For Profit Hospitals Stake Claim In Mass

MAY 2013 Voice: A glaring taste of corporate America has arrived in socially conscious Massachusetts in the form of for-profit hospitals that are now doing business in our state.

Over the past two years, eleven hospitals in Eastern Mass. have been bought out by Steward Health Care Systems.

Six struggling Caritas hospitals, which had been affiliated with Boston’s Roman Catholic Archdiocese, were given state approval to turn control over to Steward in 2010. All had suffered extensive losses, including Boston’s St. Elizabeth’s Medical Center and Carney Hospital.

The other four Caritas Hospitals that are now under the Steward control are Norwood Hospital, Good Samaritan Medical Center in Brockton, St. Anne’s Hospital in Fall River and Holy Family Hospital in Methuen. In addition, Morton Hospital in Taunton, Haverhill’s Merrimack Hospital, New England Sinai Hospital in Stoughton, Quincy Medical Center and Nashoba Valley Medical Center in Ayer are now Steward hospitals.

Cerberus Holds Purse Strings

Patients at a Steward hospital might be interested to know that Steward is actually an investment of Cerberus Capital Management, L.P., one of the world’s leading private investment firms with some 40 companies, including Steward, in its current investment portfolio and about $23 billion under management.

Chief executive Steve Feinberg is known for being among the country’s most powerful – and secretive – financiers. Among Cerberus’s more visible faces are its chairman, John W. Snow, a Treasury secretary in the George W. Bush administration; and Dan Quayle, the former vice president who gives talks about the firm’s investments.

The purchase of Caritas is the firm’s first major foray into the medical care world, coming as the industry prepares for the implementation of the sweeping health care overhaul signed by President Obama this February.

Most of Cerberus’s investments have been successful. It typically buys distressed companies, tries to fix their finances or streamline operations, and profits by selling off all or part of the companies, and reaping fees for its management along the way. Does the name Mitt Romney ring a bell? The turnaround time between purchase and sales varies depending on the market.

After the Sandy Hook tragedy in Newtown, Connecticut, under pressure from the giant California Teachers’ Pension fund, Cerberus moved to sell off its investment in gunmaker Freedom Group, the manufacturer of the Bushmaster rifle that was said to be used in the shootings.

In a statement announcing the decision Cerberus said: As a firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators. (Massachusetts does not include Cerberus within its private equity pension fund.)

Within the elite world of private equity, Cerberus Capital Management is perhaps best known for two big gambles that went spectacularly wrong: It’s acquisitions of Chrysler Corp. and GMAC, both of which ultimately required huge government bailouts and lost billions for Cerberus and its partners.

But prior to those deals, the Wall Street firm had a number of successful acquisitions which brought huge payouts, and since the Chrysler and GMAC debacles has maintained its reputation of bringing home winners.

Not A “Quick Flip”

In regard to the Steward purchase, Cerberus managing director Timothy F. Price said, “We have no incentive to do a quick flip. What we want to do is make it successful, keep it successful and hold it. We’ve been holding many of our companies for five years or longer.”

As part of adding value to an acquisition, a buyer does make changes, either actual improvements or in an esthetic sense. Also, changes in employees’ salaries, benefits and duties play a major role in the new owners balance sheet.

“It’s much too early to pass judgment on for-profit hospitals in Massachusetts. Unions have always taken a dim view of privatizing any public sector service. While hospitals are not classified as public sector, they certainly are on the fringe, especially when it’s the donation of generous citizens and religious groups that have helped sustain and improve their existence over the years,” noted Association President Ralph White.

At least one Association member, Joe Doherty of Norwood, has offered his personal observation: “I have been to the OPD at Norwood twice recently and I was very satisfied. I have not heard any complaints about the hospital. They are adding a story to one of their buildings and a new medical office building. They are going to do away with the 3 & 4 bed rooms and just have 1 or 2 bed rooms. Now that they are for-profit, Norwood gets about $950,000 in real estate taxes.”

After Cerberus bought the six-hospital system it agreed to five years of annual monitoring by the attorney general. Attorney General Martha Coakley expressed concern at the time that Steward, a for-profit entity, might raise healthcare prices and cut services.

Its first report concluded that Steward is “striving to meet its stated objective”.  Prices were competitive with other state hospitals. However, Coakley reserved judgment.

“One year of mature performance information does not provide a reasonable basis to predict or draw conclusions about Steward’s ongoing performance or whether it will continue to meet its stated objective,” she wrote.

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