It's been a while since I prepared a summary of the hospital industry in the Boston area. Some things have changed. Some remain the same.
Partners Healthcare System (Massachusetts General Hospital, Brigham and Women's Hospital, Brigham and Women's Faulkner Hospital, Newton Wellesley Hospital, North Shore Medical Center, Martha's Vineyard Hospital, Nantucket Cottage Hospital, and more.) An expansion is in process with the pending acquisition of South Shore Hospital and Cooley-Dickinson Hospital. There are numerous clinical affiliations with other hospitals, also. PHS is doing very well, thanks to above market contracts signed with Blue Cross Blue Shield and other insurers. Do not ever expect to see above average earning reports, though, as the system is a master at burying its money in new buildings, information systems, and the like. Let there be no doubt that Partners has won the Massachusetts market for years to come. The rest of this post is about how the others will fight for the remaining scraps.
Steward Health Care System (St. Elizabeth's Medical Center, Carney Hospital, Good Samaritan Medical Center, St. Anne's Hospital, Holy Family Hospital, Merrimack Valley Hospital, Morton Hospital, Nashoba Valley Medical Center, Norwood Hospital, Quincy Medical Center, New England Sinai Hospital.) This is the big for-profit system, owned by private equity firm Cerberus, which acquired it from the former Caritas Christi system. Tongues were wagging recently when the Attorney General issued her first report on this system, showing operating losses in its first year of ownership.
For example, a colleague who studies municipal bonds said, "We are sitting here in tax-exempt bond land saying 'What was Cerberus thinking?' and 'How long are they going to stick it out, but on the other hand, what can they do, is somebody else going to buy them out at this point?' All very interesting, especially since the for-profit guys are so confident that they can play the game better. Perhaps not always."
Not so fast. Don't jump to conclusions. The report only covered operations for the year ending September 30, 2011. And remember that operating losses on the income statement are not the main concern for a private equity firm. Cash flow is what matters, earnings before depreciation and taxes. Depreciation is a non-cash expense. Taxes are subject to all kinds of IRS rules and loopholes.
Nonetheless, there are some things to watch. Recall that Steward has promised to be the low-cost alternative in the communities it serves. The AG found:
While 2011 prices were not available for this Report, 2009 and 2010 data shows that prices for the Caritas hospitals vary insurer by insurer, and by inpatient versus outpatient services, with the result that some Caritas hospitals are on par with competitors, others are less expensive, and others are more expensive. Given this variation in price by local market and service category, whether Steward’s activities will raise or lower costs in its markets ultimately depends on a variety of factors, from “endogenous” factors like the services Steward chooses to develop and the prices it seeks for those services, to factors “exogenous” to Steward, such as market activity by its competitors and changes in the regulatory landscape.
Steward has also been in the forefront of signing risk contracts with Blue Cross Blue Shield. Those contracts were front-end loaded to be made more attractive the health systems. Over time, their provisions will bind and can affect earnings. Even those provider groups with the most experience with risk contracts are now finding how difficult it is to generate surpluses. Does Steward have the care management system in place to be successful under this payment scheme? How does it control the costs of tertiary referrals now that St. Elizabeth's really isn't a high-end hospital and when its main clinical partner for those referrals is MGH?
Personnel changes in recent months might be indicative of cultural problems or concerns about specific hospital business plans. Highly regarded Bill Walczak, the former head of the Codman Square Health Center, was hired to be CEO of Carney Hospital but then was quickly fired. More recently, well respected John Polanowicz left the helm of St. Elizabeth's to join the state government less than two years after signing on. There are rumors, too, that the system's consolidated hospital billing system has had start-up problems. Effective operational management is necessary even for a system that plans to do a flip in a few years.
Beth Israel Deaconess Medical Center (BIDMC, BID Hospital~Needham, Milton Hospital.) After the recent merger with Milton Hospital, an expansion continues with the acquisition of Jordan Hospital. It maintains clinical affiliations with several other hospitals, including the two other Caregroup hospitals, Mt. Auburn Hospital and New England Baptist Hospital. BIDMC is apparently engaged in a strategy of acquisitions to provide a tighter network in the world of Accountable Care Organizations. Are others in the offing? While this strategy is understandable, the challenge will be how to integrate the governance and operations of a system of hospitals, as contrasted with what has essentially been a lone academic medical center with one small community hospital outpost. The governance and operation of a health system require a different set of skills and approaches. (Of course, I am loyally rooting for success!)
Tufts Medical Center. I'm sorry to report that I haven't heard anything about the smallest of the academic medical centers, except the loss of Jordan Hospital as a referral source. The hospital has had and continues to have thoughtful and excellent leadership, but it is not clear where their strategic path is to a happy future. I'm hoping I just don't have the wisdom to see the path, as this is a treasured Boston institution, going back to 1796: "A group of public-spirited Bostonians founded the Boston Dispensary, funding tickets that enabled the city's poor to receive treatment. One of the original tickets was signed by subscriber Paul Revere." Hmm, maybe there is a deal to be done with BIDMC?
Switzerland. Places that have some geographic advantage like Southcoast Health System (owner St. Luke's Hospital in New Bedford, Tobey Hospital in Wareham, and Charlton Hospital in Fall River) seek to maintain independence and offer affiliations with all the others. As noted by the Boston Business Journal: "Southcoast Health System is strengthening its clinical offerings and financial position as it strives to endure as an independent community health care system, with no ties to a Boston academic medical center or an out-of-state company."
Steward Health Care System (St. Elizabeth's Medical Center, Carney Hospital, Good Samaritan Medical Center, St. Anne's Hospital, Holy Family Hospital, Merrimack Valley Hospital, Morton Hospital, Nashoba Valley Medical Center, Norwood Hospital, Quincy Medical Center, New England Sinai Hospital.) This is the big for-profit system, owned by private equity firm Cerberus, which acquired it from the former Caritas Christi system. Tongues were wagging recently when the Attorney General issued her first report on this system, showing operating losses in its first year of ownership.
For example, a colleague who studies municipal bonds said, "We are sitting here in tax-exempt bond land saying 'What was Cerberus thinking?' and 'How long are they going to stick it out, but on the other hand, what can they do, is somebody else going to buy them out at this point?' All very interesting, especially since the for-profit guys are so confident that they can play the game better. Perhaps not always."
Not so fast. Don't jump to conclusions. The report only covered operations for the year ending September 30, 2011. And remember that operating losses on the income statement are not the main concern for a private equity firm. Cash flow is what matters, earnings before depreciation and taxes. Depreciation is a non-cash expense. Taxes are subject to all kinds of IRS rules and loopholes.
Nonetheless, there are some things to watch. Recall that Steward has promised to be the low-cost alternative in the communities it serves. The AG found:
While 2011 prices were not available for this Report, 2009 and 2010 data shows that prices for the Caritas hospitals vary insurer by insurer, and by inpatient versus outpatient services, with the result that some Caritas hospitals are on par with competitors, others are less expensive, and others are more expensive. Given this variation in price by local market and service category, whether Steward’s activities will raise or lower costs in its markets ultimately depends on a variety of factors, from “endogenous” factors like the services Steward chooses to develop and the prices it seeks for those services, to factors “exogenous” to Steward, such as market activity by its competitors and changes in the regulatory landscape.
Steward has also been in the forefront of signing risk contracts with Blue Cross Blue Shield. Those contracts were front-end loaded to be made more attractive the health systems. Over time, their provisions will bind and can affect earnings. Even those provider groups with the most experience with risk contracts are now finding how difficult it is to generate surpluses. Does Steward have the care management system in place to be successful under this payment scheme? How does it control the costs of tertiary referrals now that St. Elizabeth's really isn't a high-end hospital and when its main clinical partner for those referrals is MGH?
Personnel changes in recent months might be indicative of cultural problems or concerns about specific hospital business plans. Highly regarded Bill Walczak, the former head of the Codman Square Health Center, was hired to be CEO of Carney Hospital but then was quickly fired. More recently, well respected John Polanowicz left the helm of St. Elizabeth's to join the state government less than two years after signing on. There are rumors, too, that the system's consolidated hospital billing system has had start-up problems. Effective operational management is necessary even for a system that plans to do a flip in a few years.
Beth Israel Deaconess Medical Center (BIDMC, BID Hospital~Needham, Milton Hospital.) After the recent merger with Milton Hospital, an expansion continues with the acquisition of Jordan Hospital. It maintains clinical affiliations with several other hospitals, including the two other Caregroup hospitals, Mt. Auburn Hospital and New England Baptist Hospital. BIDMC is apparently engaged in a strategy of acquisitions to provide a tighter network in the world of Accountable Care Organizations. Are others in the offing? While this strategy is understandable, the challenge will be how to integrate the governance and operations of a system of hospitals, as contrasted with what has essentially been a lone academic medical center with one small community hospital outpost. The governance and operation of a health system require a different set of skills and approaches. (Of course, I am loyally rooting for success!)
Tufts Medical Center. I'm sorry to report that I haven't heard anything about the smallest of the academic medical centers, except the loss of Jordan Hospital as a referral source. The hospital has had and continues to have thoughtful and excellent leadership, but it is not clear where their strategic path is to a happy future. I'm hoping I just don't have the wisdom to see the path, as this is a treasured Boston institution, going back to 1796: "A group of public-spirited Bostonians founded the Boston Dispensary, funding tickets that enabled the city's poor to receive treatment. One of the original tickets was signed by subscriber Paul Revere." Hmm, maybe there is a deal to be done with BIDMC?
Switzerland. Places that have some geographic advantage like Southcoast Health System (owner St. Luke's Hospital in New Bedford, Tobey Hospital in Wareham, and Charlton Hospital in Fall River) seek to maintain independence and offer affiliations with all the others. As noted by the Boston Business Journal: "Southcoast Health System is strengthening its clinical offerings and financial position as it strives to endure as an independent community health care system, with no ties to a Boston academic medical center or an out-of-state company."