Now Private Equity Jumps into the Health Care Fray: Will Cerberus Do Better with Caritas Christi than It Did with Chrysler?

And now for an early report on what may be the latest fashion in the ongoing commercialization of US health care in the US.  In the last few weeks we spotted three stories that appear to be closely related.  (And thanks to one of our ever vigilant scouts for finding the first of these.)

Psychiatric Solutions and Bain Capital

The first story was in BusinessWeek in early March:

Psychiatric Solutions Inc., the operator of psychiatric facilities in 32 states, said it has been approached by a potential buyer.

A special board committee will consider possible responses and Goldman, Sachs & Co. has been hired as a financial adviser, the Franklin, Tennessee-based company said today in a statement.

Earlier today, the Wall Street Journal reported the company was in buyout talks with Bain Capital LLC.

Boston-based Bain manages about $65 billion in assets under management, according to the firm’s Web site.

The significance of this story was not initially clear. The proposed deal had not been consummated. Although there may be something jarring about a private equity firm running psychiatric clinics, the clinics were already run by a for-profit corporation.

Detroit Medical Center, Vanguard Health, and the Blackstone Group

About a week later, the Detroit News published a story about another deal,

The Detroit Medical Center is expected to announce today it will be acquired by a private Nashville-based health system that is to invest $850 million in improvements, The Detroit News has learned.

The nonprofit DMC, with nine general and specialty hospitals in Metro Detroit, will be acquired by Vanguard Health Systems, which has 15 hospitals in four states, several sources said. No money is changing hands in the transaction, but Vanguard will assume $300 million in DMC pension obligations and $200 million in bond debt obligations, a source said.

The article further noted,

Vanguard is majority-owned by The Blackstone Group, one of the nation's largest private equity firms, which gives it access to capital for improvements.

This did seem to be a done deal, and one that inspired all sorts of optimism. For example, Tom Walsh, a columnist wrote in the Detroit Free Press,

Just as the bankruptcies of General Motors and Chrysler marked the end of an unsustainable business model for Detroit's auto industry, Friday's deal to sell the Detroit Medical Center to a big for-profit hospital system is a game-changer for the funding and delivery of health care in metro Detroit.

Walsh felt,

three DMC leaders made a bold move -- before it was too late -- to secure access to the money needed to invest in critical technology and top talent.

because,

'We were being choked to death by the nonprofit business model,' Duggan, the DMC CEO, said Friday.

Walsh enthused,

Vanguard's proposed purchase of DMC for $417 million and a promised investment of $850 million more gives DMC a legitimate shot at survival and growth without anywhere near the pain and suffering that the GM and Chrysler retrenchment brought to the region.

It's hard to overstate what a godsend this deal could be for a wobbly city and state where the public sector is in no shape to help a major employer like DMC, if the banks and Wall Street are unwilling to provide capital.

Similarly, Detroit News' editors opined that Vanguard Health

owned by the investment group Blackstone ... promises to plow $850 million into the DMC facilities over 10 years. The cash will modernize all of the hospitals and provide for a major expansion of Children's Hospital.

The upgrades should enable DMC to compete with the best-appointed hospitals in Metro Detroit, and set a new competitive bar for health care in the region.

The most significant news for Detroit is that Vanguard will maintain the DMC's commitment to treat all patients, whether or not they have private insurance.

Caritas Christi Health Care and Cerberus Capital Management

But third time is the charm. Today, the Boston Globe reported,

Caritas Christi Health Care, the state’s second-largest hospital group, is set to disclose today that it has agreed to be acquired by New York private equity firm Cerberus Capital Management in an $830 million deal that hospital officials say will allow the chain to shed debt and make major improvements.

Under the agreement, Cerberus’s first investment in hospitals, Caritas Christi’s management in Boston will continue running the Catholic community hospitals. In addition, Cerberus has pledged to keep the system’s 12,000 employees and won’t sell the hospitals or take them public for at least three years.

The firm said it hopes to expand its hospital holdings nationally and in Massachusetts, potentially making Caritas a more formidable competitor with large Boston hospitals for many routine procedures.

All six Caritas hospitals, including the flagship St. Elizabeth’s Medical Center in Brighton, will remain open and follow the Catholic Church’s ethical and religious directives, among them a ban on abortions. But they would convert from nonprofit to for-profit businesses and begin paying taxes to state and local governments.

This deal is so new that it has not yet generated the sort of breathless enthuisiasm fostered by the Detroit Medical Center/ Vanguard Health/ Blackstone Group deal. But the Fall River (MA) Herald-News did note,

Officials with the Caritas Christi Health Care system and St. Anne's Hospital say an agreement to sell the system to Cerberus Capital Management will have a significant impact on improving services locally.

The agreement with Cerberus, announced Thursday, will not only ensure the system maintains religious and ethical directives, but also infuse the system with millions of dollars in capital to make infrastructure improvements in the system's facilities.

At St. Anne's that will mean vastly expanding the facility's emergency room, and allow for construction of planned operating and recovery rooms. The change will also allow St. Anne's to convert the recently acquired former St. Anne's School into a medical office complex.

'There will be more construction and expansion of the facility than any time in the history of the hospital,' Caritas Christi Chief Operating Officer Robert Guyon said.

It certainly does look like a trend now. In fact, today a Wall Street Journal blogger suggested that this trend may be an immediate, although perhaps unintended result of the health care (insurance) reform legislation that just passed in the US Congress:

Cerberus is planning to turn the Caritas Christi Health Care chain into a for-profit corporation in what it is likely the first sizable M&A bet on the newly minted Obama health-care overhaul law. [seemingly ignoring the Detroit Medical Center/ Vanguard Health/ Blackstone deal - ed]

Hospitals that serve the poor and previously uninsured are expected to benefit from Obama’s plan, which is expected to extend insurance to 32 million previously uninsured Americans. That means such hospitals are likely to have more patients who can actually pay their bills. It is hard not to see how that new cash-flow stream wouldn’t have private equity licking its chops.

That's funny, I did not think that a major reason to pass the bill was to benefit private equity.  Also, somehow the image of private equity honchos licking their chops over cash flow does not seem to fit with the breathless pronouncements above about improving quality, serving poor patients, etc.


Will Private Equity and Health Care be Good for Each Other?
In fact, it is not clear that these sorts of deals in the long run will be good for private equity, hospitals and health care providers, or patients. Barely mentioned in the coverage of the Caritas Christi / Cerberus deal was that at least one major past Cerberus deal, ironically located mainly in Detroit, home of the Detroit Medical Center/ Vanguard Health/ Blackstone deal, started with similar enthusiasm, but ended in disaster.

As the New York Times reported in 2009, Cerberus' buy-out of Chrysler was once also heralded with breathless enthusiasm.

'I thought, wow, this really signals a real change in the landscape here,' recalls a person who attended a Cerberus session who asked to remain anonymous because of agreements he signed. 'I guess it gave me hope. The auto companies needed an enormous amount of capital, and where else was it going to come from?

John W. Snow, a former Treasury secretary in the Bush administration and Cerberus’s chairman, also heralded Cerberus as Chrysler’s savior, likening the firm’s investment to the government rescue of Chrysler in 1979.

'Over 25 years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance,' Mr. Snow said at a National Press Club meeting in 2007. 'Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much-needed support.'

However, the end results never did live up to the hype:

For [Cerberus Capital Management CEO] Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government.

Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April.

One problem in retrospect seems to be the hubris of the private equity leaders:

Mr. Feinberg’s education at the hands of Chrysler, the government and economic reality is emblematic of the limits private equity players have encountered as they’ve sought to reap outsize returns while also contending that they had the smarts and managerial prowess to repair companies of any size.

Even after the beautiful plan turned to ashes, it is still not clear that these leaders realized their limits:

But, even now, Mr. Feinberg, a man who can play a decent game of chess while blindfolded, is hard-pressed to pinpoint many mistakes. Sitting in his office on Park Avenue, far away from the detritus that surrounds Detroit, he grows pensive when asked what he has learned from his audacious — and failed — effort to privatize and resurrect the legendary and deeply troubled auto giant. 'I don’t know what we could have done differently,' he says, crossing his arms on his chest. 'From the day we bought it, we worked hard to improve it.'

One wonders if Mr Feinberg has learned more about his previous failure as he now grasps Massachusetts' second biggest hospital system.

Summary
The Chrysler debacle, however, suggests there should be concerns about private equity firms buying out hospitals and other health care providers, for example:

- Will making a not-for-profit health care organization into a for-profit corporation really lead to more efficiency and lower costs? For-profit leaders tend to expect even larger compensation that not for-profit CEOs. Their decisions tend to driven by their short-term compensation, rather than the good of the organization.  For-profit corporations are supposed to generate profits for investors which may reduce re-investment in the corporation. 

The thirst for more executive compensation may be a driving factor in the deal, as hinted in the Boston Globe coverage of the Caritas Christi/ Cerberus deal:

While [current Caritas Christi CEO Ralph] de la Torre and other senior executives will retain their current salaries and benefits, they would be eligible for additional compensation from Cerberus based on the financial performance of the hospitals, Caritas officials said. They said the details of those financial incentives have yet to be worked out.

- Can private equity cost-cutting techniques and other turn-around techniques really work in the health care environment? The Chrysler/ Cerberus case reveals how private equity leaders may get out of their depth in complex business contexts. Health care is even more complex than the automobile industry.

- Finally, and more important, are for-profit hospitals and health care providers run by private equity really likely to be better at fulfilling their health care missions than they were when they were not-for-profit? I doubt there is any evidence that previous conversions of not-for-profit health care organizations to for-profit status improved health care, much less while simultaneously lowering costs and improving access. (Remember that many big health care insurance companies were once not-for-profit Blue Cross plans. Does Angela Braly's WellPoint provide better care to more people at lower cost?

But then again, when a Catholic charity teams up with an organization named for the three-headed dog that guards the entrance to Hades, maybe they will need to put ski lifts in there too.

The Girl with 2 Brains

Last Thursday I wrote about the Yin to my Yang exploring the synergy between my left brain and my wife's right brain.

My daughter Lara turns 17 next week and she's definitely the girl with 2 brains (or a whole brain).

I cannot draw a stick figure (my attempts at drawing a human look more like a dinner fork than the Venus de Milo).

My daughter took a blank piece of paper and a pencil then drew the self portrait above.

Her greatest academic strength is math. She can visualize problems involving vector forces, geometry, or trigonometric functions then break them into solvable component parts. To me, the hardest part of advanced math and engineering is setting up the problem correctly, not solving it.

She's just completed her first resume. Today's high school students are expected to master college level topics, develop disciplined work habits at an early age, and complement their academics with sports/music/art/volunteer work, which she's tried to do in a balanced way. My own experience as a student was that I was not the smartest student in the class, but I was the most persistent due to minimal sleep needs, a great tolerance for any kind of discomfort - cold/fatigue/hunger, and a sense of impatience for the future.

My daughter has a different set of skills - a whole brain that can process the analytical and visual with equal competency, an ability to think about the greater good rather than personal gain, and a sense that anything is possible. She does not believe in political half truths. She does not judge success by a bank balance. She does not believe the ends justifies the means. She believes that the nice guy (or gal) can finish first.

I would like to believe that idealists can succeed through persistence and determination, always staying true to their values. Watching day to day activities in Washington has convinced me that it's critically important to have a strong moral compass.

Her current college search criteria on CollegeBoard.com are

Rural or Suburban location

Under 10,000 students

Strong Asian Studies/Japanese language program (for the right brain)

Strong Environmental Engineering program (for the left brain)

Studio art resources

If possible, a competitive collegiate archery team (she's ranked 6th in the US)

It's my hope that she has the best of both her parents without the downsides of either.

At very least, she can write a college essay entitled "Why I have a whole brain"!

The March HIT Standards Committee Meeting

Today's HIT Standards Committee included important discussions about NHIN Direct and a new Interoperability Framework supported by several ONC RFPs.

We began the meeting with a summary of the work in progress.

The Clinical Operations Workgroup is focused on vocabulary starter sets and ensuring implementation guidance is available.

The Clinical Quality Workgroup is focused on quality measure retooling to ensure meaningful use measures are EHR friendly.

The Privacy and Security Workgroup is focused on understanding all the consent standards currently available from different Standards Development Organizations and implementation guide writers.

The Implementation Workgroup is focused on creating a starter kit to accelerate EHR adoption and interoperability. Yesterday, I summarized the Implementation Workgroup "starter kit" testimony. During the meeting today the Workgroup synthesized the 10 lessons learned from the testimony into 3 major themes :

*Provide transparency to all the available resources - funding, tools, and technologies
*Clarify the requirements of meaningful use data exchanges through the use of FAQs and other online resources
*Provide simple interoperability guides with enough detail and samples so that a typical IT professional could implement interoperability

We discussed the best way to include specific implementation guidance in the Interim Final Rule, realizing that legal restrictions may limit our choices. In our IFR comment letter we recommend that broad families of standards be specified along with detailed implementation guide "floors" which will be amended through guidance letters issued outside the regulation. This strategy enables short term specificity and long term evolution/innovation. If the legal interpretation is that we cannot issue implementation guidance letters outside of regulation, there are existing government models that we can consider as alternatives i.e.

*NIST issues regular updates to the Federal Information Processing Standards (FIPS)
*CMS issues regular updates to the Physician Quality Reporting Initiative (PQRI)
*Private sector organizations provide updated implementation guidance via voluntary consensus groups (i.e. CAQH, WEDI, IHE)
*Open source communities provide continuous version releases. Although not a regulation or a single solution, such work provides reference implementations that can be widely adopted by stakeholders and become defacto standards.

We'll await legal guidance to determine next steps.

Next, Doug Fridsma presented NHIN Direct. David Blumenthal offered an introduction that identified NHIN direct as a "project" not a "product" that is designed to be responsive to customer requests, especially from small practices.

NHIN Direct does not replace existing NHIN standards, policies, and software. Instead NHIN Direct will explore simple data transport strategies for point to point communication. Over the next 6 months, it will explore the use of SMTP/TLS, REST, and SOAP implementations with running code. It will provide a way to transport data, not the only way.

Data exchanges required by stage one of Meaningful Use include e-prescribing, public health lab reporting, syndromic surveillance, immunization, and patient summary exchange (both provider to provider and provider to patient). The scope of NHIN Direct does not include new content/vocabulary standards, master patient indexes, or aggregations of data for quality reporting. It's complementary to existing NHIN Connect work and state HIE efforts. It is not to be feared and there is no reason for states to slow existing efforts while the NHIN Direct experiment is in process.

Next, Doug presented a framework for interoperability comprised of 7 components.

*Use Case Development and functional requirements
*Standards development
*Harmonization of Core Concepts
*Implementation specifics
*Pilot Projects
*Reference Implementation
*Conformance Testing

Several RFPs have been issued to support these efforts. They will leverage the lessons learned from HITSP and I'm confident that the HITSP efforts will be foundational to this next phase of work. I see the Harmonization of Core Concepts RFP as the evolution of HITSP and I suspect many HITSP volunteers will be involved, regardless of how the contract is awarded.

This seven step process will use the National Information Exchange Model (NIEM) approach as means to organize the work. Important aspects of the work ahead include:

*A b ottom up process to define requirements based on data exchanges that are needed to achieve meaningful use and meet the business priorities of stakeholders
*Delivery of fully integrated, well specified implementation guidance
*Electronic test scripts to ensure conformance and an active feedback loop to improve standards once testing has identified deficiencies

David Blumenthal emphasized that NIEM approaches, although used by the Department of Justice and Homeland Security, have absolutely no possibility of facilitating entry of healthcare data into law enforcement databases.

Carol Bean and Steve Posnack reported on the Certification NPRM temporary and permanent processes. Key points included

*Certification applies equally to EHRs and EHR modules
*Permanent certification separates the testing lab function from the certification function
*There will be multiple testing labs and certification organizations that will compete on price and service offerings. Accreditation processes for testing labs and certification organizations will ensure consistency among service providers.
*Site certification methods will be used for self developed EHRs
*No double certification will be necessary i.e. a site could purchase vendor products which are certified and self build portions of an EHR which will be site certified. There is no need to seek additional certification for the combination of the built and bought products. Making them work together to achieve meaningful use is the responsibility of the implementing organization.

A great meeting today. I look forward to the work ahead as we continue to provide tools, technologies, and educational materials in support of meaningful use data exchanges.

The Health Care Reform Bill and Health Care Renewal

I have not written much about the seemingly endless health care reform debate in the US, because much of it has not been relevant to the issues we discuss on Health Care Renewal.  Now that the current phase of the debate is done, and legislation has been passed, let me offer my opinions on the few aspects that do seem relevant to this blog.

The Sunshine Act

For Health Care Renewal readers, the most important part of the legislation is that containing the provisions of the Sunshine Act, championed by Senators Grassley and Kohl.  (See this summary on Postscript, the Prescription Project blog.)  The act requires that all drug, device, biologic, and medical supply manufacturers report essentially all payments to physicians or teaching hospitals to the goverment, and on the internet.  It does not appear that the rules apply to other health care related non-profit organizations, e.g., medical schools, disease advocacy groups, health care related charities, medical societies, etc, or to payments made by for-profit health insurers, clinical research organizations, and some other corporations.  Unfortunately, the provisions only take effect in 2013.  However, despite these quibbles, this still may be one of the most important advances promoting disclosure of health care related conflicts of interest made in the 21st century.

Comparative Effectiveness Research

As best as I can tell at this point, the current legislation used the wording from the bill previously passed in the US Senate, which we discussed here and here, regarding comparative effectiveness research.  Although its goal of setting up a not-for-profit comparative effectiveness organization seems laudable, the devil will be in the details.  The Senate version gave considerable oversight of this organization to those with vested interests in selling particular products or services, threatening the impartiality of the organization and the research it would sponsor, and perhaps thus wholly defeating its ostensible purpose.  Furthermore, the Senate bill included curious wording that seems to threaten the ability of those getting funding from the organization to express views that might disturb the organization's leadership, again threatening the integrity of their dissemination of its work, and perhaps violating the First Amendment of the US Constitution.  Whether these provisions provide benefits that outweigh their harms is highly questionable.

Payments to Physicians

We have criticized how the process of setting payments to physicians by the US Medicare system has been captured by a secretive committee of the American Medical Association that is dominated by physicians who do procedures, the RBRVS Update Committee, or RUC.  The results have been payments for primary care and other cognitive services that have failed to keep up with inflation, a major cause of the continuing decline of generalist/ primary care medicine in the US.  (See most recent post here about this.)  According to the summary provided by the American College of Physicians (here), the new legislation would enable review of  payments made for specific services, and would reconsideration of the process used to set physician payments by an independent advisory group.  However, the bill would not mandate any changes in payments, or in the processes used to set them, including the pivotal role of the RUC.   So there is some chance that the legislation would lead to a more transparent, accountable, honest, and rational process for setting physician payments and hence eliminating perverse incentives, but no guarantee of such favorable changes.

Summary

The legislation seemingly will result in one major advance fostering disclosure of some conflicts of interest, and perhaps some progress in terms of reducing perverse incentives generated by Medicare's payments to physicians, and possibly reducing regulatory capture of this process.  It likely will result in more comparative effectiveness research, but how badly it will be biased in favor of vested interests is unclear.  As far as I can tell, the legislation will leave most of the other problems we discuss on Health Care Renewal untouched.  We thus have one or two small steps for mankind, but no reason for complacency.

the news is not bad, but we are still a long way from meaningfully addressing concentration and abuse of power in health care.  There will be no rest for the weary bloggers of Health Care Renewal.

Also, see comments here and here by Dr Howard Brody on the Hooked: Ethics, Medicine and Pharma blog.

ADDENDUM (25 March, 2010) - Also see comments on the Sunshine Act by Alison Bass on the Alison Bass Blog.

Healthcare Legislation to "Control the People?"

At "AMA And Almost 100 Physician Societies Sound Off To CMS On Health IT" I referred to concern held by AMA and ~94 other medical specialty societies about comments overheard from senior government officials that:

complex measures and high reporting thresholds are needed to discourage EP's - Eligible Professionals (i.e., eligible for government EHR subsidies) from switching back to the use of paper during this transition to EHRs.

Such reporting requirements could not only 'discourage' a switch back to paper even if these 'government-approved' EHR's turned out to be a clinical and/or operational nightmare (which I feel is likely if not unavoidable based on numerous writings at this blog and here), but also could force event those planning to stay with paper and endure the "penalty" for doing so to move to computer systems. The human resources required to satisfy truly ominous reporting requirements via paper records might simply be too burdensome.

This could be perceived as an ingenious and devious plan to establish control of healthcare providers via IT and data. (He who controls the data, controls the playing field.)

Privacy activist Dr. Deborah Peel shares related concerns as expressed in a Wall Street Journal article yesterday "Your Medical Records Aren't Secure."

Along the lines of control, now there's this, recently posted on the Drudge Report:

Shocking Audio: Rep. Dingell Says ObamaCare Will Eventually ‘Control the People’ (link)

I don't care which "people" Dingell's referring to - 300 [sic] Americans (he left out "million"), physicians, insurers, etc. Our government has no business discussing "controlling" anyone.

Ideology aside, the control mentality of government over medicine, facilitated by healthcare IT, is starting to rear an ugly head. I'm afraid this phenomenon might get really out of hand in the very near future.

-- SS

Addendum: there appears to be a healthcare IT industry sockpuppet writing in the comments thread at the aforementioned WSJ article by Dr. Peel, under the especially inappropriate nom de blog "Hank Dagny." The usual dismissal of physician concerns about HIT, unqualified statements, ad hominem attacks, and other games typical of an industry shill occur throughout that comment thread.

See my reply at this link. (It takes a moment to load the WSJ comment thread.)

Also see this summary of a Canadian analysis of electronic health record security at the blog of security technologist Bruce Schneier. Hat tip to Joseph Arpaia, MD.