Little Hospital, Big Investor | Cerberus bets on community health care
Massachusetts has the most expensive health care in the country and many experts say that’s largely because people here go to fancy teaching hospitals for procedures that cheaper community hospitals could handle just as well.
Could a huge private investment firm help change that?
Steward HealthCare System LLC, the company formed when private equity firm Cerberus Capital Management bought the Caritas Christi hospitals, says its plan is to make Massachusetts community hospitals more attractive and more profitable.
Expansion Ho!
The new hospital chain now consists of the six Caritas Christi hospitals in Greater Boston. As long as it doesn’t get snagged in the state approval process, it will soon include Nashoba Valley Medical Center in Ayer and Merrimack Valley Hospital in Haverhill as well.
As part of its effort to make smaller hospitals more attractive to patients, Cerberus will spend $400 million on capital improvements at the Caritas hospitals and $19 million at Merrimack and Nashoba, according to Christopher Murphy, a spokesman for Steward HealthCare. The improvements, some of which are already underway, include upgrades to emergency departments and operating rooms and delayed maintenance, as well as more aesthetic changes.
Murphy said there’s good reason to focus on making things look nice: The effect of the “grand marble lobby” in a big teaching hospital is part of what draws patients in.
“You just have a feeling that they have more money and more prestige so you want to be there,” he said.
Donald J. Thieme, executive director of the Massachusetts Council of Community Hospitals, said the emerging Steward network could be a lower-cost counterweight to Partners HealthCare’s behemoth teaching hospital organization. He said the financial power of Cerberus puts Steward in a position to push back against Partners.
But, Thieme said, Steward has the task of appealing not only to patients but also to doctors who may be used to referring their patients to specialists at the big teaching hospitals. And, he said, the fact remains that most insurance plans don’t give patients much incentive to pick lower-cost care.
In fact, before their acquisition, the Caritas hospitals were among the first in the state to agree to an insurance contract with Blue Cross Blue Shield that offers incentives to keep patients healthy and reduce treatment costs, rather than paying for each procedure.
Patient Choice
Murphy said Steward wants to expand that style of payment system, but he said the company is not depending on insurance companies steering patients to lower-cost options. Instead, he said, it’s betting that patients would prefer to get care closer to home if they think it’s just as good.
He said the hospitals united in the Steward system will also be able to use the same electronic medical records and refer patients to specialists at other Steward hospitals.
“We think if we build the facilities and offer the right services we’ll increase volume,” he said. “Hospitals are a volume-based business.”
In general, community hospitals don’t see the kind of operating surpluses that many teaching hospitals do. Nashoba Valley had negative operating margins in 2007 and 2008, and a positive margin of just 1.35 percent in 2009. Merrimack was in the red all three years.
Murphy noted that both public and private insurers reimburse community hospitals at a lower rate than teaching hospitals for the same services, often leaving them with little cash to spend on improvements. He said that’s where the heft of Cerberus, one of the largest private equity firms in the U.S., comes in.
“As it stands now, we have capital to invest,” he said.
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