Time was, the prospect of converting Catholic hospitals into dividend-paying businesses drew the sharp ire of workers and religious clerics alike.
Fifteen years ago, amid the last great expansion of for-profit healthcare, William Cox, then vice president of the Catholic Health Association, declared that Catholic healthcare was “under assault,” while Chicago's Cardinal Joseph Bernardin urged the providers to resist “sacrificing altruistic concerns for the bottom line” (Jan. 16, 1995, p, 8).
Fast forward to November 2010, when the closing of an $895 million deal to turn six Catholic hospitals formerly owned by the Archdiocese of Boston into the largest for-profit system in New England was greeted not with scorn, but praise.
The hospitals' union endorsed last week's purchase of Caritas Christi Health Care by New York private-equity firm Cerberus Capital Management, as did the Democratic attorney general and local patient advocates.
Even the Vatican signed off on the sale of Caritas Christi to the private buyer of distressed businesses, despite the presence of unusual contract language that could eventually allow the new owners to strip the Catholic identities from the hospitals in a city that has long harbored one of the densest concentrations of Roman Catholics in the U.S.
So what changed? Experts say that's not just an academic question, as cash-starved community hospitals all across the country continue the never-ending hunt for capital. They say the experience in Boston is likely to open many more minds to the possibility of selling to a for-profit system.
Observers say the Great Recession has deflated operating margins so severely at some community hospitals that they're looking for ways just to keep the doors open. The money from Cerberus retires all existing system debt, makes the pension fund solvent again, and kicks off a series of capital projects, from fixing leaky roofs to building a new medical office building. “Most of our community hospitals have been starved for capital for decades,” said Donald Thieme, executive director of the Massachusetts Council of Community Hospitals, one of the many organizations that eventually came out in support of the Caritas deal if it included strict oversight.
Combine the capital crunch with the timing of healthcare reform, which is demanding massive capital infusions to improve healthcare delivery. And then consider the 2006 finding by the Congressional Budget Office that not-for-profit hospitals provide on average only slightly more uncompensated care than their investor-owned peers: 4.7% of operating expenses at tax-exempt hospitals versus 4.2% at for-profits (Dec. 11, 2006, p. 12).
Suddenly, the conversion to for-profit status can start to look like a way for communities to get most—if not all—of the benefits of community ownership, while hospitals improve their physical plants through new cash infusions and local governments receive new tax dollars.
“For us, being a for-profit system is a tax status, not a mission statement. We are here to serve our communities just as we were before. The only difference is now, we will also serve the communities by paying taxes,” Caritas spokesman Christopher Murphy said.
Caritas officials estimate that they will pay about $20 million a year in new taxes.
While the public was initially skeptical of the deal, many of the concerns were allayed through extensive public hearings and a thorough review of the transaction by Attorney General Martha Coakley, who imposed new restrictions on the deal, including the appointment of an independent monitor who will police the terms of the deal, and a guarantee that makes it almost impossible to sell or close any of the hospitals for five years.
“After the conditions were put on the deal,and a network of groups here agreed with the deal and conditions put on it, we in the long run think it's the right thing,” said Matt Wilson, campaign director with Massachusetts patient-advocacy group Health Care for All. “The industry is so much in flux, and things are changing. It's great that we got assurances to five years. It's hard to predict after that.”
Of course, almost nothing short of torpedoing the deal was likely to have satisfied the concerns of surrounding hospitals. “A number of our members obviously have concerns about this change, and I don't believe this is as much about a for-profit entering the market as it is another form of potentially increased competition,” said Lynn Nicholas, president and CEO of the Massachusetts Hospital Association. “Capital is king, and therefore anyone who had an infusion of capital would be considered a new form of competition and worry surrounding hospitals.”
Paul Levy, CEO of Beth Israel Deaconess Medical Center, Boston, used his blog to criticize Coakley for approving the kind of deal that will become a new business strategy for investment capital: “flipping” Massachusetts hospitals every few years through future sales to generate structured returns on investments.
“Now, however, comes the fun part—for those who define ‘fun' as watching a sector turned topsy-turvy. For that is what is likely to happen,” Levy wrote on his blog on Oct. 12. “What has changed? Well, we now have a new entrant in the Massachusetts healthcare marketplace, one whose rules of engagement and incentives are quite different from the non-profits that have operated in the state for decades.”
Cerberus Managing Director Timothy Price said the distressed asset buyer, unlike other private-equity investment groups, has a philosophy of long-term investing. He said Cerberus expects to maintain a “long and mutually successful” relationship with Caritas.
But one of the biggest open questions about the deal is how a private-equity firm with no prior experience in hospital ownership can not only turn around a set of six struggling community hospitals, but make them profitable enough to pay new taxes as well as dividends.
Caritas officials are hesitant about discussing their business strategies in public. However, they have said openly that one of their biggest goals is to use the new capital investments to cut into the number of suburban Boston residents who currently travel downtown to large academic medical centers—such as Beth Israel, a teaching hospital of Harvard Medical School—for less-intense services they could receive closer to home.
Speculation has also centered on whether Caritas officials will then use their new market clout to drive up reimbursements from payers such as Blue Cross and Blue Shield of Massachusetts, the dominant commercial insurer in the state. Caritas has also announced plans to start a new accountable care organization.
Here's what the public does know about the deal. Of the $895 million purchase price, $495 million will be transferred directly to the holding company that Cerberus set up to manage the system, Steward Health Care System. That amount will be split into two parts and used immediately: $200 million to retire Caritas' existing debt and $295 million to shore up an ailing pension fund.
Another $400 million is going into capital projects at each of the six hospitals, some of which have already been started because the need was so urgent, like a roof-repair project at 239-bed Holy Family Hospital in Methuen, Mass.
None of the funds from the sale go to the Archdiocese of Boston, which directly operated the hospitals until 2008, when a legally separate 501(c)(3) not-for-profit called Caritas Christi Health Care took over ownership from the church. However, the archdiocese has the option of directing Cerberus to donate $25 million to a charity of the archdiocese's choosing should it ever declare that the ownership by Cerberus has made the operation of the hospitals under Catholic ethical and religious directives unworkable.
A statement on the diocesan website of Cardinal Sean O'Malley, the archbishop of Boston, said the prelate was pleased that the sale would give Caritas access to much-needed capital for its infrastructure and debt. “Our prayer is that the healing ministry of Christ will endure for all people, particularly those most in need, through the continuation and enhancement of Caritas Christi Health Care,” the statement said.
The agreement to sell the Catholic system to Cerberus also allows Caritas Christi officials to stop the use of the ethical and religious directives—after paying $25 million—but only in a case where the Catholic rules become “materially burdensome” for the system.
Since the system has long followed the rules promulgated by the U.S. Conference of Catholic Bishops, the ethical buy-out clause could be triggered only by Caritas through some material change, such as the advent of a new technology or amendments to the rules by the bishops, Murphy said.
Observers said the arrangement tying ethics rules to a monetary payment has raised a few eyebrows in the Catholic healthcare community, even though it received the archbishop's blessing. R. T. Neary, chairman of the Coalition to Save Catholic Health Care, highlighted the buy-out clause in a broadside attack on the sale contained in a letter Neary said he sent directly to the Vatican (Aug. 16, p. 10). The Vatican subsequently approved the sale.
Christopher Chi, a partner in healthcare and mergers with Nashville-based law firm Bass, Berry & Sims, said that whether Caritas will ultimately choose to forgo Catholic identity in favor of performing medicine prohibited by Catholic rules will also take into consideration the market value of retaining a Catholic image in a metro market where nearly half of residents are Catholic.
“It may be that having that sort of character makes the hospital more attractive to patients,” Chi said. “Time will tell whether maintaining those sorts of restrictions and mission-influenced policies ultimately makes economic sense.”
