Sunday, February 08, 2015

One down, two to go

The new CEO of Partners Healthcare system says bigger is not necessarily better, but then he says the network is going to expand:

“A real important part of our strategy if we’re restricted in the local market is we have to look regionally, nationally and internationally. So I’d say look at the globe and spin it around and we’re going to look everywhere.”

The thought makes my head spin, too.  I just wish they would get better at delivering safer and higher quality care here.  The system could start, for example, by adopting the many thoughtful and useful suggestions published by Atul Gawande, perhaps its most famous and widely admired faculty member.

But I guess our new Attorney General should feel all right about the corporation's lack of interest in local expansion, so let's put PHS aside for a moment and think about what other time bombs are ticking on her watch.

Steward Healthcare

The most important has to be the future of Steward Healthcare, the private equity-owned entity that purchased the former Caritas Christi chain of hospitals in the state.  According to this story in Commonwealth Magazine, the CEO promised a health care network that would "provide high quality care at much lower cost than the big Boston teaching hospitals." In so doing, if it could "win over residents and businesses near the hospitals, it would not only turn a profit for Cerberus but lower health care costs overall." Well, there is no sign that is working.

But meanwhile, the company has engaged in commonly employed private equity approaches to remove cash from the business. As Commonwealth noted, for example:

In April, Steward granted 99-year leases on 13 of its medical office buildings to an Arizona real estate firm for an up-front payment of about $100 million. Steward is now renting those same buildings back from the Arizona firm under 12-year leases. The terms of Steward’s leases have not been disclosed. Steward has also not disclosed whether it kept the cash generated by the deal or the money went to New York and Cerberus’s investors. 

There were equivalents to this kind of sale-leaseback deal elsewhere in the system.  The labs, for example, were sold:

Quest Diagnostics (NYSE: DGX), the world's leading provider of diagnostic information services, and Steward Health Care System LLC (Steward), New England's largest community-based accountable care organization and one of the nation's largest Pioneer ACOs, today announced that Quest has acquired the remainder of Steward's outreach laboratory service operations. Under the arrangement, Quest will provide outreach laboratory testing services to physicians, nursing homes and other providers previously serviced by Steward.

This issue that could arise is what happens to the Steward hospitals if the system fails or falters, now that the hospitals are less resilient because a portion of their asset value has been sold off. It would probably be wise for the AG to conduct an analysis of the options before her if the private equity company decided to exit the Massachusetts market.  The previous AG signed an agreement that gives the office considerable review authority over the company.  How might that authority be used by the new AG? Is she able to track funds and see what money is actually being used in Massachusetts versus being delivered directly or indirectly to Cerberus investors? Is there more ability than was employed previously to ensure sufficient notice of possible closures?  Apparently the former AG was surprised when Steward decided to close Quincy Medical Center.

When it comes to the second largest system in the state, it would be better to avoid surprises.

Blue Cross Blue Shield of Massachusetts

While virtually everyone offered an opinion to the judge in the case, the largest insurance company in the state was silent on whether the expansion of Partners should be approved.  It also acted to increase the disparity in payments among hospital networks, even after those disparities were documented by the previous AG as being one of the major causes of health care inflation in the Massachusetts. A study commission is supposed to review this issue of disparities and make recommendations to narrow them.  What's the AG's role in that process?  Might she, for example, pursue a reference pricing approach that would require an insurer to justify payments rates outside of a normal band?

BCBS of MA has also persuaded the state to adopt a policy that shifts risks from the insurance company to doctors and hospitals but has made no adjustment to its capital structure to compensate for that savings. Will the AG consider clawing back excessive earnings given the company's new risk profile?

All other financial service industries have been able to reduce administrative and transaction costs over the years.  What is it about this company that gives them a pass? As premiums rise, the percentage the company keeps for administration and profit stays the same. Here's another area worthy of attention by the new Attorney General.  Shouldn't we expect some technological improvements and the resultant savings to passed along consumers?


Barry Carol said...

If the Steward system ultimately files for bankruptcy, existing leases can be terminated. To the extent that there is a need for the hospitals and other facilities, they could be sold off at low prices to other competitors with PHS excluded from bidding on anti-trust grounds. If the regional market loses more licensed beds that it doesn’t need, that should be a good thing for cost control.

As for MA BCBS, how fast are premiums increasing and how fast are administrative costs growing? Administrative costs for all health insurers increased from what they would have otherwise been due to the premium tax that was part of the ACA which all insurers at least tried to pass on to customers in higher premiums. Other new administrative costs resulted from gearing up to sell new policies on the ACA’s public exchanges.

Jon Hurst said...

Really need to look at the growing discrimination between small, fully insured employers vs big,self-insureds. Under pressure from specialty providers, Big Pharma, etc., the state has passed 24 new state mandates and/or assessments since the passage of Chapter 58--an incredible 3 per year. Yet self-insureds don't have to follow them. In fact the Div of Insurance did a study last year showing 12 state mandates were not covered at all by more than 90% of ERISA exempt self-insureds. And people wonder why health insurance costs so much more for small biz than it does for big biz & big govt employers. Discrimination under the law & in the marketplace is choking out small biz & their employees, and no one gets it.

Paul Levy said...

A very interesting point, Jon.

Barry, there are many assumptions implicit in your points. I think they warrant examination by the AG, too.

Anonymous said...

Mass General has relationships in New Hampshire already

Southern New Hampshire Medical Center is closely affiliated with MGH and sits on the border in northern Massachusetts.

The Granite Health Care Network in New Hampshire, made up of Catholic Medical, Concord Hospital, Lakes Region General Hospital, South New Hampshire Medical (see above) and wentworth douglas hospital is also working closely with MGH

These could be easy targets for acquisition.

Brigham and Women's has close connections with Care New England, which has three acute care hospital all close to southern Massachusetts: woman and infants hospital, kent hospital and memorial hospital. The CEO of Care New England is the former CEO of Cambridge Health Alliance, when the Cambridge group was affiliated with Partners.

Dana Farber (clinically affiliated with Partners) also has affiliated doctors in New Hampshire and in connecticut a hospital.

So Partners might have been planning a regional strategy irrespective of the Eastern Mass acquisitions.

Anonymous said...

If Partners uses its tax-exempt status in Boston as a launch pad for extension and expansion abroad (and throughout NE) should that invalidate its tax relief in MA?

What extra burden does that place on the tax-payers of Boston, in particular?

Perhaps it is worth a look since the citizens of a state not in out tax code are benefited from our loss....

Barry Carol said...

I’m skeptical about PHS’ strategy to try to expand well beyond the Boston region, including southern New Hampshire. It presumably won’t be able to demonstrate superior care quality at community hospitals it may acquire just as it can’t demonstrate superior quality at those it already owns. It won’t have the local market power to extract excessive prices from insurers outside of MA and NH. The value of its two flagship academic medical centers, MGH and B&W, will diminish as the distance patients would have to travel to get to them increases. If PHS converts any hospitals it acquires to the equivalent of five star hotels, it will be able to offer superior amenities but how willing will patients or insurers be to pay for them?

To the extent that MGH and B&W have excess capacity, they could try to copy what the Cleveland Clinic is doing in striking deals with large employers like Boeing and Lowe’s to provide heart surgery at a very competitive bundled price including transportation costs to employees of those companies. As I understand it, the CC has excess capacity while its home market is either not growing at all or growing very slowly. To fill that capacity with patients it would not otherwise treat, it’s willing to offer to do heart surgeries for a very competitive bundled price that still significantly exceeds marginal costs so it makes a respectable contribution to operating profit. If MGH and B&W want to offer equally competitive prices to patients who live far from Boston, that’s fine.

Anonymous said...

The relationships I have described above, with the three acute care hospital Care New England, South New Hampshire Medical Center are already in place as are Dana Farber's relationships in N.H.and Connecticut. I believe MGH's relationships with other members of Granite State Health Care Network (beyond S.N.H.M.C) are progressing.

What I have described is in place and could be enhanced. But it is already in place.

Brigham and Women's has cardiac specialists in place at Care New England and is the referral site for higher level care.

As an example, this is the page S.N.H.M.C. has to describe their relationship with MGH. The areas MGH helps SNHMC with include: Trauma and acute surgery, stroke, breast surgery, thoracic surgery, gynecology, oncology surgery, plastics and reconstructive surgery, pediatrics, medical oncology, vascular and endovascular care.

S.N.H.M.C. also has relationships with Lahey Hospital, and Dartmouth Hitchcock, but they don't get the their own page describing care, they are each limited to one area and at least partially overlap with MGH care.

prestige might trump logic defined as health outcomes - as it does in Greater Boston.

All three R.I hospitals and S.N.H.M.C. all site close to the border with Massachusetts, so the prestige of the MGH or Brigham and Women's name could also draw Mass patients to New Hampshire hospitals. [Note many Mass health insurance plans have relationships with hospitals and doctors in contiguous states]

Anonymous said...

Steward also sold off all of their hospitalist physicians to IPC The Hospitalist Company in September 2013. Not sure how much they received as part of that transaction but I would guess a lot of this cash from selling off assets ends up in the pockets of Cerberus. We are talking hundreds of millions of dollars between the office buildings, the lab and the hospitalists. Dr. De La Torre is nowhere to be found and they pulled the plug on Quincy which he went after just a few years ago. Let's hope the new AG is more involved in monitoring Steward as it is a large system with thousands of employees. This blog has been talking about Steward for a while now so it should not be a surprise to anyone if things get worse in the future.

Anonymous said...

It would be nice to know how much Cerberus has pulled out of Steward if any, but I am skeptical,

Steward invested hundreds of millions of dollars in new information technology like EHR, and new emergency rooms among other things. St Elizabeth's got a new cancer center, St Ann's is getting a new Cardiac care unit etc etc.

It would be nice to know net net, where things stand and I am surprised that the attorney general can't demand that information why Steward can withhold it without severe penalties, but I am guessing that investment cash flow offsets anything taken out.

If Cerberus tried to abandon Steward, after sucking all the cash out of the system, I am sure the attorney general could sue them.

My guess is Steward has used the cash pulled from sale of hidden assets for investment. Cerberus probably wanted to limit the damage to their bottom line , not putting cash in, but assets found in Steward could be used for Steward. Not pulling cash out.

Other non-profit hospitals in this area have done some of them same things as Steward, like selling and leasing back office buildings.

As I have said previousl selling the hospitalists function was probably a smart move strategically.

It allows Steward to have "surge capacity" in case of emergency epidemics etc. Hospitalists could be pulled from all over the country, rather than have extra hospitalists in place locally with the attendant costs.

What some other smart hospitals do is have many part timers who can increase hours in case of emergency.

I do agree it would be nice to have the facts on steward's financial condition, and net cash pulled out if any.

But again, I am skeptical that Cerberus has pulled anything out net net.

As I have said previously it wouldn't surprise me if Steward was sold in the next year.

It looks like Tenant's deal for five hospitals in Connecticut has fallen through. Buying eight in Massachusetts might be a good recovery.

Anonymous said...

One final point on Partners regional strategy.

MGH (Partners) bought Cooley Dickinson hospital in the Pioneer Valley which is 106 miles away and a 2 hour and 9 minute drive. This was done a couple of years. So the Partners hospital believe their reach is at least 100 miles and a 2 hour drive.

From downtown brigham and womens to providence, RI where the three Care New England hospitals are located is only 50 miles and takes an hour.

From MGH to Southern New Hampshire Medical is 43 miles and takes less than an hour.

Anonymous said...

The fact that Steward is withholding their consolidated financial statements from the state makes me think Cerberus has taken large amounts of cash out of the Steward system (either that or these statements show the system losing money.... why else not produce them?). The other thing these private equity firms like to do is load up a business with large amounts of debt and pay themselves hefty dividends.... this is exactly what happened with HCA when they were owned privately and prior to their IPO. The state and the AG need the consolidated statements to get a better idea of what is going on here.... I would think someone like Governor Baker would also want to get some clarity as to their finances. He is a smart healthcare guy who must see the same things many of us here do.

Barry Carol said...

For PHS to expand into areas where patients can reach its flagship hospitals in two hours or less is reasonable, in my opinion. Beyond that, I think it becomes problematic.

From where I am in NJ, for example, I would think nothing of traveling one hour to an NYC academic medical center or even a bit less than two hours to a Philadelphia AMC for care that couldn’t be well handled by one of our local community hospitals. I’m not too keen on going to Baltimore, Pittsburgh, Boston, etc. unless they have some expertise that I need that’s clearly superior to what I could get closer to home.

Interestingly, if I remember correctly, the late Senator Kennedy went to Duke for his brain surgery instead of MGH. I’m told that Duke is considered the best hospital in the country for brain surgery so I can understand his choice.

Anonymous said...

The AG needs to be attentive since Steward will leave behind some hospitals picked to the bone when they sell. They have not been forthcoming regarding their finances or about the big payouts promised to present execs when they do sell. The past AG gave them consent to have that status and hide behind the screen of being for-profit with the agreement that they would abide by some rules which would protect the availability of healthcare in many communities. It was not permission to suck out the lifeblood and then abandon ship with the last of the gold. So far the promises have been hot air and now word is that the President and COO at Norwood have suddenly resigned and taken jobs elsewhere?! What's up.

Paul Levy said...

Thanks, Don. Got the message!