Tuesday, June 25, 2013

Minting money on the Tenet-Vanguard deal

Golly, I got things wrong when I suggested recently that the private equity firm that had been involved in Vanguard Health System didn't do as well as it might have.  My problem is that I just focused on the price received in the initial Vanguard IPO.

I should have been more alert to the comment I received: "Morgan Stanley and Blackstone (the private equity investors in Vanguard) made out much better than the public shareholders who bought in at the IPO (there's a shocker!), since they had a much lower basis and I think may have taken some of their money off the table pre-IPO through a dividend recap."

It turns out that my anonymous source was correct. Check out this report from Dealb%k. Excerpts:

The Blackstone Group’s sale of Vanguard Health Systems to a rival hospital chain, Tenet Healthcare, for more than $1.7 billion is the latest example of a successful cash-out. The leveraged buyout firm, led by Stephen A. Schwarzman, more than doubled its money on the deal.

Private equity firms have long contended that successful sales are what counts. On that measure, things are going well. Leon Black, the chief executive of Apollo Global Management, said this year that valuations were so favorable that Apollo was selling everything “not nailed down.” Big deals done at the height of the leveraged buyout boom are finding buyers.  

Vanguard’s sale is typical. In 2004, Blackstone injected just under $500 million of equity to acquire a majority stake in the hospital chain. The sponsor recouped essentially its entire investment via dividends. The sale announced on Monday mints another $650 million for Blackstone.

Well, what about the "normal" investors who might have purchased Vanguard stock during that IPO? As I noted, they have not done so well in the buyout compared to their alternative uses of money.  Well, as someone else commented: "Generally speaking, beware when buying shares in an IPO where the company has had private equity ownership."


Just one question.  How does any of this bring value to the patients served by the hospitals that are being passed around like chips during a Saturday night poker game?


Anonymous said...

I have never been a single payer fan, but after watching the rank monetization of our health care 'system' and the effect it has had on care and caring during my career and beyond, I am starting to wonder. "Let the buyer beware' in an industry which is responsible for keeping you alive is a scary idea.

nonlocal MD

Anonymous said...

Paul...your question:

How does any of this bring value to the patients served by the hospitals that are being passed around like chips during a Saturday night poker game?

My thoughts:

I think your question really is..

How does capitalism and competition bring value in health care?

Essentially capitalism is an asset allocation mechanism designed to provide the best product at least cost through competition. It has worked better than non-capitalistic economic models, at least for the last few hundred years. The Soviet Union, china and even scandinavian countries have all moved toward forms of capitalism because centralized control just work as well at creating wealth for their people.

There are specific challenge to creating competition in health care. For competition to work, there must be a somewhat adversarial relationship between buyers and sellers of products. Buyers must have "skin in the game", meaning they look for lowest cost provider who can provide the product and level of service they are seeking. In health care this has mostly not been the case. Buyers of health services can mostly go to any hospital even if it charges two or three times as much for the same quality of hospital care.

This is what is changing in Obama/Romney care. By caring for populations on a holistic basis it will be clear what value is being provided in care.

How do patients benefit from Tenet buying vanguard?

Tenet will help lower the cost of care for Vanguard patients. Tenet and Vanguard have said they expect to lower their cost by $100 million to $200 million by combining.

Tenet also has other advantages including more developed infrastructure including technology infrastructure, lower cost of capital (borrowing costs) etc.

Bigger firms often have advantages of scale.

If Vanguard wanted to make any big acquisitions for instance just as a hypothetical, if Vanguard wanted to buy a large system like Steward and pay cash, it would be difficult for Vanguard to add significantly more debt but Tenet where ability to do this.

Currently, Vanguard has letters of intent to purchase with two hospitals in Connecticut and according to the press is negotiating with several more in that state.

Tenet has been leader in low cost high quality on the operating side.

Vanguard has also been a leader in low cost high quality, and generating growth by acquisition and strategic partnerships. They also have expertise in population management, managing health plans, innovative payment models, turn-around situations for hospitals, working with non-for profits in partnerships like its relationship with Tufts Medical Center etc.

Patients have not been hurt by Vanguards acquisition by Tenet and could benefit from a more efficient health care system in the next few years.

What is your concern?

Metrowest and St Vincents, owned by Vanguard, are two of the lowest cost and highest quality hospitals in the boston area.

The hospitals that cost by far the most for no discernable quality benefit in Massachusetts are the so-called non-profits -- MGH, B&W and Childrens, not the for profits hospitals.

Paul Levy said...

Thank you, but I think you have taken general principles of capitalism and applied them in ways that are doubtful. Perhaps I'll devote a blog post to rebuttal someday.

As to your final assertion about the relative quality of the two MA hospitals, it is just that, an assertion. The rates they collect, yes, are lower than MGH and others because of less market power vis-a-vis the insurers.

Anonymous said...

Hi Paul,

I think you have stated before that per the Attorney General's report, there is little difference in quality between the most expensive hospitals in Mass like MGH and Brigham and Womens and many other academic and even the best community hospitals.

That is what the attorney generals report stated.

So if quality of care is broadly similar, then if you are much lower cost as is the case with Metrowest and St Vincents, that should be the better value.

It is the Partners hospitals that most gouge consumers not the Vanguard or Steward hospitals which on the whole are both low cost and high quality.

(I did not mean to state that the Vanguard hospitals were higher quality than the Partners hospitals, just similar quality at much lower cost.)

p.s. I can post the link to the attorney generals report, if you'd like, but I hope my clarification above remedies your concern about my assertion

Paul Levy said...

Thanks. The AG's report could not reach a conclusion about relative quality because the metrics are not available to do so. She stated that, in the absence of such information, there was no way to justify higher rates for Partners based on presumed quality. That's not the same as saying that all hospitals have the same quality.

Steward hospitals are not low-cost. The AG's report shows Steward hospitals as having higher rates than the other community hospitals in the areas they serve. While Steward's rates might be below Partners' hospitals, for the most part, they do not compete against those hospitals.

Anonymous said...

You are correct that not "ALL" desirable quality measures are currently collected by our health system. But there are many quality measures that are available and based on "all" those the most expensive hospitals -- all nonprofits -- are not measurably better as per the attorney generals report.

The following "quote" is from the attorney generals report, pg 18 the link to the full report is below.

"Variations in price are not explained by differences in quality. Wide variations in price are not adequately explained by differences in quality of care.16
Major health insurers in Massachusetts confirmed that provider quality performance is not a primary factor in the negotiation of reimbursement rates with providers.17 We compared price
and quality to determine whether there is a correlation between the price paid by health insurers
to providers and the quality of those providers. Our review included comparisons of physician
and hospital prices to process, mortality and patient experience scores publicly available through
CMS, HEDIS, and Mass-DAC. Our results indicate that there is no correlation between hospital
price and quality. Our review of physician quality was hampered because no information is
available to associate all MHQP designated provider groups with health insurer provider groups,
and by the lack of publicly available physician outcomes measures. With the limitations noted here and in Section I(F), above, we found a moderate positive correlation between physician
process measures and prices: the R2
for each correlation was 0.44 for BCBS, 0.30 for THP, and
0.29 for HPHC. For each plan, the variation in payments made to physicians is larger than the
variation in physician performance on HEDIS measures.
We also reviewed CMS, HEDIS, Mass-DAC, and ACES measures to understand how well providers in Massachusetts deliver care as compared to each other and, where national data is available, how they perform as compared to health care providers nationally. Our review shows that providers in Massachusetts deliver excellent care with little material variation in the
quality of care delivered.18 For example, substantially all Massachusetts physician groups
performed above the national average on HEDIS process measures. Other measures that we
examined, such as CMS hospital process measures, show the same trend: little variation in the
measured quality performance of providers, and high quality care from all providers. Based on
our review of these measures, there are some differences in provider quality performance and
room for improvement in certain areas of performance, but our review does not suggest that any
provider performs consistently better or worse than any other."


the full report is here:


Anonymous said...

to respond to your comment about the higher cost of Steward hospitals

the following is from this years (2013 report showing 2011 data) CHIA publication on page 10:


approx price percentile ranks of Steward Hospitals (aproximating from the chart)

Community Teaching:

Carney - 37% (community teaching)
the only community teaching hospital that was paid less was Cambridge Health alliance out of 8 hospitals in that category.

St Elizabeth 66%

But st elizabeths while not an academic medical center, has a case mix index - 1.11 in 2010 - for all patients which is higher than most others in the teaching hospital category and medical complexity should drive cost comparisons. For instance BMC, an academic medical center had a case mix index of 1.03 in 2010 for all patients yet was at the 62nd percentile for price

DSH Hospitals:

Good Samaritan - 44%
Holy Family - 36%
Morton 30%
quincy 10%
St Ann's 50%
[Note: part of St Ann's higher cost is due to their partnership with DanaFarber B&W for cancer]
Merrimac - 25%

by way of comparison: for DSH hospitals - southcoast and Northshore were 55% and 66%. Most hospitals were between the 25th and 36th percentile as were the steward hospitals.

For Community Hospitals that were not teaching or DSH:

Norwood - 42%
nashoba - 40%

most hospitals in this category were between 40% and 50%.

so on the whole the price of Steward's hospitals is comparable to others in similar categories.

the travesty is the abuse of market power by so called non-profits like MGH, B&W and childrens.

Keep in mind that most patients seen by these academic medical centers have routine cases not tertiary etc. They have a higher case mix index that most community hospitals, but most patients seen are for routine care at twice the price.

MGH - 95%
(case mix index 1.39

B&W - 94%
(cast mix index 1.33

Childrens 98%
(case mix index 1.33)

TMC 70%
(case mix index 1.38)

BID 66%
(case mix index 1.22)

UMass 79%
case mix index 1.25

BMC 62%
case mix index 1.03

Baystate 60%
case mix index 1.16

Lahey 62%
case mix index 1.38

Paul Levy said...

Look again and compare Steward Good Samaritan to Signature (Brockton); Signature Norwood to BID~Needham; Steward Holy Famly to Lawrence General. It was to those comparisons that I was referring. This is where head-to-head competition exists between Seward and its community neighbor, and Stewards tends to get paid more.

But, really, I think we have beaten this horse to death; and it really is not very relevant to the point of my blog post. The wealth that was created for Blackstone and others in the Tenet-Vanguard deal has nothing at all to do with creating value for patients. That is where your faith in capitalism breaks down. This kind of transaction is based on a form of capitalistic behavior that--while legal and authorized--takes advantage of financial devices rather than economic principles of pricing and efficiency.

Paul Levy said...

On the quality front, we are vigorously agreeing, I think.

Anonymous said...

You are correct that Signature Brockton is less than Good Samaritan and Lawrence General is slightly less than Holy Family.

But Holy Family has done better on quality measures than LGH, while Brockton and Good Samaritan are broadly similar on quality.

Holy Family - 36%
Lawrence General - 35%

Because of Holy Family's better quality, I would choose it over Lawrence General if I had to choose between these two for my family.

Good Samaritan - 44%
Signature Brockton - 25%

In this case there is a significant difference in price and similar quality.

But on the whole for all 10 of the Steward Hospitals they are competitve in their local markets. The Brockton vs. Good Samaritan comparison is the only one this this large a variation and there are others eg

St Ann's 50% - Steward
Southcoast 55%

Carney - 37% - Steward
BMC - 66%
B&W Faulkner - 70%

Norwood - 42% - Steward
Newton Wellesley - 65%
Metrowest - 49%
BID Needham - 40% (is much smaller with fewer capabilities than the other two and the new cancer facilities, when completed) will increase measured cost here signicantly)

Quincy - 10% - Steward
South Shore - 75%
BID Milton - 20%

Morton - 30% Steward
Southcoast - 55%
Sturdy - 65%
Brockton - 25%
Jordan - 48%

In most cases Steward is lower or comparable.

The only really glaring one is Good Samaritan and to a lesser extent, St Elizabeth's. The two tiny ones Merrimac and Nashob are also comparable.

I do not see Steward as high cost compared to its peers.

Frankly, I am even surprised about the higher costs at Good Samaritan & St Elizabeth's based on my historical knowledge of both since they have a historical relationship with Tufts Med. Center which worked to keep the costs in its community hospitals low. I think this is a vestige of De La Torre's strategy for Caritas, which might now be reverse to have lower costs for all hospitals.

For instance I do know that Good Samaritan is participating in the new Tufts Med School Physician Assistant program to try add more primary care providers and increase throughput in the hospital.

Anonymous said...

I think the argument about for profit hospitals is similar to that used proponents of a payer system during the congressional debate about Obama care.

I would go into bars and have people tell me that we needed a single payer system because high medical costs was due to private insurers taking too big a piece of the pie thereby increasing costs.

I would kindly point out that most health insurers in massachusetts are not for profit and we had the highest healthcare costs in the country.

It is not the "evil" for profit hospital chains that have pushed up health costs in Massachusetts. It is Partners - MGH and B&W and for pediatric care Childrens with other hospitals following in their wake.

I do not have data to support it, but I would wager if you looked at other health markets you would find a similar phenomena. The high cost hospitals are the prestigious hospitals affiliated with the leading medical schools in that local region.

In medicine it is not the for profit providers running up costs. In fact, in Vanguard & Stewards cases they both appear to now have strategies designed to take market share from high priced academic medical centers and teaching hospitals, by being the lower cost alternative when real price competition takes hold.

I think that does benefit Massachusetts patients. As I have said many times in your blog in the past, it is up to Massachusetts state political leaders and health policy regulators to allow & foster the price competition to make this possible.

Alex said...

Such impassioned and stat riddled horn tooting for Steward I have never heard The usual Partners bashing is tiresome, and the whole diatribe so far off the original point Paul made. I echo the concern of non local MD----I have seen the changes and I too fear the commercialization of healthcare. The AG's report hardly came to the conclusions suggested by Anon. At some point folks are going to have to stop blaming their failure on MGH & BWH. Caritas can rebrand themselves all they want, but the people have not been impressed with the Steward rollout. "Ya' can't polish a sneaker!"

Anonymous said...


I posted many times above, but not to blow a horn for Steward. I just like being factual.

The facts show Steward is competitive on price.

The facts show increasing costs in health care, at least in massachusetts, one of the most expensive in the US, is being driven up by the "so-called" non-profits, not the commercial firms. [Read the many articles in the Globe about the the sinister scheme between Blue Cross and Partners to ensure that partners gave every health plan a price similar or higher than Blue Cross, whose effects was shown in the confrontation between Partners and Tufts Health Plan. All of which was validated by data in the attorney generals report showing Partners and others used market power to drive up costs. This by a "supposed" non-profit.

And people in mass can not blame it on commercial insurers since the health insurance market here is dominated by non-profits, eg. Blue Cross, Harvard Pilgrim, Tufts Health Plan, Medicare, Mass Health, Fallon, BMC Healthnet, Neighborhood health plan, et al.

The cost problem in Massachusetts healthcare is not commercialization.

Closer to the truth is market failure and greed by some non-profits.

Paul Levy said...

This thread has gone far afield from the points I raised in the blog post. I've been tolerant so far about posting everything that has been offered, but this is a lot of discussion about topics removed from the main one.

Barry Carol said...

I agree with Paul that the private equity deals in the MA hospital market have more to do with financial engineering and generating returns for private equity investors than in reducing hospital cost structure and improving value for patients. Other things equal, hospital consolidation, including the purchase of physician practices, imaging centers and ASC’s, enhances a hospital system’s market power. Moreover, since the great bulk of a hospital’s costs are for labor and benefits and are largely fixed in the short to intermediate term, there are surprisingly few economies of scale to be realized with increased size.

I also agree that the large MA non-profit systems like Partners are able to extract high prices from commercial payers because of their market power and not their care quality. I think the best way to address this is through robust price and quality transparency tools for both patients and referring doctors and special rules that limit what can be charged for care that must be delivered under emergency conditions to the uninsured and to insured patients who find themselves in an out-of-network facility.

In addition, some large employers and pension funds recently started to implement reference pricing for certain procedures like MRI’s, CT’s colonoscopies and surgical procedures like hip and knee replacements that lend themselves to bundled price quotes and can usually be easily scheduled in advance.

In short, strategies like price transparency, reference pricing and tiered or limited network insurance products are much more likely to create countervailing power against large hospital systems and create better value for patients than hospital acquisitions by private equity investors.

Istvan said...

By the way, the second and third cornerstones of Value-Driven Health Care are transparency of quality and transparency of price (Executive Order 13410, August 2006, Federal Register, Vol. 71, No. 166, Monday, August 28, 2006) as one of the biggest problems in health care is the information asymmetry.

Anonymous said...

One big advantage for bigger healthcare firms is access to capital at good rates.

That's an important reason many hospitals are seeking partners, to update I.T. systems, and other facilities and to invest in outpatient facilities in convenient locations that is so important in todays market.

Also "back office functions" in hospitals things like purchasing, logistics for supplies, billing etc are amenable to economies of scale.

Large firms if they are well managed can ensure "best practices" are identified and used in all parts of a hospital and all hospitals.

These are some of the same reasons hospitals want to join non-profits health networks; hospitals like south shore wants to link with Partners, Jordan and Signature with BID and Winchester with Lahey etc and the same logic applies to larger commercial firms like a vanguard etc.

One advantage to a commercial firm at least in the Boston area, is that they are primarily competing on high quality at LOW COST. Most of the non-profit networks are also competing on PRESTIGE. That is one important reason why systems like Partners have been able to demand and get higher prices.

And as others have said above, because of limited transparency in pricing and quality and inadequate use of tiered and limited networks, reference pricing, etc. prestige wins out driving up the cost of care for all.

Most patients are seen at the most expensive hospitals and health systems even though there is no evidence of a quality benefit for doing so.