Counterpoint

The chorus to Kris Kristofferson’s song “Jesus Was a Capricorn (Owed to John Prine)” is this:  

'Cause everybody's gotta have somebody to look down on 
Prove they can be better than at any time they please 
Someone doin' somethin' dirty, decent folks can frown on 
You can't find nobody else, then help yourself to me 

Fortunately for Kris, private equity firms now fit the bill for most health economy stakeholders.  

 As Kris also sang, “Most of us hate anything that we don’t understand.” Private equity is an increasingly frequent and convenient scapegoat in the U.S. economy, especially with respect to healthcare services. Based on more than 30 years of experience working with private equity and venture capital firms in the health economy, including dozens of hospital acquisitions, I know that the current mantra of “private equity is bad” is simplistic and sophomoric. In my career, I have encountered scoundrels in every corner of the industry: investors and investment bankers, legislators in the halls of Congress and state capitols, and executives of for-profit and tax-exempt health systems alike. Believing that private equity is the only bad actor in the health economy is like believing in Santa Claus. 

 Having led the acquisition of two Massachusetts hospitals that were later sold to Steward Health Care (“Steward”), I have first-hand experience about the Boston hospital market and the Massachusetts regulatory environment.

The saga of Steward is more an issue of inconsistent and incoherent healthcare policy than private equity malfeasance, and what follows is a brief elaboration of certain aspects of that inconvenient truth. 

Steward: The Canary in the Coal Mine of Healthcare Regulatory Policy 

Arguing from first principles, the essentials of any national health economy are physicians, nurses, health care facilities, life-saving drugs, surgical instruments, propofol, sutures, etc. Certain non-essential elements of the U.S. health economy – like health coaches and drugs that counteract poor lifestyle choices – are luxuries. Other non-essential elements – like health insurance brokers and PBMs – are superfluous. 

As we have noted previously, the Federal government is currently at cross purposes with itself, with CMS seeking to lower the cost of care while the FTC and DOJ try to prevent consolidation. The fact that hospitals are essential to a high-functioning health economy does not mean that every hospital is essential, the measure of which depends primarily on local market characteristics.  

If hospitals are the most expensive part of the health economy, then eliminating unwarranted duplication of service by closing non-essential hospitals is the fastest and most logical way to reduce costs. As we have repeatedly shown, the Federal government’s narrative that consolidation inevitably leads to “higher prices” is demonstrably false, as the most competitive markets in the country are the most expensive. To the extent that the Federal government continues to prevent consolidation based on easily disproven myths, then the easily attainable cost savings from eliminating unnecessary hospital capacity cannot be achieved.  

Logic notwithstanding, I have yet to meet the elected official or regulator or resident who wanted “their” hospital to close or doubted that “their” hospital was essential.  Community stakeholders will go to great lengths to keep “their” hospital open, resulting in a rather bizarre scenario in which every stakeholder depends upon and simultaneously scorns the “buyer of last resort” of those hospitals. Inevitably, when the buyer of last resort realizes the futility of the effort, politicians and regulators suddenly materialize to attempt to force that buyer to keep the hospital open, as exemplified in the closure of Delaware County Memorial Hospital.¹ 

More importantly for every health economy stakeholder is this: lost in the predictable outrage of a health system CEO making enough money to buy a yacht is the emerging and perhaps existential battle between the Federal government and private equity over the financing and operation of the massively expensive and incomprehensibly inefficient U.S. health economy. The appropriate role of private equity in the health economy is a conversation that America and Americans should have, even though an understanding of nuanced subjects is something with which America now struggles. The idea that the Federal government should unilaterally decide the answer to that question is at best un-American, and at worst, detrimental to Americans, at least when a desire to promote competition results in weakened competitors offering duplicative services. 

Despite the complexities of the subject, policymakers have a binary choice in the matter: allow private equity-backed firms to serve as the buyer of last resort for as long as those firms can keep the hospitals open, or unilaterally close non-essential hospitals sooner rather than later. At best, it is disingenuous for policymakers to extract onerous conditions from the buyers of last resort and then hector those buyers when those hospitals fail. Of course, policymakers more frequently exhibit hindsight than the courage of their convictions in these situations, knowing that the American public, aka voters, will always wish that the local hospital had stayed open one more day. 

Speaking of the American public, the consumers in the oft-discussed “consumer-focused health system” are mere bystanders in the battle between government and private equity, blissfully unaware of the ultimate stakes. “Pride goes before destruction” is universally true, applying to private equity executives and policymakers alike. Private equity executives overestimate the power of financial leverage, sometimes to the detriment of the companies they saddle with debt. Likewise, policymakers overestimate the power of regulations and oversight, sometimes to the detriment of the companies over which they exercise oversight and the communities they serve.  

Does the maintenance technician from Mattapan who visited the ED at Steward’s Carney Hospital last night know that “experts” do not believe Carney Hospital is essential? Undoubtedly not. Does he care that the CEO of the holding company that has kept Carney Hospital open for the past 14 years bought a yacht? Maybe. Does he know what it means to him if the ED at Carney Hospital closes? Yes. 

Steward: The Inconvenient Facts

President John Adams, born a few miles away from Carney Hospital, famously stated: 

 "Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”  

Reasoning by first principles begins with foundational elements, and deciphering the current commentary about Steward requires an understanding of the facts, which Modern Healthcare has covered for 17 years. 

In summary, Caritas Christi Health Care (“Caritas Christi”) was a small Catholic health system that operated six community hospitals in eastern Massachusetts. Caritas Christi struggled for years in the shadow of the systems now known as Mass General Brigham and Beth Israel Lahey Health. In part because of Caritas Christi’s competitive weakness, the Archdiocese of Boston sought strategic alternatives for Caritas Christi with other Catholic systems, most notably Ascension. Ultimately, the Vatican did not force Ascension or any other Catholic system to “save” Caritas Christi. Instead, the Vatican approved the sale of Caritas Christi to Steward, which was backed by Cerberus, with the notable irony of the Catholic Church ceding control to a private equity firm named after the guardian of the gates of Hell.² 

Why the Vatican was unwilling to force another Catholic system to take over Caritas Christi but would sell to private equity has long been a subject of speculation, most of which has focused on the financial challenges of the Boston Archdiocese during that period. With the benefit of hindsight, the Vatican demonstrated exceptional stewardship in selling a group of capital-starved and noncompetitive community hospitals to Cerberus for $830M plus $400M in post-closing capital expenditure commitments in lieu of transferring them to Ascension in a “balance sheet” (read: cashless) merger. 

Steward: Same Old Situation

According to first principles, health economy stakeholders should do everything possible to keep essential hospitals from closing and keep non-essential hospitals from remaining open. In a purely rational world, the challenge would be simply to develop criteria to identify which hospitals are essential. Of course, public policy is never purely rational. Politicians must answer to voters, and voters often want things based on emotional factors.   

The inconvenient truth is that Steward agreed to invest $1.2B in a group of hospitals that no one else would even operate. Faced with the possibility that some of the Caritas Christi hospitals might close, it is not surprising that Massachusetts regulators approved Steward’s acquisition of Caritas Christi – hospitals that no one else wanted – subject to numerous conditions, one of which was that Steward could not close any Caritas Christi hospital for five years.3 

No one in their right mind thought that all the Caritas Christi hospitals were essential, but no one in the Commonwealth of Massachusetts had the courage to close any of them. 

The saga of Steward is like the story of Prospect Medical Holdings, and each is symptomatic of an existential issue facing the hospital industry. Just as Mass General Brigham and Beth Israel Lahey Health never intervened to save the Caritas Christi hospitals, Yale New Haven Health and Penn Medicine and others have not tried to save the hospitals now operated by Prospect Medical Holdings, all of which have struggled for decades. Before Steward and Prospect were Prime Healthcare and Capella Healthcare and NetCare and New American Healthcare and Paracelsus Healthcare and EPIC Healthcare Group, among others. When push comes to shove, a policymaker will do almost anything to avoid being remembered as the person on whose watch the local hospital closed. And, until now, there has always been a health system executive who could convince desperate policymakers that a new owner could make a go of it with a broken hospital in a distressed market. 

Steward: Silence Speaks Volumes

F. Scott Fitzgerald stated that “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” If first principles dictates that every effort should be made to keep essential hospitals open, then the motive that enables a hospital to stay open one more day or week or year or decade is irrelevant to the patients who receive care at that hospital or the employees who work there or – in the case of private-equity backed healthcare systems – the city and state that receives tax revenue because that hospital is open.

For all the outcry about Steward, their competitors are noticeably – and admirably – quiet. Perhaps those competitors have the wisdom to remain silent knowing that they did nothing to help those hospitals over the past 17 years. Perhaps those competitors are silent because they don’t want to say the quiet part out loud, which is that Steward has served the public good for the last 14 years by operating hospitals that even the Vatican did not want. Those competitors undoubtedly understand the tangible financial benefit that accrues to them so long as any hospital in a challenged market is open, irrespective of that hospital’s ownership: 

Closing Thoughts

There is one notable exception to my observation about policymakers lacking the courage of their convictions. In the fall of 2000, Mayor James Rurak of Haverhill, Massachusetts decided that the city could no longer afford to operate Hale Hospital, a municipally owned community hospital. The private equity-backed company for which I led M&A was the only bidder to acquire Hale Hospital, much less agree to continue to operate it as an acute-care hospital.  

To his credit, Mayor Rurak was so committed to keeping the hospital open that he did not run for re-election in 2001, knowing that his decision to sell the hospital to a private equity-backed company would be controversial in the birthplace of the Massachusetts Nurses Association. My company faced many obstacles to completing the transaction, including a successful lobbying effort by the SEIU and Senator Edward Kennedy to have the Massachusetts House of Representatives deny a “home rule petition” by the City of Haverhill to facilitate the transaction. Nevertheless, we acquired the hospital on September 1, 2001, preserving access to local hospital care for the 59,000 residents of Haverhill and jobs for more than 600 employees. If you don’t believe me, here are Mayor Rurak’s comments about his decision. 

For the foreseeable future, more people will face the situation that Mayor Rurak did, as local market dynamics will inevitably threaten the survival of more hospitals. History teaches that some essential hospitals will close, and some non-essential hospitals will remain open. Whether policymakers will demonstrate the courage to close non-essential hospitals – or at least not prevent such a closure – remains to be seen.  

Each time that an essential hospital closes, the question is simple. Are you, to paraphrase President T. Roosevelt, someone who was in the arena, striving valiantly, spending yourself in the worthy cause of keeping a hospital open, who failed while daring greatly, or are you the critic who doesn’t count?