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December 14, 2010

The great sucking sound: For-profit buyouts a drain on communities

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Few have spent more time than I calling out non-profit hospitals on their inadequate charity care levels.  But when it comes down to

This picture shows a panorama of Boston (USA).

Boston, there's a new predator in town

it, I’d prefer a non-profit whose chain can be yanked over a for-profit with no public service requirements at all.

I was reminded of my concerns this week when I heard about the two hospitals Cerberus Capital Management agreed to acquire this week.  It’s picking the hospitals up from Essent Healthcare, another for-profit.  Cerberus, a New York-based private equity firm, just spent $900 million for the six-hospital non-profit chain Caritas Christi. That gave them a nice foothold in Boston, an incredibly competitive but opportunity-rich environment.

Really, both of deals the two-headed guardian of the afterlife has chosen seem to be good ones — for them.  While I’m not privy to much financial information on any of the eight hospitals, we do know that Caritas Christi was in big trouble financially.

I’d wager that the other two hospitals, which lie in the Boston suburbs, are in bad need of a capital infusion to prop them up during these bad times.  This situation allows the firm to swoop in, buy equipment, get things shipshape and get their money many times over.  Oh, and probably do a nice job of squeezing the health plans, now that they’re getting critical mass. Again, good for them.

The thing is, I strongly doubt that any private equity firm is going to have the interests of the community in mind.  One way or another, in most of the private equity buyouts I’ve followed, all of the extra money generated by improvements ends up in the bulging bank account of the PE guys.  They’re not in ANY investment for the long term; that’s just not what they do.  They’re there to pillage, however, legally, and get the hell out.

Far too often, PE players get into a deal, drag the hospitals down financially and then more or less shrug their shoulders when the facility plunges into the red.

The PE firm doesn’t give a rat’s patoot — they’ve made their money. The often-struggling community is left with, well, not a whole lot.

I’d argue that this is a travesty.  We need, as professionals and healthcare consumers, to keep hospitals as community asset with a strong bank account and a long-term view.

So, my question to you is this. Is it inevitable, during this period of transition to full-out reform, that community hospitals get decimated?

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    4 responses to "The great sucking sound: For-profit buyouts a drain on communities"

    1. # Mikey commented on December 14th, 2010:

      But you are not bothered by the alleged non-profit Partners Heatlhcare System sucking 198 million in profits out of the community while paying squat for property and income taxes.

    2. # Katherine Rourke commented on December 14th, 2010:

      Mikey, I’m *terribly* bothered by Partners’ behavior. They’ve told me they do lots of charity care but I haven’t seen proof. Still, given that it’s a non-profit, in theory the IRS and others can put lots of pressure on them to offer more charity care. (I admit that seldom happens, but that’s another story.) Private organizations, on the other hand, haven’t even got that hanging over their head. It’s a matter of the “lesser of two evils” principle.

    3. # Mark Montgomery commented on December 16th, 2010:

      Katherine,

      While your view is very common, and quite often correct with buyout firms, it isn’t generally accurate across private equity. Quite a number of PE firms backed by institutions have a much longer investment horizon than any other type of vehicle, including community non-profits. I’ve seen 40 years for example in multiple large pension funds in the EU for PE mandates.

      I have been one of the leading critics of institutional investment in PE and VC who had some experience in it, but that’s a different topic for PE publications. A couple of issues that come to mind–

      1) Having audited dozens of each, the worst managed operations I came in contact during my consulting career– formal audits contracted by boards– were non-profits. So were the most corrupt. Some for profits were terribly managed, but did not compare to the worst of the non-profits.

      2) Infusion of capital, regardless of source, enables the buyer to negotiate that which other methods have proven unable to achieve– like discipline, quality standards, and stopping abuse of previous management– who quite often manipulate books to tell quite a different picture than the community is aware.

      3) Without the infusion of capital, the entity quite often will shutter its doors. I have no knowledge of these transactions, but a buyer with access to more capital is not necessarily a bad thing.

      You jumped the gun here. The appropriate thing to do would be to get a before and after picture, relative to what matters to patients– free from emotional bias, and then (only then) can the governance be compared. I am often surprised in both directions when so doing. .02– MM

    4. # ACO Proves Major Political Turning Point For Boston Hospital Chain | next Hospital pingbacked on January 2nd, 2012:

      […] hospitals (and 11 percent of the MHA’s revenues) with it.  Steward, which was created by the acquisition of six-hospital Caritas Christi Health Care Chain a year ago by VCs, has since picked up four hospitals and done a host of doctor […]

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