

As the AG carries out her obligations under state law, the concerns of these hospitals -- which face direct competition from the Cerberus hospitals in their community -- certainly have to be considered. But how?

(By the way, Health Care for All, a public advocacy group, has offered its own set of proposed conditions.)

As I have discussed before, the financial model common for a private equity firm is to flip such acquisitions within a few years to permit the equity investors to recover their investment and make a profit. In preparation for that day, the firm will do what it can to burnish the value of the assets, as perceived by the financial marketplace. If the AG proposes and the state Court puts overly binding restrictions on the transaction and the actions of the private equity firm, they will make the deal financially infeasible. If the conditions of acquisition and operation are insufficiently powerful to protect the legitimate public interests of the rival community hospitals and others in the served communities, the regulators can inadvertently permit an excessive transfer of wealth to private investors from around the world.

This is the needle that the Attorney General must thread.


Webster O'Brien said...

Cerberus is indeed a tough group of investors -- I've worked for them before -- but they have clear incentives to create financial value in the businesses they acquire. They accept a level of risk in those investments (look at Chrysler), so they expect the acquired firms and their stakeholders to accept risk in return for the equity they cannot find elsewhere. The Caritas deal is indeed threading the needle, as there's a significant public good here -- not just Caritas, but Boston's health system -- that must be balanced against the gains of aggressive private investment.

rlbates said...

Love the analogy. :)

Anonymous said...

Caritas ran those facilities into the ground. Have you ever been in the basement of Good Sam. They need operational management accountability. You can't put a cross up and expect things to be OK. They've lacked the proper leadership for decades. They've never had the leverage to negotiate the returns from insurance companies that you big shots have and never translated that lack of ability to site management to be more efficient to compete. If you're in trouble (sick) and you have the financial means you go to Boston. That's the way we do's it! Cerberus has the capital to capitalize on the assets. It's a property grab. You should of passed the idea around to a few friends and done it yourself. They have they're hands on some nice property. You guy's compared to businesses are getting ready for a boom. those baby boomers are going to get a lot of mri's. Try not to be a crook.

Anonymous said...

If the Attorney General's office had any sense at all they would have stopped networks like Partners and Children's from using "improper" incentives (i.e. better contracts without better quality outcomes) to recruit physicians a long time ago. BIDMC engages in many of the same practices in the Brockton and Merrimack Valley area.... paying PCPs to join their networks and send their high cost cases like cardiac surgery to BIDMC. When PCPs and their patients change to a high cost IPA all of the costs associated with these patients rise as a result of higher fee schedules and higher per diems. I would say the biggest reason for increasing premiums locally is the fact that so many PCPs have joined high cost IPAs and care they previously delivered in lower cost community hospital IPAs is now paid for at a much higher rate. When BIDMC signs a PCP group in Merrimack Valley all of that care is now paid out at the higher fee schedules driving up costs for the same care. If the Attorney General had any idea about healthcare they would immediately break up Partners, break up the Children's PPOC and return these PCPs to their community hospital organizations. These providers are only joining these IPA groups to get higher payments from the health inasurance companies which is in my opinion collusion of the worst kind.

Keith said...

Since when is it the job of goverment to protect the interests of the surrounding community hospitals? Since many do not heed their own charters to serve patients who cannot afford treatment and work very hard to keep those indigent patients from their doors, I do not see that they desrve any protection. If the for profit marketplace can offer a better product, we should welcome this. If they can displace inefficient competition, so much the better. At least for profit hospitals pay taxes that can then be used to provide subsidized care. Hospitals like BIDMC do not.

76 Degrees in San Diego said...

I am a primary care physician. If any entity restricted my privilege to be paid at a fair market rate for my work, I would consider it anticompetitive and collusive. I would want legal redress.

Anonymous said...


I don't know where you get the idea that "many" community hospitals don't serve the poor and try to keep them out. I also don't know why you think for-profit hospitals will offer a better product in this regard. Also, the property taxes that for-profit hospitals pay to cities and towns will not go towards indigent care. Finally, although hospitals like BIDMC may not pay taxes, we do contribute to indigent care by not being paid the full amount of such care by Medicaid.

Anonymous said...

Please stop the Medicaid doesn't pay us enough whine, Paul. You likely don't provide anywhere close to the amount of truly free care or any other charitable activity compared to the value of your tax exemption. and i suspect there is significant cost-shifting that occurs in the payment rates you charge to commercial payers to make up as much of the difference as you can. and you probably make money on medicare, as medpac shows most AMCs do, once IME, GME and other add-ins are included.

Keith said...


Maybe I am guilty of too broad a brush stroke, but hospital systems have been attempting to steer the uninsured and underinsured away from their doors for the past decade. That's why you have to have medical institutions like Boston Medical Cnter to absorb these underinsured patients so places like Partners and BIDMC can continue to use their extra cash to fuel the technology race and build more gleaming facilities. All the while claiming they need to charge insured customers more to subsidize your low Medicaid rates! Looking a BIDMC's last tax returns, it looks like you spent alot more on buiding contractors and architects for undoubtedly another new medical palace, than on subsidized care and still made a profit.

It has been demonstrated time and time again that for profit hospitals spend as much on subsidized care as non profit hospitals and pay taxes to boot, so why give non profits tax benefits if for profits do just as much for the community if not more?

You have largely (I am referring to the hospital industry)neglected your non profit mission of caring for the poor in favor of building medical meccas that will attract the well insured.

Community hospitals in nice neighborhoods are being merged into larger health care systems while those in poor neighborhoods are left to flounder. These merger decisions are not based on community benefit, but on creating larger systems that can leverage higher payments from insurers and the desire of health care executive to create larger instituions that justify their large paychecks and bonuses. Please acknowledge that the whole system is flawed, and that hospitals are the main instigators of spiraling health care costs that are resulting in more and more people who go medically bankrupt and/or cannot afford health insurance.

Barry Carol said...

I fail to understand how any hospital can legitimately advocate for restrictions on limited network insurance products that exclude other providers or, for that matter, tiered in network insurance products. The reason insurers would choose to exclude a given hospital from its network or require patients to pay a higher co-payment to use it is because their reimbursement rates are higher than their competitors’ because of their market power and not the quality of their care or their quality is inferior. If we are ever to have any hope of bending the cost curve, we need to find ways to steer patients toward the most cost-effective providers. Limited network and tiered in network insurance products are two approaches that could move us in that direction. Public disclosure of actual contract reimbursement rates per CPT-4 or ICD-9 code or per episode of care in the case of bundled payments would also be helpful, in my opinion. That would, however, require the elimination of confidentiality agreements that currently preclude disclosure of contract rates.

Medical claims paid by commercial insurers consist primarily of hospital charges, physician fees, imaging, lab tests, and prescription drugs. Well over half of that expense is probably attributable to care that takes place in connection with a hospital inpatient stay or outpatient visit. Even routine procedures can cost thousands of dollars. It’s the hospitals that are killing us financially, and it’s hospital reimbursement rates where price transparency is needed most. Let them compete on the basis of price and quality like every other business. Why should hospital and physician reimbursement rates remain such a secret? It doesn’t make any sense.

Anonymous said...

Well, Keith, it appears you have an ally in Anon 5:37 for your point of view. Too bad it really does not reflect reality. Ah, but your argument really appears to be about whether nonprofit hospitals deserve their tax exemptions. While indigent care can certainly be viewed as part of the justification for tax exemption, the other public purposes of academic medical centers are also valid reasons for that exemption as well.

And Anon, it is not whining if a statement reflects reality. It is simply reality.

Keith, of course we use architects and contractors to renovate space in the hospital, but you would be hard-pressed to find a "medical palace" on our premises or in our outlying facilities. I don't recall "spare cash" during the 8+ years I have been here or during the previous decade either.

I certainly will not agree to your request -- "Please acknowledge that the whole system is flawed, and that hospitals are the main instigators of spiraling health care costs that are resulting in more and more people who go medically bankrupt and/or cannot afford health insurance."

Yes, you are using a broad brush, and you are attempting to dramatically simplify the situation and apply blame in an arbitrary and incorrect fashion.

Anonymous said...

Well, I never thought I'd find myself defending a hospital administrator, but I have to agree with Paul that there is significant oversimplification going on here. While it is true that hospital costs are the highest proportion of medical costs (31% in 2008 according to the Kaiser Foundation, 21% for "physician/clinical costs"), that is really only logical since hospitalization is the most intense form of medical care per unit time. Those costs simply reflect the underlying rising costs of advancing medical technology, drugs and supplies, patients with chronic disease, etc. (I am boring even myself with these well-known arguments).
Let us look to the multifactorial root causes rather than dump blame in the superficially obvious place by saying "it is the hospitals that are killing us".

And Keith, as to your statement:
*If the for profit marketplace can offer a better product, we should welcome this*, I am utterly amazed you should say that given your known skepticism about profit-taking by hospitals and administrators. Remember the issues with Tenet, and the repeated flipping of HCA from public to private and back again, taking out big $$ every time? Where's that $$ coming from? And do you think they welcome indigent patients any more than nonprofits? I would hardly hold out for-profits as a model, taxes or no taxes.

Add to that the skewed situation in Boston where "he who has the gold makes the rules", and everyone is forced to play the game by Partners' rules, and you have arrived at the eye of the needle with thread in hand. There is no simple solution here, and killing the messenger doesn't solve the problem.

nonlocal MD

Barry Carol said...


You and I are talking about two different sets of numbers. While hospital charges account for 31% of total healthcare costs as you cite, physician / clinical is another 22% and prescription drugs are 10% or so, these three categories account for essentially 100% of medical claims costs paid by commercial insurers. Private and public insurer administrative costs are another 7% of the healthcare bill (4.5% private and 2.5% public). The rest consists of long term care and home healthcare, dental and vision, public health initiatives, R&D and hospital construction. These latter categories, with the exception of hospital construction (indirectly) do not impact commercial health insurance premiums because they are generally not covered services under most standard health insurance plans.

The three categories that comprise the bulk of private insurers’ medical claims are what drive the growth of health insurance premiums, along with changes in benefits, adverse selection and the relative health of the insurance pool that each insurer has in a given year. Since a significant portion of the physician and clinical category relates to care delivered in a hospital setting, either inpatient or outpatient or in a stand alone hospital owned facility, and many expensive cancer and other specialty drugs are administered in a hospital setting as well, the rapidly rising cost of hospital based care is indeed killing us.

Consolidation within the hospital sector in recent years gave more and more hospitals outsized bargaining power with insurers and they have taken full advantage of it. To create some countervailing power to combat this trend, we need price and quality transparency tools, along with limited network and tiered in network insurance products.

Anonymous said...

Hi Barry;

I do not quibble with the substance of your analysis, and I entirely agree with your proposals regarding transparency. What I was objecting to, combined with Keith's comment, was the implication that the "big bad hospitals" were solely to blame for the mess in which we find ourselves. They, even Partners as I hate to concede, are simply playing the game by the rules they were given, whether or not one morally agrees with that.

I am even more radical than you in that I believe that the entire concept and mindset of insurance is antithetical to health care (not that I am for single payer), but that's a topic for another day.

Nice to hear you commenting again after a seemingly long layoff!


Keith said...

Hospitals have been the ones that have engaged in the technical arms race, which has added most substantially to medical costs. Hospitals have been the ones that have increasingly built extravagant meidcal faciilities as part of this competitive warfare. Hospitals are the ones that are rapidly consolidating in an attempt not to offer more cost effective health care (costs never drop but continue to rise despite this consolidation), but to enhance their marketing leverage (witness who gets the biggest slice in the Boston market; the biggest system of course).

If hospitals were interested in community benefit, would we not see hospitals merged in impoverished and underserved areas rather than those where the well insured live? And then advertising dollars are tossed into the mix to do battle with the compeitng hospital system. What part of this sounds like community benefit or a philanthropic institution committed to its mission?

I sat in amazement years ago while all the CEOs of the major health care systems sung the praises and necesity of building a new county hospital in Chicago. To me, the reasons were obvious. To witness the collapse of Cook County Hospital meant those patients would all be in their gleaming new marble lobbies trying to get treated!

While pharmaceutical cost have gone up significantly, it is hospitals plying ever more expensive and often unproven technology in order to present themselves as cutting edge that has been the major component of health care costs. They are the ones that buy the new super duper robotic machine despite no proven additional benefit proven to its use, and buy ever fancier ICDs that have not shown superiority over the old ones. They ply physicians who perform these procedures to come work at "their hospital" with enticements and incentives that create a very expensive collusion, further fueled by medical device and technology companies that take their slice. But it is ultimately the hospital that decides to purchase and employ these technologies, although some of the cost is attributed to these other categories.

Finally, all this expensive spending allows hospitals to make their costs so exorbitant, they can then claim Medicaid only pays them 30 cents on the dollar. If you choose to deploy your resources on expensive treatment with minimal benefits observed over older treaments, then you can develop a cost structure that only the wealthy can afford (which is what hospitals have done). I could build a very expensive hot dog stand with gleaming marble walls and a fountain in the middle, and a state of the art hot dog cooker that makes my hot dogs the tastiest, but I doubt anyone would buy my $50 dollar hot dogs because I built such a lovely hot dog stand with a big fat mortgage to boot, even if they are the best.

Hospitals have choosen to sell the dream that they will cure your illness through technology, even as they leave increasingly more patients without access to their lovely institution. Not suprisingly, we have seen another big leap in the numbers of uninsured recently. But as long as they aren't in your healthcare catchment area, it is not your problem. While your little universe may be doing OK, more and more people cannot get adequate health care. Lets hope your little lifeboat at BIDMC doesn't spring a leak.

Anonymous said...


I submit it's a case of be careful what you wish for. "We the people" encouraged a business attitude toward health care and endorsed "competition", and thought of ourselves as "consumers", and this is what we got. As I said, they are playing by the rules they've been given.
The days of the independent community hospital serving and supported by its own community - which is what you seem to desire - are long gone, never to be seen again. The community hospital which my parents went door to door collecting money to build in the '50's, is now a behemoth, owning 7 hospitals and completely dominating the market in Northern Virginia.

The question is not to rant and lay blame and look backward, but is, what do we do now????


Anonymous said...

Partners Healthcare is not playing by the rules. They joined together for one reason and one reason only which was to put a gun to the insurers heads to get more money from them. Brigham & Women's and Mass General are not clinically integrated in any sense of the word and since their only reason for being together is to extort money from the insurance companies then that is illegal and not playing by the rules. In fact, they have become so big that they now dictate the cost of healthcare and set prices here in eastern Massachusetts which makes them a monopoly which should be disbanded by the Attorney General. They have single handedly driven up healthcare costs by threatening insurance companies that they will not participate in their networks if they don't pay them what they demand and then Partners uses their enhanced payments to buy even more physicians into their high cost network. Bottom line, they have no real legal justification to negotiate together and they are a monopoly which are both againt the rules.

Anonymous said...

The only way the Cerberus/ Caritas model will work is if it succeeds in channeling more patients who wanted to go to Boston for high-tech and cutting edge interventions to St Elizabeth's instead of the more prestigious Boston tertiary care centers (like BIDMC), and more patients who need routine services to the Caritas community hospitals who wanted to go to their local hospital or free-standing facility.

How will they do this?

Will they make their facilities more attractive, accessible, competent? Maybe, but that would take a lot of money and time.

Do they have some way to channel the patients to go where they normally would want to go?

These are the questions that need to be answered.