Threading the needle

Comments submitted to the Massachusetts Attorney General by several community hospitals give a hint of the difficult task faced by that office as it considers the take-over of the Caritas Christi System by the Cerberus private equity company. Rob Weisman reports this morning in the Boston Globe that:

Lawrence General Hospital, Signature Healthcare Brockton Hospital, and Southcoast Hospitals Group in New Bedford, said . . . restrictions [on Cerberus] are needed to keep them viable and ensure that low-income patients have access to health care services at reasonable prices.

Recall that Cerberus is promising to invest capital in the undercapitalized Caritas hospitals; make whole an underfunded pension plan; pay property taxes to the communities in which it operates; and pay state taxes. These are powerful inducements to garner Archdiocese, local, legislative, and union support for the proposed acquisition.

Meanwhile, reports Weisman,

Among the conditions being sought by the Healthcare Access Coalition are measures to prohibit . . . Cerberus . . . from using “improper’’ incentives to recruit doctors from rival hospitals, a three-year ban on price increases for hospital services, and restrictions on “limited network’’ insurance contracts that exclude other providers. The community hospitals also want Cerberus to commit to not selling Caritas for seven years instead of three.

As the AG carries out her obligations under state law, the concerns of these hospitals -- which face direct competition from the Cerberus hospitals in their community -- certainly have to be considered. But how?

(By the way, Health Care for All, a public advocacy group, has offered its own set of proposed conditions.)

As I have discussed before, the financial model common for a private equity firm is to flip such acquisitions within a few years to permit the equity investors to recover their investment and make a profit. In preparation for that day, the firm will do what it can to burnish the value of the assets, as perceived by the financial marketplace. If the AG proposes and the state Court puts overly binding restrictions on the transaction and the actions of the private equity firm, they will make the deal financially infeasible. If the conditions of acquisition and operation are insufficiently powerful to protect the legitimate public interests of the rival community hospitals and others in the served communities, the regulators can inadvertently permit an excessive transfer of wealth to private investors from around the world.

This is the needle that the Attorney General must thread.