CEOs First to Benefit from For-Profit Takeovers of Non-Profit Hospitals

Last year, we noted concerns about the againy fashionable practice of for-profit corporations taking over previously not-for-profit hospitals and hospital systems. Two examples we cited were the planned acquisitions of Detroit Medical Center (DMC) by Vanguard Health, which was owned by the Blackstone Group, and of Caritas Christi Health Care by Cerberus Capital Management.

At the time, we noted, "for-profit leaders tend to expect even larger compensation than not for-profit CEOs. Their decisions tend to be driven by their short-term compensation, rather than the good of the organization." So we asked, "will making a not-for-profit health care organization into a for-profit corporation really lead to more efficiency and lower costs?" In a later post, we worried about "ever-increasing executive compensation while making money becomes the overwhelming priority for the organization, completely eclipsing such quaint concepts as quality of care, reasonable costs, or adequate access."

About one and one-half years later, we have some follow-up from the media about the results of these deals, especially as they pertain to executive compensation.

Detroit Medical Center, Vanguard Health Systems, Blackstone Group

Our post last year quoted then Mike Duggan, then CEO of DMC, that "We were being choked to death by the nonprofit business model."

This month, the Detroit Free Press reported,

Detroit Medical Center CEO Mike Duggan's total compensation this year from Vanguard Health Systems, the private health care company that bought the DMC, is $2.41 million in pay, bonuses and several years of stock options, up from the $1.98 million in 2009 when DMC was a nonprofit, according to public documents.

About $1.3 million of Duggan's total compensation is in stock options that he would start receiving next year through 2019, the documents show.

Note also that,

The package also calls for Duggan to get $1 million if he's fired or $5 million if Vanguard sells the DMC to another company -- fairly common conditions in contracts, experts said.

Duggan's new compensation package puts him in the top tier of local health care executives.

It seems like Mr Duggan is no longer being "choked to death."

Cursory review of the media reveals that since the acquisition, DMC has some major construction projects planned. However, I saw nothing yet about whether the acquisition has decreased costs, increased access, or improved the quality of care.

I should note that Mr Duggan appears just a bit uncomfortable with his generous compensation in this era of anger about the power of the one percent:

Duggan said he agreed with Occupy Wall Street protesters who point to the growing gap between the poor and rich: "I do believe people should be able to work hard and earn a lot of money. (But) the gap between the top and the bottom is not fair in this country," he said. "I don't have the ability to fix the world, but my wife and I are making a gesture that's appropriate for us. If people say we get paid a lot of money, I think they are right. I'm trying to do something to share some of the benefit."

The gesture mentioned above would be

he and his wife plan to create a foundation next year to hold the stock earnings, after taxes, for scholarships for children of DMC employees.

Whether it is carried out, of course, remains to be seen.

Caritas Christi Health Care, Steward Health Care, Cerberus Capital Management

The initial story about the proposed take-over in the Boston Globe noted that one rationale was how:

Caritas has long struggled financially, but since coming to the chain two years ago, [CEO Dr Ralph] de la Torre has worked to strengthen its financial position by aggressively cutting costs and boosting revenue from medical care. It posted operating income of $30.5 million for the fiscal year ending last Sept. 30 compared with a $20.5 million loss the prior year.

The aim would be:

to provide quality community-based care at a reasonable cost.

Some specific goals of the proposed take-over would be

Under the agreement, Cerberus will invest $430 million to $450 million immediately to pay off Caritas debt, finance renovation projects, and provide working capital, while also assuming its pension liability.

To pursue all this,

While 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.

Last month, a Boston Globe article provided a little more clarity about these compensation arrangements:

Ralph de la Torre, former chief executive of Boston-based Caritas Christi Health Care, drew a total pay package of $2.2 million from the Catholic hospital system in 2009, making him the best-compensated hospital executive in Boston that year, according to documents filed with the state attorney general’s office.

The package, which included base salary, a performance bonus, and incentive compensation linked to improving finances at the hospital chain, marked an increase from the $1.2 million de la Torre earned from Caritas in 2008.

Note that after the take-over, the Caritas Christi system was renamed as Steward Health Care.

So prior to the actual take-over by Cerberus, but presumably while initial negotiations about it were going on, Dr de la Torre had already become the best paid hospital CEO in Boston.

Becker's Hospital Review noted that De la Torre's 2010 total compensation was exactly $2,270,076. The Caritas Christi 2010 IRS form 990 also listed 19 executives who received more than $400,000. Of these, 11 received more than $600,000. Meanwhile, according to this form, the system's losses were accelerating, going from -$6,583,625 in 2008 to -$23,858,733 in 2009.

So, it seems that Dr De la Torre became significantly richer in anticipation of the proposed (and now accomplished) take-over of Caritas Christi by Cerberus Capital Management, even though his hospital system's hemorrhaging of money was increasing at that time.

Again, I was not able to find any clear evidence whether the take-over had decreased costs, increased access, or improved quality of care. I did find one report suggesting that some Steward Health nurses did not think that it had stabilized their pensions as promised. According to the Boston Business Journal,

Nurses and other health care workers from several of the hospitals owned by the for-profit Steward Health Care, plan to protest outside the company's Boston headquarters today at 1:30. They include nurses from St. Elizabeth’s Medical Center, Brighton, Norwood Hospital, Good Samaritan Hospital in Brockton, Morton Hospital in Taunton, Quincy Medical Center Carney Hospital in Dorchester, Holy Family Hospital in Methuen and Merrimack Valley Hospital in Haverhill.

Nurses argue that Steward, owned by New York private equity firm Cerberus Capital Management, has not honored agreements to the workers, including a commitment to create a defined-benefit pension plan. They also say that Steward has threatened to eliminate essential services in retaliation for the nurses demand for the pension plan.

Summary

Two acquisitions by private equity firms of non-profit hospital systems have resulted in increased compensation for the systems' CEOs, and perhaps other top executives.  These increases predated any recognizable improvements in quality or access, or decreases in health care costs.

Acquisitions of non-profit hospitals and hospital systems by for-profit entities, including private equity firms, is one of the newly fashionable ways our health care leaders have promised to improve care, increase access and control costs. The evidence about whether this tactic accomplishes these aims is not yet in. However, it appears that this tactic may be another, and a rapid way for top health care executives to increase their personal incomes.

Health care professionals, patients, and the public at large ought to be increasingly skeptical of the latest fashions in health care management, especially those that have potential to further enrich managers.

As we recently noted, more people in the US and other countries are frustrated that their attempts to work hard and follow the rules of the economic system yield less rewards. Meanwhile, it appears that well-connected insiders are increasingly gaming the system for their personal profit. We have noted how health care executives' compensation seems independent of their talent, skill, or innovation, much less their ability to uphold the values and fulfill the mission of their organizations. Their compensation often seems to rise inexorably, regardless even of the financial status of their organizations.

Now it appears that inflating compensation in anticipation of or due to a merger or acquisition is another mechanism by which insider executives gain, while others in health care lose.

Once more with feeling .... true health care reform requires competent, ethical leadership that upholds health care's core values within a governance structure of accountability, integrity, transparency, and honesty. Tackling the deep problems in health care will require tackling the deeper problems in the global political economy which helped to generate them.

Send Mercenaries, Guns, and Money? - Cerberus Tries to Buy Jackson Health

The latest twist in the tale of one of the US great safety-net public hospitals raises some interesting questions.  As reported by John Dorschner in the Miami Herald, Jackson Health System has had some bad times:

the system, ... has served for a century as Miami-Dade County’s safety net healthcare system for the poor and uninsured. But money and management woes in recent years have pushed the system to the brink of failure time and again. Last week, its executives said it would run out of cash in July unless drastic measures are taken.

The Bid for Jackson Health

The latest drastic measure proposed was a take-over by a for-profit corporation, one that we have heard of before:

A Massachusetts hospital chain led by a Cuban American heart surgeon with family ties to Miami has sent Jackson Health System a non-binding 'expression of interest' letter, offering to take over the financially troubled public hospitals, invest $600 million in capital and assume $500 million in debt.

The $1.1 billion offer from Ralph de la Torre of Steward Health Care System was delivered Tuesday morning to members of the capital committee of the Public Health Trust, Jackson’s governing body.

Questions Appear Immediately

The proposed deal immediately raised questions and concerns. The very nature of the deal was unclear:

Trust member Ernesto de la Fe said he wasn’t sure if the company was proposing a straight-out sale, while other board members said they thought the offer envisioned 'a public-private' partnership.

Also, in a follow-up story by the same reporter, there were questions about the rapid time-table,

Jackson is in such difficult financial conditions – its executives warn it may run out of cash in July – that many leaders are willing to consider a sale, but they wondered whether the 90-day timetable set by Steward Health Care System is realistic and what the deal might mean for the 500,000 uninsured persons in Miami-Dade County.

There were questions about the company which proposed to buy Jackson:

'We need to know a lot more about this company,' said Sal Barbera, an adjunct professor at Florida International University and a former hospital executive.

Steward has existed only since November, when Cerberus Capital Management finalized a $895 million deal to turn six Catholic hospitals into a for-profit entity. Steward has since bought two other small hospitals. Altogether, the Steward system has 1,565 licensed beds. Jackson has 2,100. De la Torre has been a hospital executive for less than three years.

That’s 'a very short track record,' said Mark Rogers, a Trust member and former chief executive of the Duke University Hospital.

Would the Mission be Upheld?

The issue of whether a private, for-profit company would respect the mission of a safety-net hospital came up quickly,

Alan Sager, a health policy professor at Boston University, said some Steward facilities are money losers in poor neighborhoods. 'Some of us had a lot of questions' about the Cerberus take-over and how the investment company could squeeze returns for investment out of hospitals that were struggling as nonprofits.

'We asked repeatedly. We never received answers,' Sager said.

He said his fear is that patient care will be reduced to make profits. 'I think there should be concerns about preserving essential patient care in Dade County' if Steward took over Jackson, he added.

'If the object is merely to cut costs to make money … then that is not the right approach for Jackson,' said Rogers, the former Duke executive. 'Clearly some costs have to come out, but we have to invest in new programs to maintain the quality of medical care that Jackson has always provided.'

One day later, John Dorschner again writing for the Miami Herald raised more questions about why a large private equity company would want to buy a money-losing public hospital system? First he noted,

While the human face on the $1.1 billion bid to buy Jackson Health System is a Cuban-American heart surgeon with strong family ties to Miami, a vast and powerful entity looms in the background: Cerberus Capital Management.

The company, named for the mythological three-headed dog that guards the gates of Hades, is one of the biggest private investment firms in the United States, and it is the owner of Steward Health Care, the Boston hospital group that this week said it is interested in buying Miami-Dade’s public hospitals

So,

The question that perplexes some Trust members is why such a big-time investment firm would be interested in a healthcare system with three public hospitals that lost $244 million in fiscal 2009, is expected to lose $105 million in fiscal 2010 and is projected to run out of cash in July unless drastic measures are taken.

The concern, again, was whether Cerberus would uphold the current mission of the hospital system:

Trust Treasurer Marcos Lapciuc said Thursday that Cerberus is 'in the driver’s seat' on this deal, not Steward. 'They are going to expect some return on their investment. This is not going to be charitable donation,' he said.

Of course, the central mission of the current Jackson Health System would seem to be charitable.

To build the health of the community by providing a single, high standard of quality care for the residents of Miami-Dade County

The implication of "single, high standard" is that applies to all residents, regardless of financial status or ability to pay.

More Questions

The CEO's Short Term Focus

There is good reason to question whether Steward Health Care, formerly Caritas Christi, and now owned by Cerberus Capital Management would uphold that mission. As we noted recently, the Steward Health Care CEO seems to have a very short-term focus, suggested by the track record of the Cerberus CEO, who quickly left an organization he had aggressively promoted, suddenly switched from the Republican party to become a big contributor to the Democratic party, abandoned his medical license after developing a good reputation as a cardiovascular surgeon, and famously was quoted, "burn the boats on the beach, baby." Would he support the long-term commitment needed to make both the Massachusetts based and now the proposed Florida based hospitals, most of which are safety net hospitals, succeed?

"Leakage Reduction" - a Threat to Physicians' Professionalism?

As we also noted recently, the main tenet of his business plan seemed to be to reduce "leakage," to make sure patients who start within the system are referred within the system and do not "leak" elsewhere. The problem with this is that physicians are supposed to decide how to manage patients, and specifically to decide where to refer patients in the patients' interests, not just to keep money flowing to the health care system. "Leakage reduction" may possibly threaten physicians' first commandment, to make decisions to maximize benefits and minimize harms to individual patients, before all other considerations. Also, as we noted earlier, since Steward Health Care purchased not only some Massachusetts hospitals, but a big network of physician practices, there could be a risk that the physicians who are now employed by a private equity group would be pushed to make referral decisions for financial reasons, rather than in the best interests of the patients.

Note that a recent (posted 9 February, 2011) advertisement for a Senior Medical Director (physician leader) of the Caritas Christi Network Services, the physician group owned by Steward Health Care LLC, said the Director's first goal would be:

This position will have a leadership role in all aspects of the CCNS system, including responsibility and accountability for:
- Lead/Mentor/Support IPA based Medical Directors (at both the IPA and Pod level) to achieve Medical Management goals and objectives in Quality, Leakage, Utilization, and Risk performance

Keeping Company with Gun and Ammunition Manufacturers and "Mercenaries"

There are also questions about whether the corporate culture of Cerberus Capital Management would be compatible with the management of safety-net hospitals. Cerberus has some current investments in firms whose operations seem oddly askew from providing medical care to patients regardless of their ability to pay.

First, Cerberus owns the biggest manufacturer of firearms and ammunition in the US. As reported by BusinessWeek last year,

Cerberus had more than DPMS [Firearms] in its sights. From April 2006 to January 2008 it bought three other firearms companies: Bushmaster, Remington, and Marlin. And it kept adding to its collection. Cerberus now controls 13 brands in a holding company it created, Madison (N.C.)-based Freedom Group. With sales of $848.7 million in 2009, Freedom Group is the largest gun and ammo maker in the U.S. That means Stephen A. Feinberg, Cerberus' founder and managing member, is the country's top civilian gun magnate.

In addition,

Luth, the rifle maker, says that when he arrived at Cerberus' Park Avenue offices to negotiate a deal in 2007, he discovered that Feinberg and several of his partners 'are real gun guys.'

Also, as reported by the New York Times, Cerberus recently bought one of the biggest "private military contractors,"

DynCorp International, the private military contractor, said on Monday it has agreed to sell itself to Cerberus Capital Management for $1.5 billion, as the private equity industry continues to return to its core business of deal-making.

Cerberus will pay $17.55 a share for DynCorp, a 49 percent premium to Friday’s closing price of $11.75. DynCorp now has 28 days under a 'go-shop' provision within the deal agreement to find a higher and better offer.

While DynCorp has continued to win new contracts from the federal government, it has also been the subject of controversy over the years for its assignments in Iraq.

That controversy was amplified in an article in The Nation by Jeremy Scahill, entitled "The Mercenary Owners, They Are a Changin' (Sort of)

Blackwater and DynCorp, the two leading mercenary firms servicing the US wars in Iraq and Afghanistan have both undertaken steps toward significant structural changes over the past month. In the case of DynCorp, the ownership of the whole business seems to be changing hands, while Blackwater is dumping its private air force.

Cerberus Capital Management, one of the largest private equity firms in the US announced April 12 it was buying DynCorp, the massive, publicly traded company, which is akin to the Wal-Mart of the private security industry, for $1 billion in cash. Cerberus counts among its big wigs former vice president Dan Quayle, who often represents the company internationally. DynCorp has had its share of scandals over the years, including whistle blower allegations that personnel have engaged in organized sex-slave trading with girls as young as 12 and allegations its personnel have assaulted journalists. It has been rebuked by the State Department for its 'aggressive behavior' in interactions with European diplomats, NATO forces and journalists in Afghanistan. A 2007 US government audit of DynCorp's work in Iraq found that the State Department 'does not know specifically what it received for most of the $1.2 billion in expenditures under its DynCorp contract for the Iraqi Police Training Program.' More recently, the company was in the news facing allegations its training of the Afghan National Police was shoddy, including allegations its trainees didn't know how to adjust the sights on their AK-47s. If the Cerberus deal goes through, it will mean that the publicly-traded DynCorp will go private, meaning that it will be infinitely more difficult to get information on the company.

Cerberus seems to have had a dream of owning its own mercenary business for at least a few years. In April 2008, the company was reportedly looking to buy Blackwater. The deal apparently fell through because of concerns over Blackwater's reputation.

Summary

So we have come a long way from 1980, when the US American Medical Association gave up the rule that the practice of medicine should not be "commercialized, nor treated as a commodity in trade."  (See posts here and here.)   Now we have private equity firms buying or trying to buy formerly non-profit safety net hospital systems to be included in portfolios that can include gun and ammunition manufacturers and private armies.  Now we have physician networks owned by private equity firms focused on choking off "leakage."  Such ownership may initially inject lots of money into the system, and may eventually profit the new private owners, but what will we give up in this brave new world of commercial safety-net hospitals and for-profit physician practices?

As we said before,.... Deals that turn not-for-profit hospital systems into privately held for-profit systems ought to be scrutinized with extreme skepticism. Furthermore, once such deals are made, the results ought to be watched extremely closely to make sure they do not put private gain ahead of individuals' and the public's health. For-profit hospitals have generally not lived up to the promises they made to provide quality, accessible health care at a cheaper price.  It is yet to be seen whether private equity running for-profit hospital systems (and physicians networks) will do any better.

Coda

The title requires apologies to Warren Zevon, who famously performed "Send Lawyers, Guns and Money."

The New Steward Health Care: Will Superbowl Ads and "Leakage Reduction" Keep the Ship Afloat, or Will a "Greater Fool" Be Left Trying to Bail it Out?

Some recent publications raise interesting questions about the leadership of a regional health care organization which now seems to have intentions of going national. 

A Superbowl Ad for Steward Health Care

The millions watching the Superbowl, maybe the biggest single US sports event, expect to be dazzled by the new, extremely expensive advertisements to be aired during the television coverage of the event.  The Boston Globe reported that the glitzy offerings by Volkswagen and Budweiser will have an odd companion, at least in the Boston area:

The local television audience for Super Bowl XLV on Sunday will get the usual array of high-impact commercials, from the suds of Budweiser to the sedans of Kia Motors. But amid all the elaborate productions, one quieter spot might stand out — an ad for Steward Health Care System, the Boston company formed to oversee the six Caritas Christi hospitals.

During the 30-second commercial, Massachusetts residents talk about the importance of quality health care, as the camera roams through Brighton and Dorchester — the homes of St. Elizabeth’s Medical Center and Carney Hospital.

There was no such marketing campaign for the hospitals before November, when they were bought by New York private equity firm Cerberus Capital Management. The ad will be broadcast only on WFXT-TV (Channel 25), not nationally.

Officials at Steward said they were looking to introduce the health care service company to customers who may have never heard of Steward. The campaign also further demonstrates a different marketing approach for the regional hospital network as it transitions to a for-profit health care player.

Why would a hospital system advertise during the Superbowl?

Brian Carty, chief executive marketing officer at Steward, said that’s the aim: make a debut during the Super Bowl to reach a large swath of local consumers.

'You can only launch a brand once, and we wanted to launch it in the biggest way we could,' said Carty.

It certainly is curious, particularly when the brand is only new in the most superficial sense. As noted above, Steward Health Care System is the new name given the former Caritas Christi, a regional Massachusetts health care system that was formerly non-profit and run by the Catholic Church, but was recently bought out by Cerberus Capital Management, a private equity company.

We discussed concerns about whether a private equity group would put its short-term financial gain ahead of the patient care mission if given the chance to run a hospital system in a series of posts in spring, 2010.

A CEO with a Short-Term Focus

Things get curiouser and curiouser. The Boston Globe also just published a lengthy report on former Caritas Christi, now Steward Health Care CEO Ralph De La Torre, which emphasized, perhaps unintentionally, his chronic focus on short-term gain.

[Friend and mentor Dr David] Torchiana has been fielding questions from lots of colleagues wondering what de la Torre might to next. 'My view of Ralph,' he tells them, 'is that he's aggressive and unpredictable.'

Forced Out His BIDMC Chief
Dr de la Torre trained as a cardiovascular thoracic surgeon who apparently was a very highly regarded surgeon. But then, the article described how Dr de la Torre forced out his clinical and academic leader at the Beth Israel Deaconess Medical Center:

He stayed at Boston Medical for only a year, jumping to Beth Israel Deaconess Medical Center for a better opportunity. Dr. Frank Sellke, Beth Israel’s relatively young interim chief of cardiothoracic surgery, saw great things in him.

But then,

After a couple of years, Sellke, who officially became chief in 2001, started hearing chatter that de la Torre was gunning for his job. He didn’t take it seriously. Traditionally, to be a chief at a Harvard-affiliated hospital like Beth Israel, you needed heavy research and teaching credentials, which de la Torre did not have. 'When I heard Ralph was trying to undo me, I thought it was joke,' Sellke says. 'It turns out the joke was on me.'

In 2004, de la Torre greatly expanded his reach when hospital officials named him chief of cardiac surgery, a section within the division of cardiothoracic surgery. Two years later, he gained freer reign over cardiac care after the hospital removed Sellke as chief of the division. Sellke – who stresses that he is happy now as a chief at Brown Medical School and remains one of the country’s best-funded cardiac researchers – says that although he respects de la Torre’s talents, he lost respect for him as a person. 'He has a take-no-prisoners approach. If he interrupts or destroys someone else’s career, that doesn’t bother him in the least.'

Developed CardioVascular Institute, then Left
After this little coup d'etat, Dr de la Torre hatched a plan to integrate cardiovascular care at the BIDMC, but then flew the coop after it did not work out as planned:

Instead, he hatched a plan to revolutionize cardiac care at Beth Israel. Traditionally, cardiac surgeons, vascular surgeons, and cardiologists operated in their own silos, even though they were all treating related cardiovascular diseases. De la Torre proposed the CardioVascular Institute, or CVI, as a way to break down those silos and centralize care by creating a 'hospital within a hospital.'

But,

The CVI officially opened in 2007, with de la Torre as president and CEO. He continued his work as a surgeon, maintaining the salary of more than $1.3 million that he had earned the previous year.

Pomposelli says de la Torre’s enormous talent, intellect, and drive helped the CVI succeed in many ways, notably in removing waste from hospital operations and in building strong networks of affiliated physicians. De la Torre wined and dined community cardiologists around the region, persuading them to become affiliates and refer patients to Beth Israel for care.

But Pomposelli concedes that the CVI fell short in other ways. The silos were harder to break down than they thought, especially since “we didn’t pay enough attention to academics and research.” Also the “enhanced revenues” to physicians turned out to be far less than promised, leading to resentment. Pomposelli, who remains the chief of vascular surgery at Beth Israel, stresses that the CVI still exists, but in a much less ambitious form. 'Ralph’s a builder. He loves the deal, loves creating new things,' Pomposelli says. 'I don’t think he loves managing things as much. Running the CVI turned out to be tedious and difficult.'

And de la Torre was out the door before this idea turned out to be less than what he touted:

In 2008, just a year after seeing his brainchild become a reality, de la Torre told Pomposelli he would be leaving to run the ailing Caritas hospital network.

Left Republican Party, Became Democrat

After assuming control of Caritas, Dr de la Torre seemed to abandon his previous political affilisations.

As recently as 2007, he was a registered Republican.

De la Torre (pronounced DEL-a-TOR-ree) says that, like many children of Cuban immigrants, he has long identified with the conservative Republican outlook on foreign policy, though he is a social liberal. Sometime after he moved to Newton, he switched his registration to independent. Regardless, he stresses that he was not politically active until recently, when he became motivated to fund Democratic candidates because of that party’s commitment to overhauling health care.

Then, the instant Democrat contributed substantially to the campaign of Massachusetts Attorney General Martha Coakley, who had to approve the take-over by Cerberus of Caritas:

she was the guest of honor at a ... fund-raiser held at the de la Torre home the previous fall when she was running for US Senate.

Some state Republicans complained that Coakley should not have been signing off on a deal being advanced by a major campaign donor, although they could produce no evidence that her office’s review was anything but thorough and deliberative.

And he hosted a better noticed fundraiser that that included a visit by President Obama,

Just before 5 p.m. on a Saturday in mid-October, a Cadillac limousine climbed the curvy driveway outside the Newton home belonging to Dr. Ralph de la Torre and his wife, Wing. Inside, the 75 guests were anxiously awaiting the main attraction while staying busy wondering how long the de la Torres’ adorable 2-year-old twin sons would be able to keep their neckties attached and their dress shoes on. Swell parties like this are not uncommon in the West Newton Hill neighborhood, which is dotted with multimillion-dollar houses like the de la Torres’ place. Still, this gathering stood out for two reasons. First, just about every person attending had paid $15,000 a pop to be there. Second, the guest of honor was none other than President Obama.

Abandoned Surgery and His Medical License

More strikingly Dr de la Torre also effectively abandoned the profession which had earlier brought him so much recognition:

After a decade of training to become a cardiac surgeon and endless effort to become one of the best in the business, de la Torre decided to walk away from surgery. He’d been in practice for only about nine years.

De la Torre says it’s impossible to be a great heart surgeon working only part time. He even took the drastic step of letting his medical license expire, his way of refusing to look back. 'Burn the boats on the beach, baby!' he says.

Saving Caritas: "Leakage Reduction"
So what set of boats would he burn to promote Steward Health Care? When he took over Caritas, he was able to improve its finances, but only up to a point,

The hospitals in the chain – flagship St. Elizabeth’s in Brighton, the Carney in Dorchester, Holy Family in Methuen, Good Samaritan in Brockton, St. Anne’s in Fall River, and Norwood Hospital – were all hurting. Worse, the system was weighed down by debt and underfunded pensions. De la Torre moved quickly to cut costs, improve efficiency, and negotiate increased reimbursement rates paid to Caritas hospitals by Blue Cross and other insurers. His actions helped turn around Caritas’s finances, going from a $20 million loss in 2008 to a $30 million operating income in 2009. But the debt, pension liabilities, and lack of access to capital combined to become an albatross on the chain. As of March 2009, Caritas had only 40 days’ cash on hand, according to Mark Rich, the CFO, who took to keeping extra-large bottles of Tums on his desk.

His solution was the private equity take-over:

In classic de la Torre style, the deal promised something for each of the stakeholders. The archdiocese, which administered the Caritas pension fund, would see support for the fund to the tune of $295 million as well as a continued commitment that the hospitals would follow Catholic doctrine and not perform abortions or sterilizations. The SEIU would get job preservation and a stronger beachhead in Boston from which to try to expand its organizing efforts into the city’s big-name hospitals. The communities would see their local hospitals stay alive, even getting spruced up rather than stripped for parts. And Cerberus would get a dynamic leader who could offer them both a laboratory for testing the post-health care-overhaul national market and a sort of cloak of righteousness, given the hospitals’ history of working with the poor.

But how would Cerberus make money on its investment? The explanation in the article raises more questions than it answers:

As he sees it, through investment in information technology and bricks-and-mortar hospitals, he will be able to offer a highly integrated 'accountable care organization' that gives patients quality care, close to home, thereby keeping costs down. The key is insisting that patients get all but the most complex care from their community hospital, rather than seeking treatment for pneumonia or a broken arm at a big shop like Mass. General.

Left unsaid, though, is who could effectively "insist" that patients get all their care within the system?

The notion that such insistence is the key also appeared in other reports on the Cerberus take-over of Caritas. For example, on October 14, 2010, the Boston Globe reported on Dr de la Torre's responses to the Massachusetts Public Health Council in a hearing on whether the take-over should be approved:

De la Torre said his aim was to stop the 'leakage' of patients from communities served by Caritas hospitals to academic medical centers in Boston.

'The business plan, the strategy, or whatever you want to call it, is all about keeping care locally,' he said. 'If we improve the facilities, improve the infrastructure, make it so that our very own patients want to stay in our hospitals, that’s the business plan.'

The same notion appeared in a post in local television station WPRI's news blog about the possible take-over by Steward of another local hospital

Private equity investors did not buy Caritas and turn it into a for-profit medical complex for the purpose of standing still. Caritas executives say they want to improve business by reducing 'leakage' — patients leaving its suburban medical settings to be treated in Boston teaching hospitals.

In fact, a little Google searching revealed that Caritas Christi Network Services had been pushing "leakage reduction" in its own newsletter in the Fall, 2009 issue:

Our job now is to focus performance on two critical success factors:
reducing leakage and improving quality.

So,

Leakage Reduction: Keep the Care in Caritas

Network-wide Referral Management

Our first initiative to help reduce leakage is to implement a network wide referral management
program.

Furthermore,

Region Specific Leakage Action Plans

Each of the Hospital and IPA presidents will collaborate to develop region specific action plans to reduce leakage. Together they will develop goals, identify reporting needs, and establish processes to achieve leakage targets. The participation and support of each physician IPA member will be important to the success of this initiative.

You and Your Patient

Your support in keeping the care you provide within the Caritas system and in participating in the care management initiatives is critical to the system’s success.

Note that Caritas Christi Network Services is apparently the subsidiary of Caritas Christi, now Steward Health Care, that employs physicians:

Caritas Christi Network Services (CCNS) is the second largest physician network in Massachusetts. Established in 2001, CCNS is responsible for the implementation and successful execution of managed care contracts, providing physicians with medical management services (referral and care management), quality improvement programs, data analysis, information systems and financial expertise.

But here is where it gets really tricky. It is one thing to aim to improve hospital services and accessibility in the hopes of attracting more patients. It is another thing to push physicians to refer patients to specific facilities for economic reasons, because physicians are supposed to make decisions for individual patients, including decisions about where to refer, based on the particular patient's needs and preferences.

So there are major questions about both the effectiveness and the ethics of "leakage reduction" based on applying leverage to physicians.

Summary: Will Someone End Up the "Greater Fool?"
Meanwhile, Paul Levy, the soon to be former CEO of BIDMC, who has not been afraid to say what he thinks on his blog, now called Not Running a Hospital, suggested that Cerberus, and by implication, Dr de la Torre, are not in this for the long haul. He first introduced the "greater fool" theory of business management,

It seems that there is no end to the number of people with cash who will be intoxicated by a good story line, even when there is little substance to back it up. All of these stories depend on the capital markets to bolster the price of investments, counting on the 'greater fool' theory: There is always someone who will take on a bad investment at just the wrong time, providing a good return to those who are lucky enough to escape before the crash.

Then he raised the concern:

Those seeking to regulate the behavior and financial decisions of for-profit hospitals will find that their post hoc authority will likely be insufficient to protect the public interest from a depletion of plant and equipment and from a plan that is mainly meant to burnish the pre-tax and pre-depreciation short-term earnings of the firm so that it is ready for the initial public offering or resale to another private equity firm.

So the question is whether Superbowl advertisements and "leakage reduction" management can really make the new Steward Health Care a lasting success? And if not, will Cerberus Capital Management hang around just long enough to buff the system up for the next buyer?

And if that happens, Levy noted:

Who gets hurt if these deals go bust when the next generation of owners takes over and discovers that creating the margin to generate the expected return is very hard in the hospital world? Well, that very last set of investors, the 'greater fools.' But, as we have seen in the examples above, the hurt goes much further. Hospitals, though, are in a special category. Investors may come and go, but the community depends on its local hospital to provide high quality service. It is the residents of the community who are left holding the bag if the hospital corporation reaches the conclusion that ownership is not financially viable.

As we said before,.... Deals that turn not-for-profit hospital systems into privately held for-profit systems ought to be scrutinized with extreme skepticism. Furthermore, once such deals are made, the results ought to be watched extremely closely to make sure they do not put private gain ahead of individuals' and the public's health. For-profit hospitals have generally not lived up to the promises they made to provide quality, accessible health care at a cheaper price.  It is yet to be seen whether private equity running for-profit hospital systems (and physicians networks) will do any better.